Electricity to rise 10% in April

Electricity rates will go up another 10% or more in April 2013, because of an unexpected rise in the cost of fuel to generate electricity, industry sources said today.

Even though a rate hike was never mentioned in the discussions on measures to help Israel Electric Corporation (IEC) (TASE: ELEC.B22), which the Ministry of Finance decided on last week, it can now be estimated that that rate hike will be double the rise previously expected. This larger hike is a direct consequence of IEC's NIS 1.5 billion cash flow shortfall.

Almost all of the pending rate hike is due to the halt in Egyptian natural gas deliveries last year. IEC has had to make up the difference by buying more expensive diesel and industrial oil to generate electricity, at a cost of up to five times the price of Egyptian gas. Ministry of Finance director general Doron Cohen previously estimated the cost to the economy from the termination of Egyptian gas deliveries at NIS 15 billion, including NIS 12 billion in direct damage from the extra cost of buying diesel and industrial oil, and NIS 3 billion in environmental damage from the use of these more polluting fuels.

IEC is fully indemnified for the cost of its fuel purchases for power production through electricity rates. In early 2012, the utility demanded an immediate 38% rate hike to finance the higher cost of its fuel purchases, but the Ministry of Finance, fearing the public backlash against such a steep rate hike, which would greatly harm the competitiveness of Israeli industry and generate inflationary pressures, decided to spread the rate hike over three years. The IEC would receive government guarantees to raise debt to cover the cash flow shortfall in the interim and restore its full indemnification from electricity rates.

Under the plan, electricity rates were raised 8.8% in April 2012, and were to rise by a further 3.6% in 2013 and 4.2% in 2014. These rate hikes wiped out the hope for reduction in electricity rates when gas from Tamar comes on line, in April 2013.

The situation changed on September 23, when IEC announced that its fuel expenses would be NIS 1.5 billion more than estimated in its cash flow forecast. Most of the shortfall was because of larger-than-expected purchases of diesel and industrial oil because the summer of 2012 was the hottest in 60 years, and major breakdowns at the coal-fired Orot Rabin Power Station in Hadera. In addition, IEC bought far more solar power than planned from solar energy producers.

All these unexpected costs are supposed to be covered by electricity rates. NIS 1.5 billion is more than 5% of the electricity rate, which means that it can said with certainty that the next rate hike will be 5% more than planned - in other words, 10%.

However, it is important to point out that unknown factors could change the final amount of the rate hike. For example, a delay in the entry of gas from Tamar, or larger purchases of liquefied natural gas (LNG) could cause a rate hike of more than 10%. Conversely, if gas from Tamar begins to flow ahead of schedule, the rate hike could be less.

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