Energy Stocks in Tel Aviv Decline Due to Concerns Over Special Taxes on Data Centers

SadaNews Economy Translation - Energy stocks in Tel Aviv are experiencing a notable decline due to fears of imposing special taxes on data centers. The stock of Mega Or (57,890.00-6.93%).

Tsahi Nachmias's company leads the list of losing firms. It has transformed from a traditional real estate and logistics company into an integrated entity in the technology and artificial intelligence sector. Its rise since the beginning of the year, which placed it in the main TA-35 index, has come almost entirely from the activities of its server farms division. Other energy companies announcing initiatives in the server farm sector, such as Novar Energy, are contributing to the decline of the TA-125 index.

(22,400.00-7.51%)
Energy Economy
(1298.00 -9.23% )
Doral Energy
(7,732.00-6.17% )

Factors contributing to the boom in the energy sector in Israel in recent years, including renewable energy which saw a 130% growth last year, include the expectations of creating massive server farms following the AI revolution. However, the Ministry of Finance fears negative impacts on network congestion, supply reliability, and the exploitation of Israel's limited gas resources. Several solutions have been proposed, including taxation, to mitigate these problems, according to SadaNews Economy's translation of a Hebrew report published in "Globes."

Server farms could bring substantial benefits to the Israeli market, as highlighted in a preliminary report from the budget department released a few months ago: they could enable control over information in sensitive areas, allowing for economic potential to increase capital and productivity, and create an "ecosystem" with the high-tech industry.

However, there are serious concerns about the cost they will impose on the electricity grid: "Connecting a relatively small server station (about 50 megawatts) to the electricity network is equivalent to connecting approximately 10,000 homes." This requires the establishment of numerous large-scale power generation stations, at a time when the energy sector in Israel is under significant pressure, and demand for electricity is continuously rising, with the "infrastructure for transmission and distribution having reached its maximum capacity."

As translated by SadaNews Economy, the Israeli electricity network is facing immense pressure, and the efforts to expand it are significantly behind schedule. Additionally, Israel's gas resources are also limited, and while its external exports are restricted, using it in server farms that will serve customers abroad could simply be considered an indirect export of gas.

The joint ministerial team is studying solutions used abroad

Therefore, the "Israeli" Ministry of Finance is considering several solutions, one of which, which sparked panic in the market, is imposing a special tax on server farms due to their significant impact on the electricity sector. This measure is considered relatively strict, but other measures being studied by the Ministry of Finance could also have a significant impact on the sector: in some U.S. states, for example, in Texas, it is common to require server farms to have independent electricity generation capacity, rarely purchasing electricity from the grid. However, establishing production capacity in Israel is much more complicated due to bureaucratic intricacies and network space shortages, and this measure might be even more burdensome than the tax.

Other steps being considered include relocating server farms away from the central region, where electricity demand is expected to rise significantly in the future.

This move has already been taken in Ireland, where server farms were relocated from the capital Dublin, which has most of the demand, under special regulations. They are also considering creating dedicated "energy complexes," where production capacities are built next to server farms, and the state will provide incentives for establishing server farms there instead of elsewhere.

All of these are, in fact, indirect ways to avoid what seems an almost instinctive economic step: differing electricity prices. If the concern is over excessive electricity consumption, prices could simply be raised and let data centers do their economic calculations. But this step contradicts a fundamental economic principle underlying the Israeli electricity system, which is the uniform price. Every electricity consumer in Israel pays a uniform price, with few exceptions.

The concern is that this might lead to a "gradual slippage" towards subsidizing electricity for favored industrial sectors or geographical areas, potentially creating problematic political incentives for distributing cheap electricity with no clear benefit for the electricity sector itself.

However, it is likely that the panic is premature: The joint ministerial team between the ministries of finance, energy, electricity, media, defense, the planning directorate, and the national AI headquarters in "Israel" is still working, according to SadaNews Economy's translation, and their preferred solutions remain unclear, and they are far from formulating final recommendations. Actual implementation, if any, will only occur in the upcoming arrangements law (which the next government is unlikely to approve until after the elections) or even in the following government. Additionally, it is possible that the chosen solution is complete non-intervention, leaving the situation as it is. This would be the preferred solution if the team is convinced there is a significant benefit in establishing server farms in Israel, and that this is a field worth encouraging. But for now, the Ministry of Finance expresses doubts about this claim and is expected to demand some intervention.