Electricity Regulator Warns of Ballooning Gas Prices Unless Contracts Are Revised

Study sees natural gas prices rising for utilities 30% by 2030 and power rates going up 6%.

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A growing share of Israel's electricity is produced from natural gas from the Tamar gas field off the Mediterranean coast. Credit: Albatross Aerial Perspective

Israel’s Electric Authority warned Wednesday that Israeli consumers and businesses stand to pay 7.3 billion shekels ($1.9 billion) more than they should for electricity between now and 2030 because of needless escalator clauses for natural gas prices.

The authority, the government body responsible for regulating power rates, blamed the gas framework agreement negotiated by the government with the gas cartel for the problem, saying it had failed to rescind inflation-indexed contracts signed between the cartel with Israel Electric Corporation and private power companies.

It estimated natural gas prices would rise 30% by 2030 due to indexation if the framework agreement is put into effect unaltered, leading to a 6% increase in electricity rates. The cost of gas would grow from year to year, reaching 1 billion shekels in 2021 and 1.3 billion in 2025, the report estimated.

“The monopolistic control of a single ownership group of [Israel’s] gas fields over the coming decades will lead to our worsening of the contractual conditions for gas sales and prices in a way that will hurt the welfare of electricity users and the ability of the Israeli economy to compete,” the report said.

The report comes amid mounting pressure on the government to revise the terms of the framework, which spells out the extent to which the two big energy companies – Israel’s Delek Group and Texas-based Noble Energy – can control the Tamar and Leviathan gas fields. The two fields account for the lion’s share of Israeli gas reserves.

In addition, the framework sets a ceiling price on gas but no price controls, makes no demands for rescinding existing contracts and protects the cartel from future changes in regulatory policy. The Bank of Israel, Antitrust Commissioner David Gilo and the treasury’s budget division have all been critical of the terms to one extent or another.

The Electricity Authority and its chairwoman, Orit Farkash Hacohen, have also been among the framework’s biggest critics. In a pushback by Energy Minister Yuval Steinitz, backed by Prime Minister Benjamin Netanyahu, the report’s release was delayed for three weeks after the authority had approved it.

In the meantime, Steinitz has been leading an effort to declaw the authority and has dismissed Farkash Hacohen from her post.

But the gas companies have suspended development of the Leviathan field pending approval of the framework by the Knesset and oppose any more negotiations. Netanyahu said speedy approval of the framework is needed to complete development of Leviathan so Israel isn’t reliant on Tamar as a single source of gas.

Yesterday the Oil and Gas Exploration Association, an industry trade group, attacked the Electricity Authority report.

“We’re talking about an authority that has caused severe damage to the power industry and the public and is now trying to wreak further damage,” it said, saying the gas now being pumped from the Tamar field has saved utilities 231 billion shekels in the last two years over competing sources of fuel.

The report takes issues with how the framework was devised, but the core of the Electricity Authority’s criticism is that doesn’t ensure that new gas contracts aren’t based on what it called “unusual indexation mechanisms.”

That, it said, would “make permanent a consistent and certain increase in the price of gas to the public unconnected to the price of gas in world markets, in opposition to accepted practices and without any economic justification.”

The benchmark contract that Israel Electric Corporation signed with the partners of the Tamar field is linked to the U.S. consumer price index plus a supplement of 1 percentage point. That would raise the price IEC is paying from $5.75 per million British thermal units to $6.63 in the year 2021 and $7 in 2030.

Steinitz and the national Economic Council of the Prime Minister’s Office have proposed a base price of $5 per million BTUs, which would go down to $4.70 by the end of the year. But it would also have a linkage element that would raise the price to $6.45 by 2012.

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