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Key View: Israel's power market, although relatively compact, is well developed and the country already produces a surplus against domestic consumption. This limits incentives for investment in new power capacity, though we do note that opportunities will be created by plans to phase out coal-fired thermal power and increase the role of non-hydropower renewables. Our core outlook remains unchanged this quarter, with generation expected to contract over the first half of the forecast period (2022 to 2026) before returning to modest growth through to the end of the forecast period in 2031.
The outlook for Israel's power sector is challenging over the near term. Total generation has decreased from 68.2TWh in 2019 to an estimated 67.3TWh in 2021 and we forecast a further contraction over 2022 to 2026 as coal-fired power generation is gradually removed from the grid. While natural-gas output is expected to climb over this period, it will not fully offset the removal of coal-fired thermal power. Modest bright spots include the wind and solar sectors, in terms of new capacity. Prospects are limited by the fact that Israel is a mature market, where practically all households are connected to reliable electricity supplies.
The bulk of power generation (forecast at just over 94% in 2022) still comes from the thermal sector, with close to two-thirds of generation coming from gas and slightly less than a third derived from coal. Owing to its lack of internal water resources, Israel has very low output from hydropower stations. The remainder of the power sector is accounted for by non-hydropower renewables, which is projected to come in at 3.8TWh in 2022, equivalent to 5.7% of total electricity generation.
Still Producing A Surplus, Despite Decline
Israel - Total Net Generation & Consumption TWh (2021-2031)
e/f = Fitch Solutions estimate/forecast. Source: EIA, Fitch Solutions
Thermal Generation And Capacity Forecast
Key View: Israel's domestic power mix is dominated by thermal power, which makes up well over 90% of total electricity generated. The country is phasing out coal-fired power which will be removed entirely within the current forecast period, leading to an overall reduction in thermal generation, despite increases in natural-gas output. Upside risk for the natural-gas segment stems from the development of Israel's offshore gas resources which will boost supply and increase energy security.
- Total thermal generation is forecast at 62.9TWh in 2022, down by 1% compared to 2021. The phasing out of coal-fired thermal power means that by 2026 thermal output is forecast to contract to 53.1TWh. Modest growth is expected over the latter half of the forecast period to reach 54.8TWh in 2031.
- Natural-gas fired generation will increase by an average of 1.7% through our forecast period, accounting for 99.9% of the total thermal generation in 2031, thanks to exploitation of the country's abundant offshore reserves.
- However, we see downside risks to our forecasts; in October 2020, the Cabinet adopted a proposal to reduce the share of gas in the country's energy mix to 70% by 2030.
Thermal power accounts for the majority of Israel's energy mix with installed thermal capacity making up nearly 16.2GW out of a total of 18.2GW, according to our current 2022 forecasts. Natural gas is the larger segment, making up a projected 75.1% of total thermal generation in 2022, while coal will make up 24.5%, down from 26.8% in 2021. Coal's share of the energy mix will decline over the years owing to enormous natural gas reserves being progressively used, and also due to government prioritisation of clean energy sources, and we expect it to removed from the country's power mix by end-2025.
A considerable portion of Israel's coal capacity consists of the 2,590MW Orot Rabin and 2,250MW Rutenburg power stations, both of which are owned and operated by the Israel Electric Company (IEC). Construction of Rutenburg began in the early 1980s, but the final units were only commissioned in 2000. Orot Rabin was completed in 1981. Both power plants are currently fired by imported coal. However, in July 2018 the Israeli government approved plans to shut down units one to four at Orot Rabin by 2022, under proposals first put forward in June 2016. In April 2019 General Electric won a contract to install a gas turbine, as part of a construction and maintenance project that would see an initial 630MW produced through gas. According to Reuters, IEC also said it had an option with GE to install a second planned gas fired unit, which would likewise have the capacity to generate 630MW of electricity. This order was duly activated in January 2020.
The phasing out of coal comes as the country increasingly exploits natural gas as the preferred means of thermal generation. Generation from gas-fired technology is forecast to increase during the period as the government seeks to take advantage of the country's abundant natural gas reserves. Among the largest of Israel's thermal power plants is the Tzafit gas-fired power plant, an 835MW combined-cycle gas turbine power plant, located some 40km south of Tel Aviv, which is operated by IEC but commissioned by Dalia Power Energies - a company owned by Energy Economy (43.3%), Hiram Epsilon (43.3%), Sigma Epsilon (3.3%) and the Israel Infrastructure Fund (10%) in 2015.
In September 2018, OPC Energy signed a USD300mn agreement with PW Power Systems for the Zomet power station near Kiryat Gat. Pursuant to the deal, PW Power Systems will build the 400MW conventional flexible open-cycle power station run on natural gas. The firm will supply both advanced aero engine-derived gas turbines and certain maintenance services for the turbines for the facility. PW Power Systems will also undertake detailed planning and initiatives necessary for obtaining a building permit. The facility is due to become operational in 2022.
Generation from oil-based fuel is relatively low in Israel, owing primarily to government policies designed to avoid power generation from diesel or heavy fuel oil, largely because of their relative cost compared with other technologies. In 2022, we forecast generation from oil-based fuel will be 0.3TWh, equivalent to 0.4% of total electricity output.
Development Of Natural Gas Resources
The key to gas consolidating its leading position in thermal power generation is the ongoing development of Israel's natural-gas resources. One key project is the development of the Leviathan gas field. Significant funding was secured when Israeli conglomerate Delek Group subsidiaries Delek Drilling and Avner Oil Exploration signed commitment letters with JP Morgan and HSBC, which would see them receive up to USD1.8bn in financing to develop the Leviathan field. The Leviathan field will provide substantial gas both for the domestic energy market - including power generation - and for export. In a further boost, the field's developers announced in February 2017 that they had approved investment worth USD3.8bn in Leviathan, on top of USD1bn previously invested in exploration, planning and appraisal. This later funding confirmation would be enough to complete the first phase of the gas project.
The Leviathan project involves two stages. Phase 1, costing between USD3.5bn and USD4bn, involves a fixed platform with production capacity of 21bcm. Four wells and a 12bcm pipeline to Israel are designed to supply Jordan and the domestic market with gas. Ensco was awarded a contract by Noble Energy in August 2017 to drill two wells and complete four production wells at Leviathan in 2018. Phase 2 - costing between USD1.5bn and USD2bn, and dependent on further offtake agreements - will be designed for exports. The initial 1.2 bcf/d throughput will more than double the capacity connected to Israel's grid. Installation of the topsides was completed in September 2019. Reports from August 2021 show that Leviathan is on track to produce 10.8bcm up from 10.2bcm forecast previously.
The other major gas development of recent significance in Israel is the Karish field. Energean is set to start a drilling campaign composing of three firm wells and two optional wells, to de-risk prospective resources of around 120bcm of natural gas. Energean signed a contract for a drill rig from Stena Drilling for the campaign in mid-2021 and planned five wells, including the Karish Main-04 appraisal well, the Athena exploration well and the Karish North development well, which is scheduled to be drilled in summer 2022. Pending the results of the three firm wells, Energean has the option for two more wells, namely to investigate the Hermes (Block 31) and Hercules (Block 23) prospects. The drilling campaign poses upside risk to Israel’s natural gas production over the forecast period, as the hydrocarbon producing Tamar sands formation is prevalent throughout the area.
Removal Of Coal Deepens Reliance On Natural-Gas
Israel - Total Net Generation By Type, TWh (2021-2031)
e/f = Fitch Solutions estimate/forecast. Source: National sources, Fitch Solutions
Non-Hydropower Renewables Generation And Capacity Forecast
Key View: Renewables generation in Israel is expected to remain on a slow upwards trajectory over the course of the forecast period, despite ambitious government-driven plans for the sector. There is currently a limited project pipeline in the renewables sector and the pre-existing domestic generation surplus means there are few incentives for investment in new capacity.
- In 2022, non-hydropower renewables generation is forecast to increase by 2.9% to reach 3.8TWh. Over the remainder of the forecast period to 2031, we are projecting average annual growth of 5.5% to take renewables output to a total of 6.2TWh - making up 10.1% of total electricity generated.
- We maintain our long-held view that the government will not be able to meet its target of 30% renewables generation by 2030 for two key reasons - the enormous supply of natural gas, which far exceeds domestic needs, and the inability of existing transmission and distribution infrastructure to cope with a huge rise in renewables generation. However, we note that the phase-out of coal in the country's energy mix and a commitment to achieving an 85% emission reduction from the electricity sector by 2050 present upside risks to our forecasts.
- In December 2021, Shikun & Binui Holdings won a contract for the construction of a 330MW solar photovoltaic power plant in Israel (Globes). Shikun & Binui submitted a winning bid of ILS0.0858 (USD0.02)/kWh. The proposed public-private-partnership project will come up on a 3.03sq km site in Dimona, and will be carried out under a finance, plan, build, operate and maintain and transfer model. The project will also feature a 210MWh battery energy storage facility. The government also awarded Prime Energy 475MW of allocated capacity.
The renewable energy segment in Israel is underdeveloped and makes only a limited contribution to the power market. The government has set out ambitious plans to develop the sector over the next decade: In October 2020, the Israeli Cabinet agreed to increase the target of energy produced by non-hydro renewables by 2030 from 17% to 30%. To facilitate the plan, the government is required to undertake grid improvements to help power evacuation, reform the state-owned IEC and switch to competitive tendering from a quota-based feed-in tariff (FiT) system. IEC has sanctioned a plan to double the transmission capacity from the Negev to central Israel. This is expected to be completed by 2023.
In February 2022, the Ministry of Environmental Protection published a new action plan to accelerate the transition from fossil fuels to renewables. The conclusions of the work show that the goals of reducing greenhouse gases from the electricity sector to 2030 can be increased from 30% reduction relative to emissions in 2015 to 42% through the installation of about 20 GW of solar combined with 5.5 GW of storage capacity across the country.
Despite being a sun-rich country, issues relating to land use, as well as an inadequate transmission system, have made many foreign companies wary of entering the Israeli renewable market, and reforms will be needed if the market is to attract sufficient investment. Israel introduced a FiT in 2008, but one of the government's main failings is that FiT rates have been arbitrarily altered several times in the past few years, meaning tariff rates are not predictable for developers. The government has also indicated it plans to move towards a competitive tendering system for solar projects, which has created a further reason for solar developers to hold back on investments.
Progress In Solar Power
Solar is by far the biggest contributor of non-hydro renewable power, accounting for a forecast 5.0% of total electricity generation in 2022 and 87.5% of renewables generation. By the end of the forecast period in 2031, we expect that solar will still account for the majority of renewables output, accounting for 80.4% of renewable electricity generation and 8.1% of total electricity generation. The majority of Israel's installed solar capacity is generated from PV units. Israel's normal direct solar irradiance is around 2,500kWh/sq m/year.
In January 2021, the Israeli Electricity Market Regulatory Authority awarded 608.95MW of projects under the second round of the solar-plus-storage capacity tender. About 33 successful proposals were received from seven developers, among which Doral Group Renewable Energy Resources secured the largest 200MW of the lot. SolGreen won 95.6MW of capacity, EDF Energies Nouvelles Israel won 90MW and Enlight Renewable Energy secured 82MW. Final tariff for the tender was set up at ILS0.1745 (USD0.0544) per kWh with the winning projects to sell power at the specific price for a period of 23 years. The plants are expected to become operational and supply power to the national grid by July 2023.
Wind Segment Gaining Traction
We forecast that wind generation will increase by 17.3% in 2022, to 0.5TWh and by 2031 we expect wind power generation to reach 1.2TWh, equating to 2.0% of total electricity generation and 19.6% of renewables generation.
There are several key projects centring on the wind power sector. A government committee in June 2017 gave approval for a 189MW wind farm - known as the Spirit of Genesis - on the Golan heights. Comprising 41 wind turbines, the facility is scheduled to be built under the auspices of Enlight Renewable Energy in the Fares area covering 15sq km. Funding is now in place for that project.
Enlight’s Golan project had previously repeatedly come up against headwinds. The defence ministry stated that the turbines would interfere with radar installations, requiring the latter to be upgraded at a cost of ILS280mn. The Energy Ministry agreed to cover ILS230mn of this cost. However, the Defence Ministry retains a power of veto over the project and, according to a Jerusalem Post report in August 2019, remained unhappy about the funding solution for the radar upgrade. In January 2020, the Defence Ministry gave the go-ahead for the 189MW Spirit of Genesis project, noting that it and the Israel Defense Forces (IDF) had agreed to shoulder 'calculated risks' in relation to the facility (and others) based on the use of 'unspecified technology', according to Recharge News. The project has not commenced construction, as of May 2022, and continues to face considerable local