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Regulating state-owned CompaniesThe Israeli case

Adv. ORIT FARKASH-HACOHENIsrael Public Utility Authority Chairperson

Israeli context - Main Trends in the 2020 Electricity Market

40% IPP’s60% gas

~10% RES

The Share of IPPs is Growing Rapidly

3

36.6%

8%

IPP’s becoming ~40% from Electricity production

0

5000

10000

15000

20000

25000

2012 2013 2014 2015 2016 2017 2018 2019 2020

(MW)RES

Cogen

IPP

IEC

Gas

Israel’s gas reform

Renewables

Government Targets 10% by 2020

0

20

40

60

80

2009 2020 (exp.)

65%25%

33% 65%

10%

Elec

rici

ty G

ener

atio

n (T

Wh)

Savings from Energy Efficiency program

Renewable Energy Sources

Natural Gas

Coal

Wind30%

Biomass21%

Large Thermo solar or PV

35%

Medium and small sized PV

14%

7

0

20

40

60

80

100

120

140

160

180

200

2008 2009 2010 2011 2012 2013 2014 2015 2016

PV ביתי

PV עסקי

PV חלוקה

PV הולכה

רוח

8

Evolution of Renewable Tariff

IEC generation cost

latest hearing

RE FITT cuts have saved the public above 12 billion NIS

However, Market not Structured (a bundled state owned Utility)

System Operator

Generation Segment

TransmissionSegment

Distribution Segment

SupplySegment

2.5% private

10% Renewables 25% IPP

10% private

PrivateIEC

Pwc 9

IEC - Status• Strong political power• Controls TPA access to grid and to end

consumers• Strongest Union labor in Israel• A distorted balance of power between IEC and

the state • Fully and heavily regulated but ignores the

regulated tariff signals completely (inefficient, poor financial condition)

The unbundling of the Utility is by law – for a decade – but not implementedExternal and internal challenges….

IPPs Facing challenges due to lack of structural reform

Growing mis-use of monopolistic power by the utility Labor Union

Self (physical) dispatch to avoid dependence on

system’s operator

Access to the grid might be denied

Lack of transparency

Regulated tariff serves as a cap for competitive

retail price

Competition limited to large consumers

Investors are facing higher risk and uncertainty to poor market structure

Capacity can be sold to the

monopoly to avoid demand risk

Capacity payments offered to IPPs in

addition to bilateral contracts

Gas purchase guarantee

War and terrorism insurance

12Over 3000 MW achieved financial closure and bring in investments

Challenges regulating IEC (state owned) in a world of change

Cont -

Conclusion

• The Israeli energy market is going through a great positive change

• In a reality of a strong Utility connected to the state as an owner, stirring private players had to be done in order to “move the cheese” and create a change in the mindset of the Utility.

• The next essential step is restructuring the market in order to support further progress.

www.wfer2015.netwww.wfer2015.org

COAL37%

GAS60%

מזוט0%

סולר0%

PV3%

2015

The use of gas decreased emission

COAL50%

GAS46%

מזוט0%

SOLER1% PV

3%2014

Gas dependency challenges

Pipeline redundancy

Antitrust issues

Gas contracts $5,00 $5,50 $6,00 $6,50 $7,00 $7,50 $8,00

2011 2016 2021 2026 2031

Pricing issues