Israel Electricity Authority Switches Pricing Model and Tightens Oversight on Producers

The Israel Electricity Authority plans to replace the current wholesale electricity pricing method with a new system, expected to increase payments to electricity producers by about 240 million shekels annually. Alongside this change, the Authority intends to strengthen supervision over private electricity producers’ price offers, citing concerns that some exploit the market structure to propose excessively high prices. The tighter oversight is projected to offset approximately 100 million shekels of the increase, resulting in a net annual cost rise of around 140 million shekels.

The transition involves moving from the System Marginal Price (SMP) method to the Market Clearing Price (MCP) model, set to be implemented from January. Currently, SMP prices are determined by the most expensive power station needed to meet demand, with all producers receiving that price regardless of their actual production costs. The MCP method, developed by the government company Noga after over two years of study, aims to factor in all operational constraints of the electricity system, reflecting not only production costs but also system conditions at the time of pricing.

Due to MCP’s greater sensitivity to producers’ price offers, the Authority plans to enforce stricter controls to cut proposals exceeding regulated caps. This move follows findings of frequent price offers above caps and patterns of price spikes during peak demand, which the Authority suspects may be strategic attempts to manipulate the market and increase producer revenues.

Research by the Adva Center, published in June, highlighted that privatization of Israel’s electricity sector has generated excess profits of 4.6 billion shekels for private producers without significantly lowering consumer tariffs. Private producers currently receive about 400 million shekels annually in availability payments to ensure power plants remain ready even when not producing electricity, a mechanism criticized for enabling tariff inflation.

Noga’s calculations indicate that MCP prices in 2025 would average about 35% higher than SMP prices, with peak demand periods showing even larger gaps, up to 80% in winter and over 50% in summer and transitional seasons. However, these are preliminary simulated prices subject to change based on final decisions by the Electricity Authority. A senior official acknowledged that despite the complexity and higher costs of the new system, after extensive evaluation including North American models, MCP is considered the best available option for Israel’s complex electricity market.