2. SOLAR - ANALYST REACTION 17 August 2012
1. ISRAEL'S ENERGY SITUATION
With a population of 7.8m, few natural resources, and chilly relations with its neighbours, Israel
Israel needs energy, but
has serious energy security issues. Due to transitions prompted by last year's "Arab Spring", it
the PUA is keen not to
can no longer count on critical oil and gas imports. In April 2012, the Egyptian Natural Gas
overpay
Holding Company cut gas supplies to Israel, complaining that a longstanding (and unpopular in
Egypt) deal was underpriced. Supply does not appear to have restarted. In any case, Egypt is no
longer a reliable source of fuel to Israel due to rising lawlessness in the Sinai and numerous
attacks on the pipeline. Gas deliveries were disrupted on 225 days in 2011 and 66 days in early
2012 before ceasing altogether on 5 March, according to Ampal-American Israel Corporation.
Secondly, Israel has a capacity shortfall in the peak demand hours in the middle of the day. In
response, the Ministry of Energy and Water Resources in June ran an 'electricity drought'
campaign through the Governmental Advertising Bureau to ask the public to use less electricity
during peak hours. The Ministry estimates that peak summer power demand is 12,370MW, while
electricity generation capacity in Israel is 12,900MW, leaving a reserve margin of only 2-3%.
In response, Israel is actively developing its offshore gas resources, solar and wind capacity, and
possibly in the longer run a 2GW power interconnection to Europe via Cyprus.
The first tender was won 2. ISRAEL'S SOLAR FEED-IN TARIFFS
at a much lower price
Israel in 2008 first launched its solar FiT, which has a complex system of quotas for different PV
than that proposed for
system sizes (Table 1). The large project quotas were quickly filled, while residential and
the next 200MW quota
commercial segments have some quota yet to be filled today, but have been built more quickly as
there are fewer permitting issues. Approximately 215MW has been built so far, according to the
Israel Renewable Energy Authority, and there is approximately 300MW with all relevant permits in
the large project queue, to be built by the end of 2014. Only two large-scale projects have been
built so far, most notably Arava Power's 5MW plant in Ketura.
In addition to the FiT, Israel has also held a tender for 60MW of large projects. This was first
published in 2008 and after many delays a winner for the first 30MW was declared. The winner is
a joint venture between US developer SunEdison and Israeli private equity investor Clal Industries
for a project in Ashalim, a small settlement in the Negev desert. The SunEdison-Clal bid came in
at NIS 0.54 ($0.14) per kWh for 27 years.
Table 1: Approved Israeli solar energy scheme until 2014
Cap just 15MW, not fully allocated. Most under 4kW
threshold for paying tax.
0.65 ($0.16) PV Quota Updated June 2011, most built segment
: .........._ ...............1
0.96 ($0.24) 300 PV Quota Updated lately in early 2012, quota fully allocated but
not yet built
200 PV Proposed formula discussed in section 0
... - ..__..--- --,,-,-----,,
>12MW Quota
>12MW Land Tariff relevant for 30MW of Ashalim tender only,
r ......_..... _.+._................................._ ,......................... +.................... jTender
... .... unders,~p~ec:,i~al,rel~nl~dA~e:r.~~~~~:~~"~ ............................................. 1
to be Land Not yet allocated, land will be offered for tender
Tender
thermal Land Not yet allocated
Tender
........ +..
All None· in public hearing Special quota for innovative renewable ,.."hnt,lnr.i.."
Total
Source: Israel Public Utilities Authority, Bloomberg New Energy Finance Note: The PUA use the word ·commissioned" to refer to projects which
have been approved for a feed-in tariff; we have used 'allocated quota' instead as we use the term 'commissioned' for 'built'.
Strictly no copying, forwarding, shared passwords or redistribution allowed without prior written permission
of Bloomberg New Energy Finance. For more information on terms of use, please contact
It) Bloomberg New Energy Finance 2012 sales.bnet@bloomberg.net. Copyright and Disdaimer notice on page 5 applies throughout. Page 2 of 5
3. SOLAR - ANALYST REACTION 17 August 2012
3. THE NEW PLAN
Integrating the Bloomberg New Energy Finance data
One unique aspect of the PUA's proposed FiT is that instead of setting fixed values to be
implemented over time, it is to be pegged against inflation, exchange rate and currency
parameters, plus the Bloomberg New Energy Finance Index for solar equipment costs, for when a
project is built. This is part of an effort to avoid the kind of wrangling seen in Germany, Italy,
Spain, the Czech Republic and the UK over adjusting rates. (For just one example of a legislative
saga, see Italv reaches a compromise on its solar bill, 13 July 2012, Italy's solar PV market too
tough to kill the bull?, 17 April 2012, I;) the italian PV market at right of boiling over?, 3 August
2011, New Italian legislation boosts rooftop segment, 6 May 2011, Italy's PV sector down the nine
rings of hell, 11 March 2011, Italian legislators not responsive to PV growth, 21 February 2011).
The basic problem is that policy changes have struggled to keep up with declining equipment
costs, and needed complete renegotiation each time, which is exhausting to policymakers and
creates uncertainty and difficulty for developers.
The newly adopted system will be much more transparent, and should allow adjustment for the
external factor of global equipment prices. Bloomberg New Energy Finance expects this to give
developers sufficient incentives without over-rewarding, and is likely to result in relatively stable,
low tariffs for the next few years as equipment prices are expected to be stable. It will be updated
quarterly on the first day of the quarter, using the latest overall average, and the new module and
inverter prices will be published by the PUA as part of the price update.
The new plan is to set the FiT for the 200MW quota of large-scale PV projects over 12MW
quarterly, according to the following formula:
RPt =P*[Dtl Do*(40% * MIt/Mlo)+40%*(cpJcpo)]*(0.15*{rt/ro+0.85»
New projects will be Where RPt =new FiT for PV over 12MW, in NIS per kWh
awarded a tariff adjusted P ::: the base rate
quarterly, based on the Dt Monthly average exchange rates of USD NIS published by the Bank of Israel, during the
cost of capital, inflation month preceding the update.
and solar equipment
Do::: Dollar exchange rate base ($1 =NIS 3.99)
costs
Mit ::: Bloomberg New Energy Finance multicrystalline silicon module and utility-scale inverter
latest price
Mlo Bloomberg New Energy Finance base rate for modules and inverters, $0.96 for modules
and $0.14NIJ for inverters
CPt = Consumer price index, as published by the Bank of Israel at the time of the update
cpo::: Consumer price base rate, as of 22 June 2012
rt ::: Quarterly average for indexed non tradable A+ 10 or 12 years obligations for the duration of
obligation 20 or 25 years by order. These will be calculated based on quotes from the company
"Mirvah Hogen" or any other source that will be determined by the general accountant office.
ro:= Base price offoreign capital (4.56% for 20 years or 5.03% for 25 years)
As it stands, the PUA has proposed an immediate cut in the 20-year tariff from NIS 980
($242)/MWh to NIS 650 ($161)/MWh for systems over 12MW, for Which the quota is 200MW. This
rate may be altered to NIS 600 ($149)/MWh for 25 years as a result of the hearing. Not
surprisingly, developers bitterly oppose the cut. This proposal is open for public consultation until
the 6 September and the results will then be published at an unspecified date after this.
The base rate was set in June 2012, calculated to give project owners a 14% return on equity.
Strictly no copying. forwarding. shared passwords or redistribution allowed without prior written permission
of Bloomberg New Energy Finance. For more information on terms of use, please contact
e Bloomberg New Energy Finance 2012 sales.bnef@bloomberg.net. Copyright and Disclaimer notice on page 5 applies throughout. Page 3 of 5
4. SOLAR - ANALYST REACTION 17 August 2012
Lease cost concerns
One thorny issue that appears yet to be resolved is exactly how much the state (via the Israel
Land Administration (ILA» will receive in lease revenue for projects developed on public lands.
The ILA is understood to have increased the price of its land leases for solar. Developers view
this as uncoordinated on the part of the government, since the PUA is trying to reduce tariffs on
the one hand and the lLA is increasing lease rates on the other.
The PUA counters that by giving long-term visibility on the tariff rates, it is clearly informing
developers about what prices they can afford to pay for the land.
4. BARRIERS TO DEVELOPMENT
A major complaint of developers is that the Israeli development process is extremely bureaucratic,
and that the various authorities are uncoordinated. Consequently, to date only two major projects
have actually been completed.
Eitan Parness, head of the Renewable Energy Association of Israel, said he has high hopes that
meetings underway between the PUA and the ILA will result in a better integrated policy. The
major problem for developers is that they need permits from at least four different government
bodies, all of whom have different concerns.
Table 2: Israeli permitting process
Agreement on land use with the
local kibbutz or moshav
(community)
Check with the Israel Land The Israel Land Administration controls 92% of the land in the
Administration that it is feasible to country.
connect a site to the transmission
grid
Obtain a license to produce i-
electricity from the PUA
Pennit from the Zoning Authority This can take from six to 18 months, or even longer if the national
for the land zoning authority needs to be consulted (for projects over 50MW).
Environmental surveys and pennits from the Ministry of Agriculture
and the Ministry Energy and Water Resources are also required.
Developers must demonstrate that they have at least 20% of the
capex for a system - ie 51,000 per kW - in an attempt to reduce
applications by developers who plan to sell development
ClOsing financing Once the PUA has issued a license, developers have a 90-clay
deadline to close project financing.
Source: Bloomberg New Energy Finance
The PUA says that the permitting process has recently been significantly improved, and the
approval process shortened from two years to six months, with 'licences and tariffs being given to
entrepreneurs this very day'. This is just as well, as if the country is to have over 1GW of PV by
the end of 2014 it will need to start approving them at some point.
5. OUTLOOK
Regulators will receive feedback on the proposal until midday 6 September. Should the proposal
be implemented in its current form, Israel will be the first to base its subsidy scheme on an
industry price index, which will be provided by Bloomberg New Energy Finance. Overall, we view
it as reasonably likely the new rules will be approved, though challenges could come over the fact
that it relies heavily on a single source about the industry - Bloomberg New Energy Finance.
Strictly no copying, forwarding, shared passwords or redistribution allowed without prior written permission
of Bloomberg New Energy Finance. For more information on terms of use, please contact
CI Bloomberg New Energy Finance 2012 sales.bnef@bioomberg.net. Copyright and Disclaimer notice on page 5 applies throughout. Page 4 of 5