Preserving Electricity Market Efficiency While Closing Ireland's Capacity Gap

Ireland will need considerably more electricity generating capacity over the next four years. This paper examines the incentives offered by Ireland's new Single Electricity Market (SEM) to electricity generators and considers if more can be done to ensure that the new market can deliver enough electricity to meet growing demand while supporting the development of competition. As of the 1st of November, 2007, there will be a single electricity market between Northern Ireland and the Republic. Wholesale electricity will be sold through a central trading system. The market design has the potential to deliver adequate capacity, and it includes incentives to encourage efficient investment. However, for these incentives to work, they must be perceived to be long-lasting. The main findings are:- Regulatory credibility is hard to establish in any new market, but particularly in the SEM: new capacity is needed soon, building a new plant takes several years, the Irish government owns the main generator (ESB) and the market rules are complex. A lack of regulatory credibility would reduce the investment in both flexible generating plants and those that run continuously. However, it would pose particular risks for investment in flexible plants because they depend more heavily upon regulated capacity payments. Ireland has a shortage of flexible generating capacity, which will be aggravated by scheduled plant retirements and the growing importance of wind power. The new market can deliver flexible capacity, but only if market rules are credible. The paper suggests policies that could help improve regulatory credibility: The Irish government's 2007 White Paper suggests measures to obtain extra generating plants independent of the SEM rules. This could undermine existing capacity incentives. These measures should be reconsidered or at least clarified. Future ESB investments should be treated (and described) by government as commercial decisions, rather than related to market capacity objectives. The regulators could commit further in advance to the level of capacity payments or the formula used to set them.