06/25/2010 18:34

Israel’s solar energy industry faces ruin.

Given the amount of sunshine this country gets, it was not surprising that when the government decided that 10 percent of electricity must come from renewable resources by 2020, solar power became the main method to achieve that goal.

However, solar power is not competitively priced when compared to fossil fuels, especially coal. So, like most other countries, to get the solar industry off the ground the government began to subsidize it in the form of feed-in tariffs. For every kilowatt hour produced from photovoltaic (PV) panels, the government would pay between NIS 1.50 and NIS 2. That’s three to four times what customers pay for electricity now – from nonrenewable fossil fuel sources.

Analysis: New technologies not bankable?

The PV solar market boomed. From two solar companies prior to the passing of the first feed-in tariff in mid-2008, more than a hundred companies have emerged in just two years. Yet the good times couldn’t last. A subsidized market is inherently unstable and some now fear that the government isn’t moving fast enough to shore it up.

So much so that sources in the private sector have said that unless the government modifies its policies, the solar market could implode. But government officials dismissed those statements as exaggerations, saying the pace is actually pretty good considering the complexity of creating this kind of market from scratch.

In conjunction with the feed-in tariffs, the Public Utility Authority-Electricity (PUA) allocated a certain number of megawatt (MW) caps to encourage private companies to enter the market. Now, private sector sources say the caps are too low and the bureaucracy too unwieldy. For instance, caps of 300 MW should be closer to 1 gigawatt (GW), sources said. The country’s total electricity demand is around 10 GW.

Government sources, however, declared that the feed-in tariffs and cap system were just what is needed to stabilize a young market and prevent the waste of money.

One issue which has emerged quite starkly in the debate is a philosophy of free market versus government control. Private sector sources say the heavy hand of government should back off and allow the market to balance itself. Government officials, on the other hand, have no intention of investing millions in expensive technology whose costs are dropping every year and whose efficiency is rising. Their mandate, they say, is to achieve 10 percent of energy needs in 2020 from renewable sources, while at the same time minimizing costs as much as possible.

SO WHERE’S THE PROBLEM? The lack of a horizon for investment because the solar energy caps are set too low and the lengthy bureaucracy which makes building a solar power station a very long process, according to BDO economist Yosi Israel. BDO provides financial services to some of the biggest companies in the market.

The government recently added an additional 135 MW to the cap for solar photovoltaic installations of up to 50 kilowatts. The feed-in tariff for the first 50 MW of the small installations which was passed in mid-2008 was what spawned the market of over 100 companies in less than two years.

The government was surprised how quickly the cap was reached. Instead of taking three years to reach 50 MW through the small installations, it took a year and a half. Moreover, there were many companies which were thrown into dire straits when the cap ran out and they found they couldn’t deliver the systems they had promised their clients.

Government officials have acknowledged the difficulty that situation has caused and have moved to rectify it. Almost six months later, PUA has released an additional cap of 135 MW for the small installations, which is supposed to give the companies more options.

However, BDO’s Israel described an increasing process of smaller companies being forced to close for lack of financing because they cannot continue to build and six months was too long to remain solvent for them without any income. “We have one company which is ready to install 150 systems as soon as the cap is lifted,” Israel said. While the additional 135 MW cap should help alleviate the problem, Israel argued that what was happening now was that only the big companies could afford to stick around and continue to pay out as they wait for licenses to be granted.

Solar power is very expensive – 1 MW costs about NIS 13.5 million to install, according to Israel. Building and approvals can take up to almost four years before the power station even starts to produce energy and there aren’t that many companies which can afford to keep operations going until the income starts to come in from the feed-in tariffs.

“What’s more, even the big companies are running out of personal capital,” he said. Companies can receive up to 80% financing from the bank for solar projects as long as they demonstrate the ability to pay for 20%. However, Israel noted, 20% still comes out to a large amount of money that a company has to be able to raise before going to the bank.

“It’s a new field so the banks are very cautious,” he said.

Since the first feed-in tariff, the government has launched another one for medium-sized fields of 50 KW to 5 MW. Those fields either require 20 dunams of land per MW or very large roofs and represent another potential market – mostly for large, well-financed companies. Another tariff for large-scale fields from 5 MW to 25 MW is in the works.

ARAVA POWER COMPANY president Yosef Abramowitz contended that the cap on medium-sized fields needs to be enlarged to closer to 1 GW. Applications will soon exceed the 300 MW cap the PUA has put in place, he said, and “it’s bad for business and bad for Israel” not to have more of a possibility to invest by expanding the cap.

According to Abramowitz, the 300 MW cap is causing a panic in the market among serious developers.

“We’ve seen this movie before with small fields [when the cap ran out in December 2009, leaving many companies unable to complete projects until another 135 MW was added last month], “Abramowitz said.

However, PUA licensing and methodology head Oded Agmon strongly denied that the 300 MW cap was in danger of running out.

“There’s still a lot of space under the 300 MW cap. We have only issued one license so far [to Arava Power] and we will be issuing a few more shortly,” he said. Moreover, the 1 KW to 15 KW household roof cap was still available, but none of the companies seemed to want to enter into it, he said. The original 50 MW for small installations was divided in two – very small household installations of 1 KW to 15 KW and larger, but still small, installations of 15 KW-50 KW. The companies mainly preferred to invest in the larger 50 KW installations as a better investment and quicker route to profit.

PUA officials said there had been some confusion when the 300 MW cap was first announced – companies attempted to “register” their requirements with the authority by handing in a short statement. However, officials clarified that allotments would only be allocated to companies which completed the licensing application process in its entirety. BDO’s Israel showed me the application booklet, which was the size of a small binder and requires many affidavits from lawyers and accountants. In essence, Agmon said that while it was possible that more licenses would be issued than the 300 MW, he did not expect all of the companies to be able to build power stations within the required deadlines. If a company cannot complete the project within the time frame, which sets interim deadlines as well as a final deadline, then its allotment reverts back to PUA. In that respect, PUA was encouraging competition among companies to see who could build the fastest, he said.

However, Agmon cautioned that PUA was not about to throw the market totally open at this point. “The government decision mandated 10% of electricity from renewable energy by 2020, while attempting to minimize costs,” he stressed. With the price of 1 MW of solar PV dropping all the time – it has been dropping NIS 1m. to NIS 2m. a year over the last couple of years and is expected to continue to do so – it makes little sense to meet the goals at current technology prices, he said. What’s more, panel efficiency is also on the rise. So a cap of 300 MW to get started now, and then perhaps another 300 MW cap in a few years would be issued for more efficient and cheaper technologies, Agmon said.

Green grid parity – where renewables would produce electricity at the same cost as fossil fuels – might be reached around 2016-7, Agmon said. At that point, PUA might consider changing its strategy of tariffs and caps, he said.

WHILE SOLAR ENTREPRENEURS and government officials might have starkly contradictory views of what is best for the solar market, there is one thing they agree upon: The government needs to appoint one ministry or entity to coordinate the solar enterprise if it is to succeed.

At present, solar entrepreneurs must focus on three areas to erect a solar power station – land, licenses and planning. Once they have those three elements in place, they can begin building solar fields. However, those three elements touch upon half a dozen different government ministries and agencies. The entrepreneur must negotiate a path through all of those ministries, some of which were late in defining clear rules for things like land use and planning.

Recently, National Infrastructures Minister Uzi Landau has been indicating an interest in leading policy on this issue. While energy falls within the purview of his ministry, each ministry has been working independently to craft the regulations needed to pave the way for solar power stations. For instance, the Interior Ministry has been working on the planning aspect, PUA on tariffs and licenses, the Agriculture Ministry on using agricultural land and the Israel Lands Administration on land allocation.

However, Fanny Sasporta, southern district head at the Israel Lands Administration (ILA) said most of the agencies were at the end of those decision-making processes, which could indicate some lessening of the bureaucratic red tape in the next few months.

A spokeswoman for the National Infrastructures Ministry also pointed to the December 2009 creation of a ministerial committee for renewable energy, headed by the prime minister, as the government body which was supposed to provide the guiding hand.

However, Arava Power’s Abramowitz contended that the committee had never met and had no agenda. A Calcalist story from the end of May confirmed that, six months after its founding, the committee had not yet met and there was no schedule of meetings planned.

Among a number of issues, Abramowitz also singled out one which was proving extremely troublesome to his company and others looking to build solar fields on kibbutz land. Finding enough land to build solar fields has been a problem from the very beginning. Some 200,000 dunams are needed for 1 GW, according to Abramowitz. He has said that land in those quantities can be found on the 800 kibbutzim and moshavim in the Negev and Arava and his company was the first to sign agreements with them.

However, there is a regulation that the kibbutz must have a 26% stake in any business endeavor on its land. When building a solar field, that comes out to tens of millions of shekels, which these kibbutzim do not necessarily have on hand to invest. Moreover, having to give up that large a stake reduces the profitability of the fields for the solar power company, which means “99% of kibbutz land deals are in jeopardy,” he said.

The ILA’s Sasporta said the issue had been brought to the attention of management, who decided to leave the regulation as is. She said other kibbutz-related business endeavors had succeeded with this condition in place. Sasporta said a bigger issue was transporting that energy from the southern part of the country to the center where it is needed. She said the government was aware of the problem but it was a matter of “planning and financial resources.” Sasporta added that the ILA was also working on allocating up to 30% of industrial land in the South for solar fields of 5 MW to 10 MW and was investigating the possibility of allowing even larger solar fields there.

The government has also allocated vast tracts of land at two sites – Ashelim and Timna – for solar energy projects after a search of several years for suitable land. Those sites are governed by government tenders and, while they have a smaller PV component, are largely intended for concentrated solar power or solar thermal power stations which require more land than PV.

There is no clear-cut answer to the question whether the solar market is on the verge of collapse. What can be said is that there are still several serious problems that need to be worked out if the country is to enter the solar age.