Powering the Promised Land: A supply-side analysis of Israel’s energy security

A recent report in CNN highlighted the rapidly growing natural gas industry in Israel and it outlined the emerging reality that Israel could achieve energy independence. Israel is a tiny country of 7 Million people, crammed into a piece of land that is roughly the size of New Jersey. So it is difficult to truly grasp the full significance of how this may reshape MiddleEast politics and more than that, have deep global implications. 

The fact is that until recently, Israel has maintained a stable, reliable, modern electricity grid in the face of every possible challenge. More than just an important news item by today's standards, Israel’s electric power industry provides a unique glimpse into some of the nation’s greatest vulnerabilities and it reveals an interesting case study in the evolution of a stable national electricity grid under adverse conditions. 

Meeting a growing demand for electric power in a high tech economy with limited access to indigenous fuel resources has been a central challenge for the Israeli government. Its exposure to fuel shortages has historically been both an economic challenge and a national security risk. Because of Israel’s continued dependence on imported fuel, and due to the geopolitical situation of ongoing hostility that Israel faces from its neighbors, providing stable electric supply has been one of Israel’s great ongoing domestic challenges. 

The geopolitical landscape over the last 100 years has been shaped by the world's great industrial powers racing to access and control the vast supply of oil that bubbles just under the surface of the Arabian Peninsula, Iran, Iraq, and Kuwait. This pursuit shaped alliances, strategic priorities, and even national borders. For Israel, it meant that unfriendly neighbors who either mobilized hostile action or financially supported others to do so, held significant influence over world energy prices (as seen in 1973). 

The recent discoveries of the Tamar and Leviathan gas fields off the Northern coast of Israel signal a turning point in Israel’s energy stability. This combined with new and alternative energy supplies, and an electricity market transformation that is slowly underway will reshape Israel's national security and may improve regional stability in the Middle East. 

 History of Israel’s Electricity Grid

The origins of Israel’s electric grid reflect some of the deep-rooted security concerns that the country faced in its early statehood. These concerns lay the foundation for the current structure of Israel’s electricity market. Israel’s electric power industry is almost exclusively controlled by the Israel Electricity Corporation (IEC), a vertically integrated, semi-governmental body that owns Israel’s electric grid infrastructure as well as close to 99% of all power generation. Starting out as a collection of small diesel plants that served Tel Aviv, Haifa, and some of the other population centers, IEC’s predecessor, the Jaffa Electric Corporation, was quickly able to accumulate sufficient capital to build a hydroelectric plant. Despite challenges from the local Arab leaders who were suspicious of “Zionist electricity”[1], the budding company was able to construct the Naharayim plant in 1927. The 18 MW hyrdro-electric plant was the first large-scale power generation site in British mandate controlled Palestine and it triggered the establishment of a national grid. By building high voltage transmission and distribution infrastructure, the Naharayim plant was able to supply electricity to a number of Jewish settlements down the Jordan valley. Furthermore, the other smaller diesel plants were tied into this grid creating a singular electricity system.

The emerging electric grid saw a major expansion after 1929 when a wave of Jewish immigrants came to Palestine to escape the growing influence of the Nazi party in Germany. These immigrants were well resourced and educated, and they brought a strong industrial capability. Many settled in larger cities of Tel Aviv, Haifa, Rishon L’Zion, Hadera, and Bat Yam among others. These new immigrants sought to develop a strong industrial capability. This led to increased electricity demand, which triggered a change in the new electric corporation’s strategy. Understanding that this new class of electricity consumers would need significant supply of reliable, high quality power, the decision was made to locate power plants close to these demand centers. This would ensure greater reliability, reduced line degradation, and lower required investment in grid infrastructure. It would also provide the large fuel oil plants with easy access to seawater for cooling. New plants were constructed along these coastal cities and there was a rapid expansion of supply capability.

The 1948 War of Independence revealed another key advantage of this strategy: these power plants were easier to defend than the remote, Naharayim power plant. In 1948, after a coordinated attack by Jordanian then Iraqi forces, the Narahayim plant was destroyed, serving a major blow to the young state, taking with it almost 25% of Israel’s total electric capacity.[2] This revealed the vulnerability of Israel’s electricity supply base, and it set the stage for the centralized control that the IEC maintains over Israel's electricity supply.

In the years following the War of Independence, the IEC embarked on a campaign to construct a number of power plants, many of which faced security concerns. Some plants, like Orim and Redding B, were constructed underground, and Israel’s electric grid remains an island today, with no interconnection to its neighbors. With the exception of power that it supplies to the Palestinian Authority in Gaza, Judea and Samaria, Israel maintains a completely isolated system. 

Electricity Mix and Supply Vulnerability 

Since its inception, Israel has imported the vast majority of its electric fuel source. Israel’s current total generation capacity today is 13.2 GW, with a total annual production of 57,000 GWh. Through 2013, almost all of this production was fueled by imports, placing Israel in a predicament of ultimate dependency. Based on 2014 data from Bloomberg, coal comprised 38% of all fuel used by Israel’s power sector; oil, once the dominant fuel source, is now only 20% of the total production, and natural gas makes up another 41% of the fuel used in electricity production. Solar technologies comprise the other 1%[3]. This profile draws a picture of a highly dependent country, whose national security decisions are complicated by the risk of losing access to key fuel resources. The recent discoveries in natural gas provide a substantial opportunity for Israel to reduce its exposure to fuel shortages, pricing volatility, and political changes that would otherwise leave the country without a fuel supply.

Another vulnerability that Israel faces is in its limited generation capacity. At 13.2 GW of total capacity, IEC fails to meet its target reserve margin (the gap between peak demand and maximum generation capacity). Most recently, this margin was reported to be around 9%, where the target margin is closer to 15%.[4] This is largely the result of the IEC's centralized control. By not fostering competition through Independent Power Producers (IPPs) IEC could not keep up with the rapid pace of population growth. Since 2013, Israel has suffered multiple power outages affecting large swaths of the country. October 2015 experienced one of the worst with many homes and businesses going more than 3 days without power. 

Oil and Coal

Since oil served as the primary fuel source early in Israel's statehood, the State conducted extensive oil exploration. With the exception of a few small oil discoveries, this exploration was fruitless, and the nation was forced to import most of its oil. The decisive victory over Egypt in the 1967 Six Day War, gave Israel control over the Sinai Peninsula and its oil fields. This led to a brief period of significant oil production. By 1971, Israel was producing 43.2 Million barrels of oil, a quantity equal to its annual consumption.[5] However, in the aftermath of the 1973 war, Israel withdrew from a portion of the Sinai and Israeli oil production came to an end.

US support for Israel during the 1973 war led to the Arab oil embargo. Israel had been able to preserve necessary reserves from its previous production activities, but the embargo served as a wake up call, and the IEC undertook a process that would ultimately lead Israel to diversify its fuel mix and include coal. Throughout the mid-1970s, Israel imported most of its oil from Iran. Maintaining a close relationship with the Shah, Israel was able to secure competitive pricing for Iranian oil. But, the Israeli government was also closely monitoring Iran’s shift towards regime change. In anticipation of the Shah’s collapse, Israel built up a 6 month reserve of Iranian oil.[6] In 1979, Israel had a short period of time to stabilize it supply of new fuel sources in order to prevent reducing electricity supply. This emphasized the need for Israel to maintain the momentum of a program already underway to design and construct a dual fuel coal plant. In 1981, the 1400 MW Ma’or David began operations as Israel’s first major coal plant. Shortly thereafter, a second coal plant, the Rutenberg plant, was brought online, with a net production capacity of 550 MW. Like oil, Israel has no indigenous coal supplies. So while coal provides fuel diversity for Israel, it does not enhance self-sufficiency. 

Natural Gas - Imported

In the late 1980s and throughout the 1990s, Israel also began integrating natural gas into its electricity fuel mix. During this period, Israel experienced rapid population growth, spurred by a sharp increase in immigration from the Former Soviet Union. With a population growth of around 7% per year, the resulting growth rate in electricity demand was the highest in the world. Gas turbines, with greater variability and lower water requirements were seen as the answer to addressing this rapidly growing demand. The appetite for natural gas led Israel to engage in one of the most contentious supply agreements of the modern era. Negotiations with Egypt, a country with which Israel shares a cold peace, led to a 15 year contract where Egypt agreed to sell Israel 60 bcf per year of natural gas, almost 30% of Israel’s total annual consumption, at a reported range of $3.00 – $3.50 per million BTU[7] by some accounts and as low as $1.50 by others. The contract was finalized in 2005, around the same time that Egyptian President Hosni Mubarak gave Israeli Prime Minister Ariel Sharon accolades for his peace efforts.[8] Egyptian sentiment moved against their leader. His close ties to an Israeli leader that had been so reviled in the Arab world was a contributing factor to Mubarak’s eventual ouster.

Many Egyptians perceived the gas contract as a unilateral step away from Egypt’s best interest in favor of the West. Not only was Israel benefitting from a stable supply of energy that could only strengthen the country (not deemed in the best interest of Egyptians who still maintain strong pan-Arabist sentiments), but Israel was getting the gas at significantly lower prices than the world market. Furthermore, with it’s own rapid growth in electricity demand, Egyptians questioned why Israel, and not their own population, was getting gas that was essentially subsidized. This objection was especially apparent towards the final days of Mubarak’s reign when the Sinai gas pipeline was sabotaged no less than a dozen times, halting operations each time. Subsequent to Mubarak’s ouster, and to the Muslim Brotherhood’s assumption of power in 2012, the new Egyptian government cancelled the contract, halting sales of natural gas to Israel. Many attribute this as one of the key factors that perseverated the rolling electric grid blackouts that occurred in Israel between the summer and fall of 2013. Due to having to pay significantly higher gas rates, IEC has sustained $5.7 billion[9] in direct damages, diverting investment that could otherwise go toward grid maintenance.

Domestic Natural Gas Discovery – Game Changer

In the early 2000s, Yam Tethys and British Gas, in separate explorations, discovered approximately 1.5 trillion cubic feet of gas (tcf) off the coast of the Southern port of Ashqelon. In 2004, IEC became the first Israeli customer to purchase this gas, and converted one of its power stations to natural gas.[10] 

In 2009 another significant discovery occurred. Approximately 60 miles off the Northern coast of Haifa, the Delek-Group, in partnership with US based Noble Energy, discovered the Tamar field, containing between 8-9 tcf of natural gas.[11] Shortly after the discovery of Tamar, another major discovery emerged with the Leviathan field, estimated to contain 16 tcf of natural gas reserves. With close to 26 tcf having been discovered between 2000 and 2010, sufficient gas reserves have been found to meet Israel’s domestic gas needs for the next 50 to 100 years.[12] 

These findings are more significant, however, than simply stabilizing domestic gas supply. Many have raised the question of whether Israel’s new status as an international energy supplier could actually strengthen its ties with regional trade partners and foster a framework for peace where diplomacy has failed. While mass production from these sites is still in early stages, Israeli companies have already signed deals to supply natural gas to Jordanian and Palestinian companies and talks are ongoing with Turkey, a country whose diplomatic relations with Israel deteriorated significantly over the last 12 years. Israel is well positioned to leverage this gas for domestic energy independence, economic gain through the creation of a sovereign wealth fund, and for regional influence. These finds are, in short, a game changer for Israel. 

 Along with the foreseeable benefits to Israel of this new gas discovery, it also raises new security concerns. A central concern lies in the vulnerability of a gas pipeline that Israeli companies will have to construct to transport the gas to its future buyers. Talks are underway with Egypt to potentially tap into the Sinai pipeline, benefiting Egypt’s poorly managed gas company, Egas, and providing Israel an easier route to its customers. Israel is also considering building a liquefied natural gas conversion hub to enable the transport of this gas to Asia and Europe where it can earn higher prices. This would put Israel in economic competition with Russia. Another key vulnerability lies in the offshore gas rigs that are susceptible to a range of threats. These threats are weighed against the considerable investment that companies like Noble Energy, Delek Group, Yam Tethys, and BG will be making in the near term. They are also be weighed against the considerable strategic advantage that these gas supplies will provide to Israel. Significant emphasis is placed on securing these gas extraction activities, providing both naval support and intelligence for companies operating in the Eastern Mediterranean.

The most lucrative opportunity emanating from these new gas discoveries may be in the sale of liquefied natural gas (LNG) to higher paying customers in Europe and Asia. Geopolitical developments fueled by the crisis in Ukraine, and Russia’s deal to supplant its key European customers with a larger and hungrier Chinese customer, means that Israel’s vast new supplies of natural gas may be viewed by Europe especially, as a viable substitute. Other energy intensive nations including South Korea and Japan are also seeing a rise in natural gas demand, and with little indigenous generation of their own, LNG is a viable alternative. Russia continues to support Iran, turn its back on Europe, and take steps that strengthen China’s competitive energy supply in the face of its neighbors. These geopolitical factors already seem to be hinting at stronger strategic relationships for Israel, now seen as a possible answer to the growing void in natural gas from Russia.

Market Reforms and Alternative Energy

These new natural gas discoveries provide a significant opportunity for Israel to take a leap forward in reducing its dependence on imported energy supplies while becoming a desirable strategic ally for any country not wanting to succumb to the whims of Russia or Iran. Another significant opportunity that could enhance Israel’s energy security is a concurrent series of market reforms that are paving the way for renewable energy sources to take a more prominent role in the county's energy mix. 

Until recently, almost 100% of power generation in Israel was owned by IEC. In 1996, the Knesset passed the Electricity Sector Law that, among other things, led to the establishment of the Public Utilities Authority – Electricity (PUA). The PUA sets tariffs, ensures grid reliability through overseeing standards, and oversees licensing and compliance for market participants. The ultimate goal is to open Israel’s electricity market to private sector participants, taking burden off of IEC, ensuring more abundant and secure power generation, and provide price stability through competition.[13] Independent power producers (IPPs) have been slow to respond in entering the market for stable, dispatch able power. As of 2011, 2300 MW of natural gas generation was approved for construction by IPPs in Israel. These projects have yet to come to fruition in Israel and the political impetus to drive market reforms has significantly slowed.

Pro IPP market conditions have emerged as favorable to renewable energy development, particularly relevant to solar energy. Israel enjoys an abundant solar resource and with the opening of the Israeli market to the private sector, innovative technology firms have found a competitive niche. The Israeli Ministry of the interior has set a 10% renewable energy goal. This goal is likely to be met, in large part due to significant feed-in tariffs that are being offered for various renewable technologies. Close to 700 MW of utility scale solar power is either currently on line or has been announced and is undergoing permitting.[14] Almost all of this production is owned and operated by IPPs who have obtained project financing that IEC is too leveraged to invest on its own.

While Israel seeks to employ renewables to bolster its fuel diversity, it recognizes that a key disadvantage of renewable energy lies in the non-dispatch-able nature of some of the most prominent renewable resources. Power companies cannot control the flow of sun or wind, which means that without backup systems or storage capability, renewable energy often fails to address large scale, and long-term electric grid requirements. Simply put, these systems cannot provide unit commitment due to the intermittent, and uncontrollable natures of the fuel supply.[15] This intermittency often takes the form of instantaneous changes in power production, causing rapid fluctuation in voltage frequency and reducing power quality. Despite these challenges, renewables serve to increase the diversity in Israel’s energy mix and establish groundwork for greater IPP participation. 

Through the commercialization of innovative new technologies developed in Israel, close to 300 MW of the roughly 700 MW of total renewable projects provides stable and reliable supply of dispatch-able renewable energy. These concentrated solar power projects are designed to store heat for later use in power generation. These plants will be able to provide a stable supply of electricity without being vulnerable to fuel price volatility. 

Conclusion 

The significant natural gas discoveries in the Eastern Mediterranean are anticipated to fare well for Israel. They can provide an asset that Israel can leverage to strengthen international ties, and they can support Israel’s move towards energy security. However, many question whether or not these finds are good for regional stability. On the one hand, deals inked with Jordanian and Gaza based companies do suggest that new regional cooperation could emerge where diplomacy has failed. But as others suggest, the precedent does not support that business trumps conflict. Palestinians are already murmuring that they actually have territorial rights to some of the gas that was discovered in the early 2000s. And to further exacerbate this tense situation, Palestinian claims that Israel is preventing them from accessing additional gas belonging to them could fuel more fractured conflict and slow the path to long term resolution.[18] Far less contentious is Israel’s advancement in the field of renewable energy. This is catalyzing the move towards a competitive power market and it is providing technological advances that are now being piloted in California, India, Australia, and Egypt.[19] Together though, trends are bringing Israel to a significant turning point in addressing one of its biggest national security vulnerabilities: energy security.  

This is not the end of the story and is far from the whole picture. Nuclear power is the elephant in the room. It is widely accepted that Israel has the capability to develop civilian nuclear power, but it would likely open a security vulnerability that could render horrible consequences.[20] Furthermore, this paper did not touch on environmental issues that are associated with Israel’s electric power sector. Heavy reliance on fossil fuels has been a contributor to pollution in Israel. How will a shift to renewables and increased natural gas impact Israel’s environmental concerns? Will this, in any way, foster support from Israel’s neighbors who drink the same water, breath the same air, and fish in similar waters?          

Finally, while all of these questions address Israel’s fuel source, hostile neighbors have increased capability to hit targets inside of Israel with relative accuracy using medium range missiles. What does this mean for Israel’s electric grid infrastructure? Should Israel take a more distributed approach to hedge against the potential for a major hit to its electric grid? How do these advanced in fuel security weigh against the vulnerabilities of an exposed electric system? All of these question merit analysis in order to gain a comprehensive understanding of Israel’s energy security options. They all factor widely into the country’s national security and eventually, they will all drive significant decisions. 

Summer 2017 Update 

Israeli Independand Power Producer (IPP) Dorad Power Station closed a purchase of the Karish and Tanin gas fields for $500 Million. Some say that $500 million is a bargain. Others, however, point to the rising tensions over access to and ownership of Mediterranean gas reserves, and raise an ere of caution.

What do you think? I'd love to get your opinion!

SOURCES AND CITATIONS

[1] A history of the Israel Electric Corporation (IEC) from the Official IEC Website, translated from Hebrew by this paper’s author

[2] Official IEC Website

[3]Bloomberg New Energy Finance, Power Plants Data

[4] Hemmings, P.(accessed July 1, 2014). Working Paper: Addressing Challenges in the Energy Sector in Israel. OECD

[5] Rosen, E. (1982). The effect of the relinquished Sinai resources on Israel’s energy situation and policies., Middle East Review 14, 5-12.

[6] Bahgat, G. (2014). Alternative Energy in Israel: opportunities and risks. Israel Affairs, 20(1), 1-18. doi:10.1080/13537121.863078

[7] Israel and the energy crisis. (2012). Africa Confidential, 53(10), 8.

[8]In an August 2004 interview with Der Speigel

[9]Bryant, C. & Mitnick, J. (2014), Can Israel’s natural gas reserves pump up regional peace?, Christian Science Monitor, 08827729, 4/17/2014

[10]Delek Group Website, Energy & Infrastructure

[11] Bahgat, G. (2014) states that 8 tcf was discovered with Delek Group Website (link above) states 9 tcf

[12] Bahgat, G. (2014) reports that Israel consumes 200 bcf of natural gas per year. This translates to 130 years of gas supply from these discoveries. However, it is assumed that the 200 bcf currently consumed will continue to rise causing a reduction in the forecasted longevity of these reserves while gas will also be sold internationally, thereby significantly reducing the 130 year timeline.

[13] Hemmings, P. (accessed 2014)

[14] Bloomberg New Energy Finance, Project data

[15] Vittal, V., (2010), The Impact of Renewable Resources on the Performance and Reliability of the Electricity Grid, The Bridge 40(1), 512

[16] Schwarzbözl, P., Buck, R., Sugarmen, C., Ring, A., Marcos Crespo, J., Altwegg, P., & Enrile, J. (2006). Solar gas turbine systems: Design, cost and perspectives. Solar Energy, 80(10), 1231-1240. doi:10.1016/j.solener.2005.09.007

[17] Heller, P., Pfänder, M., Denk, T., Tellez, F., Valverde, A., Fernandez, J., & Ring, A. (2006). Test and evaluation of a solar powered gas turbine system. Solar Energy, 80(10), 1225-1230. doi:10.1016/j.solener.2005.04.020

[18] Antreasyan, A. (2013).Gas Finds in the Eastern Mediterranean: Gaza, Israel and Other Conflicts., Journal of Palestine Studies.42(3). 29-47

[19] The Kuraymat Power plant 100 miles south of Cairo is leveraging parabolic trough technology originally developed by Bet Shemesh based Solel and acquired by Siemens

[20] Gottfried, K., (2006), Climate Change and Nuclear Power, Social Research 73(3), 1011 - 1024