Power Generation Deal Highlights Rising Electricity Demand and Market Concentration in Israel

PowerGen, the energy company of Generation Investment Fund, is acquiring Shikun & Binui Energy for 4.45 billion shekels, sparking significant ownership changes in Israel's private electricity production market. This deal reveals a market dominated by a few powerful players, raising regulatory concerns about concentration levels from the Electricity Authority and the Competition Authority. Adlatek leads in the number of power plants owned, but Dalia and OPC hold the most effective control over production capacity.

The acquisition will make PowerGen one of Israel's leading electricity producers, prompting the Electricity Authority to demand adjustments as a condition for approval. To address regulatory concerns, PowerGen and another energy company, Rafek Energy, agreed to swap shares in jointly owned power plants to "separate forces." This swap increases PowerGen's stake in the planned Reindeer plant in southern Sharon to 52.5% and transfers its 16.7% stake in the Alon Tabor plant to Rafek, which will then hold 33%. A theoretical memorandum also contemplates selling the Reindeer plant to Nofar Energy every five years to reduce concentration.

These measures aim to prevent scenarios like the Dorad 2 plant, whose construction was recently blocked due to concerns over Adlatek's effective control of 4.4 gigawatts of production capacity, despite owning only 18.75% of that plant. Regulators fear such concentration could enable coordinated production cuts to raise electricity prices. Even after the share swaps, PowerGen and Shikun & Binui Energy combined will control about 3.1 gigawatts, making them the second-largest player and raising regulator concerns.

Market insiders note that the massive investments needed for new power plants encourage partnerships, yet regulators tend to penalize decentralized ownership structures. When ownership is normalized by production capacity, Dalia and OPC emerge as the largest players, with about 2.6 and 2.4 gigawatts respectively, followed by PowerGen with 1.7 and Adlatek with 1.2 gigawatts. Despite this, the market remains highly concentrated, with these four companies controlling most private electricity production capacity. The Israel Electric Corporation remains the largest producer overall, with 39% of total capacity, though ongoing reforms may lead to further privatization.

Beyond ownership issues, the market faces a critical challenge: soaring electricity demand driven by AI advancements and demographic growth is outpacing production and grid expansion. The Electricity Authority recently halted new server farm connection requests for 140 days due to grid constraints. Although new plants could theoretically add 850 megawatts, grid limitations will restrict actual capacity to about 670 megawatts by 2035. Solar developers face similar constraints due to slow grid development. Expanding production, especially near central Israel, will likely depend on existing major players, posing a significant dilemma for regulators balancing market concentration concerns with urgent capacity needs.