Designing an Electricity Market for Ireland’s Future

Ireland’s electricity sector is changing, and this change will need to speed up over the next decade if Ireland is to achieve the 70by30 Government target for electricity generated by renewables.

Ireland’s existing electricity market, the SEM (Single Electricity Market) will need to change too.  It is no longer fit for purpose because it was designed with only fossil fuels in mind.  The SEM is made up of three primary types of market, listed in terms of value for participants:

  1. Energy
  2. Capacity
  3. System Services (via DS3)

The energy market is designed to cover the short run marginal costs of fossil fuel generators. These usually have lower capital costs relative to marginal costs; and so rely on the energy market for most of their revenue.

Marginal costs (i.e. the price of fuel) are the most significant expense of these power generators, driven by the price of coal, gas and oil.  Traditionally, the price of electricity in Ireland has been determined by the cost and price-volatility of these commodities. 

Wind energy is different.  It has relatively high capital costs but very minimal marginal costs because there are no fuel or carbon costs.  When wind energy participates in the electricity market it effectively enters with a bid of zero which drives down the wholesale price of electricity.

Not Fit for Purpose

Ireland’s power system is moving toward using 95% wind energy at a single point in time.  A market designed for fossil fuels is not fit for purpose in a world where annual electricity demand is being met by renewables.

Continuing to use the current market design is likely to lead to volatile price swings which will hamper investment in renewables because revenue certainty is necessary to attract investors and build new projects.

Fossil fuel plants will be pushed out of the energy market as renewable electricity grows to 70% of electricity supply.  They are also likely to be pushed out of the system services market, as zero-carbon solutions such as energy storage and demand side response start to emerge.

For the next decade fossil fuel power plants will still be important for back-up when wind and solar generators are not available, so the capacity market will need to provide sufficient revenue to maintain enough generation capacity on the power system.  

In the future, reliance on fossil fuel backup may be reduced by technologies such as demand side response, energy storage, interconnectors, and renewable generators.

At present there is no clear market design fit for a power system with more than 50% variable renewable electricity.  If Ireland wants to achieve 70by30, it now has an opportunity and needs to play a leading role in the design of the market of the future.

Clear Market Failure

Due to its relatively high upfront capital costs, investment in renewable electricity typically requires price certainty for 10 to 15 years to be financeable. However, as wholesale electricity prices are set one day in advance in the SEM, and a significant downward pressure on prices is expected due to REFIT and RESS supported renewable generators participating in the market, the advance price certainty that renewable electricity needs to attract investment finance is not there.

So, at present, there is a clear market failure. 

The power system wants to use as much renewable electricity as possible, but the existing market design does not incentivise this.  Therefore, the Government intervenes in the market; providing an alternative route to market for renewables via the PSO levy funded REFIT and RESS support schemes. 

In the future could there be renewable contracts of 10 to 15 years provided by the market or stimulated by Corporate PPAs, or carbon price floors and renewable electricity obligations on suppliers so that Government intervention in the energy market is no longer necessary?

What is clear is that the market is moving away from one based predominantly on fossil fuel plants and recovering short-run marginal costs to one based on renewable electricity and a need for long-term price supports.

In short

  • The electricity market needs to be fit for purpose and keep pace with the sector as we reach a point where most of our power comes from renewables;
  • The energy market needs to be based on renewable electricity with longer term price predictability;
  • Capacity markets will become critical to ensure backup for low wind/solar days;
  • New zero-carbon system services and technologies such as energy storage and demand side response must be incentivised to support a system with high levels of variable renewable electricity.

An electricity system with 70 per cent renewable electricity needs an electricity market designed for 70 per cent renewable electricity.

A dedicated team should be put in place now by SEMO, the market operator, via EirGrid and the CRU, to focus on electricity market design to facilitate 70by30.

Ireland is a world leader in the share of electricity demand met by onshore wind.  We are a world leader in the integration of renewable electricity on the transmission system. We could be a world leader in market design for power systems with these levels of renewable energy.