The electricity market in Israel is operating out of the courtroom these days. Engineers and planners have been replaced with legal teams, who work hard to flood the High Court of Justice with petitions: Etgal, Enlight Renewable Energy Solutions Ltd. (TASE:ENLT), Tzomet Energia, Dunham Capital - these are just a few names of companies that have already submitted, or plan to submit, petitions to the High Court in the coming days. The petitions are a direct result of the uncertainty created by the electricity industry regulator.
Bank financing arrangements cannot be signed, and new solar fields cannot be connected to the grid - all until further notice. The Ministry of Finance and other government ministries place responsibility for the situation on Haifa District Labor Court president Judge Rami Cohen, who announced a freeze in the electricity market two months ago, with the goal of preventing the government from continuing to advance unilateral initiatives that weaken the Israel Electric Corporation (IEC) (TASE: ELEC.B22) workers’ bargaining power. According to the developers, however, the primary culprit is the Public Utilities Authority (Electricity).
This is the case, for instance, in the field of wind energy: only a petition to the High Court of Justice against the Public Utilities Authority (Electricity) made it possible for the first large wind turbine project in Israel to get underway. Shlomo Shmeltzer’s Afcon Industries Ltd. (TASE: AFIN) and partner Dr. Eli Ben Dov recently announced the completion of financing for the joint venture to establish eleven turbines in Ramat Sirin and fourteen turbines in Ma’ale Gilboa. NIS 200 million will be invested in the project, 80% of which will be financed by Bank Hapoalim (TASE: POLI).
Moments before the deal was closed, the developers petitioned the high court, after it became clear that the electricity rate that the Public Utilities Authority (Electricity) had set (in other words, the rate they would be paid for the electricity produced by the wind farm for the next 20 years) had been reduced by the authority from NIS 0.5177/kWh to NIS 0.4675/kWh. The petition worked: the Public Utilities Authority (Electricity) agreed to a compromise of 0.4851/kWh, an amount that allowed Afcon and Ben Dov to move forward. The venture began 10 years ago, by the way, a fact that illustrates just how difficult it is to launch green energy initiatives in Israel.
But will the first project built in Israel also be the last? At least for the foreseeable future? The wind-energy developers warn that this is exactly what will happen if the Public Utilities Authority (Electricity) does not back down on its stated intention to cut the promised rate by 15%. The Electricity Authority, on the other hand, is not moved by the threats. They are convinced that these are the usual empty threats that are sounded every time the authority tries to cut a rate, which also includes a subsidy, paid for by all the electricity consumers. The truth seems to lie somewhere in the middle.
On April 8, the Public Utilities Authority (Electricity) announced its decision to update the rates for large wind farms (with capacities greater than 50kW). The original rate set in 2011 is NIS 0.4322, but the Public Utilities Authority (Electricity) decided to reduce it to less than NIS 0.40. The authority explained that the update is necessary if the level of profitability that the rate guarantees the developers is to be preserved - 14% on capital. Since the original rate was set, the authority explained, turbine prices around the world fell by an average 12%, while, at the same time, turbine efficiency increased by an average 10%. Based on accounting calculations, the conclusion is that in order for the profitability rate to remain around 14%, the rate paid per kilowatt of energy needs to be reduced by 15%.
The response from the developers was furious. According to one of the companies, what changed was not the price of turbines, but the Public Utilities Authority's (Electricity) guiding principles of setting a goal of cutting the rate no matter what. Other developers accuse the authority of nothing short of manipulation, and presenting distorted and misleading data. “There is some sort of malicious intent here. Some negative determination to run fast and cut before the first wind facility has even been built,” says former Israel Military Industries Ltd. (IMI) CEO Shlomo Milo, who today heads the Tailwind Group, which provides services to wind-energy developers.
The developers’ claims may be divided into two. First, they are furious about the authority's decision to link the rates to Bloomberg’s turbine price index. This is a private company that charges an annual $50,000 membership fee for access to its data. Eurocom Group member company Enlight Renewable Energy Solutions Ltd. (TASE:ENLT) petitioned the High Court and demanded that the Public Utilities Authority (Electricity) reveal the data upon which the Bloomberg index is based, for the sake of transparency.
Another foreign company that asked not to be mentioned by name says, “This is an unacceptable dismantling of the central authority for which the Public Utilities Authority (Electricity) was set up, where the authority is transferred to a foreign business entity. Bloomberg is not obligated to impartiality standards and its index does not reflect Israel’s unique characteristics.”
The developers also claim that the authority ignored data that did not suit its needs. For example, the Bloomberg index went up 20% since the beginning of the year. The cost of wind turbines is $0.82 per watt installed, compared with the original rate of $1.1 in 2011. But the figure for the 2011 rate was taken from a different index.
The developers say that in analyzing turbine prices based on the revised rate index, it becomes clear that their prices actually went up since 2011. A table of comparisons by country that the Electricity Authority presented is also warped, according to the developers: in eleven of the fourteen countries presented in the table, there was no change in wind rates, while in only three of the countries were rates cut - between 26% and 60%.
Furthermore, the developers claim that the Public Utilities Authority (Electricity) is ignoring the unique difficulties in the Israeli market, where they are forced to absorb high land and sea freight costs and where there is a shortage of skilled manpower and suitable equipment for establishing wind turbines. And, finally, nothing is possible without the environmental groups that took care to obligate the developers to undertake additional expenses, such as setting up special night radar, which cost about a million dollars, to limit damage to bats.
The Public Utilities Authority (Electricity) claims that this is an attempt to distance the conversation from the data. Even without Bloomberg, numerous surveys and reports have piled up at the Electricity Authority, conducted by independent entities - among them the International Energy Agency (IEA) and the US Department of Energy - that point to a drop in turbine prices.
The Public Utilities Authority (Electricity) does not understand the claim that the index has risen since the hearing was publicized - then the rate will also rise, they say. The claims about mixed data from various indices stem from the fact that type of turbines the developers are using changed, and instead of the old generation of wind turbines, there are today new, modern turbines, with higher production capacities - turbines whose prices have dropped significantly. And, as for the unique characteristics of the Israeli market, the Public Utilities Authority (Electricity) has an answer for that too: turbine cost is the only component of the rate that changed. The other costs, such as transportation, construction, maintenance and operation costs even adding radar to protect against bats at night - these factors have already been priced into the rate.
In order to find out who’s right, it seems we will have to wait quite some time. Only the Ramat Sirin and Ma’aleh Gilboa wind farms will be built in Israel in the next two years, and it seems there is only one other large wind project on the horizon, in Emek Habacha. Meanwhile, we’ll see you in court.
Published by Globes [online], Israel business news - www.globes-online.com - on June 30, 2014
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