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By Brett Goldman and Ari Indyk

This post was in The Truman National Security Project’s Doctrine Blog

Introduction

A natural gas revolution is currently sweeping across the United States. While not without a degree of controversy, the sheer breadth of these new discoveries has the potential to reduce greenhouse gas emissions, stimulate the American manufacturing industry, and, critically, serve as a stepping stone towards greater energy independence and security.

Yet, America is not the only place where a natural gas revolution is underway. Israel is also beginning to explore and grapple with the implications of its own recently discovered natural gas reserves. A 2010 USGS survey indicated that the Levant Basin contains some 3,450 billion cubic meters (bcm) of natural gas – 850 bcm of which have already been found in Israel’s territorial waters. At current market rates, these massive reserves are valued at almost a quarter of a trillion dollars. However, in addition to providing Israel with an economic boon, these reserves can also help forward American regional interests in a number of important ways:

  • Israeli reserves are critical to the country’s energy security. The country is an ‘energy island’ and has been largely dependent on imports to meets its power generation and fuel needs. With these recent gas finds a crucial American ally in a pivotal region is taking a significant step towards addressing a key security concern.
  • Israeli gas may be exported to Europe, where Russia has wielded a broad – and often disruptive – influence in the energy market. The addition of an Israeli supply chain could help mitigate the stronghold that Russia has held on the EU for the past decade, inducing a more complacent posture from Moscow and providing American allies in Europe with increased flexibility when crafting policy.
  • The current wave of resource discoveries in the Eastern Mediterranean has heightened tensions regarding national borders, especially between Israel and Lebanon. America has already begun brokering a bilateral agreement – a move that could provide Washington with an opportunity to regain political capital and re-establish itself as a credible arbiter in the region.

Israel’s natural gas revolution could have immense implications for American foreign policy. In addition to helping secure a key ally in the region, US policymakers should also consider how Israel’s gas reserves could impact the regional geopolitics and assess how Washington, even in an ancillary role, can leverage these new energy market dynamics to its strategic advantage.

Israeli Gas to the Rescue

Israel has been and, for the foreseeable future, will continue to be an energy island. That is to say that the country does not have any energy sharing agreements with its neighbors and is unable to draw on nearby electrical grids in the event of a crisis. Until now Israel also has had negligible domestic natural resources, forcing the country to import the vast majority of all its energy needs.

This stark reality was further compounded when, during the Arab Spring, more than a dozen attacks were launched in Sinai on the EMG pipeline, which carried some 1.6 bcm of natural gas from Egypt to Israel. Egyptian imports provided Israel with close to 40% of its gas needs, and, at the time of the attacks, natural gas was accounting for about 40% of the country’s total power generation. With fuel transfers effectively suspended for the duration of the attacks, and the import agreement officially terminated in March 2012, pressure began to mount on Israel’s energy sector.

An energy crisis erupted in the summer of 2012, when Israel’s national electricity provider was forced to import more expensive fuel, like diesel, to make up for the shortfall, causing a sharp rise in the price of electricity. Furthermore, Israel’s natural gas reserves are not slated to come online for another few months and a lack of capacity in the power generation sector led to sporadic blackouts throughout the summer.

Overall, this episode was important in that is underscored two critical points: Israel’s energy situation is incredibly precarious, given its dearth of domestic natural resources; Israel cannot depend on other countries for its energy security and needs to move towards self-sufficiency as much as possible.

With enough proven and prospective gas reserves to meet the country’s power generation demands for decades to come, Israel is now also weighing the use of natural gas to transform its transportation sector, a move that would give the country even greater insulation from foreign energy markets.

If Israel is able to meet the majority of its energy demands with domestic reserves, the US will have a fundamentally stronger and more secure ally in a pivotal region of the world. For example, it was reported that during the 2006 Lebanon War Israel was dangerously close to a fuel crisis, as importers refused to approach the coast during the fighting. A stable and robust domestic production capacity could help alleviate such situations in the future. Additionally, if Israel decides to move authorize natural gas exports, these world-class finds could also aid other American allies diversify their own energy supplies and help mitigate the impact of deleterious foreign influences.

David vs. Goliath: How Israeli gas threatens dominance in the EU

For more than a decade, the European natural gas market has been a Russian-dominated affair. Moscow, through its state-owned enterprise Gazprom, has been the single largest supplier of natural gas to the EU, typically responsible for importing between a quarter and a third of the EU’s annual natural gas consumption. Gazprom has also established or holds stakes in dozens of subsidiaries across the EU, including in downstream sectors, like power generation, which gives the Russian gas giant control over critical pieces of energy infrastructure, too.

The key position that Gazprom holds in the EU energy market has given Moscow wide ranging influence and geopolitical clout. Consider that multiple pricing disputes between Gazprom and the Ukraine resulted in gas imports being cut on three separate occasions. Moreover, because Ukraine is the entry point for some 80% of Russian gas into the EU, the shortage affected numerous Western European markets, too. Gazprom has also cut gas supplies to Moldova, Lithuania, and Latvia. In addition, claims have been made that Russia sought to influence policy in Europe’s former Soviet States using supply agreements as leverage. In short, Moscow has shown it possess both the determination and capacity to cut critical natural gas supplies to the EU market, a concern that could hang over EU policy decisions in any number of critical scenarios.

There are, however, two important qualifications to the current situation. The first is that the relationship is a two-way street: as much as the EU relies on Gazprom for its gas, so, too, does Gazprom rely on the EU – the European market accounts for some . The second caveat is that the Brussels is aware that it has become increasingly beholden to Moscow and is actively looking to diversify its natural gas supply chain.

In light of these realities, the EU has begun increasing natural gas imports from countries like Algeria and Qatar. Several European states have also commenced domestic exploration operations in search of unconventional reserves, such as those found in the US. The EU has also revisited pipeline proposals emerging from the Caucasus. However, these options also have risks. Indeed, questions should be raised regarding the volatility of export markets like Algeria, where an Islamic attack in January claimed the lives of dozens of at a natural gas plant in the country’s south, as well as the domestic opposition that exists to shale gas exploration in several European markets. There is also the desire to avoid Iranian gas, which analysts say would be necessary for any Caucasian pipeline to be viable. As such, Israel’s new offshore reserves, free of the above entanglements, present an even more promising option.

For its part, Gazprom is well aware of the shift that is taking place. Given the primacy of the EU market to its export economy, Moscow has moved swiftly to enhance its delivery capacity and secure potentially competitive resources. That includes pushing forward two new pipelines – the Nord Stream and the South Stream – that would enable Gazprom to ship an additional 118 bcm a year to Europe, which would almost double its current export capacity and further entrench its position within the EU market.

Moscow’s desire to stifle any competing gas import projects also sheds light on why Gazprom established an Israeli subsidiary and made a strong bid to become a strategic partner in Israel’s Leviathan concession, the country’s largest natural gas find to date. Reports from Israeli ministries increasingly suggest that Moscow would have sought to stymie the development of its reserves.

At present, Israeli natural gas exports have yet to be approved, but there are, nevertheless, some encouraging signs. The inter-ministerial committee tasked with formulating Israel’s natural gas policy issued a final report in September 2012 recommending that almost half – some 500 bcm – of the country’s prospective reserves be allowed for export. Moreover, the entrance of Australian Woodside Energy as a partner in the Leviathan field (which won the tender instead of Gazprom) means that Israel now works with a company that possesses deep experience in natural gas exports. There have also been ongoing discussions between Israel and its closest EU neighbor, Cyprus, concerning the joint development of a liquefied natural gas (LNG) export facility or the join operation of a pipeline bringing Eastern Mediterranean gas all the way to Greece.

Natural gas exports from Israel are far from a done deal – especially in light of the country’s recent elections, which will likely delay this politically divisive issue for several months. Yet there are already questions as to the final destination of any gas exports.

Far East markets, like Japan and South Korea, pay a third more for LNG than European markets. That being said, the Far East market is highly competitive as well as risk averse. Australia, Qatar, and Indonesia are in closer proximity and have longer relationships with and a greater capacity to service the Pacific. Newly discovered reserves in Eastern Africa may also flood Far East markets in coming years. In addition, China and India, the region’s largest energy consumers, are still using a large amount of coal for power production, a trend that does not seem likely to reserve in the near future, as coal still remains a cheaper fuel source than liquefied natural gas. Thus, Israeli exports to the Far East, while not impossible, become less probable in light of these factors. The European market, however, is closer to Israel, has a continental emissions scheme which benefits from increased usage of natural gas, and has proven itself open to the entry of multiple players.

If exports to the EU are approved, then an influx of Israeli gas into the EU could help displace Russian natural gas, giving European states a greater level of energy diversity and foreign policy flexibility. In this way, America’s interests would again be well served by enhancing the security of key European allies and diminishing the geopolitical leverage that Moscow has shown it can wield through its gas supply agreements.

America Re-Engaged

The geopolitical ramifications of natural gas in the Eastern Mediterranean are, without a doubt, incredibly significant. In addition to providing several countries with a chance of achieving a high-level of energy independence and import diversity, these natural resources could also serve as a cornerstone of greater stability within the region.

Israel and Lebanon, the two countries whose territorial waters comprise the largest percentage of the Levant Basin, have a great deal to gain – and lose – in the exploitation of their respective natural resources. However, the two countries have been at a state of war since 1948 and lack an official maritime border. The issue here is a critical one. The absence of clear boundaries could not only be a major obstacle to securing investment, but, given the tempestuous relationship between the two neighbors, any conflicting claims could quickly be turned into the pretext of a broader conflict.

That being said, both countries have already submitted individual proposals to the UN delineating their southern maritime boundary, which has resulted in an overlapping claim concerning a 330 square mile swath of territory.

Considering that none of Israel’s current finds appear contestable and that Lebanon has yet to make any discoveries in its own offshore waters, the two countries are at an important juncture, where demarcating boundaries at this point could help avoid future conflict.

While the conflicting claims seem to stem out of an earlier agreement that Lebanon and Cyprus drafted regarding their respective maritime boundaries, as well as Lebanese interpretations of steps Israel took when parceling out its natural gas concessions along its northern border, the general consensus seems to be that the two countries are unable to resolve this dispute bilaterally.

To assist the two parties in reaching an agreement, the United States has quietly and swiftly entered the fray by dispatching seasoned Middle East diplomat Fredric Hoff to help achieve a resolution. Hoff and his team have been mediating since mid-2011 and may actually have made some headway, . The US has submitted a proposal to both sides, predicated on a compromise of the overlapping claims that largely follows the guidelines of international law.

Although a resolution is by no means guaranteed, particularly in light of the historical intricacies of the Israel-Lebanon relationship, the role the US has begun to play here is important. If able to arbitrate an equitable solution to this thorny issue, Washington will have taken a step towards re-establishing the US as a credible negotiator in a region where it has seen its influence and standing wane over recent years.

Success, in this regard, will provide the US with political capital and a reinvigorated reputation as a goal-oriented negotiator that will be indispensable to American foreign policy – especially if the next time the US engages in the region it may concern an issue more divisive and with higher stakes than a maritime border dispute.

Conclusion

For a country that was once limited in terms of natural resources, Israel’s potential to reduce its energy dependence through domestic natural gas production is an economic game changer. It also holds enormous implications for the country’s security. In light of the cancelled gas accord with Egypt, Israel’s gas reserves will help the country meet its growing energy demands. The transportation sector and local industry are already taking note, too, as factories across the country are quickly securing supply agreement and the government has begun exploring the conversion of heavy vehicle fleets to run on natural gas.

It is also important to consider the impact that Israeli natural gas exports could have on the European market, where Moscow has used supply agreements to push, pull, and even punish states into alignment with Russian interests. Moreover, recent events in Algeria, which also exports natural gas to the EU, means that secure supplies from a regional ally like Israel become increasingly attractive.

The United States has also seized another opportunity to bolster its foreign policy clout in the region by helping to arbitrate a border agreement between Israel and Lebanon. The successful demarcation of a maritime border between the two countries would not only help ease investor concerns and spur increased development of offshore reserves in the Levant Basin, but it would also accrue the US significant political capital for defusing a potentially charged issue with an equitable and preemptive solution.

Finally, it is worth noting that Israel and the US have a long history of mutual collaboration when it comes to research and development, and the energy sector should be no exception. Opportunities for joint R&D programs, technology transfer programs, and foreign direct investment initiatives should not be underestimated. The potential for collaboration between Israeli and US firms has extended to new areas thanks to burgeoning natural gas economies in both nations. Now it’s just a matter of having the wherewithal and the funding to get the job done.

By Stefan Babjak

With a new year come new initiatives and new goals concerning our future energy use and sustainability. The world still runs on fossil fuels and our fuel demands are growing daily. As newly emerging economies grow at a rapid pace our demand for fossil fuels will have to continue to grow exponentially to keep up. Our increased extraction has begun depleting the most easily obtainable fossil fuels, leaving us with more labor intensive, environmentally hazardous, and expensive methods of extraction. These include hydraulic fracturing, which is facing opposition, and deep water oil drilling, which precipitated one of the worse offshore crises with the 2010 BP spill. The increasing demand for worldwide growth and the difficulty associated with new extraction methods has spurred investment in alternative energies.

In 2011, worldwide renewable energy supplied an estimated of global final energy consumption, and encompasses all different types of renewable energies, including: solar, geothermal, tidal energy, and wind energy. However, one of the most promising of these energy sources is biofuels, where Israel is quickly becoming an industry leader.

Biofuels are derived from biological carbon fixation. This includes any type of biomass or recently living organisms, and can be categorized into first generation and advanced biofuels:

  • First generation biofuels are derived from seed and oil crops. This includes corn, canola, palm oil cassava, wheat etc. Yet there are obvious problems that have been encountered with this type of biofuel. Food prices have and environmental degradation from monoculture have taken their toll on people’s faith in first generation biofuels, and, as such, most research is now starting to move towards advanced biofuels.
  • Advanced biofuels are non-food crop biofuels and can be divided into the two most promising sources of future energy: algae oil and cellulosic ethanol.
    • Algae derived fuel, or , is made from the resulting biomass of growing algae. When the algae grows it takes CO2 out of the atmosphere, it’s burned as a fuel which puts the CO2 back into the atmosphere, giving it a carbon neutral property. In another process, the algae biomass that’s not used to make fuel can be skimmed off and buried along with all the carbon it locked away during its growing process, making it
    • Cellulose is the most abundant material on Earth; it is in the cell walls of every piece of grass, tree, bark, lawn waste, wood chips or plant of any type. The cellulose can be broken down through a variety of methods, and the sugars from the plant cells are then refined into what is known as .

In Israel, renewable energy accounts of energy usage, with the majority of power generation and transportation energy demands being met by fossil fuels. Yet while Israel may be slow in adopting alternative energy solutions, they are leading the pack in the R&D and commercialization of renewable energy technologies, particularly in advanced biofuels. Due to its large commitment of government resources, strong academic backing, and a robust private cleantech sector, Israel is well-positioned for success.

Government

In Israel, there are several key government programs currently geared towards the development of renewable energy and biofuel solutions: The Alternative Energy Administration, The Israel NewTech program, and the I-CORE (Israeli Centers for Excellence in Research and Development) program.

The  (AFA) is a governmental team within the Prime Minister’s Office that supports the establishment of a homegrown alternative fuel industry, with the ultimate goal of reducing the world’s dependence on oil in transportation. The main goals of this administration are:

  • Reducing Israel’s oil consumption while serving as a role model for the world
  • Establishing Israel as a center of academic and industrial know-how in the field of alternative fuels
  • Spreading Israel’s vision and expertise globally while furthering the world’s progress on alternative fuels for transportation.

The AFA has promoted several programs within this framework, including: research grants, venture capital investments, global partnerships, and making innovative research in Israel easier by tailoring government regulations for each case.

The administration partners with other ministries within the government, such as: the , which awards grants in the field of oil alternatives, including the $1 million Prime Minister’s Award for Groundbreaking Technology; the , in light of the extensive cooperation needed to implement a broad-based biofuel solution within the transportation sector.

A recent jointly organized by the AFA, the Ministry of Transport, and the Ministry of Industry Trade and Labor discussed the goals for the decreased use of fossil fuels in public transportation. The conference was held a day after the Israeli government approved a plan to reduce the role of oil in Israel’s transportation sector 30% by 2020 and 60% by 2025. Currently, the initiative is focused on converting public transportation to natural gas, “…but as time goes by we will see other solutions like electric vehicles and biofuels,” noted the drafters of the plan.

The program, which is a national program run out of the Ministry of Industry, Trade, and Labor, is also heavily involved in biofuel development. Under the auspices of NewTech, work towards commercializing their renewable energy technologies. The national program has been active since 2006.

Academia

In addition to these government initiatives, Israeli academia is also deeply involved with forwarding the renewable energy industry. , which is a joint initiative between government and academia, has a program specifically focused on R&D in the field of alternative energy. The program connects 27 researchers from the Technion Institute, Ben Gurion University, and the Weizmann Institute with colleagues from US universities, like Harvard and UC-Berkley.  I-CORE will also seek out investment for R&D, with the government and participating institutions promising to match 200% of every dollar invested. The program had an initial budget of $17 million, but has already secured additional pledges of $5.4 million in private funding.

The , based out of Tel Aviv University, cooperates with 300 researchers from 7 different disciplines, all working within the renewable energy field. From work conducted within the framework of this center, hundreds of patents have already been filed and thousands of scholarly papers have been published in just the last few years. Currently, there are concentrating specifically on biomass, organic matter used as fuel. The center also holds international conventions where they offer funding for select projects to attract the best and brightest minds to the renewable energy sector in Israel.

Industry

Lastly, there are already a number of private companies that have been as leaders within the biofuel field. These companies have made significant advances by leveraging government programs and ultimately relying on innovative R&D.

is developing a microalgae-to-oil process that addresses the major technological obstacles associated with providing cost-effective and high-quality oil as feedstock for biofuel through microalgae aquaculture. The company already has an entire process in place and is currently looking to scale up its operations and enhance its cost-efficiency.

Another innovative Israeli company in the biofuel space is . The company is the first in the world to utilize flue gases from coal burning power stations for algae cultivation. They are based in Ashkelon next to one of Israel’s largest coal burning power plants. The plants CO2 exhaust is piped directly from the smokestacks into Seambiotics open air algae ponds. The resulting algae are grown rapidly and the biomass is then harvested into high quality food additives. Seambiotic is simultaneously developing methods to create biodiesel and bioethanol from the algae species they cultivate. The company was also recognized at the most important bio-fuel event in Europe, the , held in Rotterdam in April of last year.

Also present at the Rotterdam conference was , formerly known as HCL Cleantech, which was founded by two biochemist professors. The company develops extraction technologies for the conversion of cellulosic biomass into highly refined fermentable sugars and high quality lignin (this is the most abundant renewable carbon source on Earth, after cellulose.) They have currently expanded to Danville, Virginia, where they plan on opening a commercial plant by 2015.

Yet another promising company researching cellulose extraction is , a start-up that develops biocatalyst substitutes as an alternative to chemical catalysts, the latter of which are presently used for the production of biodiesel. The company has a pilot plant that produces small batches of biodiesel within 4 hours. Unlike chemical catalysts, biocatalysts are environmentally benign and lower the total production costs of biodiesel fuels.

It’s important to remember that renewable energy and biofuels have only entered the conversation in the past decade. As technological advancements continue to prove the environmental and economic value of biofuels, regulations will be lifted and bureaucracy will be streamlined in ways that could accelerate adoption.

Due to extensive and harmonized cooperation between private companies, academia, and government, along with a society and business environment conducive to innovation and change, and an experienced and well-established R&D sector, Israel is poised to lead the world into our new alternative energy future.

I have received some feedback concerning an I wrote last month on Israel’s natural gas economy that I would  like to address. In sum, the piece argued that without implementing proper policy to govern export quotas, the world’s largest publicly owned oil & gas (o&g) companies – the 6 largest are collectively known as the supermajors – would not invest the billions needed to properly develop Israel’s offshore gas fields. Without such investment, a significant amount of natural gas could remain in the ground or completely undiscovered – ultimately costing the Israeli economy .

A number of individuals have commented that another strong reason – perhaps, even, the primary reason – for the lack of investment by the supermajors (ExxonMobil, Shell, BP, Chevron, ConocoPhillips, and Total) was due to their interests in the Arab world. If these companies were to engage Israel, the argument goes, then they might be closed out of lucrative opportunities in places like Saudi Arabia, Qatar, UAE, Kuwait, and so on. However, upon closer examination, this line of thinking does not seem to hold water, at least in this case. Consider the following:

, the Australian firm that recently became the in Israel’s 480 bcm Leviathan field, is a major (although not supermajor) oil & gas company, with a market cap of $28.61bn and operator of several of the world’s largest LNG facilities. However, Woodside is also deeply involved with the A$440 million oil project in Western Australia, a JV that counts KUPEC as a 33% stakeholder. , or Kuwait Foreign Petroleum Exploration Company, is a subsidiary of Kuwait Petroleum Corporation, the country’s state-owned o&g company.

Then there is also , the Italian company and of French energy giant EDF. In November, Edison became a in Israel’s southern economic zone. However, Edison was as a strategic partner precisely because this license encroaches upon the territorial waters of Egypt, where the company already operates extensively. Edison holds a in the Abu Qir licesnse and a in the Sid Abd El Raham concession, both of which are located in the Nile Delta. The company also holds a in the West Wadi El Rayan license. Outside of Egypt, Edison also holds a in the Reggane North Block in Algeria. Lastly, Edison is a key stakeholder in the Adriatic LNG terminal located in the Eastern Mediterranean, where also holds a and is responsible for .

It is also worth mentioning two other companies – one a national major and one a supermajor – that submitted closed bids to become a partner in the Leviathan field. While these companies have not actually become partners in any Israeli licenses, the assumption here is that if they bid they were also ready to win.

(KoGas), the national o&g firm of South Korea, has a of energy relations with Qatar. In fact, the two companies have traded over 9 mta of LNG over the past 15 years, and RasGas has made over 1,000 shipments of LNG to KoGas, which submitted a bid to become a partner in the Leviathan field.

Last, but certainly not least, is French , the sixth largest publicly traded o&g firm in the world. Total also submitted a closed bid to become a partner in Leviathan, yet retains the most extensive connections to the Arab world of any company already mentioned. Indeed, Total has more than projects currently operating in the Middle East, including in the UAE and another in Qatar. In fact, the Qatari government actually . The company is also a joint partner in the development of a being built in Saudi Arabia alongside Saudi Arabian Oil Co.

There is also another reason why the importance being ascribed to the fear of reprisals from the Arab world is being overstated. At present, the global o&g industry is experiencing a renaissance. Petro-resources are at some of the highest sustained price points ever and new technology is unleashing a wave of exploration opportunities not seen in decades.  This is important for two reasons:

  • The supermajors – not the national o&g companies (NOCs) of major petro states – currently retain the expertise and resources needed to extract oil/gas from new, unconventional reserves, like deep sea drilling and shale.
  • Due to the adoption of new technology, a large portion of new oil/gas reserves are being discovered outside the Arab world.

In light of these major shifts, the supermajors should recognize that the balance of their relationship with the Arab world is changing. With unrivaled expertise in extracting oil/gas from unconventional reserves that are increasingly being found outside The Gulf, the supermajors are gaining the upper-hand. This realization should allow more 0&g companies to invest in Israel’s burgeoning offshore energy industry without worrying about the possible repercussions of working with Jerusalem.

Which leads back to the original point made in the op-ed. While relations with the Arab world may have factored into the calculus of companies weighing entry into Israel’s energy sector, and, indeed, we have no way of knowing these companies’ internal deliberations, it seems that several of the world’s largest o&g firms have – or were ready to – invest in the Israel market. Moreover, those that already invested seem to have been met with little if any blowback from Arab partners; meaning, there must be other, more fundamental considerations, deterring investment in Israel’s natural gas economy. And what could be more basic than considerations of supply vs. demand and return on investment – issues that hang in the balance as Israel sorts out its natgas export policy.

The other week was the 5th annual Eilat-Eilot Renewable Energy Conference, which was attended by thousands of people in the industry, including ministers, government regulators, state officials, media, academics, and entrepreneurs. While there was certainly some excitement surrounding a number of new technologies being showcased, most of the anticipation centered on the release of additional quotas, as the country gears up to meet its interim renewable energy (RE) goals.

Indeed, there is an increasing amount of being given to how far away Israel still stands from its stated RE of 5% by 2015 and 10% by 2020. Currently, the country derives of its total energy needs from renewables and will need about  1.3 GW of additional RE to reach its 2015 target. At present, solar provides the largest portion of Israel’s RE capacity, generating approximately 250 MW of clean energy for the local market. As there are already some 1000 MW of approved solar projects in the pipeline, solar energy has the best chance of providing the country with the additional volume needed to hit its interim goal. The government seems to agree, and, on Dec. 2., an additional 300 MW of solar quotas.

It needs to be , however, that the additional 300 MW quota was actually reallocated from an existing quota for wind energy. However, Israel’s wind industry, which had an 800 MW quota initially set by the government almost four years ago, has not seen a single new commercial installation in the past two decades. While the potential for wind energy in Israel was debated at Eilat-Eilot, with regulators claiming just a few 100 MW of potential existed and industry representatives suggesting totals closer to a gigawatt, this most recent reduction of quotas is likely the proverbial nail in the coffin for the local wind industry. Moreover, several conversations with wind energy executives revealed a much more layered opposition to the development of a domestic wind industry:

  • Israel apparently sits on a major migration path for birds, and environmentalists fear wind turbines may interfere with their migratory patterns.
  • The Israeli military fears that wind turbines may interfere with surveillance and radar across the country.
  • Some local entrepreneurs argue that the country’s national electricity provider, the Israel Electric Corporation (IEC), has vested interests in obstructing the establishment of independent power producers that could serve as competition. That includes the further development of the alternative energy industry – especially wind, which, on a per unit basis, has significant power generation potential.

Yet while the local wind industry is now effectively moribund, the announcement of the new quotas certainly augurs well for the domestic solar sector – Israel now stands to be a $1bn market for solar over the next two years (~$1 per watt x 1.3 GW).

In addition to the quotas, another big announcement for the solar industry was made at the conference, as Prof. Eugene Kandel, Chairman of the National Economic Council, presented his committee’s findings on the appropriate pricing point for renewable energy.

Over the past year, after the government made to the FiT and was met with a strong backlash (and rightfully so) from the solar industry, Prof. Kandel was tasked with determining the true price of solar energy to help inform national policy in this area. The Kandel committee adopted an intriguing and unique approach, deciding to measure the net benefits – rather than focusing on the drawbacks – of solar energy. It is a unique approach because the committee sought to quantify solar energy’s benefits, including aspects like reduced emissions, enhanced energy security, and stimulated regional development – three blatantly clear advantages of solar, yet elements that are often deemed too economically difficult and politically sensitive to incorporate into such a study. That being said, the Kandel committee undertook a total examination of four main areas:

  • Fuel and capital savings
  • Reduction of emissions
  • Energy security and price stability
  • Regional development influence

To bring balance and credibility to the study, the committee was comprised of an inter-ministerial team, ensuring that all relevant branches of the government got their fair say, and included a simulation by the Israel Electric Corporation (IEC) assessing the implications of additional renewable energy fed into the national grid. The study projected greenhouse gas prices by examining carbon market forecasts and estimated the value of energy security through “revealed preferences” of hedging and fuel diversification. Taken together, this methodology brought to light the huge benefits that could be derived in the areas of fuel savings, capital investment, and emissions.

In his presentation, Kandel also made sure to stipulate that the level of benefits will depend on the degree of penetration; that dispatchability, i.e. the ability to store and control accumulated solar energy, would be crucial in determining net benefits; and that production facilities built near consumption centers will provide increased benefits by reducing overall losses.

Based on its analysis, the Kandel committee argues that the of solar energy in the Israel market is NIS 47.6 ($0.12) when built in remote locations, NIS 51.1 ($0.13) when built near consumption sites (i.e. cities), and NIS 65.3 ($0.17) when the facility also has a storage capacity. Anything above these prices, according to the committee’s analysis, should be deemed a subsidy. While the impact of the committee’s recommendations have yet to be seen, one can already be sure that this report will heavily influence the Public Utility Authority (PUA) when it is determining RE policy and future FiT rates.

Overall, it seems that solar was the big winner at this year’s Eilat-Eilot Conference. With an encroaching deadline, new quotas, a favorable Kandel committee report, and a slated to be introduced in the coming months, it seems that the next two years will present a number of big opportunities for the expansion of the local solar industry and help bring Israel closer to its RE goals. Other countries looking to move their RE industries forward should also look to the Israel market to see how these new policies will play out, and effort to learn from both the successes and challenges that will undoubtedly arise.

In July of this past year I visited the Better Place (BP) visitor’s center in Glilot, right outside of Tel Aviv. The center is housed in an old oil silo, symbolic of the company’s attempts to help wean the world off of crude. While there I met with BP executives, saw an inspiring introductory video outlining the company’s vision (in a movie room that was furnished with seats from vintage cars and featured holograms of the company’s founder, Shai Agassi), and test drove the company’s first electric vehicle, the Renault Fluence. I’ll be the first to admit that by the end of the day I was a believer; which makes the company’s turn for the worse over the past few months all that more difficult to digest.

Established in 2007 by Shai Agassi, BP revolutionized the electric vehicle (EV) business model by introducing the concept of a swappable battery. Under this scheme, EVs would be able to swap depleted batteries for new ones at battery switch stations, which would extend the driving range of EVs in between charges. The swap of the batteries would be automated (similar to a carwash) and could be completed in less time than it takes to fill up a tank of gas. BP would be leasing the batteries and setting up the required market infrastructure, i.e. the switch stations and more numerous charging stations. Agassi’s initiative was lauded and received an initial capital investment of $200 million.

While the company has been rolling out its infrastructure package in several markets, like Australia and Denmark, it has made the most progress in Israel, which was viewed as an ideal beta site, since it is a transportation island: one cannot drive beyond the country’s borders. Under such circumstances, the company had a contained market where it could expand its infrastructure in key transportation corridors, refine its deployment strategy, and work out any kinks before moving onto larger, more expansive markets. By , the company had opened 38 out of an anticipated 45 battery switch stations across the country and set up more than 2,000 recharging stations in public areas.

However, BP encountered a major blow in early October when the company’s board . While Agassi initially stayed on as board member, he , too, just a week later. Then, in mid-November, the company saw the , Moshe Kaplinsky, and , including the VP of marketing, VP of infrastructures, and its spokeswoman. To top it all off, BP also announced that it would be laying off from its Israel operations.

Although the reason for Agassi’s departure is still speculative, it has that Agassi may have been forced out by Idan Ofer, CEO of , the main investor in BP, who clashed with him personally and felt the company was hemorrhaging too much money under Agassi’s watch.

Which leads to the next hit. Since it was founded, BP has raised $750 million, but . Israel Corp., which holds 28% of BP, saw $160 million in losses from this total. And this wasn’t just an initial bump in the road: in the first half of 2012 the company posted losses of $132 million and had a negative cash flow of $104 million since January 1.

The last challenge, and perhaps the most fundamental one facing BP, is lackluster sales in its most promising beta site. By the end of October, the company had sold in Israel, with coming that month. That is a long ways from its target of 4,000 by June 2013, which at this point seems unattainable.

Following Agassi’s departure, institutional investors pledged an additional (but not the full $150 million BP was requesting), led by Israel Corp., which will be providing an in funding. Yet, it is unclear whether Israel’s largest holding corporation truly believes in this enterprise and is doubling down, or has just not reached the point of conceding defeat. Consider, also, that Mr. Ofer owns a in BP and is putting up $19 million himself.

While the BP concept is undeniably attractive and holds tremendous potential its future is far from certain. What is clear, though, is that the company has huge financial problems: the company is not yet profitable; some institutional investors are already refusing to pour in more money; and earlier this year, prior to the $100 million infusion, Agassi estimated that the company only had enough money to stay afloat till March 2013. A mass exodus of executives also doesn’t instill confidence. Low sales further compound its problems and actually raise questions as to long-term viability of the company.

EVs have always had detractors, typically over issues of reliability and driving range. However, the BP model seemed to address these concerns. Yet, for all the potential the BP model has, the company will need to re-think its strategy, including pricing-packages and partnerships, to get consumers on-board. I truly believe that many people, both in Israel and abroad, want to believe in the BP concept. But, unfortunately, EVs cannot run on vision and dreams alone, so BP will have to find a source of profits – and not just investment – if it wants to achieve what it set out to do.

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