20140305, Jerusalem Walter Boltz

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

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

RES-E push out conventional generation 20140305, Jerusalem Walter Boltz

Installed vs. firm RES-E capacity 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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. 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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. 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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 20140305, Jerusalem Walter Boltz

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! 20140305, Jerusalem Walter Boltz

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

Electricity prices

Electricity prices

20140305, Jerusalem Walter Boltz