a climate change pic

I-SEM Two Years On – Part 1 – A look back at the value and volatility in the Irish electricity market

A Flexible Procurement Strategy Naturgy

Eoin Mooney, Heading of Trading and Dara Faulkner, Trading Analyst, energy experts at Naturgy Ireland regularly work with customers to guarantee the best value and prices for their energy in Ireland.

The introduction of the I-SEM (Integrated Single Electricity Market) in Ireland two years ago has had a tremendous impact on the Irish electricity sector. From greater value to consumers, to greater volatility in the market, Eoin and Dara have produced a three-part series of blogs on what the I-SEM has meant for consumers and what to expect in the future. 

Blog Series: I-SEM – “The Toddler Years”.

Article 1: Wholesale Market Prices

Having recently celebrated its 2nd birthday on October 1st, 2020, the I-SEM (Integrated Single Electricity Market) is a mere Toddler in terms of maturity and development. However, like most Toddlers it is starting to show some strong personality traits and characteristics that look like they are here to stay.

In today’s article we are going to look at the Wholesale Electricity Market in detail and examine the impact the introduction of I-SEM has had on the Wholesale Power Price. In doing so we will compare prices before and after the I-SEM launch and show how Irish electricity consumers have benefitted greatly from I-SEM market performance by availing of a floating tariff tracking the Wholesale Market directly e.g. Naturgy Tracker.

There is no doubt that directly tracking the Wholesale Electricity Market is more valuable in terms of energy costs when compared with most fixed-price tariffs. In our article tomorrow, we will look at the volatility that occurs day-to-day in this Wholesale Market and introduce the concept of a flexible approach to procurement.

Flexible procurement allows electricity consumers to fix in prices for portions of their electricity load while floating the remainder at the Wholesale Price. This enables them to manage risk and achieve some budget certainty, while also allowing them to capture some of the renewables-driven value that we are seeing in the market.

When looking at the market volatility we will see that it is most significant during the peak demand hours (evening), especially in the Winter months. This presents an opportunity for electricity customers on a floating tariff, that have flexibility in their load scheduling, to manage their exposure to peak demand prices and further reduce their energy costs.

In the third and final article in the series, having completed our look back on the first two years of I-SEM, we will discuss what this means for Irish Power Consumers and further explore the concept of a flexible procurement strategy.

Wholesale Prices 

What do we mean by Wholesale Power Price?

This is the price that suppliers, like Naturgy Ireland, pay in the market for power consumed by their customers. It is determined via a daily auction at 11am and prices are set at that time for the next day’s power consumption (“Day Ahead” auction).

Before the new market arrangements came into effect two years ago, the Wholesale Power Price was determined by the system operator and was set four days after consumption. It was known as the System Marginal Price (“SMP”). This new daily auction mechanism is a significant factor behind the wholesale market performance we are now going to look at.

Power Prices Performed in ISEM

Figure 1 shows a decrease in the Wholesale Power Price from SEM to I-SEM. The daily average wholesale power price has continued this downward trend as I-SEM has progressed.  I-SEM Year 2 saw the first instances of negative average daily wholesale power prices: 5th April (-€2.47/MWh), 23rd May (-€10.05/MWh), 28th June (-€4.08/MWh), 5th July (-€0.92/MWh).

Negative wholesale pricing can occur due to the unconstrained nature of the Day Ahead auction that sets the wholesale price, when there is an excess of wind volumes on the sell side of the auction (vs demand on the buy side), willing to clear at negative prices.

We can however see from Figure 1 that I-SEM has brought increased volatility in the average wholesale power price day-to-day which we will discuss in the next article tomorrow.  

 

Figure 2 looks at the average Wholesale Power Price on a monthly basis, and we can see from this chart the average price has fallen from SEM to I-SEM, and again from I-SEM Year 1 to I-SEM Year 2.

The Wholesale Power Price for I-SEM averages to €46.61/MWh. This is a decrease of €6.56/MWh when compared to the last two years of SEM, which had an average of €53.17/MWh.

For a medium sized Industrial & Commercial Electricity Customer on a floating tariff, this drop would have resulted in over €100,000 of savings on energy costs alone.

Since the new market went live on October 1st 2018 the average electricity price has decreased by €20.43/MWh from I-SEM Year 1 (€56.84/MWh) to I-SEM Year 2 (€36.41/MWh). The high Wholesale Power Prices experienced in the first Winter of I-SEM have proven to be a thing of the past, as the average price for Winter I-SEM Year 2 was lower than the previous three Winters. The Summer and Winter averages have decreased by 33% and 38% respectively.  

In tomorrow’s instalment of this series I-SEM – “The Toddler Years”, we discuss 
Article 2: Market Volatility – The “Terrible Twos”