-
EnergyMay 19, 2022
Lebanon’s Ailing Power Sector: What is the Government’s Latest Electricity Plan?
- Ali Taha
WHAT’S THE ISSUE AT HAND?
A plan to reform and revive Lebanon’s ailing electricity sector has been approved by the Lebanese cabinet on 16 March 2022. The new proposal—which builds on the World Bank’s Lebanon Power Sector Emergency Action Plan, a “Least-Cost Generation Plan” from Électricité de France, and previous plans by the Lebanese Ministry of Energy and Water (MoEW)—sets the goal of 17 hours of electricity supply daily by 2023. Notably, it includes the establishment of an Electricity Regulatory Authority (ERA), a longstanding demand by the World Bank and Western donors, the construction of new power plants, diversifying the energy mix towards affordable renewable sources, and the introduction of cost-reflective tariffs.
Speaking about the proposed plan, which is set to begin with the first of three stages in the spring of 2022, Minister of Energy and Water Walid Fayad maintained that it was technical in nature and should not be subject to political wrangling, something that many believe had undermined previous electricity plans. According to the minister, the second stage will involve switching to natural gas in both the Deir Ammar and Al Zahrani plants, instead of the more costly fuel oil that is currently used, in addition to tendering for a Floating Storage Regasification Unit (FSRU) in Zahrani. The final stage of the plan includes the deployment of renewable energy at an installed capacity of 1936 MW, as well as the decommissioning of the Zouk plant, which has high running costs and is a source of serious air pollution in the surrounding area.
The plan aims to reform the electricity sector by addressing these key areas:
- Supply and generation: Ensuring the reliability and affordability of the power supply.
- Transmission and distribution: Increasing efficiency and transparency across transmission and distribution operations.
- Financial: Improving the sector’s financial performance by adjusting tariffs, reducing losses, and enhancing financial guarantees to private investors.
- Institutional, legislative, and regulatory: Introducing a series of structural reforms to the sector’s operation and oversight model, opening it up to more private sector involvement.
In the short term (less than a year), the plan aims to provide 8 to 10 hours of power supply by securing the necessary fuel, gas, or electricity through bilateral and multi-party agreements with Jordan, Egypt, and Iraq. The financing of this phase is supposed to come from the World Bank. This step is expected to provide up to 600 MW, which in addition to existing generation capacity, will produce a total output of 1,100 MW. The plan also seeks to reduce Électricité du Liban’s (EDL) losses by removing illegal connections to the grid, ramping up billing and collection, and investing in the distribution networks.
Financially, EDL will start indexing its tariffs to international fuel oil price, while ensuring lowest cost for vulnerable households. The national utility will also establish a “Cash Waterfall Mechanism”[1] that will guarantee fair distribution of revenues across the different market players to maintain the sector’s continuity. This stage of the plan also calls for a comprehensive review of Law 462, which regulates the sector, according to international best practices and in consultation with the sector’s stakeholders, without specifying which parts of the law will be reviewed. On the institutional level, the long-awaited ERA will be appointed to oversee and regulate the electricity sector.
In the medium-term (1-2 years), electricity supply is expected to increase to 16-18 hours per day, using the current infrastructure, through the temporary deployment of Floating Storage Regasification Units (FSRU)[2] at the Zahrani power plant and gas-fired generation units at the Deir Amar plant, in addition to solar and wind farms.
This phase will see the commissioning of EDL’s National Control Center and the installation of advanced metering infrastructure. Medium-term goals also include encouraging the participation of the private sector by awarding distribution contracts based on a Public Private Partnership (PPP) model and by enhancing financial guarantees. This will be achieved by adopting a transparent and sound tariff methodology, as well as increasing collection, especially from ministries and government offices, as well as refugee camps, in order to reduce collection losses from 12% to 4%.
In the long-term (more than 3 years), the plan promises 24 hours of electricity supply. This will be realized through the construction of three gas-fired, combined cycle power plants at a capacity of 825 MW each, and scaling up the share of renewables to reach 30% of the total energy mix by 2030. Long-term goals will also include the full roll out of smart meters and the establishment of a Transmission System Operator (TSO),[3] along with the complete legal unbundling of generation, transmission, and distribution, in order to corporatize EDL.
Upon its adoption, the plan came under scrutiny by many energy experts who highlighted some of its less convincing elements. For example, they question the need for some of the infrastructure the plan envisions, such as the deployment of Floating Storage Regasification Units (FSRU) for each of the three power plants in Zahrani, Deir Amar, and on the northern coast, while a more optimal approach would consider having one regasification unit and connecting it to the other plants via a pipeline. The use of temporary generation units is also problematic, according to some critics, in light of the ministry’s record in arguably wasting public funds on non-strategic temporary solutions, such as the power barges that were contracted in 2012.
Finally, despite introducing a pricing methodology that reflects production costs, the plan relies on a fixed exchange rate of 20,000 LBP to the dollar and a set oil price of $80 a barrel, both of which can vary widely and jeopardize the financial sustainability of the plan.
WHY IS IT IMPORTANT?
According to the International Monetary Fund (IMF), reforming state-owned enterprises—and the energy sector, in particular—is one of five key pre-conditions to Lebanon’s economic recovery. The Fund estimates that failure to implement a reform plan for the electricity sector will result in monthly losses of around USD 70 million, and more than USD 800 million yearly. The World Bank, the IMF, and donor countries have all conditioned their support on the country’s commitment to reforming and rebuilding its electricity sector—to prevent it from draining public resources.
BACKGROUND
Since the end of Lebanon’s Civil War (1975-90), successive governments have failed to either rebuild the country’s power production infrastructure or stimulate the domestic energy sector, much less develop a sustainable energy strategy. The current economic and financial crisis has only exacerbated the problem, as the hard currency needed to import fuel supplies is dwindling fast.
References:
Cabinet has approved electricity reform plan, energy minister says. (2022, March 16).
L’Orient Today. https://today.lorientlejour.com/article/1293861/cabinet-meets-with-electricity-reform-plan-on-its-37-item-agenda.html.
LBCI News Lebanon. (2022, 20 February). Energy Minister Fayad reveals via LBCI more details about the electricity plan. LBCI Lebanon. https://www.lbcgroup.tv/news/d/lebanon-news/632123/energy-minister-fayad-reveals-via-lbci-more-detail/en
Cash Waterfall. (z.d.). Financial-Modeling. Retrieved 19 april 2022, van https://www.financialmodelingacademy.com/cash-waterfall
ExxonMobil. (n.d.). Floating Storage and Regasification Units (FSRUs). https://www.exxonmobillng.com/-/media/project/wep/exxonmobil-lng/lng-us/pdf/110-fsru.pdf
ENTSO-E Member Companies. (n.d.). Entsoe.Eu. Retrieved April 19, 2022, from https://www.entsoe.eu/about/inside-entsoe/members/
Ayoub, M. (2022, March 21). خطّة الكهرباء بنسختها الثالثة: تذاكٍ وغموض مقصود. الأخبار
https://al-akhbar.com/Issues/333305
[1] “Cash Waterfall Mechanism” refers to the distribution of revenues from the sale of electricity proportionately among the different market players in the energy sector. A distribution order of these items is as follows: operating costs, capital expenditures, debt service, corporate tax, preferred equity, common equity.
[2] Floating Storage and Regasification Units (FSRUs) are multi-function vessels that combine LNG storage and built-in regasification systems onboard a ship or barge. FSRUs can receive LNG directly from conventional and large ships, storing it in insulated tanks, and can convert the LNG back into natural gas when needed.
[3] A Transmission System Operator (TSO) is an entity entrusted at the national or regional level with the bulk transmission of electric power on the main high-voltage networks.
Ali Taha is a political scientist and researcher at LCPS. His research focuses on public policy, governance, and energy. He is also involved in writing “The Government Monitor” series, organizing educational webinars, and supervising the LCPS Legislative Tracker, an interactive online tool that allows users to analyze the policy-making agenda of the Lebanese government. Prior to LCPS, Ali worked as a program director at Delegations for Dialogue, facilitating research in conflict zones. He holds an MSc in International Relations from the University of Amsterdam, specializing in energy politics, and a BA in Political Science/International Affairs from the Lebanese American University.