Israel's Energy Market: PowerGen Deal Highlights Concentration Concerns

The giant deal by PowerGen (the energy company of the Generation fund) to acquire Shikun & Binui Energy for 4.45 billion shekels has sparked a wave of ownership changes in the private electricity production market. The deal reveals a market in which, primarily, a number of powerful players operate, whose level of concentration puts the Electricity Authority and the Competition Authority on high alert. At the top of the table is Adeltec, which holds small stakes in a large number of power plants, but considering the power of effective control, Dalia and OPC are the prominent leaders.

All this is happening against the backdrop of an intense race to expand national production capacity, which is stretched to the limit following the artificial intelligence revolution and the demographic and economic growth in Israel.

The ownership change game

The deal to acquire Shikun & Binui Energy, which includes holdings in a number of power plants and renewable energy production, is expected to make PowerGen one of the prominent electricity producers in Israel. So prominent that the Electricity Authority is expected to demand a number of adjustments to its holdings as a condition for approving the deal.

To satisfy the regulator, a deal was signed with another energy company, Rapac Energy: the two will exchange shares in power plants under their joint ownership in order to "separate forces" - which will bring Generation to a 52.5% stake in the Reindeer station expected to be built in the Southern Sharon region (compared to 27.5% before), and at the same time it will transfer to Rapac its share (16.7%) in the Alon Tavor power plant, which will bring them to 33%.

But it is possible that even this will not satisfy the Electricity Authority - in such a case, a more theoretical memorandum of understanding was also signed, with the goal of selling all holdings in the Reindeer station to Nofar Energy. Within the framework of this unusual deal, the two will exchange ownership every five years. The sale of this station, or another station, is expected to lower Generation from among the largest companies.

The goal of these exchanges is to prevent a case like that of the Dorad 2 station, whose construction was recently blocked. The station is held, among others, by Adeltec, controlled by businessman Uri Adelsburg, at an ownership rate of only 18.75%. Despite the relatively low ownership rate, the regulators were concerned that Adeltec holds a stake in a huge amount of power plants, allowing it to coordinate a reduction in production and raise market prices.

The concentration picture is changing

On the other hand, a number of market sources say: the huge investments in billions required to build new power plants almost necessarily require the joining of a number of players. Therefore, they are frustrated by the fact that it is precisely the distributed partnership structure that the regulator "punishes".

In this definition, Dalia holds an effective ownership (normalized to the ownership rate) of about 2.6 GW, OPC about 2.4 GW, Generation with Shikun & Binui Energy about 1.7, and Adeltec - only about 1.2. And yet, even with this method, the market is still concentrated. The Israel Electric Corporation, it is important to note, is still the largest electricity producer in Israel by any method, with 39% of the general production capacity.

The truly fundamental problem

While the regulators are debating about concentration and ownership structure, there is an even more fundamental problem in the market: the gap between the huge demand for electricity and the pace of development of the economy in terms of production and the electricity grid. Due to electricity grid limitations, the new stations that could theoretically produce up to 850 MW are expected to be limited to 670 MW by 2035. This is expected to pose a significant dilemma for the Electricity Authority's economic planning when it comes to approving expansions and deals in electricity production.