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Researchers have studied Israel’s clearing price method for PV tenders and raised concerns about its potential for long-term dominance. They examined how power abuse and technological inefficiencies lead to market inefficiencies, concluding that a duopoly best suits the Israeli market.
Scientists from Ben-Gurion University of the Negev analyzed Israel’s PV market through three large tenders. They examined it in terms of economic welfare, focusing on inefficiencies caused by market concentration and technological inefficiencies from less competitive companies winning tenders.
The Israel Electricity Authority (IEA) held three tenders in 2016, 2017, and 2019 using the clearing price method. In this approach, bidders submit generation capacities and fixed-tariff offers per kilowatt-hour without knowing the final capacity the regulator will select.
“The tender quota ultimately determines the market-clearing price. Multiple companies submit bids offering varying prices for producing different output quantities, yet the final price awarded to all winning companies is uniform, irrespective of the individual prices they initially proposed,” the researchers said. “Bids are ranked, and the firms offering the lowest tariffs are selected until the quota is met.”
The clearing price method set a production quota of 235 MW with a tariff of ILS 0.199 ($0.053)/kWh in the first tender, 105 MW with ILS 0.1978/kWh in the second, and 220 MW with ILS 0.188/kWh in the third. Twelve firms won in the first tender, while only six participated in the second and third. The largest firm received 33.83% of the total quota across the three tenders.
“After the third tender, Firm A received 190 MW in quotas, Firm B 110 MW, Firm C 101 MW, and the other winners up to 55 MW,” the academics said. “These findings may imply that if future tenders continue to use the same method, the result will be an oligopolistic market, meaning a more concentrated market. According to the economic literature, this market may be more efficient in production but would prove costly to the country’s economic welfare.”
Using the tender outcomes and a fitted demand curve, the scientists applied the Cournot oligopoly model to calculate the economic welfare loss rate and simulate future scenarios in Israel’s market. The Cournot model assumes firms’ products are perfect substitutes, and each firm’s strategy involves selecting production quantities simultaneously.
“The equilibrium obtained from the Cournot model allowed us to calculate measures of economic welfare, including consumer surplus in the electricity sector, producer surplus, and the loss attributed to maintaining competition by allowing less efficient firms to win the tender (i.e., technological inefficiencies),” the group said. “Additionally, we assessed the decrease in economic welfare due to market power resulting from the lack of competition (i.e., the calculated economic welfare loss relative to the most efficient outcome).”
The results showed that economic welfare loss from market power abuse was lower than that from technological inefficiencies. In the first tender, market power caused about 9% welfare loss, 14% in the second, and 12% in the third. In contrast, technological inefficiencies led to welfare losses of about 41%, 37%, and 28% in each tender, respectively.
The scientists used the results of the most recent tender to assess the impact of further market downsizing, from the current six companies to a monopoly.
“The comparison shows that as the market shrinks in terms of the number of firms, the cost of maintaining competition (that is, production by less efficient firms) imposes a decreasing economic burden,” said the scientists. “Surprisingly, economic welfare loss is minimal with only two winning firms. If we are left with only one firm, electricity production will cost less, but the monopolistic player will install approximately 31% less capacity than that obtained in the third tender. Thus, the monopoly company will maximize its profits at the expense of the consumer and society’s overall welfare.”
They presented their results in “Preserving competition and economic welfare in Israel’s PV market,” which was recently published in Utilities Policy.
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