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					 Commission for Energy Regulation


Capacity Margin Payments Scheme for
                2006


         A Decision Paper

            CER/05/198




           7th October 2005




                                      1
EXECUTIVE SUMMARY

This Decision Paper by the Commission for Energy Regulation (“the
Commission”) sets out the electricity capacity margin payments scheme
for the period from 1st January to 31st December 2006.

The current capacity margin payments scheme, which came into effect in
October 2001, has its basis in the Commission’s Paper of September
2001 (CER/01/126). In 2004, the Commission decided to cap payments
under the scheme to €16 million, and this cap also applies for 2005.

ESB Power Generation has requested an increase in the total 2006
capacity margin payment scheme to €46 million, on the basis that the
current energy pricing structure does not provide for the economic
viability of mid-merit and peaking plants, even though these plants are
increasingly important for ensuring security of supply. The Commission
has decided that increasing the total capacity margin payment to this
level for 2006 is inappropriate at this time, for the following reasons:

   In its Consultation Paper “Regulation of ESB Power Generation
    Business until the Establishment of the Single Electricity Market”
    (CER/05/111) published on 26th July 2005, the Commission has
    proposed allowing ESB PG earn a margin for operating its fully
    depreciated plants. The margin would apply from 1st January 2006
    and all of the plants to which it applies are in the mid-merit and
    peaking category. An allowable margin of €18.75 million is proposed,
    linked to ESB PG meeting a weighted availability target for these
    plants of 82%. A bonus/penalty scheme for deviations from this
    availability target will apply. This additional revenue stream for ESB
    PG recognises the importance and value of these plants in providing
    security of electricity supply; and,

   There are already existing peaking generation plants being financed
    by the Public Service Obligation, at Rhode (104MW), Aghada (52MW)
    and Tawnaghmore (52MW) - these will continue to operate in 2006;
    and,

   Market participants are facing upward pressure on costs, due to
    increases in global fuel prices over the last year. Given that the
    capacity margin is paid by suppliers and administered through the
    Transmission Use of System (TUoS) billing system, any increase
    would add further upward pressure on supplier costs and therefore
    on consumer tariffs.

However, in recognition of the role of these plants in contributing towards
security of supply, and the fact that the all-island Single Electricity
Market (SEM) will incorporate a capacity payments scheme, the
Commission has decided to continue with a capacity margin payment
scheme for 2006. This scheme will be identical to the structure of the
current scheme. Thus the €16 million cap will remain, adjusted for
inflation at a rate of 2.2%, resulting in a cap of €16.35 million for 2006.




                                                                         2
TABLE OF CONTENTS


Section                                   Page
1. Introduction                            4
2. Background                              5
3. Key Provisions of the Current Scheme    6
4. Scheme for 2006                         8
Appendix: Comments and Commission’s
Response                                   9




                                                 3
1. Introduction

This Decision Paper by the Commission for Energy Regulation (“the
Commission”) sets out the electricity capacity margin payments scheme,
for the period from 1st January to 31st December 2006.

The capacity margin is the margin of generation capacity beyond the
daily system peak demand that is required to cover situations of
unexpected failure of generation, or unusual or unanticipated increases
in demand. Thus it plays a role in helping to ensure security of electricity
supply to the final customer. The margin is illustrated in Figure 1 below -
plant overhauls and outages are scheduled in the maintenance
opportunity zone, so that the daily capacity margin remains the same for
a given level of generation capacity.

Figure 1: Illustration of Capacity Margin




The plants that provide the capacity margin are usually mid-merit or
peaking, which means they are typically run only at times when they are
needed to meet high demand and/or loss of generation. These plants
provide energy infrequently, but they are vital for security of electricity
supply at such times. Given the low and uncertain number of annual
running hours of these plants, the revenue that they receive as energy
payments cannot be relied upon to cover their annual costs and ensure
their presence in the market. Capacity margin payments are therefore
made to help ensure that such plants are available to provide a capacity
margin and hence aid security of supply.




                                                                          4
2. Background

In November 2000 the Commission published a Paper (CER/ESB 0064)
setting out proposals for a centrally administered system of payments for
the provision of a capacity margin by generators. Following consideration
of responses to the Paper, the Commission published its conclusions in
September 2001 (CER/01/126), whereby it agreed to the implementation
of a capacity margin payments scheme. The scheme came into effect in
October 2001.

The scheme only had a modest impact in incentivising capacity to be
available and the following additional measures were also required to
help maintain a secure capacity margin:

   Peaking generation units at Rhode (104MW), Aghada (52MW) and
    Tawnaghmore (52MW), financed via the Public Service Obligation
    (PSO);

   Demand reduction schemes, with the Winter Peal Demand Reduction
    Scheme (WPDRS) operated by both ESB National Grid (NG) and the
    Winter Demand Reduction Incentive (WDRI) operated by ESB Public
    Electricity Supply; and,

   A contract between ESB Power Generation (PG) for 167MW of capacity
    with Northern Ireland Electricity’s Ballylumford plant, financed via
    the PSO.

In light of above, since 2004 the Commission has capped payments in
the scheme to €16 million per annum.




                                                                       5
3. Key Provisions of the Current Scheme

The current capacity margin payments scheme has its basis in the
Commission’s Paper of September 2001 (CER/01/126). These are shown
below.

1   Requirement Set by the TSO

It is a quantity-led approach, in which the Transmission System Operator
(TSO), ESB NG, administers the scheme and defines the amount of
capacity margin required. This is set with reference to the five largest
generating units connected the electricity system. The effect of losing
each combination of two of these units is calculated and the average is
taken. Thus it is a signal indicating the level of capacity required in order
to replace two of the largest generating units on the system, and it
increases as more larger units come on-line. In 2004, this resulted in a
requirement of 636MW. From January 2005 to March 2006, the
requirement is set at 646MW. From March 2006, when the new 382MW
Tynagh power station is expected to be commissioned, until June 2007,
the requirement is anticipated to be 684MW under present
arrangements.

2. Payments for Available Spare Capacity

Payments for the provision of capacity margin by generating units are
made daily by ESB NG and are calculated on the basis of capacity that is
declared available, but not running, from a generating company.

The hourly price paid per MW of capacity margin provided was initially
based on a calculation of the annualised fixed costs of a best new Open
Cycle Gas Turbine (OCGT) entrant. This resulted in an hourly rate of
€5.94 per MW for 2001/02, inflated to €6.22 in 2003. As referred to in
Section 2, in 2004 the Commission decided to cap annual payments
under the scheme to €16 million, meaning that the hourly rate per MW
was effectively reduced to €2.86. The €16 million cap currently translates
to an hourly rate of €2.87 per MW.

The capacity payment is made daily to a generating company and is
based on the point in the day when capacity margin is tightest - the Daily
Minimum Margin Trading Period (DMMTP). The daily payment for each
generating company is determined by the level of a generator’s declared
availability (not running) in this trading period, irrespective of levels of
availability in other times of the day. Thus the daily payment to a
generating company is currently as follows:

Capacity Margin MW provided at DMMTP * Capacity Margin Rate * 24

The capacity margin cost is recovered as a separately identified item
within the Transmission Use of System (TUoS) tariff. Therefore it is paid
for by all licensed electricity suppliers, based on their usage of the
transmission system.




                                                                           6
3. Payments Adjusted Pro Rata

When the capacity declared available exceeds the amount of capacity
margin required (as set by ESB NG) at the DMMTP, the price paid for
what is provided is adjusted pro rata downwards, such that the total
daily amount paid for capacity margin is not exceeded. Thus payments
on these days are calculated as follows:

Capacity Margin MW provided by Generator / Capacity margin MW
provided by all Generators * Capacity Margin Requirement * Capacity
Margin Rate * 24




                                                                      7
4. Scheme for 2006

ESB Power Generation (PG) requested an increase in the 2006 capacity
margin payment scheme to €46 million, from the current €16 million cap.
This is on the basis that the current energy pricing structure does not
provide for the economic viability of mid-merit and peaking plants (i.e.
energy prices do not cover their costs), even though these plants are
increasingly important for ensuring security of supply at peak demand
times.

The Commission has decided that increasing the total capacity margin
payment for 2006 is inappropriate at this time, for the following reasons:

   In its Consultation Paper “Regulation of ESB Power Generation
    Business until the Establishment of the Single Electricity Market”
    (CER/05/111) published on 26th July 2005, the Commission has
    proposed allowing ESB PG earn a margin for operating its fully
    depreciated plants. The margin would apply from 1st January 2006,
    with all of the plants to which it applies are in the mid-merit and
    peaking category. An allowable margin of €18.75 million is proposed,
    linked to ESB PG meeting a weighted availability target for these
    plants of 82%. A bonus/penalty scheme for deviations from this
    availability target will apply. Therefore the Commission is already
    proposing, via this additional revenue stream for ESB PG, to recognise
    the importance and value of these plants in providing security of
    electricity supply; and,

   There are already existing peaking generation plants being financed
    by the PSO, at Rhode (104MW), Aghada (52MW) and Tawnaghmore
    (52MW) - these will continue to operate in 2006; and,

   Market participants are facing upward pressure on costs, due to
    increases in global fuel prices over the last year. Given that the
    capacity margin is paid by suppliers and administered through the
    TUoS billing system, any increase would add further upward pressure
    on supplier costs and therefore to consumer tariffs.

However, in recognition of the role of these plants in ensuring security of
supply, and the fact that the all-island SEM will incorporate a capacity
payments scheme, the Commission has decided to continue with a
capacity margin payment scheme for 2006. This scheme will be identical
to the structure of the current scheme. Thus the €16 million cap will
remain, adjusted for inflation at a rate of 2.2%, resulting in a cap of
€16.35 million for 2006.




                                                                         8
Appendix: Comments and Commission Response

On 9th September 2005, the Commission issued a Draft Decision Paper
(CER/05/161) setting out the proposed electricity capacity margin
payments scheme for the period from 1st January to 31st December 2006
(the final Decision is set out above).

A response to the Draft Decision was received from ESB Power
Generation (PG) and is summarised below, along with the Commission’s
response.

ESB PG expressed its disappointment with the proposed cap in capacity
margin payments. It believes that it needs to be increased to reflect the
economic cost associated with increased wind generation and the fact
that the cost of capacity margin is approximately €6/MWh (double the
Commission figure). In relation to the Commission’s reasons for not
increasing the cap, ESB PG made the following points:

   The allowed €18.75 million margin for fully depreciated plants is a
    return provided under Bulk Power Agreement (BPA) income, and not
    the full cost of an Open Cycle Gas Turbine (OCGT) used to provide
    capacity margin;

   ESB PG’s estimate of €46 million as a fair figure for capacity margin
    provision does not include any payments to the peaking plant for the
    provision of this service;

   Capacity Margin is a system cost that should be recovered from all
    market participants; otherwise it places an unfair burden on ESB
    Public Electricity Supply (PES) customers.

Commission Response

The vast majority of the current capacity margin payment cap of €16
million is made to ESB PG plants. Thus any increase in capacity margin
payments would mostly accrue to ESB PG, but, as a separately identified
item within the Transmission Use of System (TUoS) tariff, would be paid for
by all Suppliers and therefore customers in the electricity market. Thus the
Commission took into account that it was already allowing ESB PG an
additional €18.75 million to operate its fully depreciated plant in 2006.
Given this and the fact that there are already peaking generation plants
financed by the market via the Public Service Obligation (PSO), the
Commission is satisfied that a cap of €16.35 million is an appropriate
amount for 2006.

The Commission is working on a new capacity margin payments scheme in
the context of the all-island Single Electricity Market (SEM) to be introduced
in July 2007.




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