Short Licenses Spell Trouble for Israel's Private Power Plants

The Energy and Water Resources Ministry announced last week, in a surprise move, that licenses issued to private electricity plants will be valid for one year only, despite the fact that many such companies have already signed agreements with customers to supply power for anywhere between five and 20 years.

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Also, the state is already committed to paying the new plants availability fees for a period of 20 years, which together with the long-term customer contracts formed the basis for the funding arrangements needed to build the projects.

The announcement has caused confusion for regulators and is provoking anger from the financial institutions that have put up billions of shekels for projects that are now shrouded in doubt.

Some industry figures believe the ministry’s decision was the result of pressure from Israel Electric Corporation, which is hoping to avoid further competition before it negotiates a new collective bargaining agreement with its employees.

Over the past year the Energy and Water Resources Ministry has not issued licenses to any new private power plants. Three different projects, in Be’er Tuvia, Palmahim and near Plugot junction, are waiting for the ministry’s approval.

At the same time, Finance Ministry Accountant General Michal Abadi-Boiangiu has instructed all organizations that receive state funding to halt any electricity purchases from private suppliers. Also, the Public Utility Authority — Electricity announced the end of preliminary benefits granted to new private electricity projects, saying they would be replaced by modest financial incentives.

In 2013, around 40 large customers cut ties with the IEC, opting for private electricity suppliers, primarily OPC. In 2014, 50 additional major electricity users are expected to turn to private suppliers, primarily the Dorad power plant near Ashdod. According to IEC estimates, the company stands to lose about 15% of sales to competitors over the next two tears. In a financial report published about six months ago, the IEC estimated that it will lose around 3.2 billion shekels in revenues from in 2015 as a result of increased competition.

The Energy and Water Resources Ministry explained its decisions by referencing the ongoing discussions of the Yogev Committee, formed to recommend reforms in the electricity sector, as well as the need to introduce more transparency into the sector and to divide the market between the IEC monopoly and its competitors.

The first victim of the licensing decision was Clal Industries’ generating plant for the Nesher cement factory, which was completed a few months ago at a cost of $90 million dollars (313 million shekels.) The plant recently received a license valid for one year only.

The next victim is likely to be Dorad, one of the largest private power plants in Israel, which is due to be dedicated in about two weeks. Located near Ashkelon, the plant was built over three years at a cost of 4.3 billion shekels, using external funding of 3.5 billion from five banks and a similar number of financial institutions.

The electricity authority has already approved the plan’s rates for electricity supplies over the next twenty years, yet is subject to the ministerial decision to limit licenses to one year only. It is difficult, therefore, to see how the plant will operate.

Compromise discussions, in terms of which the Nesher and Dorad stations will be licensed for one year but will secure extension commitments from the authority, are ongoing.

It is unclear whether such a compromise would be acceptable to the banks. Nor is it clear what will happen after the first, “test” year if the finding of the Yogev Commission are not adopted.

The Energy and Water Resources Ministry said in responce that “recommendations from the Yogev Commission will be published in the coming days, and they will include, among other subjects, conclusions about electricity suppliers. Therefore, the Energy Ministry will grant licenses for a year, in order to prevent harming or limiting production.”

The electricity authority stated that it was currently “examining the interface between the suppliers and the authority. In the coming months, a hearing is expected to be held on this subject. In light of that, and in light of the energy ministry’s position, licenses are being limited to one year in order to allow for future updates. In any case, the authority has no intention of limiting relations between Dorad and its customers to one year only, but rather to update the terms of the license in one year’s time.”