Electricity consumers will subsidize manufacturers who switch to using natural gas. That is the implication of a decision by the Natural Gas Authority to introduce a pro rata distribution regime for gas from the Tamar reserve. A further rise in electricity prices is expected as a result of the fact that Israel Electric Corporation (IEC) will have to make substantial use of imported natural gas, which costs three times the price of Israeli gas.
The Natural Gas Authority's draft decision obliges IEC to forego some of the gas it undertook to buy from Tamar in favor of other consumers. In place of the shortfall in gas from Tamar, IEC will import liquefied natural gas (LNG). The quantity of LNG that IEC will import will amount to one third of its gas consumption at times of peak demand. As revealed by "Globes", the price of LNG in proposals that IEC recently received is $18-20 per million BTU, compared with a price of $5.3-5.8 set in the agreements between IEC and Tamar.
The extra cost of the imported gas will be imposed equally on the economy's large consumers of natural gas, i.e., IEC and the private power producers, but small consumers, such as mid-size factories, will be exempt. It is important to stress that the use of natural gas can improve industry's competitiveness and indirectly lead to a fall in prices.
The new arrangement is proposed in a document produced as a basis for a hearing at the Natural Gas Authority, revealed this morning in a notice by IEC to the Tel Aviv Stock Exchange. According to the notice, under the Natural Gas Authority's draft decision, the owners of the Tamar license will not be allowed to use the limited capacity of the pipeline bringing the Tamar gas ashore as a reason not to sign gas supply agreements. "At any particular moment at which the aggregate demand from all consumers is expected to exceed maximum capacity (of the pipeline, A.B.), distribution of the pipeline's capacity will be on a pro-rata basis, in proportion to the contractual quantity." The pro-rata regime will not apply to gas marketers and small consumers.
The need for the arrangement arises from the limited capacity of the undersea pipeline system that will start to bring gas from the Tamar reserve to Israel in mid-2013. The system's limited capacity will allow Tamar to supply only 60% of the Israeli economy's gas consumption at peak demand times from 2015 onwards. Tamar is due to expand its transport capacity towards the middle of 2015, but it is still not clear whether the planned expansion is possible either technically or from a regulatory point of view.
The main casualty of the new arrangement is private power producer Dalia Power Energies Ltd., which will have to reopen the agreement it signed with Tamar. Apart from manufacturers, a gainer from the arrangement will be Israel Corporation (TASE: ILCO), which has been left without a gas supply agreement after preferring to sign an agreement with Egyptian supplier EMG, from which the flow of gas has ceased because of sabotage and the political upheaval in Egypt.
Published by Globes [online], Israel business news - www.globes-online.com - on July 8, 2012
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