The Development of the Electricity Market in Israel: Toward a Sustainable Electricity Market

Full paper (Hebrew)


  • Electricity production through renewable energy lags significantly behind government targets, after also lagging behind in the previous decade.
  • In retrospect, we see that since the costs of production through renewable energy have declined significantly, the lag saved the economy about 10 percent of electricity expenses, but it caused a delay in meeting the environmental targets set by the government.
  • The lag is a result of unrealistic targets, onerous regulation, and delays due to the sharp decline in the costs of production.
  • The lack of long-term planning, particularly of the electricity transmission network, creates the main future barrier to producing electricity from renewable energy sources, and is already effectively blocking the expansion of the use of such energy sources.

 

An analysis by Yehuda Porath and Lior Gallo of the Bank of Israel Research Department examined the process that the electricity market in Israel has undergone toward realizing the targets for electricity production from renewable energy sources, the regulatory changes in the field, and the challenges that are likely to develop in the future.

 

The government’s decision to promote electricity production from renewable energy sources was made for environmental reasons, with a preparedness to bear the economic costs.  In particular, over the last two decades many countries have signed agreements to reduce greenhouse gas emissions with the aim of achieving climate targets, and technologies for producing electricity from renewable energy sources are helping achieve those targets.  Since Israel is committed to those international agreements, successive Israeli governments have adopted greenhouse gas emission targets, from which the targets for producing electricity from renewable energy sources have been derived.

 

As the Figure below shows, the analysis found that a gap has developed between the targets and their achievement.  In 2014, the target was 5 percent of production, but only about 1.5 percent of electricity was produced from renewable energy sources.  However, the pace of growth of electricity production from renewable energy sources increased in recent years.  While the pace of growth from 2014 to 2015 was 0.5 percentage points, it was 0.7 percentage points from 2015 to 2016.  However, this is not sufficient to reach the target set for 2020—10 percent of production.

 

A retrospective analysis shows that the delay in achieving the government targets led to noticeable savings because of technological developments in the field of renewable energy and the fact that there were sharp declines in the costs of production.  But these savings came at the cost of a delay in reaching targets for the reduction of pollutant emissions.

 

The analysis showed that in order to promote the production of electricity from renewable energy sources, such production must be economically feasible, there must be adequate regulation, proper planning, and appropriate infrastructure.  Increased economic feasibility and improved regulation have led to increased production in recent years.  Photovoltaic technology, an area in which Israel has a relative advantage due to its climate, has recently become a successful competitor against the alternatives, and many barriers that had been preventing its development have recently been removed.  The low prices of solar panels and the guaranteed profit for developers also apparently act to remove a barrier to the realization of the quotas allocated by the government.  In the area of wind energy, there are still regulatory barriers, and removing them will enable production from this energy to develop.  The main challenge is now posed by the electricity transmission system: Without long-term investment, it could block the continued development of electricity production from renewable energy sources and the ability to meet government targets in this area.

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