"Israeli gas price divorced from economic reality"

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Energy experts say the linkage mechanism set by the Electricity Authority causes damage in the billions of shekels to consumers.

A few weeks ago, Public Utilities Authority Electricity (Electricity Authority) chair Orit Farkash-HaCohen wrote to Prime Minister Benjamin Netanyahu concerning what she claimed was a series of failures in the natural gas market. The main failure, according to the letter, is the unique indexing mechanism put in place in Israel that will mean that gas prices will only rise.

"The gas price indexing mechanism in the current agreements perpetuates this trend for the next two decades," Farkash-HaCohen wrote. Energy experts with whom "Globes" spoke agree that the mechanism will cause damage in the billions of shekels, but also express surprise that Farkash-HaCohen complains about a mechanism that she herself created.

The price of gas in Israel is currently linked to the US and Israeli consumer price indexes plus 1%, for eight years. After eight years, the price will be linked to the consumer price indices minus 1%. In the letter of intent for the purchase of gas between the partners in the Tamar gas reserve and Israel Electric Corporation (IEC), the two sides did agree on linkage of the price of gas to the price of oil, as is the norm around the world, but before the agreement was signed, the Electricity Authority intervened and demanded that the linkage mechanism should be changed to the current one. The Electricity Authority even boasted about this achievement.

"Whether the decision is good or not, the Electricity Authority has no-one to complain to but itself," says Natural Gas Authority director Alexander Varshavsky.

"Clearly gas prices in Israel can only rise, they are linked to a price index that only rises," says Fadel Gheit, senior energy analyst at Oppenheimer, who came to Israel for the Energy 2015 Conference. "I have to say that I was very surprised when I heard about the new mechanism," says Gheit, "This mechanism creates a situation in which the price of gas in Israel has no connection to economic reality outside the country. When you want to link the price of gas to something, it must also be linked to one of the different kinds of fuels, the main one being oil. Of course, it is also possible to link the gas price to a mix of fuels."

"The damage caused by this linkage mechanism is about NIS 1 billion annually," says energy financing consultant Shachar Harari, "The Electricity Authority insisted on ordering IEC to change the formula immediately and link the price of gas to the US consumer price index, and the direct damage caused by that to Israeli electricity consumers is about NIS 1 billion a year. This is a colossal economic failure at the Electricity Authority that has caused damage in the billions. The poor consumer will have to bear it for years ahead in the electricity tariff."