Third Framework: European Target model for electricity market integration

Feilim O'Caoimh, Partner
Renewable Energy
McDowell Purcell

Third Framework: European Target model for electricity market integration

For those still getting used to the Single Electricity Market (SEM), be aware that further seismic changes are on the way. Implementation of the EU target model for electricity market integration is steadily approaching.

The EU target model for electricity market integration has evolved out of the third energy package published by the European Commission back in 2007. The package recognised that despite some relatively minor regional integration there is a lack of market integration in the European electricity market as a whole. This lack of integration leads to inefficiency and what has been recognised at EU level as “sub-optimal use of transmission network capacity”.

As an interim step in moving towards an integrated electricity market the European Regulators Group for Electricity and Gas (ERGEG) implemented an initiative under which seven regional (and in places overlapping) electricity markets throughout Europe were recognised (See diagram). While the initiative placed Ireland in the France / UK / Ireland grouping (“FUI Market”), the changes will not be felt until the single electricity market, with a target implementation date of the end of 2014, is implemented.

An analysis of the reasons for the lack of integration revealed that it was principally caused by:

Insufficient interconnection infrastructure
Insufficient market incentive to improve interconnection infrastructure
Inefficient allocation of existing network capacity
Incompatible market design between jurisdictions

At the root of the rationale for change is the theory that a sufficiently integrated EU electricity market will facilitate the flow of capacity from areas where it is cheap to produce electricity to areas where electricity is more highly valued. Other benefits include:

the facilitation of increased penetration from variable inputs like wind via greater network interconnection
the provision of robust signals for the development of interconnector infrastructure
a more competitive electricity market aimed at driving aggregate electricity prices down
the provision of improved network security across the EU

At a simplistic level, the concept effectively requires that all electricity prices in all zones of the new integrated EU market would be determined by a common piece of computer software.

Timing

In terms of timing, it is currently intended that the new EU wide market arrangements will come into effect by 31 December 2014. Given the size of the task, whether this can be achieved remains to be seen.

Challenges for SEM

With current levels of integration (and even including the east-west interconnector, due to be completed towards the end of 2012), the Irish market will face challenges under the new regime. While the new market will lead to overall electricity price convergence throughout the EU, it is inevitable that some parties will gain and some parties will lose.

One of the significant concerns for Ireland is that in harmonising regional markets / networks in order to achieve a standardised model of system rules, it is unlikely that the accommodation of SEM concerns will be top on the list of priorities for the responsible bodies, namely ACER (Agency for the Cooperation of Energy Regulators) and ENTSO-E (European Network of Transmission System Operators (Electricity)).

ACER issued Draft Framework Guidelines on Capacity Allocation and Congestion Management for Electricity (“CACM-FG”) in July 2011. CACM-FG identifies four key elements for the design of the target model, namely:

methods for calculating capacity and zone definition
forward markets for capacity allocation
day ahead capacity allocation
intra-day capacity allocation

Based on the work carried out so far, it is likely that the existing Nordic market design (Norway, Denmark and Sweden) will have a strong influence on the development of the EU target model. The difficulty for Ireland is that SEM is significantly different to the design of many European markets, in particular the Nordic model. This is based on the fact that SEM was designed to maintain secure supply on an isolated island system – concerns not shared by the Nordic model.

Derogation

As part of a recent consultation process on the implementation of the target model, the SEM Committee expressed concerns on the CACM-FG issued by ACER. These concerns resulted directly in a derogation from CACM-FG being granted to “island systems with central dispatch”, i.e., SEM. The derogation means that transitional arrangements will apply within SEM for a limited period following implementation of the new EU wide model (expected to be at the end of 2014), however, these cannot be extended beyond 31 December 2016.

Fundamentally, Ireland’s ability to influence the new system rules is likely to be non-existent given our relative proportion of the overall market and, given the derogation, we are likely to be the last to join the new integrated market.

It remains to be seen what impact the EU target model will have on the Irish wind energy market or indeed the wider electricity market. One point, however, is certain – the evolution of the EU target model over the coming months and years will give lenders in the wind farm sector another thing to think about. All stakeholders in the wind energy market will need to keep themselves informed.

Feilim O’Caoimh heads up the Renewable Energy Unit at McDowell Purcell. He has 13 years experience as a commercial solicitor specialising in renewable energy. Feilim brings the benefit of his wider commercial expertise in advising wind industry participants on project finance and construction, joint ventures, fundraisings and project sale and acquisition.

Click here to contact Feilim.

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