Lebanon power sector in urgent need of reform
Over the past decades Lebanon’s energy sector has been largely disregarded, creating a heavy burden on public resources in addition to the poor quality of services delivered that pose a major hurdle in the way of social and economic development
The short-lived flash of hope brought in June 2010, by an unusual cross-party approval for a comprehensive reform plan for the energy sector in Lebanon and which was later hindered by the inability of the old government to pass on the budget for the year due to political wrangling, was revived two days ago following the Parliament session.Yet the Parliament failed to pass the reform project that encompasses the allocation of $1.2 billion for the construction of 700MW power plants due to divergence in economic views and internal political bickering.
Over the past decades Lebanon’s energy sector has been largely disregarded, creating a heavy burden on public resources in addition to the poor quality of services delivered that pose a major hurdle in the way of social and economic development. The sector has been a drag on GDP since 2005, with a negative value added-to-GDP fluctuating within the range of (-0.7 percent to -2.5 percent) over the past five years. Prior to 2005, its value added-to-GDP has been mere, going down gradually from 1.1 percent in 1999 to 0.2 percent in 2004.
Public transfers to Electricite du Liban absorb an excessive amount of the government budget, amounting to $1.5 billion in 20091, 4.3 percent of GDP, or 20.4 percent of total expenditures, and are expected to reach $2 billion at the end of this year. This stands as a huge drain on government finances, crowding out more adequate services in other areas, such as education, infrastructure and health care; and put the macroeconomic stability at risk due to the high debt accumulated by the sector. The shortfall in supply is estimated to cost the economy $2.5 billion per year.
For consumers, the issue is no less than severe. Power cuts are a common occurrence that is becoming more frequent with the continuous 7 percent yearly rise in energy demand. In rural areas, blackouts rise up to 12 hours a day and for the whole country, the supply of energy averages only 18 hours a day. The problem does not end here, as consumers pay dues to private generators on top of the high fees for energy services to make up for the rest of their needs. Statistically, the average demand in 2009 was 15,000 GWh, whereas the total production stood at 11,522 GWh, resulting in energy being supplied through other networks of 3,478 GWh or 23 percent of the total. The average capacity available in 2009 was 1500 MW, while the average demand was about 2100 MW peaking in summer time at 2450 MW.
The same scenario applies to the business community where most industries have their own generation services, at high economic and environmental costs owed to the fuel emissions. The need for private power generation adds to the cost of doing business in Lebanon, and stands undoubtedly as a hurdle to investment flows.
Lebanon’s energy sector is controlled by the state-owned Electricite du Liban under law 16878, despite approval by the Parliament of law 4624 in 2002 that offers the legal framework for privatization, liberalization and unbundling of the sector; but which implementation decrees are until today not issued due to political infighting. EDL is responsible for the chain supply, including the generation, transmission and distribution of electrical energy in the country. It produces the energy from hydroelectric – 4.5 percent of the total compared to 44 percent for worldwide average and a major drive of the high cost of energy in Lebanon – and thermal power plants – 88 percent of the total, both power plants of which are ageing and extensively used. Lebanon also purchases up to 7.5 percent of the total from Syria and Egypt through regional interconnections.
Regardless of the age, the plants operate in an inefficient and uneconomic way partly due to the deteriorating administrative status. EDL has an organizational chart of 5027 full time employees out of which 63 percent are vacant with an attrition rate of 8 percent and employee average age of 52 years as the company froze on hiring since mid-1990s.
The energy sector main problems are hence heavily linked to the operational conditions of EDL which have been deteriorating at a relatively fast pace over the past 10 years. The value added to the sector is the smallest and has been on a down path from a high of $197 million in 1999 to $423 million in 2009. EDL’s losses amount to about $300 million, 15 percent of which are technical (transmission and distribution), 20 percent non-technical (mainly illegal connections), and 5 percent are uncollected bills.
The feeble framework also leads to a lack of investment in the sector with total investment from 2002 to 2009 standing at only $50 million. Challenges are faced on both, the supply side and demand side.
On the former front, the weak management including poor enforcement of fees collection, poor governance, and reliance on oil instead of less expensive gas or renewable sources of energy, in addition to the deprived operating status of power plants hinder the development of the sector. On the demand front, the absence of right management including a lack in awareness of proper electricity use in order to save demand impend the sector. Also, the wrong tariffs structure – such as the current one (an average of 9.4 cents/kWh) is perceived high in relation to service but very low in relation to cost as it was last adjusted in 1996 based on an oil price of $21 per barrel – poses additional challenges to the sector.
A forward looking approach reveals that in case no immediate action is taken, the production shortage, at 23 percent in 2009, will reach 59 percent in 2015. In dollar terms, the shortfall in electricity supply, currently estimated at $4 billion a year ($1.5 billion on the public purse and $2.5 billion on the national economy), will potentially reach $10 billion in 2015. Such an increase is problematic for Lebanon since its economy is almost totally dependent on imported fuel, which meets up to 96 percent of the overall energy requirements.
Several international donors’ projects were initiated over the past decade, focusing on the rehabilitation of the electric network and the exploration of renewable sources of energy to potentially substitute for the use of petroleum products, but failed so far to move the sector to the next level. In 2006 CEDRO (Country Energy Efficiency and Renewable Energy Demonstration Projects for the Recovery of Lebanon) was established to introduce renewable technology. More recently, in June 2010, the Central Bank of Lebanon and the United Nations Development signed an MoU for technical cooperation to launch a national initiative for energy efficiency and renewable energy (NEEREA). Also, in January 2011, CEDRO launched the National Wind Atlas of Lebanon to determine the exact constrained potential of onshore and offshore wind power in Lebanon and assess the total bio-energy potential of the country.
The initiative estimates that the use of onshore wind power mills could generate up to 75 percent of the country’s 2009 electricity consumption. The latest Energy and Water five-year plan, aims at installing a targeted generating capacity of 4,000 MW by 2014 and 5,000 MW thereafter to meet current and future demand. The expansion of capacity will be enabled through the enhancing of the transmission and distribution networks with the installation of the required infrastructure for natural gas, including LNG terminal and pipelines; and improvement of the fuel sourcing policy through low cost energy sources.
The plan suggests 2/3 of the fuel mix to be based on natural gas with varied supply sources; more than 12 percent are renewable energies, while the rest come from other sources of fuel. The plan also covers measures to improve the demand side management through an awareness policy whereby a minimum of 5 percent of total demand is saved, and tariffs are raised to eliminate the financial deficit in the sector.
The objective of the legal framework under the plan is to set norms and standards for the provision of services and to corporatize EDL as it is the core entity of the sector. The reform program, if successfully implemented, will almost eradicate all the financial losses of EDL (currently at $4 billion) and provide 24/7 power delivery.
The initiatives however, rely heavily on the private sector participation through the use of public-private partnerships or independent power producers in collaboration with the ministry. The capital needed for the implementation of the plan is estimated at around $5 billion, of which the state is expected to fund about $1.55 billion, with roughly $2.32 billion coming from the private sector and around $1 billion from the international donor community.
An additional sum of $1.65 billion would still be required in the long term to carry on the development of the supply infrastructure. Developing renewable energy power production to promote new non-fossil fuels for electricity generation, such as solar, is of utmost importance for Lebanon and stands as the ultimate solution for the country to become self sufficient and meet the existing and growing electricity demand at an economical operating cost, through alternative options such as thermal power plants, wind farms, and photovoltaic.
The five-year plan developed by the Ministry of Energy and Water does not allot any government fund to renewable energy schemes but rather calls upon the private sector and international partnerships to do so. Therefore, the plan, if functional, should provide a strong incentive for the private sector to endorse it as the latter’s role constitutes a keystone in the fate of the ailing sector.
Blominvest released a comprehensive overview of the electricity sector in Lebanon and the numerous challenges it faces. The report underlines the need to speed up the rehabilitation of the sector and to seriously consider allowing the private sector take part in these mega energy projects. The above text is the full report.