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Bridging the banking crisis to implement electricity reform in Lebanon

by Carol Ayat

Today, the electricity sector is in full collapse and Lebanese people are plunged in darkness, with only 1-3 hours of state electricity per day. They have to rely on expensive and highly polluting private generators to provide their needs in electricity at exorbitant costs averaging $0.40/kWh. In addition, imports of diesel and heavy fuel oil (HFO) necessary to generate this electricity are estimated to average $3 billion per annum, which are being funded through the dwindling reserves of the central bank of Lebanon, Banque du Liban (BDL). Since the start of the crisis, $18 billion are estimated to have been spent from BDL reserves on imports, out of which, $6 billion on electricity related imports. Today, the remaining reserves are estimated at $13 billion.

The status quo is no longer viable. Breaking the vicious cycle requires the implementation of a comprehensive solution that is consistent with the political economic reality. One of the main impediments to implement the needed solution is the availability of funding. The state has limited ability to obtain new financing without multiple pre-requisite laws, programs, and reforms, which would certainly involve long delays. Meanwhile there is currently no appetite for private investment.


In October 2021, in coordination with the Issam Fares Institute at the American university of Beirut (AUB) and multiple experts in energy and finance, I proposed a comprehensive solution to the electricity crisis across the generation, transmission, and distribution of electricity with 100 percent local funding, by bridging the banking crisis for an electricity solution. This would result in 24/7 electricity supply, allow scaling up renewables, reduce losses and theft of electricity, save $2 billion of direct costs on the annual electricity bill, relaunch economic growth and reduce the budget and balance of payment deficits.

The proposal provides the necessary prerequisites for the transition towards renewable energy. The goal of any electricity reform should be maximizing renewable energy, as it offers the cheapest, cleanest and most secure electricity source. However, the scale-up of renewables faces major obstacles in Lebanon. The technical ones being the status of the grid and the lack of base load power. Base load power is the minimum amount of electricity that should be constantly provided to the grid to manage the intermittency of renewable energy. One of the most efficient and cleanest types of base load power are gas-fired combined cycle power plants. Natural gas is considered an integral part of the energy transition and complementary to renewable energy, as it is the greenest of the fossil fuels with significant reduction in emissions when compared to HFO or Diesel, it is also cheaper.

 Therefore, the proposal includes the construction of new gas-powered plants in Zahrani and Deir Ammar with a capacity of up to 2,000 megawatts, and a natural gas import facility in Zahrani (taking into effect the procurement of natural gas to Deir Ammar from Egypt), the upgrade of the grid infrastructure including the roll-out of smart meters, tariff reform with prepaid cards and a new distribution model based on decentralized distribution companies who manage the billing, collection, and sale of prepaid cards. The total needed financing is estimated at $2 billion: $1.6 billion for the generation and gas infrastructure, and $400 million for the grid infrastructure.

 The funding for the generation is proposed to be sourced via crowdfunding from depositors in local commercial banks, who are offered to subscribe on a voluntary basis to the equity capital of two new Lebanese generation companies, Zahrani II SAL and Deir Ammar II SAL, with local dollars. Investment restrictions apply such as a cap on the investment amount, subscription needs to be pro rata between the two companies and no politically exposed persons “PEP”, banks shareholders or executive management are allowed to subscribe.

 The management of the company will be contracted to a tier one international developer, who will manage the procurement of the Engineering Procurement and Construction (EPC) contract, while the operation and management contract of the plants will be with a globally renowned equipment manufacturer like Ansaldo, GE, Mitsubishi or Siemens.

Over the project life, depositors are expected to recoup $7 billion in fresh dollars with quarterly cash flow via the sale of electricity to the electricity utility Electricité du Liban (EDL) according to a 20-year power purchase agreement guaranteed by the Lebanese government and with political risk guarantee from a multilateral agency. The cost of electricity to EDL is estimated to drop to around $0.09/kwh (compared to current cost of generation that approximates $0.15/kwh). All the project agreements will be structured to be bankable as per international standards to allow for the leveraging or sale of the companies to international developers once macro-economic stabilization is achieved. The newly raised funds could be used to invest in renewable energy projects or as an early exit to depositors.

 The electricity distribution model to consumers is proposed to be handled by localized distribution companies who take on the role of selling electricity to consumers with pre-paid cards to reduce losses linked to theft and uncollected bills. Those companies could hire some of the workforce of EDL and private generators. All revenues are deposited in an account pledged in favor of the generation companies to ensure funds are directly channeled to service the companies owned by depositors, The consumer would benefit from a significant reduction in their electricity bill from the current unsubsidized private generators rates (that are fully indexed to fuel and LBP/USD rate) currently between $0.4/kwh and $0.15/kwh. 

The project should be coupled with an International Monetary Fund program to achieve macroeconomic stabilization and eliminate multiple currencies, however it can be launched imminently following the passing of a project-specific law, complementary with Law No. 462/2002.

 The proposal has been designed to force the required sector reforms at the project level. It is a bridge towards the decarbonization of the Lebanese electricity sector and is resilient to external shocks. It aims at resolving multiple problems at once (including resolving the electricity crisis, enabling the scale-up of renewables, allowing economic recovery by reducing the cost of electricity, reducing the balance of payments and budget deficits) and presents a growth-story partial and voluntary solution to local depositors.

 Every single day delayed in implementation has direct financial costs to the Lebanese economy estimated at $5.5 million, not to mention the environmental and opportunity costs on the economy. If successful, the funding model can also be applied to renewable energy projects and to various sectors such as transport, waste, water, ports etc. With political leadership and popular willpower, Lebanon can emerge from this crisis stronger, more resilient, and with a healthier economic model.

To know more about this project, which was published by the Issam Fares institute for Public Policy and International Affairs at the American University of Beirut, you can download it from the following link: https://www.aub.edu.lb/ifi/news/Pages/20211020-comprehensive-solution-to-the-lebanese-electricity-sector-report-launch.aspx

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Carol Ayat

Energy finance professional and investment banker, and a senior fellow at the AUB Issam Fares Institute

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