Debt-Ridden Israel Electric Bets on Cyber Security Exports

Was Published first in Wall Street Journal

Israel Electric Corp. is opening a new line of business, and it has nothing to do with providing electricity into homes. The state-owned, debt-ridden electricity company, which says it fends off between 150,000 and 300,000 hacking attempts on an average day, is betting its future on cyber-security exports – software, hardware, training, and consulting to foreign governments, utilities companies and airports.

The new focus comes on the backdrop of increased scrutiny on the company’s monopoly status over its steep debt – totaling about 70 billion shekels ($18.4 billion) at the end of 2014, about 6% of Israel’s annual gross domestic product. Criticism over high electricity prices, and public anger over employees’ allotment of free electricity each month at taxpayers’ expense, has also been mounting. Ongoing deadlock over structural reforms are preventing the utility from seeking more traditional projects to generate new revenue.

The 92-year-old utility, established even before the state of Israel, is betting that its in-house expertise as well as the growing international demand for cyber-security solutions will bring in between 2 and 3 billion shekels ($523,000 – $784,000) a year in new revenue within the next few years.

The global cyber security market, worth $95.6 billion in 2014, is expected to be worth $155.7 billion by 2019, according to MarketsandMarkets, a Dallas-based research firm.

In the last year and a half, Israel Electric has launched joint ventures with two local startups, mPrest Systems Ltd., which developed software for Israel’s IronDome missile defense system, and Liacom Systems Ltd., an IT consulting firm.

With mPrest, Israel Electric this month began marketing a command and control system that detects system irregularities on energy production networks. It then streams reports to a data-analysis center in order to detect and react to both physical and cyber threats. The solution was developed after mPrest participated in Israel Electric’s cyber security incubator program.

In a separate joint venture with Liacom, called CyberGym, specially-trained employees train clients from abroad at a facility in Israel, made up to look like a control room of an electric company. Participants need to fend off attacks organized by CyberGym’s trained attack team. CyberGym earlier this month signed a contract to set up a similar program in Lisbon at Portugal’s state-owned electric company. The sale was worth 8 million euros, according to Israel Electric. The Portuguese utility couldn’t immediately be reached for comment.

Israel Electric says negotiations are underway to open dozens of additional CyberGym training centers as well as to sell the command and control system developed with mPrest Israel Electric holds 50% of the shares in the joint venture with mPrest and 50% in the CyberGym joint venture.

“It’s a minor investment in a huge chance to gain a lot of profit,” said Yosi Shneck, vice president of information systems at Israel Electric. He points to formerly state-owned utilities, like France’s EDF and Italy’s Enel ENEL.MI +0.18%, as examples that grew into international companies after losing their local monopoly statuses.

Israel Electric says income from the cyber projects will start replacing the revenue it is losing from private power production, which came online in Israel in 2013. The power company said its revenue shrank by about 2 billion shekels in 2014, mainly due to losing market share to private power producers.

Mr. Shneck said he hopes revenue from CyberGym, and the ventures with mPrest will make up for these losses, which are expected to become more severe as more private power producers enter the market.

Others are skeptical about the move’s impact of Israel Electric’s new projects on its balance sheet. “In the greater scheme of things, it’s not going to make that much of a difference, but it is a reflection of a new way of thinking,” said Hezi Kugler, a former director-general of Israel’s infrastructure ministry who was involved in the failed efforts to reform the electric company and energy sector.