Meeting I-SEM challenges

Ciaran Duffy Head of Utilities Practice at Neueda Consulting assesses the impact of ISEM on the Irish energy market.

The current SEM wholesale market arrangement is well embedded and changing course to work with new wholesale ISEM arrangements is the most significant and disruptive challenge for participants in the Irish energy market in a decade.

The programme schedule and deliverables are regularly published by the RAs (www.semcommittee.com) and a range of liaison groups have been established for participants. Work continues on the specifics of some key components of the new design and approach but it has been clear for some time that there will be significant impacts on participant operations requiring participants to adapt and change.

The fundamental impact of ISEM will be financial, centered around how much generators will receive and suppliers pay under the new multi-tier market and operating to avoid exposure on the balancing market. However, the impact of twisting to operate in this new way has impacts across any participant business.

Some of the upcoming changes to interacting with the ISEM wholesale market are:

• the need to operate across multiple competitive markets i.e. Forward Market, Day Ahead Market, Intra Day Market, Balancing Market, and a revised Capacity Renumeration Mechanism;

• outcomes for participants will not be based on participation in one market as per SEM but on the overall impact of activities in all the markets above;

• participants will be able to trade over a much wider set of timeframes than under SEM to adjust portfolio positions as frequently as needed;

• price formation will be less predictable leading to greater uncertainty than under the rules based SEM;

• the complexity of multiple market mechanisms will require a new focus and depth for forecasting capabilities and market study and analysis;

• generators will not automatically qualify for capacity payments but will have to participate in the auction and bid for same;

• new complex market mechanisms are likely to increase the complexity of settlement and related financial activities;

• with increased trading complexity and frequency, robust risk management and monitoring capabilities will be required;

• new forms of exposure e.g. to imbalance pricing, bring new risks to be worked through and mitigated.

The precise impact of ISEM is very specific to each participant but for most, new ways of working, disciplines, processes and systems are likely to be required to meet the challenge.

Many larger participants are engaged in projects to address the impact of ISEM but identifying the starting point for unravelling and identifying business changes and new requirements to operate in IEM is not easy but needs attention and management by each participant.

Establishing a project internally to facilitate a business impact study and driving towards a ‘Readiness Plan’ for operating in ISEM is key. Although different for every business, this should have a focus on two key strands: market readiness and the readiness of the wider business.

In terms of market readiness, the internal project needs to work through:

• assessing a new operating model including ‘as-is – to-be’ process mapping and day to day operational functions and resourcing;

• business strategies for operating in the market: Trading Strategy and Risk Governance;

• assessing changes to ICT systems to support new operating model: new solutions, integration requirements, support arrangements, business intelligence, forecasting;

• training of staff required to engage with the market on systems, processes and strategies.

• Using this as a baseline, the impacts on the wider business functions can be worked through and woven in:

• HR – contract reviews, new resourcing requirements and skill sets, recruitment;

• legal – trading contracts, licence changes, market rules review; and

• finance – credit rules, collateral, risk and financial reporting changes.

The final piece of the readiness jigsaw will be planning in business acceptance testing and cut-over/transition to the new operations next year.

Looking forward, the most significant milestone in the ISEM program plan is the commencement of market readiness trials currently scheduled for June 2017. By this stage, all participants should be well advanced with the introduction of new systems, skills and processes.

This date is currently a hard stop and provides a clear focal point to work back from and commence addressing the practicalities of ISEM.

Email: ciaran.duffy@neueda.com

Mobile: 07970 524934