Getting the basics right for I-SEM success
There have been a lot of words written about I-SEM over the past couple of years, ranging from 100 page regulatory decision papers to newspaper pieces speculating on the future direction of power prices in the new market. If you were to apply some rudimentary word cloud analysis you find that the words ‘radical’, ‘complex’, ‘dynamic’ and ‘volatile’ would appear in fairly large font. These are the most common terms used to describe I-SEM because many participants feel that it will be complicated, unsettling and potentially painful.
The decision papers, analyses and articles sound familiar to us, along with some of the conclusions being drawn. At SSE, we’ve been through a lot of market change in both electricity and gas. We’ve seen the England and Wales Electricity Pool morph into NETA and subsequently BETTA. We’ve continuously traded at the UK National Balancing Point as it has become a major European hub for gas and we’ve managed the numerous Gas and Electricity Code Reviews that have taken place to fix issues or implement new European Directives.
Throughout each market change, people have tended to focus a bit too much on the new details and forgotten about the fundamentals. The details are certainly important – they will redistribute revenue, change incentives and introduce lots of new jargon. However I-SEM is more than simply a reshuffling of the decks – the architectural redesign can deliver some real benefits for customers and generators. However, fundamentals are the things that can make a project bankable and determine whether an existing asset performs or struggles to pay the bills.
For I-SEM, we think these fundamentals are going to be much the same as under any other electricity trading arrangement – access to data, access to markets and financial strength. Across the UK and Ireland, we operate around 3300MW of renewable capacity, soon to include the 588MW Beatrice offshore project and the 169MW Galway Wind Park. Under the comparable GB BETTA market, we operate 24/7 electricity trading and renewables operations desks to maximise revenues. This level of trading capability hasn’t been required in SEM to date, but it will be in I-SEM – power will have to be more actively traded and balanced. For SSE the new requirements just mean expanding our existing trading operations to include Ireland, allowing us to act as a commercial partner to any renewable developer or asset owner. In doing so, we can optimise your assets as we optimise our own, so I-SEM need not be complicated, unsettling or painful.
So, what is our solution going to deliver? At the centre of successful trading is data – producing and analysing lots of information to make sure resources are directed to their highest value use. Although the requirements needed to operate in the I-SEM power market might seem quite far removed from the requirements needed to develop a renewable asset there are some cross-overs. When you build and operate a wind asset, you will reveal lots of information about its performance. I-SEM makes this information valuable – we can help you collect, translate and deliver this information to the right place. And we have the benefit of performance information associated with our own portfolio too.
This brings us to the second fundamental – access to markets. There are lots of components to I-SEM itself – if you want to optimise the value of your wind farm, you won’t just be delivering megawatts of power. Your wind farm can deliver power, probability and flexibility. SSE will be operating right across the curve from long-dated financial CfDs to intraday adjustments to shape, and to TSO balancing services. We are uniquely placed to participate in all of these markets, and can leverage SSE’s diverse portfolio to that effect. Regardless of whether you have an out-of-support unit that needs to meet financing terms or a REFIT supported unit that wants to minimise balancing costs, we can access the markets that suit your project.
In our mind, the final fundamental is one that is often overlooked, particularly when markets are undergoing radical change – that is, credit risk. When you are looking for someone to manage an entirely new set of ‘radical’, ‘complex’ risks for you, you don’t necessarily consider the most important and omnipresent. Unfortunately, credit risk does not go away, regardless of how well the new I-SEM financial settlement algebra is written. Financial strength is difficult to build and easy to lose – particularly during periods of market change where people can be over optimistic and end up overpromising. As a FTSE 100 company that has delivered a dividend increase year on year since 1999, we know about the long-term outlook that long-term projects need. You and your financial partners can be sure that we’ll be standing with you and delivering on our contract for the life of your asset.
So, still worried about I-SEM? Come and talk to us and we’ll help you to seamlessly transition into I-SEM.