Energy Forum 33: The Israeli Electricity Sector Reform

Prof. Gershon Grossman, Idan Liebes, Yigal Evron

Cite As:
Grossman Gershon, Liebes Idan, Evron Yigal. Energy Forum 33: The Israeli Electricity Sector Reform Haifa Israel: Samuel Neaman Institute, 2015. https://neaman.org.il/EN/EF33-Israeli-Electricity-Sector-Reform

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Since the late 1980s the state of Israel has been looking to reform its electricity sector, the majority of which is controlled by the Israel Electric Corporation (IEC). The main objective of the reform is to create competition with the goal of increasing electric production efficiency, while minimizing production, transmission and distribution costs for the end users, and improving reliability and service quality for the consumer.

Other countries implemented unbundling of the electric sector into three sections: production, transmission and distribution. The method proposed by the Yogev commission, established by the Government Companies Authority (GCA) and tasked with this subject in Israel, is to focus on the production section, under which most of the competition should take place, and to manage the system as an entity which is supposed to oversee it. In addition, steps to enhance efficiency in the other two sectors which are not natural monopolies, the transmission and distribution, were also discussed. Regarding electricity production, private producers have already begun to enter the production section and now comprise 30% of electricity production, whereas in the transmission and distribution sections there is controversy over whether they should be separate and included in the reform. In 1996 the Electricity Sector Law was set in place, its goal is to "regulate the sector's activity for the benefit of the public, while ensuring reliability, availability, quality, and efficiency, and creating conditions suited for competition and cost minimization". In spite of many efforts, and several expert committees dedicated to this subject, the reform did not take place. This is an intricate process that was halted due to different reasons relating to the state, the labor unions, and in the past also the IEC.

As a starting point it is important to remember that the Israeli electricity sector is in a good state in principle, compared to other countries and other public products that are supplied in Israel. The reliability level of electricity transmition is high compared to the western world and the price for the domestic consumer is one of the lowest of the western countries for years, especially since the enactment of the Electricity Sector Law. One must also consider the complications associated with the fact that Israel is an isolated "island" in terms of the electric grid and therefore unable to use neighboring countries as backup, in contrast to Europe and the USA.

The participants of the Forum agree that a reform is important and necessary. A reform is not merely an economic decision but also a moral one. One of the moral aspects is the advancement of competition mechanisms in the production section, and provision of options in the distribution section. There are three main issues tackled by reform globally: technological change, price reduction, and ensuring reliability of electricity supply. Technologically, the aim is, for instance, to adjust the sector and the pricing system to handle the difficulties associated with the emergence of renewable energies, even when these cause an increase in electricity prices. The price is based on fuel cost, capital, and operating cost; the first two elements depend primarily on global parameters which Israel has no control of, whereas for the operating cost (a small part of the total cost) the local parameters are more significant.

The foreseen changes in the electricity sector in terms of technologies, natural gas, and problems relating to the IEC urge to advance the reform process. A reform must balance between the need for the reliability and availability of the grid, and the moral aspiration to implement competition structures in the sector with an emphasis on the production section in order to reduce prices and provide options for the consumers.

Recommendations:

Adopt a regulation model based on the concept of an ISO (Independent System Operator) to oversee three functions: operation, long-term planning, and prediction. The tasks of the ISO are a) to predict in real-time the electricity demand and accommodate it using the appropriate producer without delay and with minimal residual costs, b) conduct periodical (annual) planning of the electricity grid which includes an engineering analysis of the required changes in the grid, c) estimate the demand for electricity by pooling all energy sources – including renewables – while maintaining high quality and availability of electricity for the consumers.
Two alternatives were discussed regarding the production section: One, supported by some of the Forum participants, was to prescribe that any construction of an additional power plant in Israel must be through a bid. The state will determine the required specifications using a central entity which will plan the electricity for the public, the lowest bidder will construct and operate the power plant. It will be available for the system manager which will incorporate it in the grid according to the best interests of the sector. This can be done according to a BOT model or by a priory transfer of ownership to the state under suitable payment conditions. It is the state's responsibility to deliver the first line of the Electricity Sector Law – ensuring reliability, availability, quality, and efficiency, while minimizing costs.

The other alternative, supported by other participants, was to promote a model where competing power plants (primarily natural gas) will be transferred to a subsidiary (or subsidiaries) while other models of competition will be implemented for these subsidiaries and private producers, ensuring that eventually all the different producers will compete under equal terms and all will answer to the would-be system manager.

Regarding the transmission and distribution: the correct recommendation is to understand that this is a natural monopoly which should not be privatized and decentralized. Today the distribution company is part of the IEC. It was explained during the Forum discussion why segregating the distribution company is operationally illogical and would block future improvements. The transmission and distribution are in fact a single system which should remain under the ownership of the IEC and become more efficient and undergo an appropriate structural change.
Regarding regulation: procedures to enhance transparency and right of appeal should be set in place. Today there are many thousands of private entities dealing with the regulator and there must be a way to allow due process and transparency in decision making. This is in the interest of the private producers as well as the IEC.
Since joining the OECD, Israel is committed to the Regulatory Impact Assessment. It must periodically analyze whether or not it achieved the goals it set for itself and at what cost. It is recommended to define a set of measures by which it is possible to quantify the current benchmark, and determine the desired target for the next 8 years. Meeting the desired measures such as electricity prices, transmission reliability, bureaucratic efficiency, etc. would be considered a 'success' of the reform. In 8 years' time – determine whether the desired target measures were achieved and at what price; if not, why? What were the obstacles?
It is recommended to allow the IEC to erect renewable power plants (under subsidiaries). This is the only way by which the IEC can obtain experience that will allow it to properly define the requirements private renewable entrepreneurs must meet in order to connect to the grid. In addition – this will create a large market for knowledge export.

Some participants disagree with this recommendation.