20140305, Jerusalem
Walter Boltz
1
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
3
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
4
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
5
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
6
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
7
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
8
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
9
Gaps created by the third package
Increased crossborder trade
• Need to counteract
market abuse
More integrated
markets and RES
penetration
• Need for reinforced
transmission lines
Open markets
• Need for targeted security
of supply considerations
 Legal framework needs (yet again) to be expanded
20140305, Jerusalem
Walter Boltz
10
Complementary mechanisms
Internal Energy Market
Third package of EU liberalization laws
REMIT:
Preventing,
detecting and
sanctioning
market abuse in
power
and gas trading
EIP:
Supporting
construction of
crucial
transmission
infrastructure for
gas and
electricity
Security of
Supply
Regulations:
Creating
coordination and
solidarity
mechanisms for
crisis situations
Cross-border cooperation of national regulators and TSOs
20140305, Jerusalem
Walter Boltz
11
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
12
What issues do we face?
Uncoordinated
climate protection
(RES support vs.
CO2 trade)
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
Political decisions to
shut down power
plants, regardless of
technical
circumstances
20140305, Jerusalem
Insufficient
expansion of
TSO
infrastructure
Plans for introducing capacity
mechanisms
Walter Boltz
13
RES-E push out
conventional generation
20140305, Jerusalem
Walter Boltz
14
Installed vs. firm RES-E capacity
60000
50000
25000
40000
PV
Wind onshore
30000
20000
30000
10000
0
300
0
Installed capacity
20140305, Jerusalem
Firm capacity
Walter Boltz
Source: BDEW
15
Capacity mechanisms in EU countries
Capacity options
Strategic reserve
Capacity market
(since 2007)
Strategic reserve /
capacity market
Capacity options
Strategic reserve /
capacity options
Capacity payments
(since 1998)
Strategic reserve
Capacity payments
(since 2011)
Capacity payments
(capacity options
planned from 2014)
Capacity payments
(since 2005)
No CRM (energy only market)
CRM proposed / under discussion
CRM in use
20140305, Jerusalem
Walter Boltz
Source: Survey of national regulators
(2012), E-Control
16
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
17
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
18
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
19
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
20
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
21
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
22
Unsolicited advice for Israel (V)
• Avoid costly and market-distorting capacity markets
as far as possible
– Very few countries have managed to establish wellworking 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
23
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
24
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
25
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
26
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.
20140305, Jerusalem
Walter Boltz
27
Contact
Walter Boltz

+ 43 1 24 7 24 200

Walter.Boltz@e-control.at

www.e-control.at
28
Electricity prices
29
Electricity prices
30
20140305, Jerusalem
Walter Boltz
31