1. , Jerusalem
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
National markets
Inconsistent, mostly quite high prices
Monopolies, national champions
Inefficient situation
Massive over-investment in generation
Too expensive energy (compared to e.g. US)
 EU wide, harmonized legal framework for market opening needed
, Jerusalem
Walter Boltz

4. First “package” of energy liberalisation laws
Authorisation of new generation
Accounting and functional unbundling only
Independent authority to settle disputes (regulator)
Liberalization for big customers only
Adopted in EU in 1996 (electricity) / 1998 (gas)
for transposition in member states two years later
, Jerusalem
Walter Boltz

5. Gaps in the first package
Insufficient unbundling creates big problems for new entrants
Cross-border problems not addressed
Market opening for large consumers only
No mandatory regulatory authorities
Lack of clear rules for third-party access
Households and SMEs pay too much  voters complain!
 Legal framework needs to be expanded
, Jerusalem
Walter Boltz

6. Second energy liberalisation package
Full liberalisation
Legal unbundling
Regulated third party access
Consumer protection
Independent regulatory authority
adopted in 2003
for transposition in member states one year later
, Jerusalem
Walter Boltz

7. Gaps in the second package: sector inquiry 2005
Markets still mainly national and highly concentrated
Competition slow to take off
Market abuse in many forms
Low levels of supply security (2005 blackout)
TSO unbundling insufficient for cross-border coordination
Regulatory gap at the borders
 Legal framework needs to be expanded
, Jerusalem
Walter Boltz

8. Third energy liberalisation package
Stronger unbundling rules for TSOs & DSOs
Development of immediately applicable EU-wide rules
More powers and independence of Regulators
Mandatory cooperation of Regulators in ACER
Mandatory cooperation of TSOs in ENTSOs
Coordinated infrastructure planning
adopted in 2009
for transposition in member states two years later
process is complex but without interference of national governments
, Jerusalem
Walter Boltz

9. Success of the third package
Market integration is progressing
TSOs are becoming more independent (majority is already ownership unbundled)
First EU-wide technical rules are coming into force
Many additional rules are being prepared
Increased transparency (generation, transmission capacity, prices, etc.)
More than 60% of EU elctricity markets are coupled (have full price correlation)
Day-ahead and intraday market liquidity growing
, Jerusalem
Walter Boltz

10. Gaps created by the third package
Need to counteract market abuse
Increased cross-border trade
Need for reinforced transmission lines
More integrated markets and RES penetration
Need for targeted security of supply considerations
Open markets
 Legal framework needs (yet again) to be expanded
, Jerusalem
Walter Boltz

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

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

14. RES-E push out conventional generation
, Jerusalem
Walter Boltz

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

16. Capacity mechanisms in EU countries
Capacity options
Strategic reserve
Strategic reserve /
capacity market
Capacity market
(since 2007)
Capacity options
Strategic reserve / capacity options
Capacity payments (since 1998)
Strategic reserve
Capacity payments
(capacity options planned from 2014)
Capacity payments
(since 2011)
Capacity payments
(since 2005)
No CRM (energy only market)
CRM proposed / under discussion
CRM in use
Source: Survey of national regulators (2012), E-Control
, Jerusalem
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.
, Jerusalem
Walter Boltz

18. Costs of capacity mechanisms
Strategic reserve
~5% of annual peak load
Annual costs estimated at € 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
, Jerusalem
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
, Jerusalem
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
, Jerusalem
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
, Jerusalem
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
, Jerusalem
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
, Jerusalem
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.
, Jerusalem
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
, Jerusalem
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
, Jerusalem
Walter Boltz

27. Conclusions Good luck! 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.
Good luck!
, Jerusalem
Walter Boltz

28.  Walter.Boltz@e-control.at  www.e-control.at  
Contact

29. Electricity prices

30. Electricity prices

31. , Jerusalem
Walter Boltz