Opening up electricity markets: Liberalisation in the EU and recommendations for Israel

1. Walter Boltz

2. Opening up electricity markets: Liberalisation in the EU and recommendations for Israel Walter Boltz, Executive Director E-Control Vice Chair of ACER’s Regulatory Board

3. Before liberalisation EU wide, harmonized legal frameworkformarketopeningneeded Walter Boltz

4. First “package” of energy liberalisation laws • Adopted in EU in 1996 (electricity) / 1998 (gas) • for transposition in member states two years later Walter Boltz

5. Gaps in the first package Legal frameworkneedstobeexpanded Walter Boltz

6. Second energy liberalisation package • adopted in 2003 • for transposition in member states one year later Walter Boltz

7. Gaps in the second package:sector inquiry 2005 Legal frameworkneedstobeexpanded Walter Boltz

8. Third energy liberalisationpackage • adopted in 2009 • for transposition in member states two years later • process is complex but without interference of national governments Walter Boltz

9. Success of the third package • Market integrationisprogressing • TSOs arebecomingmoreindependent (majorityisalreadyownershipunbundled) • First EU-widetechnicalrulesarecomingintoforce • Many additional rulesarebeingprepared • Increasedtransparency (generation, transmissioncapacity, prices, etc.) • More than 60% of EU elctricitymarketsarecoupled (havefullpricecorrelation) • Day-aheadandintradaymarketliquiditygrowing Walter Boltz

10. Gaps created by the third package Legal frameworkneeds (yetagain) tobeexpanded Walter Boltz

11. Complementary mechanisms Internal Energy Market Third package of EU liberalization laws Security of Supply Regulations: Creating coordination and solidarity mechanisms for crisis situations REMIT: Preventing, detecting and sanctioning market abuse in power and gas trading EIP: Supporting construction of crucial transmission infrastructure for gas and electricity Cross-border cooperation of national regulators and TSOs Walter Boltz

12. Where do we stand today? • We see progress on the market • Prices are declining (electricity close to US levels) • TSOs are really quite independent • Regional cooperation develops • But there is still a long way to go! • Energy increasingly in the political limelight Still too many market interventions Walter Boltz

13. What issues do we face? Uncoordinatedclimateprotection (RES support vs. CO2 trade) Insufficientexpansionof TSO infrastructure “Low-price islands” where investments in generation do not pay off Non-harmonisedanddistortive RES support (e.g. in Germany) Concerns over security of supply Political decisions to shut down power plants, regardless of technical circumstances Plans for introducing capacity mechanisms Walter Boltz

14. RES-E push outconventional generation Walter Boltz

15. Installed vs. firm RES-E capacity Walter Boltz

16. Capacitymechanisms in EU countries Capacityoptions Strategic reserve Strategic reserve/ capacitymarket Capacitymarket (since2007) Capacityoptions Strategic reserve / capacityoptions Capacitypayments (since1998) Strategic reserve Capacitypayments (capacityoptionsplannedfrom2014) Capacitypayments (since2011) Capacitypayments (since2005) No CRM (energyonlymarket) CRM proposed / underdiscussion CRM in use Source: Survey of national regulators (2012), E-Control Walter Boltz

17. EC guidance on capacity mechanisms • Let the energy-only market work • Undertake a fact-based assessment of generation adequacy, using a harmonised methodology • Include regional and Union-wide context in assessment • Assess not only the amount, but also the quality of available generation capacity • Adapt market mechanisms, market rules and bidding procedures to enable the demand side to participate in the wholesale market • Conduct detailed cost-benefit analysis before introducing a capacity mechanism. • Costs should be borne by the beneficiaries of the system. Walter Boltz

18. Costs of capacity mechanisms • Strategic reserve • ~5% of annual peak load • Annual costs estimated at € 140-240 million per year • Translates into 2 €/year for an average household • Financial consequences if price peaks and congestion coincide • Capacity options • Annual costs difficult to estimate, as strongly dependent on system particularities • First estimates at 16 €/year for an average household • Experience in other countries: implementation very complex Walter Boltz

19. Unsolicited advice for Israel (I) • Get the structure right • Ensure effective unbundling of the TSO (~ITO level) • The TSO must ensure security of supply and coordinate any emergency measures and market interventions needed  must be truly independent • Enable effective competition between generators(>5 equally sized competitors in the medium term) • Split up existing monopolies • Encourage new entry of fossil plants • Encourage autogeneration (IPPs) • Long-term PPPs (5-7 yrs) as interim measure only • Expose plants to price and balancing risks as much as possible • VPP (Virtual power plants) priced through auctions in the interim Walter Boltz

20. Unsolicited advice for Israel (II) • Encourage RES generation (but do not subsidise) • PV should be commercially viable in a system with high air conditioning load and lots of sun • Wind should be (almost) commercially viable as well in some locations • Support for RES should focus on favourable connection rules and not on direct feed-in tariffs • Expose medium to large RES to price fluctuations and balancing risks Walter Boltz

21. Unsolicited advice for Israel (III) • Organise wholesale markets in a mandatory pool model and monitor developments • A fully functioning wholesale market should only be established once the risk of market dominance and market abuse have been addressed • A fully functioning wholesale market needs >5 equally sized producers • Organise ancillary services as a public service obligation for generators and only gradually move them into a market system  risk of market abuse is high! • Balancing • Back-up generation plants Walter Boltz

22. Unsolicited advice for Israel (IV) • Develop a common understanding in the electricity sector about the level of generation adequacy needed and monitor closely • As an island system, generation adequacy is crucial • There is no “true” level for an island system like Israel • The generation adequacy debate is usually misused by market participants to call for unwarranted subsidies  beware of this risk • Normally, a generation adequacy ratio of 12% (up to 15% for an island system) has worked well in many countries (calculated like in Europe from dispatchable generation!) • Determine a proper goal for the future fuel mix in generation (coal, oil, gas, biomass, waste, RES) and communicate this also to licensing authorities but do not administratively set these goals Walter Boltz

23. Unsolicited advice for Israel (V) • Avoid costly and market-distorting capacity markets as far as possible • Very few countries have managed to establish well-working capacity mechanisms • It is inherently difficult to do so – avoiding it seems the better solution • Providing a (truly independent) TSO with exclusive access to some emergency capacity is a far better and cheaper alternative to capacity payments for all Walter Boltz

24. Unsolicited advice for Israel (VI) • Establish strong and independent institutions with clear mandate and sufficient resources • A truly independent national regulator ( independent from the industry and government) • A truly independent TSO • A clear definition of who is in charge of what • Secure system operation: TSO • Short-term security of supply: TSO • Long-term security of supply (=generation adequacy, network reliability): regulator/government • Ensuring competition on wholesale markets: regulator • Etc. Walter Boltz

25. Unsolicited advice for Israel (VII) • Design and implement a transparency regime • Transparency is a powerful tool to restrain market abuse and get the political support for necessary changes • Transparency is needed on • Wholesale prices • Ancillary service costs • Generation adequacy • Long-term contracts • Generation utilisation and availability • Electricity consumer service levels Walter Boltz

26. Unsolicited advice for Israel (VIII) • Develop a timeline for end-user/retail liberalisation • Ensure that regulated end-user prices are set in a way that allows competition to survive (e.g. rather higher, to give an incentive for moving into the free market) • Make sure all end-user prices which are set by the independent NRA are cost-based. • Make easy rules for new suppliers to enter the market (contestability) • Any assistance to vulnerable customers should come from the social security system, not from the electricity price system • Avoid (most) cross-subsidies for energy intensive industry Walter Boltz

27. Conclusions • Get the structure right. • Unbundle your TSO properly. • Create competition in generation. • Encourage RES without subsidising. • Introduce a mandatory pool at wholesale level. • Start with ancillary services as public service obligations. • Closely look at generation adequacy. • Do not introduce capacity mechanisms. • Establish strong and independent institutions. • Be transparent. • Plan for full market opening. Goodluck! Walter Boltz

28. Contact Walter Boltz + 43 1 24 7 24 200 Walter.Boltz@e-control.at www.e-control.at

29. Electricity prices

30. Electricity prices

31. Walter Boltz