"The next crisis of power outages like we experienced earlier this month is on the way, and it's only a matter of time when it will happen – this summer or next summer. Since the beginning of the year, we have counted seven 'almost hit' incidents when we scratched the limit of reserves and managed to avoid a crisis, but we were left with a reserve of less than 10%, which is a borderline reserve that means they operated the least efficient electricity generation units and squeezed the lemon," says Chen Herzog, chief economist of consulting firm BDO, who was a guest this week on "Added Value," the economic podcast of Israel Hayom. Herzog has decades of experience in the energy market, advises leading companies, and three years ago was chosen as a candidate for Chairman of the Electricity Authority.
Herzog also referred to the outcome of the tender for IEC's large power station, Eshkol, which will be sold as part of the electricity reform for a huge sum of NIS 12 billion or NIS 7 billion, saying: "The two leading proposals submitted, the first of NIS 12.4 billion and the second of NIS 7 billion, are significantly higher than the value of the power plant on the books, which stands at NIS 7 billion. As far as the state is concerned, NIS <> billion is also a very high price. So why is this property sold at a price that is several times its value? What's in it?" wonders Herzog.
Chen Herzog, Chief Economist of BDO Consulting, Photo: Nati Hadad
"When the electricity reform was launched, the assumption was that the power plants of the Israel Electric Corporation would be sold at their book value, and that the benefit to the consumer would be that competition would be created and prices would fall. But because the state created electricity quotas and created an artificial shortage of electricity, the result is that the market understands that the country is sitting in a traffic jam. When there is a shortage, production costs go up. This is not good news, but rather a failure of the reform. The excess costs are eventually passed on to the consumer," Herzog argues.
"The assessments of the developers who submitted the tender say that electricity prices will not fall because the electricity shortage will remain for a long time. This situation should worry us as citizens of Israel because we have not succeeded in creating a competitive market and have created a shortage of electricity. In a competitive market with sufficient production capacity, there are no such high premiums beyond book value," he concludes.
Herzog also referred to a report he conducted for the Natural Gas Association on the occasion of the tenth anniversary of the production of gas from the Tamar reservoir. According to the report, the cumulative savings to the economy over the past decade stand at more than NIS 316 billion. "This is a real economic revolution. In 2010, we were in a world where 80% of our energy for electricity production was imported, today we are in the opposite situation – almost 80% of our electricity is produced from independent sources – natural gas and renewable energies."
"We all benefited from this first of all in electricity prices - in the last year with the outbreak of the war in Ukraine, electricity prices in Europe jumped more than twofold, with electricity rations - meaning a real energy crisis. On the other hand, Israel has demonstrated tremendous resilience to the crisis, hardly touching us. Electricity prices have risen because of the coal component, but at a much more moderate rate than electricity prices in Europe. And if we look at the past decade, since the beginning of the natural gas revolution in Israel, electricity prices in Europe have jumped by 2%, and in Israel they have dropped by 40%. The level of emissions has also dropped significantly, because gas has replaced much more polluting fuels – coal and oil."
Israel Electric Corporation, Photo: Yehoshua Yosef
Herzog adds: "Another conclusion that emerges from this report is that we ended this decade with more gas than we started. In other words, the rate of discovery was higher than the rate of gas production. We learn from this that apparently the gas potential in the Mediterranean Sea has not yet been exhausted, it's like the miracle of the oil jug, and the country's challenge is to see how to continue developing this potential that contributes to our economy, energy security, geopolitical relations," he says, noting that 90% of trade between Israel and Egypt is in natural gas.
Regarding criticism of revenues that are lower than forecasts from taxation of gas companies in the wealth fund, he said: "Our analysis shows that to date, state revenues, including royalties and taxes, have reached NIS 20 billion, and we assume that by the end of 2030 they will be an additional NIS 70 billion. To this must be added a contribution of hundreds of billions of shekels in reducing electricity prices and air pollution costs."
Apartment prices - where to?
On home prices and the stagnation in the real estate market, Herzog says: "The signs we are seeing now that point to the stagnation in the real estate market are worrisome, because the decline in home prices in recent months stemmed from the economic crisis – a decline in growth, the risks of legal reform and more – all of which caused the construction industry to put pressure on the brakes. No one buys, no one sells, and the statistic that worries me the most is a decline in building starts. If we don't build enough, and the population continues to grow, then we're basically leaving the crisis for another two or three years, because if there aren't enough building starts this year, in two and three years there won't be enough building completions."
So what's the solution?
"The state needs to increase the supply side, the ILA is sitting on the land stock. We have 60,70-100,<> new households every year, and I promise that if every year there were actually <>,<> building starts within three years, the problem would be solved, and in a healthy way. But the state wants to maximize the profit from the land."
"Our moral obligation to the younger generation is to come and say that the land is a natural treasure, just like gas. Why are we denying the younger generation the right to enjoy a national resource at a fair price, because the state wants to maximize the revenues of the ILA? It doesn't make sense. It's like imposing the tax on the young winners. We need to create a fairer taxation system that will increase the supply of homes, which is under government control," Herzog said.
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