A rush to power

Flurry of announcements hints toward reform, finally

If the many announcements coming out of the energy ministry last month translate into reality then the country’s electricity sector is on the verge of major change. In a few short days the government announced the start date for the increasing of the country’s energy capacity, the winners of a number of crucial contracts and even plans to control the price of illegal generators.

But if anybody has learned to be wary of the difference between presentations and performance it is the Lebanese. There are significant obstacles in the path of Energy Minister Gebran Bassil, among them political infighting, lawsuits and even allegations of corruption looming over the ministry’s head. 

At present, Lebanon’s consumption of power far outstrips supply. Including generation and imports the country has around 1,500 megawatts (MW) of electricity available, but demand reaches as high as 2,500 MW at peak times, leading to blackouts of over 6 hours a day in some parts of the country.  Late last year the government came close to collapse over the $1.2 billion electricity plan, which aims to add 700MW to the country’s grid, with Free Patriotic Movement (FPM) leader Michel Aoun threatening to pull his ministers from the cabinet if Bassil’s plan was not accepted. 

This cabinet collapse was averted and in January a government circular announced that the projects — including the redevelopment of Jiyye and Zouk power plants, a new gas pipeline and floating electricity-producing barges — are due to begin in March. Yet the infighting continues, with allegations that the finance ministry is preventing the transfer of the $1.2 billion. Cesar Abu Khalil, advisor to the Minister of Energy and Water, admitted that there have been “unnecessary” delays and confirmed that they are still waiting for the funding to be released.

“Technically no, I cannot confirm they [the funds] have been transferred but they have been allowed for by a law. It can be delayed but it cannot be stopped,” he said. “Sometimes it gets delayed in some administration but inevitably we will get our $1.2 billion.”

Unperturbed, the ministry plans to begin the tenders on the 700MW project in March and has begun announcing the winners of other contracts. One project that has been given the go-ahead despite a cacophony of criticism is the distribution service providers (DSPs). Under the scheme Lebanon is to be divided up into three sections, with one private consortium in each area allocated electricity distribution, maintenance and collection operations for a four-year period, with each contract worth more than $100 million. Last month the contracts were awarded, with Butec due to administer the north, Arabian Construction Company (ACC) dealing with Beirut and Debbas in the south.

Potential conflicts of interest are, however, apparent. Butec’s founder and majority stakeholder, Nizar Younes, ran for the Aoun/Franjieh alliance in the 2005 election in Batroun, alongside the energy minister. Meanwhile the ACC is run by the Qatari Prime Minister Hamad bin Jassim bin Mohammed al-Thani, whose country is known to have close relations with the FPM. Furthermore, while all of the companies are well respected, none have experience as energy distribution units in Lebanon.

One of the losing bidders in the north was E-Aley, a company that has been distributing energy in the country for more than 80 years. Following the decision to overlook them in favor of Butec, deputy general manager Albert Khoury confirmed that they have begun legal proceedings against the ruling. Khoury did not wish to discuss the bidding process for fear of jeopardizing the legal proceedings, but said: “electricity is more about politics in this country than about kilowatts and hertz; this is my conviction and this is how it is being played today.”

Mohammed Qabbani, head of parliament’s Public Works, Transport, Energy and Water Committee, says he believes the project is not permitted by Lebanese law, which grants powers exclusively to Électricité du Liban (EDL). “It is a completely illegal project. I will be asking the President of the Republic and the Prime Minister to stop [the minister] from continuing his illegal preparations for these service providers,” he said.

However Khalil denies all accusations of wrongdoing or political favoritism, welcoming legal challenges from those who believe there have been nefarious dealings. “There have been many allegations in the media and we don’t respond to these allegations. We waited for justice to issue its verdict and the verdict of justice is our response to all these allegations,” he said. Given the backlog of cases in Lebanon’s courts, justice may be a long time coming. 

Punishing success?

E-Aley is not the first company to take the government to court over their plans. Last month the ministry won a case brought by Électricité de Zahle (EDZ) over plans to reduce concessions for independent providers of electricity. 

Under the current scheme EDZ, and other firms that have exclusive concession agreements, receives electricity cheaper than cost price. The ministry claims Zahle is provided electricity at LL50 per kilowatt (KW), with others mostly around LL75, while average prices are around LL127. A ruling from the council of ministers in January upheld the decision that the cheapest price going forward will be LL95 per KW, a price Zahle owner Assaad Nakad claims will squeeze him out of business.

“It will be impossible for us to continue our services, and this will lead to the total liquidation of EDZ,” he said. He added that EDZ had been providing a similar service to the distribution service providers for decades. “I really do not understand why they want to destroy such a successful example while they do not know yet the outcome of the DSP project.”

But Khalil points out that these concessions add to the deficit of EDL, which ranges anywhere from $1.2 billion to $2 billion a year depending on oil prices, and are therefore paid for by the Lebanese people. “These concessions are some kind of feudalism, out of the Middle Ages. They try to portray themselves as a success story for Zahle and others,” he said. “If you got a kindergarten kid and put him in these conditions — where he has a fixed cost and a fixed selling price and exclusivity on people with 150 percent in profit — he will be a success story.”

Generating a regulator or regulating generators?

While announcing sweeping changes in almost every part of the industry, the government has remained tight-lipped about one issue; the creation of an independent regulator. Lebanon has been due a financially and politically independent body to organize and control the development of the sector since it was promised as part of Law 462 in 2002. 

Roudi Baroudi, Lebanon secretary at the World Energy Council, believes a regulator is the most important step toward increasing confidence in the energy sector. “The regulatory authority would make the market very transparent and honest; it would create competitiveness and a modern platform for private investors to have more of a stake in the industry,” he said. “And finally somebody would be liable for failures; the consumer will be able to pursue companies for mistakes.”

Yet successive energy ministers have proved unwilling to relinquish absolute power in their fiefdoms and the current one appears little different. Khalil claims the minister is open to the idea of a regulator but is waiting on the outcome of an amendment to Law 462, something a cabinet committee formed during the electricity crisis last September promised to create within three months — yet it has still not come to fruition.

“Whenever there will be a need for this body we will work on creating it,” said Khalil, though many in the private sector would claim the need has been clear for more than a decade. 

Perhaps the most bizarre of the ministry’s many announcements in January was the ‘directive’ on the price of private generators. Under Lebanese law only EDL is allowed to distribute electricity, but the power cuts that plague the country have led many to rely on illegal private companies, or ‘neighbourhood generators’ as they are more commonly known, to provide them with energy when the lights go out. 

The government has long turned a blind eye to such practices but has become concerned by the growth in companies exploiting their monopolies and overcharging customers. So a recent circular announced that the minister was introducing a ‘maximum price’ that generators are allowed to charge at LL400 ($0.26) per hour per five amperes, seemingly ignoring the fact that the industry is outside the law.

Khalil explains that whilst the whole issue is outside the rule of the law they do have tools at their disposal to make the generator owners comply. “Last week two generator companies were shut down by the municipalities; for those who will not abide by this tariff the municipalities, along with EDL, can ask them to remove their cables from EDL installations.” 

What Khalil is admitting, in effect, is that the government has begun to regulate an illegal industry. Whilst it may be commendable to face up to the elephant in the room there are serious concerns that without a regulator to ensure best practices, this process is open to abuse. The relationships shared between local officials have the potential to become more important than the service they provide.

“He [Bassil] is indirectly legalizing generators in the villages and streets. Why do it this way?” asked Qabbani. “Create a regulatory body and this body would have the right to give licenses for the production and generation of electricity. What can you deduce when somebody wants to monopolize illegal authority? What could it mean except corruption?”

The bottom line

When all this squabbling is over and done with, the average Lebanese customer cares about two things: whether they have electricity and how much it costs. The minister’s plan of 2010 aims to “gradually increase the (EDL) tariff” as the additional 700MW is introduced onto the grid over the coming years, thus reducing consumers’ reliance on expensive illegal generators. Yet the government has admitted that demand continues to grow by between 100 to 200 MW year-on-year. Therefore the 700MW, spread over three or four years, could only match the increase in consumption, meaning any increase in price will burden the Lebanese consumer without offering a tangible return.

Qabbani questions whether the plans will be able to counteract the growing gap between supply and demand. “They might be able to stabilize the inclination downward but I don’t think they can have any appreciable increase.”

The flurry of announcements suggests that at least something is happening. After years of deadlock, with electricity reform constantly overlooked, any news may be good news. Yet Riad Chedid, professor of electrical engineering at the American University of Beirut, believes for all its announcements the government is facing an uphill battle. “One should not underestimate the difficulties of trying to fix the electricity sector. It is multi-character: technical, political, human resources, financial. This is what the ministry has been doing so far, but you are dealing with 40 or 50 years of neglect.”

Joe Dyke

Joe has extensive experience covering the Syrian crisis, oil and gas, and Lebanese government and regulatory authorities, among other topics. He was Executive's online editor from 2012 to 2014, and led the Economics & Policy section from 2013 to 2014.

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