With Rainfall Aplenty, Israel to Rely Less on Expensive Desalinated Water This Year

Four big desalination plants will operate at only 70% capacity this year and expansion plans will be frozen.

After two years of relatively heavy rainfall, the government will be reducing the amount of water it buys from the country’s desalination plants by 30% this year.

Under an agreement arrived at last week with the plant operators after several weeks of talks, the Water Authority and Finance Ministry the government will buy 360 million cubic meters of desalinized seawater from plants located along Israel’s Mediterranean coast in Ashkelon, Palmahim, Hadera and Sorek.

That equals just 70% of their total production capacity of 510 million cubic meters, but the heavy rainfall means that the government water company Mekorot can now draw more water from natural sources, instead of using costlier desalinated water.

“The decision on reducing desalinized water purchases at this time was made possible due to a considerable improvement in natural water sources and a wide range of additional sources [such as treated wastewater and brackish water] that ensure the stable and integrative management of all water sources in the country,” the authority said.

The partial shutdowns will save 191 million shekels ($55 million) in operating costs. Along with the cost-cutting measures imposed on local water suppliers, these savings are enabling the government to cut bills by an average of 5% at the beginning of the year.

Over the next few years the government is likely to seek even bigger cuts in desalinization output, a move certain to face bitter resistance by concessionaires concerned about the return on their investment in the plants, and their value. Meanwhile, plans to expand desalination capacity have been put on hold, and many water industry officials are questioning the need for the desalination capacity already granted approval.

Under last week’s agreement, output at the Ashkelon plant - a 50-50 venture between France’s Veolia group and IDE, which is a joint venture of Israel Chemicals and Delek Group - will decline to 80 million cubic meters from 118 million. At the Palmahim plant, which is operated by Azrieli Group’s Granite Hacarmel unit, will be cut 65 million cubic meters from 90 million, while at the Hadera plant, 50% held by IDE and 50% by Housing & Construction Limited, will sell 85 million cubic meters instead of the 127 million cubic meters it could.

The relatively new Sorek plant, 51% owned by IDE and the rest by a subsidiary of Hong Kong-based Hutchison Whampoa, will cut operations by 20%, selling 120 million cubic meters of its 150 million cubic meter capacity. Another 15 million cubic meters will be saved by delaying the opening of a fifth desalinization plant under construction by Mekorot at Ashdod.

Israel’s desalination plants were built as concessions awarded by the government to private operators based on a take-or-pay model, which presumably lets the government decide whether to activate them or shut them down, according to its needs. The government is only committed to paying the fixed costs of the plants, which mainly consist of their capital costs. So when their variable costs exceed the cost of pumping water from natural sources, it pays for the government to shut them down.

Intensive lobbying

In the case of excess capacity, the government presumably should have cut purchases from plants with higher variable costs, which would have meant the Hadera plant, the plant that produces the most expensive desalinated water. The relatively new Sorek plant should have been allowed to operate at full capacity since it offers the cheapest water among the four.

But when the time to make a decision rolled around, the Water Authority and treasury chose to weigh other factors as well. First, it set a rule that production at any plant would not be scaled back by over 60%. Additional factors taken into account were the quality of water – degree of salinity – and proximity to end users. That’s how the Hadera plant, the plant furthest north and apparently the only one that could supply water to the northern region network, was “saved” from assuming most of the burden of the cutback.

Still, the final scheme for the cutbacks wasn’t what the Water Authority and treasury originally had in mind. They were forced to redistribute the reductions partly due to vehement opposition on the parts of two concessionaires.

The main objection was raised by Granite Hacarmel, operator of the relatively small Palmahim plant, which faced having its output slashed by 52 million cubic meters, 58% of its capacity. But this came just months after $100 million was invested to double the plant’s capacity, and against the background of a tender for its sale.

Granite reacted accordingly and hired a host of consultants to battle the government. Granite, like all the other plant operators, raised a string of legal arguments stating that the take-or-pay mechanism they had agreed to was presumably meant to only apply in extreme individualized cases and for limited periods of time.

The legal battle didn’t ultimately have much sway over the final outcome, but salvation came from an unexpected source – the operators of the Sorek desalinization plant, Israel’s largest. The owners, IDE and Hutchison, turned to the government on their own initiative with an offer to partially cut back on production. Apparently, the partners were concerned about running into unexpected glitches during its first full year of operations and risk being fined for producing under quota. The government was thereby able to reassign the cutbacks among the other three facilities on a pro-rated basis and overcome most of the opposition the move.

Despite the rather quiet resolution ultimately achieved in the dispute, this was only the first of several rounds of anticipated cutbacks. In only a matter of months the Water Authority and treasury could be coming out with a much deeper cut in quotas for 2015 as the Sorek plant goes fully on stream, along with Mekorot’s spanking new 100-million-cubic meter plant at Ashdod. In such a case, the take-or-pay model could meet its first legal challenge and possibly put all of the government’s public-private partnership licensing agreements at risk.

Sixth plant planned

The five desalination plants are capable of filling half the country’s freshwater needs and could already supply most of the urban demand. But the Water Authority is continuing with plans for building a sixth plant in the Western Galilee, claiming that it will solve the area’s brackish water problem. The authority also forecasts a 10% to 15% decline in precipitation in Israel by 2050 due to creeping desertification in the region, and therefore plans to triple Israel’s desalinization capacity to 1.7 billion cubic meters over the next 30 years.

But after experiencing two years of abundant rainfall and with demand for water leveling off, government officials have recently expressed doubts about going ahead with the project. The shutdown of facilities raises questions about the need for so many desalination plants, especially since the cutbacks could have been much broader had the Ashdod plant, slated to open last September, not fallen behind schedule.

The Water Authority dismisses any arguments raised involving extreme projections about supply and demand. It insists that Israel doesn’t have a surplus of water since desalinization capacity was meant from the start to ensure reliable water supply even through extended years of drought.

The authority cites the state commission of inquiry established in 2008 to investigate the lack of preparation for the severe water crisis faced by Israel at the time. The panel slammed the government and Finance Ministry for cutting desalinization programs in the early 2000s following rainy years in 2002 and 2003, leaving the country unprepared for the drought that followed.