January 1995

Ministry of Energy and Infrastructure

Executive Summary

The concept of the Inter-Seas Project is based on the exploitation of some 400 metre difference in height between sea-level and the Dead Sea for the desalination of the water and the production of hydroelectric power.

2. The Ministry of Energy and Infrastructure has been involved for the last 15 years in the investigation of alternative DSHP’S.

3. The recent change in the political atmosphere and the severe regional water problem have created a new interest in the Dead Sea Hydro Project

(DSHP) via a canal from the Mediterranean or the Red Sea.

4. Recently the Ministry has been engaged in the economic reassessment of DSHP schemes, based on a new concept of integrated production of desalinated water and hydro power. In particular, the new design refers to a hydrostatic powered reverse osmosis (RO) system, as well as some new scheme alignments, to take advantage of the previously considered state- boundary constraints.

5. The Ministry of Energy and Infrastructure has developed software packages used for Dead Sea water balances and the optimisation of Seawater Conveyance Systems (SWCS) capacities., along with hydro power capacity and operating regimes. These packages have been recently extended to include the new concept of the integrated production of desalinated water and hydro power and the new scheme alignments.

6. The above-mentioned design and software packages have been used continuously to process all available data regarding regional water demand projections and other relevant data to optimise investigated DSHP schemes.

N.B. Only since our agreement with Jordan and the discussions leading up to this agreement, has the aspect of desalination achieved a primary role.

7. A team nominated by the Minister of Energy and Infrastructure has recently submitted its first report on the DSHP. The team considered three DSHP schemes.

* A Mediterranean – Dead Sea route via Qatif (the Qatif Alignment).

* A Red Sea – Dead Sea route starting near Eilat or Aqaba (the Arava Alignment).

* A Mediterranean – Dead Sea route starting near Haifa or Hadera (the Amakim Alignment).

8. For each scheme, hydrostatic powered desalination plants were designed and cost estimated, in addition to producing electric power. At this stage, in accordance with conservative projections of the Dead Sea water balance, an overall final potable production of 800 million cubic metres per year (MCMY) was assumed, to be installed according to a projected time schedule of desalinated water demand.

9. The required seawater supply capacity to produce 800 MCMY is about 2,000 MCMY. However the design refers to a 2,700 MCMY capacity, to enable the Dead Sea level to reach its target in about 15 years and to make the most effective use of the available hydrostatic energy.

10. The economic criterion to evaluate the different DSHP schemes is the Net Present Value (NPV), while the assumed prices of desalinated water and electricity produced by the project have been evaluated on the basis of the alternative production costs of supplying these products.

11. The NPV represents the present value of the following components:

(a) The produced electricity;

(b) Cost saving of the desalinated water supply;

(c) Investments in the conveyance and hydro power system;

(d) O & M costs of the conveyance and hydro power system.

12. The cost saving of the desalinated water supply refers to the alternative production cost at coast-sited conventional desalination plants and the differential transmission cost to final consumers.

13. The three most cost-effecting parameters needed to assess the economics of the various schemes are:

(a) The projected energy prices;

(b) The projected water demand schemes, including their geographical distribution in the region;

(c) The discount rate on the capital investment.

14. Being aware of the volatility of international energy prices and the difficulty of projecting the cost over a very long period of six decades, we decided to assume current electricity prices in the present cost assessment.

15. Optimal scheduling of desalinated water capacity is somehow complicated because the time schedule of building alternative desalination plants at different sites, rather than a single production center, depends upon the distribution of the regional water demand to the various consumption centers.

16. Initial preliminary evaluations have verified that the sea-coast-located consumption centers in Israel and the Gaza strip should receive their supplies from coast-sited desalination plants, while the hydrostatic powered desalination plants development schedule should be set to supply the demand at locations where production plus delivery costs from coast-sited plants are higher.

Based on available water demand projections, excluding the demand of the coast-sited consumption centers, the installation scheduling of hydrostatic RO systems is currently assumed in 5 phases, at 5-year intervals, with capacities of: 100, 100, 200, 200 and 200 MCMY, resulting in a total of 800 MCMY, 20 years after initial operation. This will be modified more updated information regarding water demand becomes available.

17. It is quite evident that the economic feasibility of the DSHP concept is strongly dependant on soft financing conditions. At this stage, before exploring all of the possible financing options, this economically key parameter cannot be defined and the assessment has been made on the basis of a range of different discount rates. The present evaluation was made by assuming 3-5% annual discount rates.

18. The comparative total investment costs of the three considered schemes amount to approx. 3.5, 3.7 and 4.2 billion dollars for the Qatif, Amakim and Arava Alignments, respectively. These costs include the seawater conveyance systems, the hydroelectric plants and the RO desalination systems. Not included are desalinated water transmission system costs, estimated to range between 1.2 and 1.6 billion dollars for the DSHD and about 1.1 billion dollars for the coast-sited desalination plants.

The alternative investment cost for coast-sited desalination systems and for an equivalent pumped storage hydroelectric power station plus thermal power station capacity to comply with the higher power consumption of conventional desalination, is estimated to be 2.8 billion dollars.

19. The comparative desalinated water costs, excluding delivery, evaluated at a 3% discount rate, are estimated to amount to 38, 42 and 45 cents/m3, for the Qatif, Amakim and Arava Alignments, respectively. The alternative unit water costs, evaluated at the same low discount rate, are estimated to amount to 53 cents/m3*. All of these costs are based on current electricity prices of approx. 4.9 cents/kwhr.

20. The above-mentioned desalinated water costs were obtained for high standard drinking water qualities (up to 250 mg/l chlorides). For industrial and agricultural uses, tolerating higher salinities of about 500 mg/l, the cost would be about 10 cents/m3 lower.

This cost seems to be very low when compared with the reported costs for recently completed desalination projects not applying fully mature technology. It should, however, be recognised that the reported $ 1 /m3 cost range was derived for relatively small plants (5-10 MCMY) and much higher commercial discount rates (8-10%). More advanced technology, economy of scale and soft financing substantially reduce the desalinated water cost.

21. The lower desalinated water costs resulted from the very reduced energy requirements and the lower investment costs of the hydrostatic RO plants, when compared with the conventional coast-sited desalination plants. These benefits are partially offset by the seawater conveyance cost, which is strongly dependant on the applied discount rate.

22. A preliminary evaluation of desalinated water transmission costs indicated higher costs, in comparison to coast-sited plants in the range of 4 to 8 cents/m3.

According to assumed regional consumers, based mainly on domestic urban consumption, neglecting other potential consumers, especially in the Dead Sea area and in other southern regions, differential transmission costs related to the Arava Alignment were found to be 1-2 cents/m3 higher than for the other two Alignments.

23. By assuming high average differential transmission costs of 8 cents/m3 for the Arava Alignment and 7 cents/m3 for the other two, the resulting NPV evaluated for a 3% discount rate amounts to approx. 1.2 and 0.6 billion dollars for the Qatif and Amakim alignments, respectively, but not more than break-even for the Arava Alignment.

If the lower transmission cost differential is realized, e.g. 5 cents/m3 for the Arava and 4 cents/m3 for the other two alignments, the corresponding NPV would amount to 1.6, 1.0 and 0.4 billion dollars for the Qatif, Amakim and Arava Alignments, respectively, by using a 3% discount rate; and 1.0, 0.5 and -0.1 billion dollars at a 4% discount rate.

24. The large NPV difference between the Arava and the other alignments can be reduced by using a combination of schemes.

Preliminary evaluations of a 400 MCMY desalinating capacity connected to the 1,000 MCMY seawater conveyance system along the Arava route; and a 15-year-delayed 1700 MCMY seawater conveyance system along the Qatif route, indicated considerably improved results when compared to the single large 2,700 MCMY seawater Arava scheme.

25. The following findings are summarised from the interim preliminary study conducted by the Israeli professional team:

(a) All considered DSHP schemes could eventually be economic if a financing package based on a 3% discount rate can be realised. Comparative economic figures of the alternative DSHP schemes – investment, desalinated water cost and NPV are displayed in diagrams 2, 3 and 4 respectively.

(b) The comparative higher NPV of the Qatif and Amakim schemes, versus the Arava scheme, is derived due to lower investment costs, higher hydroenergetic benefits and lower desalinated water delivery costs. This difference may, eventually, be reduced by a reassessment of regional water demands, reoptimisation by considering a combination of routes, and assessing economic values for ancillary projects. The break-even for Amakim would be achieved if the net value originated by regional development on both sides of the border will sum up to about 600-700 million dollars. This issue requires further investigation, but will be considered in the light of the agreement with Jordan.

(c) The preliminary results are based on a set of assumptions, some of them extremely conservative, such as energy prices, the projected water demand schemes and projected Dead Sea water balances.

(d) The above-reported results regarding the cost/benefit of producing desalinated water and electricity, do not take into account benefits derived from regional development, consisting of a variety of ancillary projects on the one hand, and hazardous effects on the other hand. Ancillary projects include tourism, marine-agriculture, solar energy and cooling of inland power stations. Hazardous effects may include, among other things, risks to groundwater resulting from seismic activities and potential damage to the Dead Sea Works in Israel and in Jordan. Here again, these aspects receive greater importance in the light of our agreement with Jordan.

26. Comparison to other recently reported assessments of alternative desalinated water supply indicates, in some cases, similar findings to one of the investigated schemes, while others show contradictory results. However, none of them complies with all outlined aspects essential for a comprehensive economic comparison as indicated below:

(a) Comparative assessment of all feasible options;

(b) Identical and consistent assumptions and methodology;

(c) Updated design and cost data;

(d) Integrated production of power and desalinated water.

27. It should be emphasised that the results reported here are preliminary and should be considered as indicative only. A more comprehensive study is necessary before conclusions regarding the preferred scheme and its key design parameters can be drawn. This study should also consider environmental aspects, geopolitical considerations, ancillary projects and various benefits and non-benefits resulting from this project.