Cheaper Fuel Prices, but No Savings for Israeli Customers

The Israel Electric Corporation is pressured to raise electricity rates despite reporting 14% decline in energy expenses.

Avi Bar-Eli
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IEC's Reading Power Station, north Tel Aviv.
IEC's Reading Power Station, north Tel Aviv. Credit: Moti Milrod
Avi Bar-Eli

Six months after Energy Minister Yuval Steinitz instructed the Israel Electric Corporation to reduce output at its coal power station by 15 percent, warnings over how much the move would cost the public — that is, how much electricity prices would go up — turned out to be baseless.

The IEC’s third-quarter report, released Thursday, reported a net loss of 39 million shekels ($10.3 million), following a reported net profit of 576 million shekels in the first two quarters of 2016.

Company reports for the first half of 2016 show that a number of factors — reduction in the use of coal from 60 percent to 52 percent, the ongoing steep decline in coal prices worldwide in recent years, an increase in natural gas use from 39 percent to 45 percent and an increase of cheap natural gas imports, from 0.08 percent to 2.7 percent — have lowered the company's costs by a total of 538 million shekels. This represents a 14 percent decline in fuel expenses, compared to the first half of 2015.

Despite this sharp decline (which did not stem from lower electricity consumption) as well as the fact that fuels account for fully one third of the its expenses, the IEC still has not updated electricity rates.

The Electric Corporation underwent a reform and now answers to the energy minister, but the two spots reserved for public representatives on its plenum have not been filled for the past eight months.

In fact, the IEC has been pressured in recent months to approve an increase in electricity rates, both by raising tariffs for electricity delivery and by taking into account the increased costs of IEC employees’ pension plan.

According to the third-quarter report, the IEC pension fund is growing stronger: It now has a surplus of 5.75 billion shekels, which means that as of the end of June, the reserve value of the fund will be 30.1 billion shekels. But according to the IEC’s calculations, it only owes its pension fund 24.35 billion shekels.

However, under the pension fund’s regulations, the IEC must deposit 33.6 billion shekels for its employees. A number of regulators have noted this large gap, but the Finance Ministry’s capital market branch continues to turn a blind eye to this obstacle, and the company continues to channel surplus money into its pension fund — 416 million shekels since the beginning of the year — at the expense of the public.

The IEC finished its second quarter with an increase of 3 percent in income, at 5.1 billion shekels, but reported that a 40 percent jump in financing expenses (753 million shekels) eroded the operational profit, which was 416 million shekels. Earnings before interest, taxes, depreciation and amortization in the second quarter were 1.53 billion shekels.

IEC board chairman Yiftah Ron-Tal said that from the beginning of 2016, the IEC reduced its net financing debt by more than a billion shekels to 43.5 billion shekels, which he said was a “significant achievement that shows the financial strength of the corporation and is proof of achievements that are the result of a conservative and responsible financial policy." The IEC’s director general, Ofer Bloch, said that “the corporation is facing a series of operational-infrastructure challenges, alongside the need to continue internal streamlining.”