The current state of the energy sector in Lebanon is worrying. Daily power cuts coupled with Electricite du Liban (EDL)’s chronic budget deficit, which has contributed to more than half of Lebanon’s public debt, makes it clear why reforming the sector is a top priority for the international community, and why it cannot be separated from the macro-economic reform package being negotiated with the International Monetary Fund (IMF).
The reform of the electricity sector rests on two pillars: improved governance and the transition to sustainable, efficient and clean power production. Given the central bank’s dwindling hard currency reserves that make the long-standing subsidies of electricity impossible to maintain , the main challenge for the current government is keeping the lights on.
Annual transfers from the government to EDL have averaged 3.8 percent of Lebanon’s gross domestic product over the last ten years, amounting to half of the annual fiscal deficit. Over the last 10 years, the annual subsidy from the government to EDL to support fuel purchases has averaged $1.5 billion. Despite these heavy subsidies, which aim to lower the price of electricity for the Lebanese population as a whole, the combined average cost of electricity for consumers is estimated to be approximately 18.8 cents, USD, per kW (kilowatt) – compared to 22 cents per kW in France, and 11.1 cents per kW in Jordan, due to the fact that electricity needs are largely being met by private diesel generators. Indeed, EDL has until now only managed to supply between 55 and 64 percent of Lebanon’s electricity needs according to a recent World Bank report published on December 1, 2020.
According to the “Electricity Sector Reform Notes” published by Bank Audi on June 27, 2019, energy supply is currently insufficient to meet demand, with a shortage of 1.5 Gigawatts (GW), with peak demand in 2018 reaching 3.45 GW, and power generation only reaching 2 GW. This gap is filled with diesel-fired private generators charging on average 30 cents per kW according to the World Bank report. The total cost of electricity is estimated at 21cents/kW per hour for every kW sold, while the tariff remains unchanged at EDL since 1994 at 9.5 cents/kW.
Lebanon only produces around 2GW, of which approximately 390MW are being supplied by rented barges owned by Turkish company Karadeniz, 850MW by the two power plants in Zahrani and Deir El Ammar, 220 MW by the new Zouk and Jieh power plants, around 800MW by old and obsolete plants in Zouk, Jieh, Tyre, Baalbeck, and 200 MW split between some hydro plants and purchases from Syria. In 2018, the average cost of production to EDL stood at around 14 cents per kW. When administrative costs and maintenance costs and losses on the grid, EDL’s cost of electricity exceeds 21 cents/kW; explaining the huge loss on electricity supply incurred on a yearly basis.
EDL sells each kW at a loss. The high cost of production is a combination of high fuel costs due to the usage of heavy fuel oil (HFO) and diesel to power its fleet, and to high network losses in theft and technical losses on the grid. With peak demand at 3,450 Megawatts (MW), the gap on average is between 1,400 and 1,500 MW, resulting in significant daily electricity cuts being filled by costly and polluting private generators.
By 2030, electricity demand is forecast to increase to 4,700 MW, taking into account yearly growth of 4 to 5 percent with population growth; and up to date, no plan has been put in motion to meet this demand. The situation has been aggravated due to the devaluation of the Lebanese Pound (LBP) and the lack of dollars for fuel imports, which may threaten to plunge Lebanon into darkness.
Missed Payments and Devaluation
The LBP having fluctuated at rates exceeding 7,000 lira to the dollar in late 2020 (as of December 17, it depreciated to 8,400 LBP per USD) devalued to 8,400 to the dollar at black market rates on December 17th, EDL has to rely on the support of the Central Bank to meet its dollar commitments – mostly for imports. These include: 1) purchase of fuel oil; 2) payment to the rented barges (Karadeniz); 3) payment to the maintenance contracts of the power plants; 4) payment to the Distribution Service Providers (DSPs), the last two relying on imported equipment to maintain the generation and distribution assets. While the Central Bank has been procuring the necessary funds from its thinning reserves for fuel oil, it has stopped payments towards other obligations (see list numbers 2, 3 and 4). The unpaid amounts exceed $300 million to date.
EDL owes around $175 million to Turkish company Karadeniz, which is refusing to be paid in Lebanese pounds, while the Lebanese government is not able to access dollars without great cost. For the moment, the Turkish company is still providing electricity according to the contract, which covers around 11 percent of Lebanese’s current energy usage, but with no extension being discussed for the latter, Lebanon may very well, before the end of their contract in 2021, lose around 390 Megawatts of electricity – losing around 3 hours of electricity per day in Lebanon as a whole.
In addition, EDL owes around $110 million to the electricity sector distribution service providers, due to the latter having to import spare parts and cables. Due to the devaluation of the currency, providers are threatening to shut down their activities. Lebanon as a result could fall victim to more power cuts.
The government in 2017 had managed to cap the billing by private generators at 30 cents per kW. Private generators rely on imported diesel which is currently subsidized, but a small part of the billing is related to spare parts that have to be imported and are not subsidized. Prices for the consumer have gone up due to the devaluation, as private generators have to obtain dollars on the black market in order to import said parts.
EDL’s deficit is already growing: with a fixed average tariff of 9.5 cents per kW, the devaluation has hit EDL’s budget as it charges its prices to consumers at a rate of LBP 1,500 to the dollar, and so by taking into account the devaluation, EDL is effectively billing consumers less than 2 cents per kW, for a total cost of electricity exceeding 21 cents per kW. Though most of its costs (a large part being fuel) is at the moment subsidized by central bank reserves, the lifting of subsidies is approaching every day and may threaten the continuation of EDL’s operation.
According to Carol Ayat, head of Energy Finance at Bank Audi, the solution is not limited to the sector itself, but to the economy as a whole, and dependent on macro-economic reforms. “You need to rebuild trust and confidence and stabilize the economy to attract the needed investments in the sector.”
The creditworthiness of the Lebanese government following the default on its Eurobonds, as well as the convertibility and transferability of the currency have become real impediments to any new investments in the country. These impediments can be overhauled with the negotiation of an IMF package, which comes with a list of prerequisites and reforms at the government level, and second with the appointment of the Electricity Regulatory Authority (ERA), which has become a key prerequisite of the international community. Law 462 envisioned the creation of an independent and autonomous Electricity Regulatory Authority to provide regulation and oversight over the electricity sector in Lebanon.
The IMF deal would also ensure that government finances are placed on a sustainable path forward. Once confidence is restored, this would unlock the funding from the international community and CEDRE donors to the sector. This also includes the rebuilding of the damaged EDL assets such as the National Control Center, the Achrafieh substation and the EDL building following the August 4 blast.
Energy Sector Governance
The Ministry of Energy and Water (MEW) proposed amendments last year to law 462 for the formation of an independent regulator. Said amendments, according to the World Bank, would limit the regulator’s independence by requiring them to be part of the ministry. This, according the World Bank report, “raises questions as to the regulator’s ability to maintain its administrative independence”. The same report highlighted the need to appoint the members of the ERA in a transparent manner that would send a signal as to the independence and transparency with regards to energy sector regulation.
Tariff reform and increased generation
The other necessary reform is to restore EDL’s financial stability. With electricity tariffs at an average of 9.5 cents per kW, unchanged since they were set in 1994, compared to a cost of electricity exceeding 21 cents per every kW sold by EDL, the electricity sector is in clear deficit. Indeed, according to the Bank Audi report dated June 27, 2019, when added, the losses from the uncollected bills, the tariffs barely cover a third of EDL’s operating costs.
In order to ensure the financial viability of EDL, it is imperative that the tariff structure is revised, and becomes cost effective. This tariff revision would need to be paired with the reduction of the cost of electricity supply with the switch to natural gas. In addition, it is necessary to reduce network losses, and provide for a social safety net to protect the most vulnerable population from price hikes. According to the MEW electricity reform plan in 2019, the average tariff was forecast to increase to 14.4 cents/kW in line with the increase in generation to rebalance EDL’s financial viability. This would come with the elimination of the private generator bill, resulting in a decreased cost to the consumer.
Analysis also indicates, according to the World Bank, that at least 1500-2000 MW of additional capacity is needed just to eliminate or at least minimize Lebanon’s reliance on diesel-fueled private generators.
Increasing generation capacity is by no means easy. It is therefore necessary to immediately launch tenders (the procedure by which offers by private contractors are evaluated) for thermal power plants to produce 1800 to 2000 MW, to bridge the gap in electricity generation, taking into account that the barges will be disconnected in the near future. The size and choice of plants, according to Ayat, need to be based on a “least-cost generation plan,” which would ensure the plants are built in the most cost-effective manner. At this stage, the government owns available land in Deir El Ammar and Zahrani to host new power plants.
A third power plant in Selaata may be needed, especially if it is in replacement of the old and obsolete plants like the old Zouk and Jieh (costly from financial and environmental perspectives). The choice of this site would need to adhere by the least cost generation plan. These plants are also critical to provide the base load power required to manage the additional stress on the grid from the increased share of renewable energy.
High losses in transmission and distribution are also a drag on the financial soundness of EDL, amounting to 34 percent in 2018, which are split between technical losses of 17 percent and non-technical losses of 21 percent.
Technical losses are standard in electricity generation and therefore cannot be completely eliminated. According to Ayat, reaching a level of around 10-12 percent of technical losses would be in line with international benchmarks. On the other hand, non-technical losses are mostly due to theft and uncollected bills, and can be reduced with the installation of smart meters coupled with a strong political decision and support to disconnect the contraveners.
The original government plan, which had been reviewed last in 2019, mentioned the installation of 1 million units of smart meters by 2021 by the DSPs to facilitate better collection, but for the moment, this has been put on hold. According to the World Bank report, to date, billing lags approximately 12 months in some areas, and cash receipts for 2016 and 2017 reflect a collection rate of 74 and 66 per cent respectively.
Switching to natural gas
In light of cost and environmental concerns, Lebanon would have to reduce its fuel cost by using natural gas. According to the World Bank, it is estimated that switching from liquid fuels to natural gas would save the electricity sector up to $200 million a year, given the significance of fuel to EDL’s operating costs. At the moment, Lebanon imports diesel and heavy fuel oil to power its generation plants. “Gas is less polluting” says Ayat. “It’s more efficient in terms of cost and the environment”.
The transition from fuel and diesel-powered stations to gas-powered is not without hurdles, but is very feasible if a plan is put in place. 60 percent of EDL existing power generation assets can be switched immediately to natural gas.
Such gas procurement can be obtained via a Floating Storage Regasification Unit (FSRU), which is a Liquid Natural Gas (LNG) storage stationary marine vessel that has an onboard regasification plant capable of returning LNG back into a gaseous state and then supplying it directly into the power plants.
According to Mona Sukkarieh, a political risk consultant and co-founder of Middle East Strategic Perspectives, there are two main ways to import gas: via pipeline or in liquified form as LNG. “Lebanon is connected to neighboring countries via one pipeline, the Arab Gas Pipeline (AGP),” Sukkarieh explains. “But there are obstacles that stand in the way of importing gas via the AGP to Lebanon.” This is because the AGP passes through Syria, and the Lebanese Government has had difficulties until now dealing with the Syrian regime.
Egypt has expressed the desire to export gas to Lebanon, which could either be in liquefied (LNG) form, which would require special facilities such as an FSRU, or via the AGP, which is sensitive due to the difficult relationship with the Syrian regime. Overall, according to Sukkarieh, reaching a decision with Syria is a political issue, which will depend on the policy a Lebanese government would adopt towards Syria. In addition, to import LNG, Lebanon would need special terminals, the FSRUs, which it does not have at this stage.
Another possibility would be to import natural Gas in a compressed form directly from Egypt via ships, a solution defended lately by member of Parliament Neemat Frem after a meeting on July 20, 2019 with the former Minister of Water and Energy, Nada Boustany. Nevertheless, there are questions with regards to the feasibility of this option according to Sukkarieh. As to date there is only one project using this technology, in Indonesia, according to a World Bank report.
Questions arise regarding the possibility to use Lebanese gas, should any be discovered. At this stage, Lebanon has not made any gas discoveries, and it would be difficult to assess when and if a commercial discovery will be made, according to Sukkarieh.
“There is no more denying that the future of energy is green, and we need to invest in the future. Lebanon is blessed with strong solar, wind and hydro resources,” affirms Ayat, head of Energy Finance at Bank Audi SAL. “Prices of solar panels have dropped by more than 90% in the last 10 years, so much that solar is today more competitive than thermal power in many parts of the world.”
Once perceived as an environmentally friendly initiative, today, renewables provide undeniable benefits. The first round of wind farms in Lebanon were priced at 9.6 cents/kW and the first round of solar farms in the Bekaa at 5.7 cents/kW. Both tariffs are well below the average cost of production of EDL at 14 cents/kW in 2018.
In addition, these electricity generation costs are fixed, and do not fluctuate with the price of oil, offering clear advantages in terms of price stability and security to the country.
The wind farms project, which would procure about an additional one hour of clean electricity to Lebanon per day, had received financial approval by the European Investment Bank “EIB” on November 14, 2019, but the disbursement of the loans was halted following the crash of the Lebanese economy. The funding is still pending, its disbursement resting on the same conditions highlighted above: improved governance and the transition to sustainable, efficient and clean power production.
Renewables are also environment-friendly, capital intensive, bring developmental benefits and create more jobs than thermal energy. Once Lebanon adopts a least cost generation plan, the share of renewable energy in the energy mix will have to be substantial. Lebanon has already committed to the Paris Agreement to generate 30 percent of our energy production from renewable energy by 2030.
To help the government reach such a target, the private sector can play a significant role. Due to the high cost of electricity supply in Lebanon stemming from the reliance on expensive private generators, the private sector is highly incentivized to invest in decentralized solar power. Such solutions provide a cheaper, cleaner and more efficient source of electricity. This however would require the enactment of certain regulations and laws to allow for peer-to-peer trading of electricity and net metering with EDL.
Overall, Lebanon is at risk of plunging into the dark as early as February 2021, should the government fail to initiate macroeconomic reforms, electricity reforms and negotiations with the IMF. Such reforms primarily need political will to be put in place, and one can only hope that they are initiated imminently due to the urgency of the situation.
Lebanon may lose 3 hours of electricity per day if EDL fails to pay the $175 million it owes to the Turkish company, Karadeniz; the contract covers around 11% of Lebanon’s current energy usage.
EDL owes around $110 million to the electricity sector distribution service providers, due to the latter having to import spare parts and cables.
The IMF deal would also ensure that government finances are placed on a sustainable path forward.
According to the World Bank, at least 1,500 – 2,000 MW of additional capacity is needed just to eliminate or at least minimize Lebanon’s reliance on diesel-fueled private generators.
“There is no more denying that the future of energy is green, and we need to invest in the future.”