Disorder in the Energy Sector May Spell Dark Days for Israel

Due to poor regulation and an ineffective public awareness campaign, Israel faces power shortages during the hottest time of the year - shortages that could have been prevented.

As the demand for electricity reached a new high last week, Israel found itself on the verge of rolling brownouts. It’s been only six years since the first wave of actual blackouts hit the country because of a lack of electrical generating capacity. A naïve citizen might have expected his government to learn its lesson, fix the flaws in the system and prevent them from happening again. But that wasn’t the case.

Israel’s energy sector continued to move forward largely by inertia, adhering to conventional wisdom of expanding the market’s ability to generate electricity while relying on the crumbling Israel Electric Corporation to take care of the logistics. But the moment something breaks down in this delicate balance, the country faces the prospect of blackouts once again.

Anyone trying to place blame for the recent state of affairs would have trouble knowing where to point the finger. All the key players in the electricity sector are hurling accusations at one another. The truth is, they’re all right. They’re all to blame.

“Glitches don’t just happen. They're made.”

Since the Electricity Market Law, which opened to the industry to competition in 1996, the IEC has done everything possible to ensure that it retains control of the electricity generation capacity that consumers demand. It benefits from regulators fecklessness and thus increases its strength from crises to crises.

The IEC’s goal is to capitalize on hurried emergency plans, which essentially give the utility free range to build more power plants and ensure its workers are employed with minimal oversight. Only later will the issue of funding these plans and ensuring schedule goals be addressed. This is why the emergency power plan for the country has yet to be successfully completed. Approved by the government back in 2008, it was partially funded by a customer rate hike in exchange for the IEC meeting several conditions, including changes in the company's structure, which were never fulfilled.

The IEC is also taking advantage of the current crisis to push forward on the public agenda plans to construct another coal-fueled facility (Project D) at the Ashkelon power complex, and violating the ban on constructing new power stations by resuscitating the plan to build a new power plant in Alon Tavor.

Currently, IEC power plants produce about 12,800 megawatts of electricity. If the effects of the heatwave and the natural-gas crisis are factored in, the IEC is actually producing about 12,400 megawatts of electricity – 800 megawatts over the highest demand on record, which occurred last week.

But, in fact, the IEC had only 10,900 megawatts available at one point last week because of a series of malfunctions in its power plants, glitches that occurred at the moment of greatest need. As the saying goes, glitches don’t just happen, they're made. 

There were two reasons for the malfunctions. The first was negligence, demonstrated by the hole discovered in a steam boiler at the Hadera power plant just after recent repairs there were deemed successful. The second was quiet, ongoing cuts in the IEC’s maintenance budget, which is easier to decrease than an attempt to scale back on the salaries and benefits of unionized employees.

Lacking an effective PR campaign

The Public Utilities Authority, which was established by the Electricity Market Law, is entrusted with promoting competition and encouraging the entry of private producers into the electricity market. A number of reasons explain why no substantial private electricity producer exists today, yet responsibility still lies, first and foremost, with the Public Utilities Authority.

The Public Utilities Authority is the body responsible for keeping new electricity initiatives tied up in red tape, tripping them up with hopelessly complicated and constantly changing regulation. Quite a few new entrants into the electricity field threw in the towel because of the authority's actions, not to mention all the others who were deterred from entering the field in the first place.  All the while, the authority failed in its task of supervising the IEC, or exercising any effective control over the pace of the company's activities (even if this was due to a lack of regulatory tools).

But the Public Utilities Authority’s worst sin is not just that it dealt inadequately with supply, but that it failed to restrain demand. Officials now take pride in implementing 16 economic incentives to reduce consumption of electricity during peak times. Yet for years, the authority opposed offering private consumers incentives to conserve power and considered such incentives unnecessary.  

For example, previous Public Utilities Authority chairman Amnon Shapira turned down Energy and Water Resources Minister Uzi Landau’s demand to adopt the “California model,” which gives a 20-percent discount to consumers who use 20 percent less energy than they did the previous summer. Only when the extent of this summer’s anticipated crisis became known did authority officials hurry to put together a campaign to offer such discounts.  The program was publicized in the middle of May, a mere two weeks before the program was to begin.

At the same time, other conservation programs proposed by the energy authority met with opposition from consumers and complaints from the IEC, and were thus delayed. It is therefore no wonder that total demand for power in June of this year soared 14 percent compared to June 2011. In contrast, three years ago there was an 18 percent drop in water consumption thanks to the water-conservation campaign under the slogan “Israel is drying up.”

Still no protocol in case of brownouts

Reports from the state comptroller’s probe into the Carmel fire sometimes seemed like they could be applied to the crisis in the electricity market as well. Just as it had done with the Israel Fire and Rescue Service, the Finance Ministry asked officials of the IEC to carry out urgent structural reforms. Encountering opposition from a corrupt and politicized monopoly, the IEC responded by letting is funding dry up while disregarding the necessity of exploring alternative solutions.

As part of the Economics Arrangements Law, in 2007 the Finance Ministry's Budget Department transferred Paragraph 60 (D9) to the Electricity Sector Law, which stipulates that beginning in 2009 the IEC would no longer be involved in the construction of new power plants. This was part of the sanctions imposed on the IEC to force it to implement reforms that had been postponed for more than a decade.

But while with one hand (and with good reason) the government halted the continued, unrealistic bloating of the electrical monopoly, with the other it did nothing to promote a competitive private market for electricity production.

Additionally, the Finance Ministry did nothing to remove obstacles in the marketplace for funding power generation projects even though in the past it examined the possibility of seeking funding from institutional investors for such purposes. These generation projects even benefited from an unprecedented network of protections to support financing.

The Energy and Water Resources Ministry is responsible for supervising the electricity market, even if lately it has been pointing the finger of blame at every other ministry. While it’s true that its officials warned of power shortages over the past several years, they’ve done nothing more than that.

The ministry, which is already late in drafting a master plan for the development of the electricity market, forgave the IEC for its delays in constructing power plants and its failure to establish a natural gas transportation and distribution infrastructure. It even claimed that there was no need to import natural gas after the discovery of the Tamar gas field.  During the government’s previous term, they completely ignored implementing structural changes at the IEC. It still hasn't managed to put together an official protocol for cutting power in case of brownouts.

Brawn over brains

Under the current government, the Environmental Protection Ministry has taken pride in frequently flexing its muscles against powerful organizations, but brawn doesn't have to replace brains. Twice in the past two years, the ministry has mistakenly fought tooth and nail to prevent limited environmental damage in specific locations, shortsightedly causing long-term environmental damage on a national scale.

The first incident was when it raised a ruckus over picking a landfall site for the natural gas pipeline from the Tamar field. The second was when it forbade the use of diesel oil or heavy residual fuel oil to heat the IEC’s power plants in order to keep up natural gas reserves for the summer.

Since February 2011, the series of explosions in the natural-gas pipeline in Egypt has led to a 40 percent loss of the natural gas on which the Israeli economy depends. Officials of the Energy and Water Resources Ministry warned against the increased use and accelerated pumping from the Tethys Sea natural gas field's reservoir. They suggested shifting some of the IEC’s power stations to diesel fuel and heavy residual oil for fear of a future natural gas crisis.

Officials of the Environmental Protection Ministry chose to dismiss the warnings out of hand, refused to permit the IEC to use the pollution-causing fuel and ordered increased pumping from the reservoir off the coast of Ashkelon. In 2011, 31 percent more natural gas was pumped from the reservoir than in 2010, and devastating results followed. Eight of the ten offshore wells in the Yam Tethys reserve collapsed, compelling Israel to use a great deal more diesel and oil fuel over the summer months, increasing the prospect of blackouts.

“Not in my back yard”

Cynics point out that regulations for the private sector in the electricity market were not done in the public offices of the Utility Authority in Jerusalem but rather in the Tel Aviv offices of Bank Hapoalim and Bank Leumi. In no other energy market in the world do banks receive government loans for granting credit to electricity-generation projects. The reason for Israel’s exception is the absence of competition in the Israeli credit market and the flight of foreign banks, thus strengthening the power of the large local banks. Otherwise no energy entrepreneur would ever receive funding.

Despite its apathy toward competition in the credit sector, which has earned a heated public debate, the Bank of Israel’s apathy toward the energy sector goes further. For example, the Bank Supervisor insists on classifying high-risk real estate bank debts, thus diminishing the amount of credit available for the relatively safer energy sector in favor of real-estate like agriculture in the Moscow suburbs.

Usually, the Interior Ministry’s Planning Administration is criticized for its work in the real-estate market and is well known for its delays, indecisiveness, and clumsy implementation of decisions once they are made.  But housing units aren’t the only thing being delayed in Israel. Given that the IEC claims that it requires a new power station nearly every year, but it takes eight years to complete (of which only three years are required for the actual construction) then it’s clear that the planning committees play a substantial role in the fact that Israel lags so far behind in the field of energy infrastructure.  It’s also one of the reasons that potential investors stay away. This And this is without mentioning the decade that has passed since the D power station in Ashkelon was given the go-ahead.  

In light of the weakness of the central government, the influence of municipality leaders has become stronger. The leadership at the municipal level tends to protect the narrow interests of its residents, even at the price of harming the national interest. The local authorities have no problem exercising their political power, running media campaigns and turning to the legal system to prevent the placement of vital national infrastructure projects in their municipal territory. Simply put, they say, “Not in my back yard.”

To cite just a few examples: the Hof Hacarmel communities are opposed to the construction of a receiving station for natural gas from the Tamar reserve, though the same communities were silent when a similar station was expanded in Ashdod. The residents of Be'er Tuvia resisted the construction of a natural-gas-fueled power station in their area, even at the price of building a second coal-fueled power station in Ashkelon. The Tel Aviv municipality is currently trying to prevent one of the units at the Reading power station from being fueled with heavy residual fuel oil, even though the country urgently needs its operation in order to avoid the blackouts.