Following the outcry over price rises and the planned 8% hike in electricity prices, sources inform "Globes" that Israel Electric Corporation (IEC) (TASE: ELEC.B22) has an option for reducing the quantity of expensive natural gas it is supposed to buy, which will have a dramatic effect on electricity prices.
Under the "questionable" agreement signed in 2012, IEC has an option to reduce the amount of gas it buys from the Tamar natural gas reservoir by 40%. Under that agreement, on January 1, 2019, according to IEC's existing contract with Tamar, IEC can reduce the annual quantity of gas purchased from Tamar from 5 BCM to 3 BCM and ask the Tamar monopoly for a discount on any amount of gas it buys "outside of the contract."
This take or pay (TOP) clause in IEC's contract with Tamar is known to all of the parties involved. During the past year, when negotiations for opening the contract with Tamar were being conducted, agreements could have been reached enabling IEC to reduce the price applying to 2 BCM starting two weeks from now, thereby reducing mounting electricity bills. The importance and urgency of the matter is particularly stark, given the fact that the excessive price of gas from Tamar was responsible for nearly a third of the anticipated increases in electricity bills.
Had IEC managed to lower the current price of the gas it purchases by 20%, from $6.50 per BTU to $4.90 over the coming year, until the Leviathan reservoir is connected, the government company would have gained an extra $100 million in its treasury from the saving, thereby reducing the current electricity rate by 1.5%.
Meanwhile, however, IEC published an auction for the purchase of 2 BCM starting in October 2019 until the end of June 2021 - from the date on which Leviathan begins to supply gas until the expected date on which gas supplies from the Karish reservoir begin. This means that a period of at least 10 months in which the current price of gas could be cut will remain unused.
"Globes" reported in January IEC's announcement that it would act to reopen its questionable gas contract with Tamar. The statements by IEC chairperson Yiftah Ron-Tal were issued, among other things, as a result of public pressure generated following the class action suit concerning the excessive price of gas. Almost a year has passed since then with no visible results.
IEC claims that it is currently conducting negotiations with Tamar to reopen the questionable contract with the aim of achieving something in the first quarter of 2019. The first renegotiation point in the 15-year contract is only in 2021, so the IEC chairperson can take credit for any achievement sooner than that.
At the original renegotiation point in 2021, the price of gas can be cut by a maximum of 25%. Assuming that the inflationary environment in the US remains similar to what it is now, it is likely that this rate of discount will not suffice to bring the price of gas down to a reasonable level, because IEC is already paying 30% more for gas than the private electricity producers. Furthermore, due to the questionable linkage mechanism, IEC pays more for Israeli gas than the Egyptian government, which will buy gas from Tamar and Leviathan at an average of $6 per BTU.
IEC: Trying to take advantage of all options
The agreement signed with IEC in March 2012 was based on a special linkage mechanism, under which the price of gas is linked to the US Consumer Price Index, plus 1%. This linkage mechanism caused the price of gas to rise from $5.042 per BTU (the starting price 6.5 years ago) to $6.10 at present. In 2015, when the gas plan was signed, it was proposed to reopen the agreement with the company, but this did not happen - while it was clear to everyone that even the current high price of $6.10 was not final, and was liable to continue soaring.
IEC said in response, "The gas plan states that IEC's contract with Tamar will not be changed. IEC is therefore acting in several areas in order to bring down gas costs, with a determination to cut gas costs already in 2019. The company has put in motion a competitive process between Tamar and Leviathan for buying gas beyond the minimum quantity under the agreement. At the same time, the company is continuing its negotiations with the Tamar partners in an attempt to reach agreements about the gas price even before the date for opening the price. IEC is committed to utilizing all of the options for reducing the cost of buying gas."
Sources from the Tamar gas partnership told "Globes," "Thanks to the gas agreement with Tamar, IEC has saved tens of billions of shekels in recent years. Without natural gas from Tamar, electricity prices would have gone up 40%. The price of gas in the contract is significantly lower than the price of natural gas in European trading in recent years. The Tamar partners are committed under the contract to set aside much larger quantities than the minimum that IEC is committed to buying, and we respect the existing of this agreement, including the price reopening mechanisms in it."
Published by Globes, Israel business news - en.globes.co.il - on December 16, 2018
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