Don’t raise prices following pipe explosion, experts say

Prices may rise as Israel Electric Corporation needs to replace gas with coal, heavy fuel, or diesel, as well as using own natural gas.

By
July 5, 2011 02:52
Flames from February attack on Sinai gas pipeline

Egypt gas pipeline blast 311. (photo credit: REUTERS)

 
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After saboteurs blew up a section of the Egyptian natural gas pipeline, which conveys gas to both Israel and Jordan, for the third time in five months on Monday morning, experts had conflicting predictions as to the impact on electricity prices, but urged the country to continue to develop its alternative resources.

While the outcomes of this explosion will in all likelihood be similar to those of the previous two occurrences – more expensive, polluting fuels will be used as backup during the period – this third incident has made experts increasingly doubtful of Egypt’s gas reliability.

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In the wake of last week’s announcement from the Public Utility Authority that electricity prices could increase by 20 percent in 2012, industry leaders expressed hopes that such a rise would not be further influenced by the events in Sinai.

“You are losing a second supplier that was important to the industry and hopefully the newcomers. The new, recent discoveries will create eventual competition,” Prof. Eytan Sheshinski, of the Hebrew University’s economics department, told The Jerusalem Post on Monday night.

“There is no objective reason for [price] rising,” he continued, noting that prices are determined by a sole seller and a sole buyer.

“I hope that this will not happen. The government and the electricity company should be firm in their positions.”

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But others feared that despite having no “objective reason” for price hikes, the country might see some regardless.

“A disruption in supply of Egyptian gas to Israel has a significant impact on the electricity tariffs in Israel,” Amit Mor, CEO and energy specialist at the Eco Energy consulting firm, said.

Mor said he felt price rises might be inevitable due to the Israel Electric Corporation’s need to replace the gas with sources like coal, heavy fuel oil and diesel, as well as to extract gas quicker from Israel’s own depleting Mari-B reserves in Yam Tethys.

While Egyptian gas only costs $4.5 per million British thermal units, diesel costs more than $40 after taxes, coal costs about $5.5, and heavy fuel oil costs $17 plus negligible taxes, according to Mor.

“The government has some leeway, has some means, to lower the impact on electricity price increase by allowing the IEC to utilize the less costly but more polluting heavy fuel oil,” he said.

If price increases due occur, however, Mor said he expected to see effects far beyond the electricity market. A price increase would have “a macroeconomic impact,” spurring a resultant increase in prices “of many domestically produced products, from food to retail sales,” and also negatively impacting “the comparative advantage of Israeli export manufacturing,” he explained.

But ultimately, the experts maintained, prices can only be determined by the buyers and sellers.

“Electricity prices are not set by the market or even by the fuel input – they’re policy instruments and that’s okay,” added Prof.

Brenda Shaffer, an expert on energy policy and management in the School of Political Science at the University of Haifa. “They should be high enough to keep consumption down and low enough to allow economic growth.”

No matter what happens to the prices, however, the latest event proves just how unreliable the Egyptian gas supply is, she said.

“Basically, it’s like, how many times do you have to bump your head on your bed frame until you fix it?” Shaffer said. “It’s another reminder that in all the considerations about what Israel needs for consumption, it shouldn’t count on the Egyptian supply.”

“At least [before] there was the hope that the gas supply would be resumed and maintained,” Mor agreed. “But with the current explosion the Egyptian government is facing a major challenge in resuming gas supply and meeting its contractual agreement with the Israeli consumer.”

Nonetheless, Mor said he did think that gas would eventually begin flowing again from the Egyptian pipeline.

“The Egyptian government and the Egyptian natural gas company will do their utmost to renew the gas supply, and it should be noted that also Jordan is highly affected, in fact much more than Israel, because it’s much more heavily dependent on the Egyptian gas supply for electricity than Israel is.”

Shaffer’s picture was a bit grimmer.

“We don’t even know what’s going to happen in Egypt in terms of government,” she said. “Does the interim government want to keep the supplies up for business as usual? Yes.”

But there is no predicting what will happen in the long-term, she continued, and even putting aside geopolitical concerns, Egypt “doesn’t produce enough natural gas for stable exports.”

Shaffer did agree, however, that Jordan will face far worse consequences than Israel will.

“All their gas is imported and a higher percentage of their electricity is produced by gas. Israel can balance with Yam Tethys gas,” she said. “I think in the long run Israel is going to be exporting to Jordan.”

Israel will have sufficient resources once the Tamar and Leviathan gas fields are developed, but it must find alternatives for the short-term, according to Shaffer.

“After a year and a half of muddling through until Tamar comes online, there won’t be these questions of supply anymore,” Shaffer said. “So we just need a year and a half of creativity and then Israel will be in a good situation.”

CEO of Arava Power Company Jon Cohen advocated increased government support for the development of the solar industry, as “the sun cannot be sabotaged.

“It’s the safest and most available energy source in Israel,” Cohen said in a statement.

“Energy security, energy independence and balancing the appropriate combination of energy sources are of critical economic importance to Israel’s future.”

Meanwhile, Mor encouraged bringing in a permanent liquefied natural gas (LNG) regasification unit, which he said would be “strategic insurance for the natural gas supply” and which he estimated would take about a year and a half to install, similar to the temporary LNG buoy that the government has decided to hire.

Acknowledging “the shadow of flames that at this moment are towering over the source of the sabotaged Egyptian gas,” National Infrastructures Minister Uzi Landau stressed to the Knesset’s Finance Committee on Monday that Israel is prepared to deal with the loss.

“We are not expecting disruptions in the electricity supply,” Landau said. “We went through this in the past, and we are set.”

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