Israel Electric Corporation expects to lose NIS 3.2 billion of revenues a year beginning in 2015 because of competition from private electricity producers.
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The state-owned utility forecast recently that 70 major customers will switch to privately owned electric power providers by then. Private providers will supply 10% of the country’s power this year, 19% next year and about 23% in 2015.
By the end of this year alone, about 40 major customers are likely to have left IEC, most of them opting for the alternative of the OPC Rotem electric power plant at Mishor Rotem in the Negev, which is controlled by The Israel Corporation. Other customers are expected to desert IEC for the Dorad Energy plant in the Ashkelon area.
Last week, the Technion became the first institution of higher education to join the trend, issuing a tender for a power provider to supply it electricity over 15 years, with a five-year optional extension. The Technion buys about NIS 45 million a year of power, which means the contract will be worth somewhere between NIS 800 million and NIS 850 million to the winner.
Despite the prospect of the departure of major customers, the loss of revenue will not necessary leave a dent in IEC’s profit, because the losses of sales would also reduce its fuel and operating expenses. For their part, the private producers say their production will ease IEC’s considerable financial burden and eliminate the need to take on additional debt.
Finance Ministry to IEC’s aid
IEC’s worries about private competition prompted the Accountant General’s Office at the Finance Ministry to intervene recently in the private electricity market. It barred any additional government entities from contracting to buy privately produced power, which is being sold to major customers at rates 5% to 10% less than what IEC charges. Yet while IEC attempts to fight the competition over their respective slices of the pie, the pie itself has shrunk.
In the third quarter, which is traditionally a strong one for the utility because demand for electricity is especially high during the summer months, electricity use by IEC customers dropped by 8.4% from the same time the year before. In the first nine months of the year, electricity demand slumped by 5.3%, compared with the first nine months of 2012, primarily due to the relatively cool summer in Israel this year, but also because of IEC customers who jumped ship and signed up with OPC.
In IEC’s favor, the drop in consumption, along with the utility’s own falling fuel bills since it started sourcing cheap natural gas from the Tamar offshore field in April, is saving IEC a lot of money. Its third-quarter fuel bill dropped by more than 59% from the same time last year, which translates into savings of NIS 3.8 billion.
And thanks to an 7.5% average hike in electricity rates, IEC’s revenues remained steady for the third quarter at about NIS 8.5 billion - despite the drop in usage by its customers. Its operating profit for the quarter also remained unchanged due to recognition for accounting purposes of its surplus fuel for the past two years.
However, it finished the quarter with a net profit of just NIS 248 million, down from NIS 692 million the same time last year. Moreover, for the first nine months, the company has chalked up a net loss of NIS 368 million, representing a negative yield on capital of 2.3%.