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The Integrated Single Electricity Market or I-SEM

Last updated on 11/05/2016

The Single Electricity Market isn’t that old but its days are now numbered. It is to be replaced by the Integrated Single Electricity Market or I-SEM by the end of next year. The reform is driven by Brussels which has noted how cross border trading of power on the Continent has driven down wholesale prices.

I-SEM represents a pretty radical change from what we now have. I suspect it is little understood. That is partly because its working are very complicated but partly because official documents are almost wholly written for and aimed at market participants. What is glaringly missing - at least I haven’t come across it - is a straightforward account from those in charge which shows how the new system departs from the old.

The following is my own effort to highlight some of the main points about I-SEM and how it differs from SEM. It is less than perfect because I have to struggle with documents littered with ill defined terms and references.

In SEM the process of setting the eventual price suppliers pay is largely a one sided affair. That is, generators with capacity greater than 10MW who want to supply power have to bid in, along with start up charges, what it would cost them to create a megawatt of power. Naturally the cheapest generators are called up first but as demand builds up, more expensive units have to be given the go ahead until there is enough electricity on the system to meet everyone’s needs. The charge demanded by the last generator sets the price that everyone pays. 

In this arrangement the role of suppliers seems largely confined to paying the price decided through the bidding process. This eventual price - it is different for every half hour - is arrived at after the power has been transmitted. It evolves through five different stages from a so called Ex Ante (EA) estimate a day or so before transmission to a final Ex Post (EP2) several days later which is the one that appears in suppliers’ bills.

In I-SEM, there are different prices which unlike most of the SEM ones are not merely indicative but will form part of suppliers’ bills. I’ll come to that shortly. A forward market exists but it is not where power can actually be bought and sold. It’s for hedging through the use of CfDs. The bar on so called physical trading means for example interconnectors cannot be booked at this stage leaving them free for use at a more critical point in the market.

The key price, but not the only significant one in the I-SEM, is set in the Day Ahead Market or DAM. Power producers bid in the rates they require for each individual generating unit they are making available. An exception is made for smaller generators such as wind farms which will be able to use are Aggregator of Last Resort to market their power for them. Overall the arrangement is designed to aid transparency in pricing which in the case of the day ahead market is set in a single auction. Lastly unlike SEM, generators are not forced to sell into the day ahead market but it’s expected they will.

Suppliers, in the day ahead market, will have to specify the quantity of power they require. That amount multiplied by the day ahead price will effectively comprise the bulk of the bill they eventually face but there are likely to be extra costs to be faced in subsequent stages of the market. 

The next stages in the market are essentially for refining positions established in the day ahead market. In the intra day market market participants have the opportunity, through matched trades, to buy or sell power to manage their positions. Participation in the subsequent balancing market is mandatory as the Transmission System Operator market safeguards the system. Finally in the Imbalance settlement, the process of settling up is completed with players paying or being paid the same rate per MW to increase or decrease amounts.

Capacity payments continue in the new system but in a new form. Currently a pre agreed pot of money is divided up between those generators who are prepared to make their units available when called upon. In the new arrangement the Transmission System Operator will auction off reliability options to generators which, in return for a fee paid for by consumers, will reimburse the TSO to the extent the market price exceeds a pre agreed strike price.

If you have any comments which would make this summary better, please email me.


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