2. The supply of electricity in Israel during the coming decades
Electricity production in Israel is expected to become less concentrated in the coming decades, which is due in large part to the increased availability of natural gas and the transition to the use of renewable energy. These trends have a major impact on the planning of the supply of electricity in Israel since they lead to greater flexibility in planning, while at the same time they require building greater reserve production capacity, which will exceed the expected rate of growth in total demand. This reserve capacity will become necessary since the production of electricity from renewable sources (such as solar energy) varies during the course of the day, by season, and from year to year.
Until 2013, the Israel Electric Corporation (IEC) produced almost all of the electricity in Israel, apart from a small amount produced by factories. Since 2013, a significant amount of privately owned production capacity has been added and already in 2016 private producers are expected to account for about 30 percent of the electricity in Israel. This change is the result of the government’s decision to halt the construction of any additional power plants by the IEC, as well as technological innovations. Most of the electricity produced in the new private power plants is sold in bilateral deals to private consumers and the rest is sold to the IEC. In coming years, additional producers are expected to enter the market and the share of private production is expected to reach about 40 percent. The integration of private producers into the system will require the development of mechanisms for coordination between the private producers and the national electricity grid. This is because the national electricity grid is obligated to purchase the surplus production of the private producers, while producers’ first obligation is to their private customers. Therefore, the private producers cannot commit themselves to the timing or quantity of delivery to the national system.
The size of the gas reserves off the coast of Israel enables Israel to expand the use of natural gas in the economy over the course of the next few decades. The expanded availability of natural gas will make it possible to establish relatively small power plants, which will produce electricity for self-consumption and will sell the surplus to the electricity system. This change is likely to be beneficial for large consumers (such as kibbutzim, shopping malls, hospitals and factories). However, the exit of these consumers from the national electricity grid will not necessarily make it possible to reduce, in parallel, the production capacity of the system, since they will continue to rely on the national system for backup.
Another process that is expected to have an impact on the structure of the electricity sector in Israel is the transition to renewable energy. This process is driven by increased undertaking of international standards regarding environmental issues, as reflected in the Climate Change Conference in Paris in 2015. However, this process is dependent on overcoming fairly significant engineering and statutory barriers. Up until now, the proportion of electricity produced from renewable energy in Israel stood at less than 2 percent. However, following decisions by the government leading up to the conference, this proportion is to grow to at least 13 percent within a decade and to at least 17 percent by 2030.
In addition to the pressure originating from international norms, another important development is the decline in the cost of renewable energy from solar panels as a result of technological innovation. The cost of solar energy is expected to eventually equal the cost of producing energy from conventional sources, such as natural gas. However, the large-scale introduction of renewable energy will require the expansion of the capacity of the electricity network. Furthermore, there are still major technical barriers in the field of solar energy, primarily the development of the ability to store electricity at low cost (since solar energy can be produced only during the daytime and is also affected by weather conditions). The existence of these barriers means that the system will require reserves of production capacity in order to meet demand during the nighttime and on cloudy days. Therefore, the technological changes will at the same time require the judicious management of the electricity supply system.
The rate of growth in demand for electricity is expected to slow during the coming decades, among other reasons due to the growth in the share of industries that are not electricity-intensive. On the supply side, it is expected that there will be greater dispersion of electricity production among various producers (accompanied by greater potential for the activity of small producers who will produce electricity from natural gas and renewable energy) and greater use of renewable energy.
While the more moderate growth in demand will make it possible to expand production capacity at a relatively moderate rate, the increasing number of producers, which is partly due to the potential for private production in relatively small facilities, and the use of renewable energy will require significant reserve capacity in the central system, with its accompanying cost. In order to reduce this cost, it is important to develop tools for regulating demand. To this end, it is possible to exploit the proven effect of changes in the price of electricity on the demand for electricity and to make use of existing technologies, such as electronic consumption meters, in order to enable the pricing of electricity according to the variation in demand during the day. At the same time, it is possible to use existing technologies to develop a mechanism that will shift the costs of backup onto the entities that choose to establish independent production facilities, in order for the burden not to be borne by consumers in general.
The trends on the production side are increasing the complexity of the system, but at the same time are reducing the risks involved in forecasting demand, and they will apparently make it possible to maintain smaller safety margins in the planning of production capacity. This is because in coming years it will be easier and cheaper to adjust production capacity to unforeseen changes in demand. This flexibility will be made possible by the production of electricity using natural gas and solar energy in small, and even micro, facilities, in contrast to production using coal or oil (the dominant sources of energy in the past) which requires huge facilities (with all that it implies for construction time, allocation of land, and use of engineering, financial, administrative and statutory resources).
The systemic significance of these various trends is that the electricity sector in Israel will become increasingly complex in coming years, and in turn it will become even more important to have a professional planning and regulatory capability to deal with these challenges.