Privatization of IECs Natural Gas power plant compounds

This overview focuses on the privatization process of Israel Electricity Corp's natural gas power plant compounds. There are 5 such compounds designated for privatization - two of them, the Alon Tavor and Ramat Hovav, have already completed the process. The 600MW Alon Tavor was acquired for the Chinese-Israeli consortium MRC for 1.9 billion NIS back in July 2019, while the larger 1150MW Ramat Hovav tender was won by Israeli consortium HPLP this month (June 2020) for 4.25 billion NIS. Other designated power plant compounds are to be released for bidding by 2023 - Reading Tel Aviv, Hagit Yokneam (see photo) and Eshkol Ashdod. Next sales are however to be performed under completely different circumstances, due to dramatic changes in local and global economy.

The Electricity Market Reform is slowly but surely taking shape in the Israeli electricity sector. However, there is still a long way for its complete implementation. Interestingly, much of structural change had already been achieved prior to the formal announcement of Modification 16 to the Electricity Market Law in July 2018. Thus, the Israeli electricity market reform should rather be considered a prolonged structural change process with multiple players involved, than a single step decision by the government made in 2018.

Back in 1996, the 70 years electricity generation and distribution license, originally provided by the British authorities to Israel Electricity Corp (originally Pinhas Rotenberg's electric company PEC), expired. Though the electricity market reform was not achieved back then, the "crawling reform" was initiated by the government aiming to privatize, distribute and modernize the electricity sector. In 1996, the Electricity Authority was established in order to independently regulate the electricity sector in parallel with formal enactment of the 1996 Electricity Market Law aiming at IEC privatization. Though the privatization process would take more than two decades, from 1996 the IEC had gradually been stripped of ability to add new generation capacity. Only in early 2010s, the generation segment welcomed private players to the enter the market, beginning with 440MW OPC Rotem natural gas power plant in 2012. The share of private power plant generation rose from less than 1% prior to OPC Rotem inauguration to as much as 34% in 2019, mainly driven by introduction of new natural gas power plants and to lesser degree solar fields.

Despite the progress in privatizing the Israeli electricity generation segment during the 2010s, the transmission and distribution segments were not affected, remaining the sole courtesy of the IEC until the more significant structural reform. The monopoly of the IEC was not only problematic in terms of electricity market distribution and grid resilience, but even dangerous in the longer term. The Electricity Authority was responsible to set electricity tariffs doing so based on fuel costs, but without taking into account the internal policies of the IEC, where powerful worker unions diverted funds from maintenance and development into human resources and pensions. Moreover, until recently the IEC had held the national grid control unit, which was not included in fuel costs, thus contributing to revenue draining of the corporation. Furthermore, the government refrained from backing IEC's debt, resulting in high-interest loans taken by the corporation and contributing to the massive debt elevation. The IEC debt spiked to over 70 billion NIS by 2012, the year when Egyptian gas supply was irreversibly disrupted. Two main factors led to later stabilization of the IEC economic status - the connection of the Tamar gas field supply to Israeli power plants in 2013 and essentially the structural reform achieved in 2018.

The 2018 reform included long-term solution to IEC's debt, reduction of its monopoly to a single segment of electricity transmission and an internal financial reform, in parallel to the distribution of the national electricity market. The reform plan included reduction of IEC share in generation segment to 35%, keeping its 100% control over the transmission segment, reducing its majority share in the distribution segment to around 70% and finally entirely splitting the grid control unit into a separate government-held company.

The reduction of IEC share in the generation segment had already been partially achieved via the "crawling reform" during the 2012-18 period, encouraging construction of privately held conventional and renewable energy power plants while arresting any novel construction by the IEC. By the time of the 2018 reform, this had already resulted in IEC share to reduce to 71%, but further steps also required actual privatization. The privatization targeted the five compounds with most potential to attract private investors - the Alon Tavor, Neot Hovav, Reading, Hagit and Eshkol. In addition, the sale of those compounds would also bring billions of NIS to cover a significant share of the IEC previous debt, thus finally reaching a reasonable debt-asset ratio for the corporation.

With the successful bidding process for Alon Tavor and Ramat Hovav, it seemed that the IEC and the government are on the fast track to implement this significant part of the reform in the generation segment and the private sector is hungry for those deals. The winning bids for those two power plant compounds were almost double their initial estimates. Moreover, the 2019 national Israeli electricity demand increased by more than 4%, changing the previous trend of 2% annual growth. This was however prior to the COVID19 crisis, which changed the rules of the game. The electricity demand pattern will not be the same in 2020 and probably will change for good. The collapse of oil & gas prices change the gas supply prospects in the Israeli market and energy sector investors are not willing to spend much cash until the pandemic is over. Those happenings require reassessment of those deals for interested players.

Would you like to know more?

Note: Please fill out the fields marked with an asterisk.

Interested in professional electricity market analysis?