Walter Boltz 120140305, Jerusalem

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

Walter Boltz

Before liberalisation

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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

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Walter Boltz

First “package” of energy liberalisation laws

• Adopted in EU in 1996 (electricity) / 1998 (gas) • for transposition in member states two years later

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Authorisation of new generation

Accounting and functional unbundling only

Independent authority to settle disputes (regulator)

Liberalization for big customers only

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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!

20140305, Jerusalem

Legal framework needs to be expanded

Walter Boltz

Second energy liberalisation package

• adopted in 2003 • for transposition in member states one year later

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Full liberalisation

Legal unbundling

Regulated third party access

Consumer protection

Independent regulatory authority

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Walter Boltz

Gaps in the second package:sector inquiry 2005

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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

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Walter Boltz

Third energy liberalisation package

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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

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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

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Walter Boltz

Gaps created by the third package

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• 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 considerationsOpen markets

Legal framework needs (yet again) to be expanded

20140305, Jerusalem

Walter Boltz

Complementary mechanisms

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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

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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

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What issues do we face?

Uncoordinated climate protection (RES support vs.

CO2 trade)

Insufficient expansion of

TSO infrastructure

Political decisions to shut down power

plants, regardless of technical circumstances

Non-harmonised and distortive RES support

(e.g. in Germany)

“Low-price islands” where investments in generation do

not pay off

Concerns over security of

supply

Plans for introducing capacity mechanisms

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RES-E push outconventional generation

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Walter Boltz

Installed vs. firm RES-E capacity

Installed capacity Firm capacity0

10000

20000

30000

40000

50000

60000

30000

300

25000

0

PVWind onshore

Source: BDEW

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Capacity mechanisms in EU countries

Strategic reserve

Capacity payments(since 2005)

Strategic reserve /capacity market

Capacity payments (since 1998)

No CRM (energy only market)

CRM in use

Capacity payments(capacity options

planned from 2014)

Strategic reserve

CRM proposed / under discussion

Source: Survey of national regulators (2012), E-Control

Capacity options

Capacity options

Capacity market(since 2007)

Capacity payments(since 2011)

Strategic reserve / capacity options

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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

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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

complex20140305, Jerusalem

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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

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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

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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

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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

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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

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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.

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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

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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 industry20140305, Jerusalem

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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. Good lu

ck!

20140305, Jerusalem

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Walter Boltz

+ 43 1 24 7 24 200

Walter.Boltz@e-control.at

www.e-control.at

Contact

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Electricity prices

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Electricity prices

Walter Boltz 3120140305, Jerusalem