The sun king
France's EDF Énergies Nouvelles dominates the Israeli solar power industry. Local manager Ayalon Vaniche explains why it puts up with the land prices and the regulation.
According to this analysis, EDF Énergies Nouvelles (EDF-EN), a unit of France's national power utility Électricité de France, controls precisely 39.8% of the medium-size solar installations in Israel. Apart from producing this surprising finding, the Electricity Authority's survey also has practical consequences, in what has become fashionably known as "preventing concentration". The Authority seeks to restrict the market share of the leading player in each of the four branches (conventional power plants; cogeneration plants; photo-voltaic (PV) solar installations; and thermo-solar installations). The restriction will prevent the dominant player from raising its share beyond 30% or 40%, depending on the branch. With a 40% ceiling, EDF-EN is in effect prevented from buying even a single additional solar megawatt.
EDF-EN Israel CEO Ayalon Vaniche is not perturbed by the Electricity Authority's surprise move. "We consider it normal to impose regulation on concentration," says Vaniche in an exclusive interview with "Globes", "but it is not clear to us where this number, 39.8%, came from. Our numbers are different. It also seems strange to us that the decision is made retroactively, and on the basis of a new definition of what constitutes a medium-size installation. The bottom line is that it is not clear to us what this directive will contribute to competition in the industry."
EDF-EN is wholly owned by EDF, which employs 160,000 people around the world, and controls a portfolio of power plants ten times larger than that of Israel Electric Corporation. EDF-EN employs about 2,000 people, and is responsible for the group's renewable energy activity; not just solar, but also wind, biogas, and even an innovative area like wave energy. The company managed by Vaniche, EDF-EN Israel, may only be a subsidiary of a subsidiary of the French energy giant, employing only a few dozen people, but its parent companies provide it with financial clout in a different league from that of most of its competitors.
EDF-EN's deep pocket has been exploited in the past two years to carry out an expedited acquisition campaign, in the course of which it has put together a most impressive bank of medium-size and large solar enterprises, totaling 120 megawatts. The focus of the company's activity in the coming years will be the Zmorot Solar Park project, which, with an output of 50 megawatts, will be the largest solar project in Israel, and one of the largest in the world. Apart from the size of the project, what is unusual about EDF-EN's activity is the way that the company is financing its construction. It usual, in this market, to finance capital-intensive developments with equity amounting to up to 20% of the investment. The rest is raised from the banks and institutions. EDF-EN, by contrast, is financing all its projects out of equity, at 100% of the investment, apart from three projects of Arava Power which it joined as a partner after a lending bank had already been selected.
"The strange thing about Israeli regulation," Vaniche says, "is that if you finance the project yourself and not via a bank, the regulator wants to see all the funding, that is to say, all the money has to be deposited with it up front, and we are talking about very large sums. Just for the five projects we bought from Dalkia had to deposit over NIS 800 million, and to obtain a license for the Zmorot project we had to deposit another NIS 350 million. It's clear that there's a substantial loss of financing revenue here."
On the other hand, with capabilities like these, one can understand why the other players on this field see you as a kind of Gulliver in Lilliput.
"It's true that not everyone manages to attain financial closing, but there are quite a few players who were in from the start in order to make an exit, and had no intention of reaching closing. We are not here to speculate, but to build for twenty years ahead. The model is to operate conventional and renewable power plants for 20-50 years, and so we have come to build and remain. If I understand the Electricity Authority's goal correctly, it is not to bring the most players they can into the market, but rather to ensure that as many serious entities as possible, with financial and professional capabilities, operate here."
But theoretically you could even reach 80% of the market tomorrow?
"I can say that all the projects in the market came our way at some stage, and the fact is that we didn't buy them all. Anyone who wants to make an exit and thinks we are some kind of bank, is mistaken. We don't buy ready projects in order to operate them, but invest in projects where we know how we can generate large value in the financial closing and in construction."
Do you intend to expand here?
"The regulation is making Israel less interesting. Land prices are crazy, and the combination of that and falling tariffs and the instability in the market brings the projects very close to our minimum profitability threshold."
During its fairly short period of activity in Israel, EDF-EN has got into more than one confrontation with the Israeli regulators. Recently, a petition it filed in the High Court of Justice, after the Electricity Authority disqualified two of its projects on land of Kibbutz Mefalsim and Kibbutz Samar because the land for the power plants was already subject to old plans for a railway and a road, was settled. Under a compromise agreement, EDF-EN gave up the Mefalsim project, in return for approval of the Samar project.
Before that, the company petitioned against the decision by the Israel Lands Administration to raise lease payments steeply for land used for installations and to demand NIS 42 million that had not been originally planned.
If so, why did the French power giant choose to invest huge sums in a small market like Israel, with its regulatory headaches? The trivial answer is Israel's famous sunshine, which makes it possible to produce 1,700 kilowatt-hours a year from a PV installation with an output of one kilowatt, compared with just 900 in Germany and 1,200 in southern France. But the real reason for EDF's move was different.
"What interests EDF is to prepare here for the next wave of tenders around the world, for the purposes of bidding in markets like India and Saudi Arabia. India today is the developer's Eldorado. On the one hand, we bring here capabilities that don't exist in Israel, while on the other hand we are learning here how to build in the desert, and how to build more cheaply , because of the demand to cut prices."
So Israel is your test site?
"Israel is very suitable as a beta site for the next generation of solar installations. In France, for example, it is usual to build using a highly industrial model, on the turnkey method. A project like Zmorot enables us to learn how to optimize many elements of the installation. There are lots of start-ups here in areas like converter design, current optimization, selection of panels and connecting them to maximize production. The subsidy per hour of sun in Israel is very small, and so every percentage of optimization is worth a lot, and assists the business model. In Europe, the subsidy is higher, while in the US there is a tax-break regime, and so optimization is less important. Apart from that, the Israel Electric Corporation is like EDF rather than like the Indian power company, and the regulator here, for all the criticism, is no less good that the regulator in France. It's more flexible and more independent, and is not corrupt. Here, you have to make an effort to make projects economically worthwhile. The reduction of the tariff at Zmorot by the Electricity Authority by 30% and more creates a challenge for us that obliges us to change the model to make construction cheaper."
One of the arguments that arises against the foreign companies that invest here is the fact that a large part of the economic benefit does not stay in Israel but goes to the country of origin.
EDF-EN, for example, buys its solar panels from an obscure French company called Photowatt, and not from the cheap Chinese manufacturers as is normal in the industry. Vaniche however insists on speaking of EDF-EN's activity in Zionist terms. Zionism, incidentally, brought Vaniche himself here six years ago, which meant giving up a safe and desirable career with McKinsey in France. EDF-EN Israel employs only Israelis "a quarter of them new immigrants," Vaniche points out proudly. "Beyond that," he says, "in all the projects in which we are involved we give priority to Israeli-made products. We had at least one case of a German construction contractor that persuaded us to switch to an Israeli supplier instead of the German supplier with whom he worked. In projects in which we are the construction contractor, we prefer to work with Israeli sub-contractors. We also support Israeli exports, because the companies that work with us receive, via us, access to overseas markets in which the EDF group operates. Every week, I send the presentation of an Israeli entrepreneur to France. Its amazing how many Israeli entrepreneurs are developing projects in Africa and Eastern Europe, and I bring many of these proposals to France."
Published by Globes [online], Israel business news - www.globes-online.com - on June 10, 2013
© Copyright of Globes Publisher Itonut (1983) Ltd. 2013
- Tel Aviv market report
- Tel Aviv Stock Exchange
- Israeli stocks in NY
- Arbitrage gaps for dual-listed stocks
- Israeli stocks in Europe
- Israeli stocks on other markets
- Tel Aviv 25 options
- Mutual funds
- Current representative shekel rates
- Historical representative shekel rates
- Bank shekel rates
- Shekel/dollar options