Generators are regulated through the Commission for Energy Regulation's (CER) regulatory regime, in the main through their licences, and by the mandatory requirements placed on their participation in the Single Electricity Market (SEM). The regulatory regime and the wholesale market rules apply to generators regardless of the ownership of electricity generation. Such a framework ensures efficient and cost effective generation of electricity and provides generators with a transparent and stable regulatory framework which is a key consideration for investors.
The SEM is the wholesale electricity market for the island of Ireland, regulated jointly by the CER, the Utility Regulator. By combining what were two separate jurisdictional electricity markets, the SEM became one of the first of its kind in Europe when it went live on 1st November 2007. The SEM is designed to provide for the least cost source of electricity generation to meet customer demand at any one time across the island, while also maximising long-term sustainability, reliability and generation adequacy.
The SEM includes a centralised all-island gross mandatory pool (or spot) market. In this pool, electricity is bought and sold through a market clearing mechanism whereby generators bid in their marginal cost and receive the System Marginal Price (SMP) for each trading period for their scheduled dispatch quantities, with the result that the cheapest possible generators are run to meet demand across the island. Generators also receive constraint payments for the difference between the market schedule and the system dispatch. Suppliers purchase energy from the pool and pay the SMP for each trading period along with capacity costs and system charges.
Under specific arrangements in the SEM, generators also receive separate payments in the form of capacity payments, which ensures they are paid regulated sums of money for providing available generation capacity to the market. The Capacity Payments Mechanism (CPM) is administered by the SEM Committee, composed of both Regulators and independent membership. The CPM is a key feature of the SEM design in order to encourage the provision of generation capacity. By providing revenue to generators additional to market payments for generation, it provides a separate financial reward for generation capacity and, for this reason, a financial incentive for new entry and investment, which applies irrespective of ownership.
Since its establishment on 1st November 2007, the SEM has delivered a transparent and efficient wholesale electricity market and provided for the dispatch of the cheapest generators across the island to meet demand. This market, including the capacity payments mechanism, has demonstrably new investment in modern thermal generation capacity as well as renewable energy. This has been recognised by the ESRI, which concluded in 2009 that "The [SEM] rules provide for a transparent and efficient operation of the market, encouraging plant availability". It further concluded in 2011 that the SEM "has worked as it was expected to do since 2007 and has provided sufficient certainty for investors to ensure adequate investment".
The SEM will to continue to evolve, with the SEM Committee working to address the key challenges, such as accommodating increased levels of intermittent renewable generation, continuing to ensure adequate investment in generation capacity and the challenge of integration with the European single electricity market over time.
