Blog: How Ireland's electricity is traded

27 Sep 2019

In our latest blog on Ireland's electricity system Aidan Power, Commercial Analyst with ElectroRoute, provides a high-level overview of trading in our electricity market and looks at how wind farms participate in the market.

Trading in the Electricity Market

In Ireland electricity is bought and sold on the Integrated Single Electricity Market (I-SEM). This was launched on 1 October 2018 and brings the Irish electricity market in line with the rest of Europe. In I-SEM auctions takes place daily where generators compete to supply electricity in hourly blocks.

I-SEM is really made up of three different markets. There are two ‘ex ante’ markets – called the Day Ahead and the Intraday – which means electricity is bought and sold before the market closes. And there is a third, called the Balancing Market, which takes place after trading has ceased.

It can best be explained using an example. Let’s say EirGrid, the market operator, expects to need 4,000 MW of electricity at 3pm next Tuesday. Before Tuesday different generators will offer their electricity at prices they hope are competitive in the amounts they think they can deliver.

They are selling this electricity to suppliers – the companies that sell electricity to your family or business. This is the Day-Ahead Market and it closes 24 hours before 3pm on the Tuesday.

As we get closer and closer to the time the power is needed more accurate information may be available to generators. Maybe they won’t be able to deliver as much electricity as they had hoped. Or maybe they can deliver more. 

They can adjust their position in the Intraday Market (IDM). However, when this market closes, an hour before 3pm on Tuesday, they are locked into the price they have offered for the power they say they can deliver.

If the generator does not deliver what they agreed the difference between what is actually delivered and what they promised to deliver is sorted out in the Balancing Market (BM).

In other words, if a generator agreed to deliver 100 MW of power to a supplier but is now only able to provide 95 MW, they need to buy the difference on the Balancing Market to meet their commitment.

The Balancing Market is more volatile than the Day-Ahead Market. As can be seen in Graph 1, which sets out the prices seen in the BM for each half hour since 1 October 2018, the Balancing Market prices can quickly fluctuate from very high prices to very low prices.

On 24 January, the Balancing Market Price even went as high as €3,774/MWh, when the average wholesale price for electricity in Ireland is around €60. This meant that generators which under-delivered i.e. which were “short” during that trading period were forced to buy back at €3,774 for each MW they were short. This volatility and price uncertainty presents a balancing risk for market participants.

Graph One

Graph 1. All market prices to date – Ex Ante WAP (Weighted Average Price)

Negative Prices

The new market has experienced a considerable amount of negative prices. Negative prices are an interesting phenomenon. These occur when market prices clear at a value less than zero, meaning generators are willing to pay for their power to be consumed.

This can seem confusing to people. Why would you pay people to buy your electricity?

But there are some large generators that incur a cost when they reduce their generation below a certain point. It can, depending on the market, be cheaper for them to sell their electricity at a loss and keep going than it is to power down only to power up later. This creates a situation where the market price is less than zero.

Interestingly, approximately 4 per cent of all half hour periods were negative. Note that negative prices are often seen in power markets across Northern Europe. It is an economic signal that there is a significant over-supply in the market.

Graph 2 below illustrates the average half hourly price in each market since the 1 October 2018. The morning and evening demand peaks correlate with higher prices on average as can be seen in the two peaks at 9am and 6:30pm.

Graph Two

Graph 2. Average I-SEM Prices to Date

Wind Trading

Wind farms use wind forecasts to predict their generation volumes for the Day Ahead Market and will establish positions based on those, altering their ex-ante position in the Intraday Market when they receive new wind forecasts closer to the trading period.

Considering the risk, a good wind forecast is crucial for trading wind energy. Wind is a price taker in the Balancing Market. This is because wind energy – because it doesn’t need to pay for fuel like coal or gas and has the benefit of the support scheme – bids into the market with a price of zero. This drives downward pressure on the price of wholesale electricity prices.

Generation from wind units is prioritised over other generation sources – fossil fuels for example. So, in times of high generation and low demand, when the System Operator (SO) might need to turn generators down or off to prevent overgeneration and grid pressures, wind will be turned down/off only after non-priority units have been.

Overall, wind units put downward pressure on wholesale electricity prices by displacing expensive electricity sources such as gas/coal-fired power stations along with other benefits such as a reduction in capacity market costs and avoidance of EU compliance costs as outlined in a recent Baringa publication.

The future of wind in the Irish Electricity Market

Ireland has had huge success installing new wind capacity on the island over the last decade. There is significant optimism that the upcoming Renewable Electricity Subsidy Scheme (RESS) auctions will usher in the next wave of onshore wind and facilitate the delivery of offshore wind in the Irish sea.

As previously mentioned, wind has put downward pressure on wholesale electricity prices and the prospect of more installed capacity is exciting from an electricity market perspective.