Progress with coupling FUI and CWE region Market Coupling: Progress with coupling FUI and CWE region Charlotte Ramsay Ofgem 16th June 2010

Overview Drivers for Market Coupling Target model for Day Ahead Timeframe Progress with CWE and North West Region Coupling FUI and CWE/NW Region GB and Ireland BritNed and IFA Next steps Other considerations for implementing market coupling Two power exchanges in GB Firmness Charging 1) Update on progress against the FUI priority on coupling FUI with the CWE region

Drivers for Market Coupling Moving towards a single market for electricity Efficient use of available capacity on all borders Maximisation of capacity available on all borders Legal Requirements: CMGs require market based capacity allocation methods Under the 3rd package: Capacity allocation models may become mandatory through the Framework Guideline/Network code process Regional approach to cross-border capacity allocation For FUI Britned’s exemption requires day-ahead implicit auctions

European Target Model Forward Market Day-ahead capacity allocation Models Main Features Forward Market TSOs sell forward capacity Options: physical or financial reservation for day ahead Harmonised terms Day-ahead capacity allocation Single Price Coupling across Europe: Single matching algorithm Common market rules Intra-day capacity allocation Regional: implicit continuous or implicit auction Inter-regional: implicit continuous. Balancing TSO-TSO with Common Merit Order Capacity Calculation Improved coordination amongst TSOs Coordinated redispatch Move to flow based Already in place in TLC and NordPool Soon to be in place across CWE and ultimately the North West Region …

Proposed roll out of Market Coupling Timetable proposed by the EC in Florence last year Where are we now? Completion of CWE, and finding “interim solution” to allow CWE and EMCC to co-exist Looking for the NW region roll out, including GB, with the “enduring solution” of price coupling across all borders in the region Feedback from stakeholders in the consultation: broad support for closer collaboration between regions and looking to coupling with CWE and the wider NW region as a reasonable goal / next step For FUI region now, we are waiting for completion of the “interim solution” for EMCC and CWE before we can couple SEM market integration is an issue, GB will couple first, and Irish will follow. Next steps for FUI are to determine how GB will be coupled to CWE and Nordics. NW region and “enduring solution” Completion of CWE, and coupling to EMCC / Nordics Proposed roll out of Market Coupling

INTER-REGIONAL SOLUTIONS? PX initiative: PRICE COUPLING OF REGIONS* Markets initially included in PCR - 2860 TWh Markets which showed interest to join Markets that could join next as part of an agreed European roadmap *Source: Europex slides from the 18th Florence Forum

Other considerations for FUI-NW Region Market Coupling Input from Ofgem Consultation: Two power exchanges in GB Not a material issue Firmness Support for firmness, but diverse views how it is applied Diverse views on risk sharing between traders, TSO/IC owners and consumers Diverging views on adopting a common approach to firmness Charging Many respondents highlighted potential distorting impact of TRIAD / Transmission charges Review underway coordinated by Ofgem and National Grid Firmness: Wide support that IC capacity should be firm, but diverse views on how this should be applied: Most agree that market coupling requires firmness (RWE, RTE, Statnett, APX, Consumer focus, Britned ) and some specifically talk about physical firmness (Moyle, NG, EON, Centrica, Statoil ASA) Others prefer Financial firmness (SSE, EON AEP). EON: against physical firmness as IC operator will become trading business; recognise that it’s needed for IA ; don’t support interruptible products without financial firmness Some respondents prefer firmness for DA only: with full market spread compensation (Statnett) reimbursement at initial price paid (Eirgrid); or extended to ID (IPR) CWE approach to Firmness after nomination for yearly, monthly auctions (Elia) Who pays/risk sharing TSOs/IC owners in better position to bear risks(AEP,Consumer Focus,EON, Statoil ASA, IPR) TSOs to share the risk and face equal exposure (NG,IPR) NG: Firmness capped (110% of initial price paid) or pass through cost to TSOs revenues & end consumers Also in favour of cost socialisation: Eirgrid, Moyle Vs no cost socialisation (consumer focus) Moyle: currently IFA & Moyle earn nothing in the event of outage, sufficient incentive to maximise capacity. Could still work if the costs of physical firmness were socialised. If firm IC was required then firmness of transmission system would be necessary (Moyle) Some recognize the higher costs for DC lines (Statnett) and for IFA in particular (RTE, NG, Eirgrid) Common approach for all ICs? Some support for harmonisation of firmness rules and for common approach for all ICs (RTE, Britned-as long as their business model is protected-, EON-financial firmness-, Centrica, Statoil ASA, RWE) Consumer Focus: degree of latitude could improve investor confidence EDF: Not one policy for firmness, case by case approach ; competition law can be used when restricting IC capacity so no need for regulation

Coupling FUI and CWE / NW region Irish Market (SEM) design issues GB to couple first – Ireland to follow BritNed Interconnector comes online in Q1 2011 Exemption decision condition = implicit auctions in day ahead BritNed needs a market coupling solution in Q1 2011 GB coupling options Price coupling on both BritNed and IFA (enduring solution) Price coupling on BritNed and IFA to follow (spur solution) Timing for roll out of the “enduring solution” Commitment from NW region TSOs to deliver in 2011, but not in time for BritNed Next steps Roadmap to enduring solution for NW Region (NW TSO group) BritNed develop spur solution (in line with roadmap) NOTE: Meeting between: UK, France, Belgium, Netherlands TSOs and Regulators to discuss BritNed and the enduring solution on 21st may – step forward in developing a solution for BritNed and demonstrating clear commitment to the enduring solution. Irish Market (SEM) design issues Issues are being pursued under a separate FUI workstream, CER and NIAUR to report back to IG Solution - GB to couple first – Ireland to follow as issues are resolved SEM Design Issues The BETTA market has a rolling one hour gate closure compared with 20 hour gate closure in SEM. This means that if exporting from SEM to BETTA, a position has to be taken by 10 am on the day prior to the trading day which is 20 to 44 hours ahead of real time. This is considered by many participants to create an unacceptable and significant degree of uncertainty. Exporting from SEM to BETTA is also risky because of ex post pricing in SEM. By the time the trade is made in BETTA, the participant will not know the price it has had to pay in SEM until four days after the event. If importing from BETTA into SEM, the IC Unit will know its physical SEM position by 12.00 on D-1 and will then have time to trade this out in BETTA. However, the IU is still exposed to price movements during the two hours between 10am on D-1, when it submits its offer prices into the SEM, and 12 noon when it is told its physical position. The requirement on SEM interconnector users to bid half-hourly prices in the SEM when the only liquid day ahead products available in GB are four hourly EFA blocks with a minimum EFA block size of 50MW. The current setting of SEM capacity payments for ICs based on flows was argued to be a barrier to trade by some participants. It was suggested that there should be remuneration for unused capacity on Moyle (and East West), allowing a reduction in capacity charges for interconnector users. The 80MW limit on Moyle exports to GB, the size of which inhibits the interest of suppliers in the GB market in sourcing energy in the SEM for use in BETTA; BritNed Interconnector comes online in Q1 2011 Exemption decision condition = implicit auctions in day ahead BritNed needs a market coupling solution in Q1 2011 Note commitment from BritNed to provide implicit and explicit auctions in line with market demand in Heren this week. GB coupling options Price coupling on both BritNed and IFA Price coupling on BritNed and IFA to follow Timing for roll out of the “enduring solution” Commitment from NW region TSOs to deliver in 2011, but not in time for BritNed

2. 2 Approach to Firmness. Common for all ICs 2.2 Approach to Firmness ? Common for all ICs? C/B from changing our approach Who pays/risk sharing TSOs/IC owners in better position to bear risks(AEP,Consumer Focus,EON, Statoil ASA, IPR) TSOs to share the risk and face equal exposure (NG,IPR) NG: Firmness capped (110% of initial price paid) or pass through cost to TSOs revenues & end consumers Also in favour of cost socialisation: Eirgrid, Moyle Vs no cost socialisation (consumer focus) Moyle: currently IFA & Moyle earn nothing in the event of outage, sufficient incentive to maximise capacity. Could still work if the costs of physical firmness were socialised. If firm IC was required then firmness of transmission system would be necessary (Moyle) Some recognize the higher costs for DC lines (Statnett) and for IFA in particular (RTE, NG, Eirgrid) Common approach for all ICs? Some support for harmonisation of firmness rules and for common approach for all ICs (RTE, Britned-as long as their business model is protected-, EON-financial firmness-, Centrica, Statoil ASA, RWE) Consumer Focus: degree of latitude could improve investor confidence EDF: Not one policy for firmness, case by case approach ; competition law can be used when restricting IC capacity so no need for regulation