The plummeting price of solar energy equipment could leave Israeli electricity users paying some 1.5 billion shekels ($385 million) more than they should over the next 20 years, all because of the high rates the government agreed to pay two companies building and operating solar power fields, TheMarker has learned.
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The problem goes back to three years ago when two large business groups — Shari Arison’s Houisng & Construction Limited and the U.S. private equity fund Two Sigma Investments, together with IC Green, a subsidiary of Idan Ofer’s Israel Corporation — won a written comitment from the government to be paid relatively high rates for the power they undertook to generate at the two plants. The high rates were meant to compensate them for the high costs prevailing at the time to construct solar plants, especially those using thermo-solar technology.
But since then, the cost of building a plant has plummeted. Deutsche Bank, for instance, estimates that the solar module costs of leading Chinese solar companies, both rooftop equipment as well as those used by uitilities, dropped 60% from around $1.31 a watt in 2011 to around 50 cents in 2014, and is likely to drop further in the next few years. Now the govenrment and the solar power providers are locked in battle over just how much rates should be lowered.
The solar power providers insisted at the outset that the government keep to its commitment on the rate. The Public Utilities Authority — Electricity, better known as the Electricity Authority, argued that the public interest demanded it be revised and contended that the high rates were no longer needed to ensure the operators earn an acceptable return on their investment in the solar fields.
Just before the projects are set to get underway, the excess cost was estimated at some 800 million shekels ($206 million) on a discounted cash flow basis. That meant the electricity-consuming public would have to pay via their electric bills over the next 20 years.
The two sides entered into several months of quiet negotiations, during which TheMarker has learned that in several months, the Electricity Authority and Housing & Construction reached a draft compromise in which the company would reduce the rate on 55% of the power they produed but get the original, higher rate on the rest.
Yet by the time the two sides were hammering out the draft version, world solar equipment prices were falling further, with solar-generating electricity rates dropping in tandem. Far from reducing the overpayment, the compromise would have left Israeli consumers paying even more than was necessary, or close to 1.45 billion shekels over the next 20 years.
The govenrment pulled out of the talks, but even as the stakes have grown even larger, the two sides are due to try again to reach an agreement and avoid a long legal struggle.
Housing & Construction received a conditional license in 2012 to build a $1 billion, 120-megawatt solar field on 3,000 dunams (750 acres) near Kibbutz Tze’elim in the Negev. At the same time, Two Sigma began work on its own solar field of 60 megawatts not far away, near Kibbutz Mashabei Sadeh, with the Ofer Group as a partner.
The fields were supposed to employ thermo-solar technology, which has proven more expensive and less cost effective. In thermal solar projects, the sun is focused to heat up a medium, such as water, oil or even molten salt, which is then used to produce electricity by, for example, powering a steam turbine.
Meanwhile, the price of photovoltaic technology, which turns sunlight directly into electricity via solar semiconductor panels, has plunged, so that it is not only more cost effective but easier to build and maintain. As the price of PV panels has fallen, there is no longer any need for utilities and government to subsidize thermal solar plants as they have done in the past.
This is how the rates the government promised the two groups went from 107 agorot per kilowatt-hour in 2010 to only 61 agorot two years later in 2012. At the beginning of 2015, the Electricity Authority set a new price of 38 agorot per kilowatt-hour, after a 54% drop in equipment costs for PV solar plants.
As a result, the authority asked to shift power-generating quotas allocated for thermal solar plants to PV projects. The authority says if the huge fields planned by Housing & Development and The Israel Corporation switch to PV technology, electricity users will save some 2 billion shekels, which amounts to an 0.8% reduction in electricity rates.
Four years ago all the parties involved met to discuss the obvious need to change the plans. The companies claimed that by granting them licenses the government had agreed to subsidize their costs and that they would have to be compensated for any change in the technology involved.
The Electricity Authority countered that moving to PV technology would benefit the producers, too, by cutting their capital costs and cutting the time needed to complete the fields. In any case, the authority contended it was legally entitled to amend the licenses.
Under the compromise, 180 megawatts of production quotas were to be switched, one for one, from thermal solar to PV. Critics asked why the companies merited any compensation for switching over to the cheaper technology if these firms were going to beenifts from it to begin with. If they are going to be compensated, why not simnply pay the operators for the investment they had made to date on thermo technology?
In the end, the Electricity Authority, National Infrastructure, Energy and Water Ministry and the Finance Ministry stuck with the compromise, which was supposed to be approved by the cabinet at the end of 2012. Instead the matter got entangled in an unrelated political fight in the cabinet and approval was delayed for two years. By the time the compromise agreement was ready to be brought up again, it had become even more problematic.
Even after it got the cabinet go-ahead, disgareement arose over how to interpret it: What rate would they be paid for the electricity the operators produce starting in two to three years? Should it be the 61 agorot per kilowatt-hour, the price at the time the compromise was reached, or the price at the time it was approved, 39 agorot, about a third less?
The difference between these prices discounted over the 20-year license period was the 800 million shekels. The companies, of course, claim that this is what the government has promised them, and the rate on which they made their financial commitments. They are threatening legal action.
Surprisingly, the National Infrastructure Ministry has taken the side of the companies. But the Electricity Authority says the commitment was only to adopt the normative returns on investment set back in 2012, which were the basis for setting the electricity prices, and not a commitment to nominal prices.
In addition, the authority says it is the only government body with the authority to set these prices by law, and even the cabinet decision has no legal standing concerning the prices to be paid to the companies.
Finally, the authority says it has a responsibility as a public body to protect public funds, and that even though there is no binding commitment in any case, it still must prevent an unrealistic agreement that harms the public interest.
For now, under the direction of Deputy Attorney General Avi Licht, the Electricity Authority and Housing & Construction have been conducting quiet negotiations and a form of compromise is emerging. This is thought to be a “meeting in the middle” between the two sides: 57 agorot per kilowatt-hour (after inflation linkage) is the offer from the company, while the authority is proposing 39 agorot.
For now there seems to be agreement at about 47 agorot.
However, the price of PV solar energy is still dropping fast, and even this latest agreement seems to be irrelevant now. Just a week ago the Authority further reduced the price it is offering for new solar projects to 31.9 agorot per kilowatt-hour — and this is how the price of the compensation involved has rocketed up to 1.45 billion shekels. Finally, the price guaranteed for private solar electricity producers competing for the new production quotas in the next two years has fallen even further, to only 27 agorot.
The government ministries involved all seem to want to pass the hot potato on to someone else, and in a recent meeting with National Infrastructure, Energy and Water Minister Yuval Steinitz it was decided to pass it back to the Electricity Authority. Now it seems the price they will offer this time will fall below the 40 agorot per kilowatt-hour level.
All of the parties involved declined to comment on the report.