Cheap electricity era is over

Amiram Barkat

In the long run, a realistic electricity rate will have to be set which will reflect the production cost of electricity and ensure a realistic return on capital.

"The era of cheap electricity is over," Israel Electric Corporation (IEC) (TASE: ELEC.B22) deputy CEO Moshe Bachar declared three years ago. Electricity rates were at a historic low at the time, the natural gas revolution was at its height, with gas flowing from Egypt by pipeline from Sinai to IEC's power stations.

Following the fall of Egyptian President Hosni Mubarak in January 2011, the Egyptian natural gas crisis emerged, upsetting the applecart and sending electricity rates up 25%. The gas shortage is supposed to end early next year when gas from Tamar is due to begin flowing, but even if prices come down a bit, they won't go as low as they once were.

Electricity rates have been rising for years for a fundamental reason: the crisis in the electricity market for which no solution is seen on the horizon. The current rate does not cover IEC's costs, and it is sinking under mounting debts. The entry of independent power producers over the next two years will exacerbate this dangerous and worrying process.

There is no doubt that a lot can be done to cut IEC expenses and streamline its operations. For example, the utility's reform should cut its inflated workforce by 2,000 employees, the NIS 2 billion deposited in the trust account to pay for employees' free electricity should be returned, and billions squandered on procurement procedures and the construction of inefficient power stations can be saved.

But in the long run, a realistic electricity rate will have to be set which will reflect the production cost of electricity and ensure a realistic return on capital. This means that the era of expensive electricity will not end anytime soon.

Published by Globes [online], Israel business news - www.globes-online.com - on November 14, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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