Report No. 49923-SY Syrian Arab Republic Electricity Sector Strategy Note August 15, 2009 Sustainable Development Department (MNSSD) Middle East and North Africa Region (MNA) FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY TABLE OF CONTENTS Page Excutive Summary ........................................................................................................................ 1 Excutive Summary (Arabic) ....................................................................................................... 13 Chapter 1. Electricity Demand.............................................................................................. 27 I. Evolution o f Demand Through 2007 ................................................................................. 27 I1. Demand Forecast ............................................................................................................... 31 1. 11 Curbing Demand: Syria's Energy Efficiency Potential................................................. 34 Chapter 2 . Electricity Supply ................................................................................................ 38 . I Sector Organization ........................................................................................................... 38 I1. Electric Power Generation................................................................................................. 38 1. 11 . . . . . Transmission and Distribution....................................................................................... 42 I V. Regional Interconnections ............................................................................................ -44 Chapter 3 . Generation Expansion Strategy ......................................................................... 48 . I Fuel Sourcing Options ....................................................................................................... 48 I1. Generation Technology Options ........................................................................................ 51 1. 11 Preferred Generation M i x .............................................................................................. 52 I V. Generation Expansion Plan ........................................................................................... 55 V . Renewable Energy (RE) .................................................................................................... 56 Chapter 4 . Financial Performance ........................................................................................ 59 . I Electricity Tariffs ............................................................................................................... 59 I1. Fuel Prices ......................................................................................................................... 62 1. 11 Financial Performance .................................................................................................. 63 Chapter 5 . Role o f the Private Sector ................................................................................... 66 . I Private Sector Participation in the Power Sector to Date .................................................. 66 I1. Major Considerations for Private Sector Participation. ..................................................... 66 1. 11 Potential Areas for Private Sector Involvement ............................................................ 67 I V. Key Risks for Private Investors ..................................................................................... 70 Chapter 6 . Sector Reform ...................................................................................................... 73 I. .. Electricity Sector Restructuring ......................................................................................... 73 I1. Energy Efficiency and Renewable Energy ........................................................................ 79 Annexes .......................................................................................................................... ..81 This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed without World Bank authorization . This document was written by Husam Beides, Ananda Covindassamy, Waleed Alsuraih, Henk Busz and Khalid Boukantar with contributions from Mohab Hallouda, Paul Noumba Um, Maria Vagliasindi and Antony Lim. The team i s grateful for guidance provided by Jonathan Walters, comments provided by peer reviewers Ashok Sarkar, Hossein Razavi, and Masaki Takahashi and for Anna Bjerde for leading this work at i t s initiation. The authors are also gratefil to the staff o f the Ministry o f Electricity in Syria who provided valuable support and cooperation in the preparation o f this report. The document was prepared in part by assistance from the Energy Sector Management Assistance Program (ESMAP). E S M P i s a global technical assistance program which helps build consensus and provides policy advice on sustainable energy development to government o f developing countries and economies in transition. E S M P also contributes to the transfer o f technology and knowledge in energy sector management and the delivery o f modern energy services to the poor. For more information on the program see the website www.esmpap.org EXECUTIVE S U M M A R Y This Electricity Sector Strategy Note was prepared by the World Bank, at the request o f the Government o f Syria. I t identifies options for the Government to improve the financial and technical performance o f the electricity sector. The note focuses in particular o n the following major sector objectives: Increasing the efficiency o f the electric power sector, including by reducing large technical and commercial losses now standing at 27% o f demand; Reducing the growing gap between demand and supply o f electricity through capacity expansion, thus enhancing security o f electricity supply and reducing power outages; Increasing security o f supply further in an environmentally sustainable manner by developing vigorous energy efficiency and renewable energy programs; Encouraging regional energy integration through a series o f targeted investments in electric power and natural gas; Attracting private sector investment into generation capacity expansion, including in renewable energy, through Independent Power Producers; Making the electricity sector financially viable and coordinating natural gas production plans with electricity generation requirements; Introducing electricity sector reforms and associated institutional changes to facilitate and enable the above. Electricity Sector Challenges The Ministry o f Electricity regulates and manages the electric power sector. The Public Establishment for Electricity Generation and Transmission (PEEGT) i s responsible for planning, development, operation and maintenance o f the generating plants and transmission networks. The Public Establishment for Distribution and Exploitation o Electric Energy (PEDEEE), has f similar responsibilities for the distribution network. After years o f relative stability the Syrian power sector i s n o w facing a number o f major challenges, including rapidly growing electricity demand; a widening demand-supply gap, leading to frequent load shedding; large technical and non-technical losses in the network; fuel security issues due to an inadequate supply o f domestic gas; a deteriorating financial performance, requiring large Government subsidies; and the need to attract private financing to help close the demand-supply gap. Exhibit 1 shows some major sector organization and performance indicators for Syria compared with other countries. I t shows that Syria lags behind these countries on each o f these major indicators. I Exhibit 1: Syria Sector Performance Benchmark P: Partial. Y: Yes. N: No. G: Generation. T: Transmission. D: Distribution These electricity sector challenges can be addressed by a significant change in Government policy towards the energy sector. They include notably measures such as: 0 Commercialization o f generation, transmission and distribution, including unbundling into separate u n i t s and subsequent corporatization as state-owned companies; 0 Substantial adjustments in electricity tariff structure and levels, including coordination with input fuel prices (gas and heavy f u e l oil); 0 Major technical and non-technical electricity loss reduction programs; 0 Major investments in the order o f about US$10.5 billion in generation, transmission and distribution through 2020 0 Strong support for, and implementation of, substantial energy efficiency and renewable energy programs; and This Executive Summary summarizes the issues and recommends proposed actions. Electricity D e m a n d and Supply Demand: During 2002-2007, the demand for electricity in Syria increased on an average by a very high rate o f 7.5% per year, caused by: (i)strong economic growth; (ii) electricity tariffs that are below cost recovery level and that do not encourage energy efficiency; (iii) high technical and non-technical network losses; and (iv)an inflow o f refugees from Iraq. During the same period, the power system experienced increasing difficulties in meeting demand. Load shedding increased sharply starting in 2006 (Exhibit 2). Exhibit 2: Unserved Load Due to Load Shedding (in GWh) 2002 2003 2004 2005 2006 I 2007 Unserved load 86.3 83.4 103.8 55.0 345.1 I 427 In 2007 PEDEEE had about 4.6 million customers and 99% o f the population had access to electricity. About 75 % o f delivered energy was billed; the remaining 25%' consisted o f technical (1 5%) and non-technical (10%) losses. About 5% o f billed energy was not collected, 25% i s the distribution loses. Total system losses including transmission losses i s about 27% 2 mainly due to low payment levels by government entities. Assuming more commercially acceptable loss levels, the equivalent financial loss to PEDEEE on account o f these three factors was about US$278 million in 2007 alone. Residential and industrial consumers are the largest categories, constituting 47% and 37%, respectively, o f 2007 total electricity consumption. In contrast, the commercial sector constituted only 9% o f the electricity consumption. Compared to other intermediate income countries, the demand from industry i s high and the demand from commercial activities i s relatively low. In terms o f capacity demand and during system peak, residential users had by far the largest peak demand with 4,760 M W , followed by industry with 1,016 M W . Residential consumers typically use a great deal o f capacity but only during relatively short periods, while industry uses a given capacity on a more continuous basis throughout the day (Exhibit 3). Hence it i s very important to manage the demand o f the residential sector by reducing its demand for peak capacity. Exhibit 3: 2007 Demand Structure During System Peak (in MW) Resideritia I Coninicrcid bl Strcct lighttng Govcmnicnl Religion Power sector : Inciustty Supply: The total installed power generating capacity in Syria was about 7,500 M W in 2007, o f which 6,250 M W was actually available; this capacity was inadequate to meet peak demand o f 6566 M W in 2007. N o new capacity was added to the system between 2001 and 2006. In 2007, 300 M W was added through conversion of an existing plant and a major new 750 M W gas-fired plant i s expected to become fully operational during 2009. Expansion o f two existing power plants by a total o f 750 M W i s expected to be completed by the beginning o f 2010. Without further capacity additions, however, the demand-supply gap w i l l increase rapidly during the coming years. Base case demand forecast projects a 67% increase in electricity demand during 2009-20202. This would require the addition o f about 7000 M W o f new generation capacity during the same Corresponding demand increases over the same period are 106% in the high case scenario and 45% in the low case scenario. period3. The investments in new generating capacity and in expansion o f the transmission and distribution networks would cost an estimated US$ 10.5 billion, o f which US$ 7.0 billion for generation and U S $ 3.5 billion for rehabilitation and expansion o f the transmission and distribution networks. Energy Efficiency Potential; Energy efficiency in Syria i s s t i l l in the early stages. The Government has recently established the National Energy Research Center (NERC) to deal with energy efficiency and renewable energy issues. It has also started implementing enacted legislations to promote energy efficiency and several small pilot energy efficiency programs have been initiated. N E R C has presented a draft preliminary plan for implementation o f efficiency programs. The plan forecasts reducing electricity demand by 19% by 2030 compared to a business-as-usual scenario. This i s a very ambitious goal considering the limited track record o f the existing institutions to develop energy efficiency programs and scale up their implementation, and given the absence o f energy efficiency "infrastructure" in Syria. Nevertheless, based on that plan and World Bank experience in the Region, it i s estimated that industrial sector electricity demand could be reduced by up to 15% over the next ten years and residential demand by about 10%. The equivalent energy efficiency "negawatts" (Le., capacity that does not need to be built or i s freed up for other uses) are estimated at about 931 M W by 2020. Reaching that target will require that aggressive energy efficiency programs are developed and implemented. Regional Integration: Syria's power system i s connected to the power systems o f Iraq, Jordan, Lebanon, and Turkey. Cross-border electricity imports and exports have developed through bilateral agreements. However, the present situation where most countries in the sub-region have a shortage o f electricity, keeps utilization o f interconnection capacities to minimal levels. Exchanges are essentially limited to emergency operations to serve the grids during critical conditions only. Egypt, Jordan, Lebanon, and Syria have also embarked with EU support o n the establishment o f a regional gas market which will ultimately be integrated with the EU internal gas market. This market will interlink the respective countries through the 1,300 km long Arab Gas Pipeline (AGP4). Segments o f AGP connecting Egypt, Jordan, Syria and Lebanon have been completed. Since Egypt may not be in a position to supply additional gas, Syria could in the long t e r m be able to obtain gas imports from other countries, such as Iraq and Iran. This would be feasible once the planned AGP connection to Turkey i s completed and especially if an extension o f the AGP to Iraq i s developed. Syria would benefit from a Mashreq regional energy market, integrated in the long term with Turkey and European energy markets. Development o f such a regional market requires Assuming about 2,500 M W of older capacity would need to be retired during 2009-2020 and the requirement to establish 10% o f reserve margin by 2020. The AGP i s being constructed with the objective o f exporting gas from Egypt to Jordan, Syria and Lebanon and in the long term from Egypt and possibly Iraq via Turkey to Europe through its future connection to the Turkish network and pipelines (including the planned NABUCCO pipeline). The frst three phases o f the AGP have been completed connecting Egypt, Jordan, Syria, and Lebanon. Tendering for stage 1 of the last phase o f extending the pipeline to Turkey has been initiated. The pipeline has a 36" diameter, with an ultimate capacity o f 10 bcdyr. 4 sustained commitment and coordination between countries in the region. However, it would yield substantial mutual benefits including energy supply security, better utilization o f the region's enormous gas reserves and development o f renewable energy under the Mediterranean Solar Plan. To enhance integration o f Syria within the Mashreq region and eventually with the EU market the following regional projects could be considered: 0 Electric Power: (i) construction o f a 400 kV interconnection with Iraq and a gas-fired generation plant supplied by gas from the Iraq's Akass field, which i s close to the border with Syria. This plant could supply electricity to Syria and Iraq and possibly to Jordan; and (ii)rehabilitation and reinforcement o f the existing 400 kV interconnection between Syria and Turkey. 0 Natural Gas: (i) complete the final two stages o f the AGP within Syria (Aleppo-Kilis and Aleppo-Furglus); (ii) complete the AGP link to the Turkish gas network; and (iii) build a gas pipeline from central Iraq through Syria to the AGP, for domestic consumption and export, the latter either via an LNG terminal or via the Turkish transmission system to Europe. Recommendations: 0 The Government should start implementing major energy efficiency programs to slow the growth o f electricity demand. At the same time i t should start a vigorous program to reduce technical and nontechnical losses. 0 Non-technical losses need to be reduced by upgrading the consumer metering and billing systems, including: (i) replacing outdated meters by modem electronic meters; and (ii) upgrading customer information systems, including improving the client data base. Technical losses should be reduced by major investments in the distribution networks. Loss reduction programs should focus first o n the Damascus, Rural Damascus, and Aleppo regions since the largest losses occur there. 0 Syria should develop i t s generating capacity while curbing uneconomic demand. At the same time it should seek to expand opportunities o f regional integration. Generation Expansion Strategy Syria needs about 7,000 M W o f additional generating capacity by 2020 to meet growing demand and establish a reserve margin about 10%. The choice o f the best combination o f technologies and fuels for meeting demand in Syria should be based o n their comparative costs and risks. A generation costing model i s used to determine the preferred new generation mix. The resulting generation expansion plan calls for the development o f up to 1,640 M W o f new peaking capacity, about 5,300 M W o f new base load capacity and 120 M W o f new wind power plants by 2020 as follows: 0 Peaking plants: The preferred option i s gas or HFO-fired medium-speed diesel engines or gas turbines. Base loadplants: Since gas supply may be a problem, new base load capacity developed in the medium t e r m should have a combination o f CCGT operating on gas, as well as 5 thermal steam plants with dual fuel capability. Given the present shortage o f supply, Syria may also consider developing some amount o f low-speed diesel engines as a base load taking advantage o f their fast track development. Depending on the availability prospect o f regional supply o f piped gas, Syria may in the long term also wish to consider coal-fired steam power plants, which can switch at limited cost from coal to gas or to HFO. This would help diversify fuel sources and enhance Syria's security o f supply. While coal has environmental disadvantages compared to gas, these can be effectively minimized by using modern technologies and high-grade coal. 0 Renewable Energy (RE): Syria should carefully investigate and develop its renewable energy potential. The Mediterranean Solar Plan, in which Syria i s participating, also encourages development o f RE sources other than solar. RE would: (i) diversify Syria's fuel sources and enhance i t s security o f energy supply; (ii) reduce i t s greenhouse gas emissions and enable it to profit from Clean Development Mechanism credits and potential project financing from the Clean Technology Fund'; (iii) generate local employment; and (iv) extend the l i f e o f i t s fossil h e 1 reserves. RE cannot displace large conventional power plants, but it can substantially reduce the need for more fossil fuel- fired generating capacity. TQ encourage the development o f Syria's renewable energy resources the Government should take a number o f actions as elaborated in Chapters 3 and 6. Recommendations: For new generating capacity Syria needs to consider fuel mix, plant technology, and associated risk profiles; 0 In the medium term new generation capacity should be gas fired. Part o f that capacity should have fuel switching capability; 0 In the longer t e r m and depending on availability o f domestic and imported gas, Syria may consider development o f coal-fired power plants; and Syria should encourage development o f i t s renewable energy resources as a matter of priority. Comprehensive renewable energy resource studies, assessing the potential o f renewable resources must be prepared. Financial Aspects The power sector's ability to finance almost US$10.5 billion in investments from i t s own resources and through private sector financing depends on the magnitude and stability o f i t s cash flow. This requires: (i) adjustment o f electricity tariffs, including coordination with input fuel prices; and (ii)reduced network losses, improved metering and billing, and improved payment discipline. EZectricity tariffs: The average tariff level in Syria i s l o w at U Cents 4,42/kWh. This i s S comparable to the tariffs in o i l and gas exporting countries such as Algeria, Abu Dhabi (UAE), and Qatar, but significantly lower than the tariffs in regional non-oil rich countries such as The Clean Technology Fund (CTF) i s a collaborative effort by International Financial Institutions and bilateral donors to promote scaled-up demonstration, deployment, and transfer o f low-carbon renewable energy technologies. Over U S $ 6 billion has been pledged to the CTF, which i s managed by the World Bank. 6 Jordan, Lebanon, Morocco as well as Dubai (UAE), the EU and the U S (Exhibit 4). The Syrian tariff i s not enough to cover the power system's operating costs, let alone its investment needs. S It is particularly l o w for residential consumers at an average o f U Cents 2.73/kWh. Exhibit 4: Electricity Tariffs in Syria Compared to Regional Tariffs The tariff structure for residential consumers consists o f eight electricity consumption blocks, ranging up to 2,000 kWh and above (Exhibit 5). Exhibit 5: Block Structure of Electricity Tariff for Residential Consumers (per two months) II 16 -t In USCents/kWhper two months 14.58 14 12 10 8 6 - * - * - 4 2 0 The tariff for consumption up to 300 kWh per month (or 600 kWh per two month) i s much below the level o f the average tariff and could be considered to fall under the lifeline tariff for subsidizing consumption o f basic electricity needs, although it i s in line with the threshold for basic electricity needs which i s usually about 300 kWh per month. However, the rates for consumptions within this block are extremely low, as shown in Exhibit 5, indicating high amount o f subsidy which may not be needed. In addition, such a "lifeline" block o f 300 kWh per month also benefits the medium and large residential consumers, who use far more than the basic electricity needs and who, at the same time, could pay higher tariffs. 7 The affordability o f electricity o f low-income households and the burden that necessary future tariff increases and collection enforcement will impose o n them is an important issue to consider by the Government. In principle this i s best addressed through targeted support programs through cast transfer programs (social safety net) to eligible needy households. Shifting the burden to the utility by means o f lower tariffs undermines the financial viability o f the utility and discourages energy conservation. However, in many countries, including Syria, the administrative capacity t o identify eligible recipients o f a subsidy on a means-tested basis and administer a subsidy program i s limited. The next best method is to continue with the electricity lifeline tariff until the capacity to administer a cash transfer program is in place. The tariff structure should nevertheless be revised to achieve a better targeting o f the lifeline tariff for l o w income residential customers including considering the exclusion from the social tariff o f the first 600 KWh o f consumers with bi-monthly consumption in excess o f 600 KWh and a reduction o f number blocks including the gap in the tariff between the average tariff and the lifeline block. The electricity tariffs for medium and high voltage consumers are structured on a time-of-day basis. This provides in principle the right incentive to shift their demand from peak to off-peak periods, which is an essential requirement for load management and energy efficiency. However, the time-of-day tariff does not apply to l o w voltage consumers (residential and commercial), even though they represent 56% o f the demand and are responsible for most o f the peak demand. Therefore, it i s recommended that future tariff revisions extend time-of -day differentiation to l o w voltage consumers as their metering systems permit. Fuel Prices: Until 2008 all fuels used in the power sector were domestically produced and their prices were set by the Government well below international prices. As a result, the natural gas and o i l sectors incurred significant revenue shortfalls on the sale o f their products to the power sector. If fuels were priced at or near international parity level, electricity consumers would have to pay a higher tariff. Higher fuel prices would benefit the gas and o i l producing companies and would enable them to invest in exploration and production. This should eventually make more gas available to the power generation sector. Sector Financial Performance: During 2004-2008, the financial performance o f the sector deteriorated as input fuel prices started escalating faster, but were s t i l l below international levels, than electricity tariffs. As a result, as o 2008, the sector's revenues from operations were f insuflcient to cover cash operating expenses and the sector could not contribute to capital investment. Action i s urgently needed to restore the sector's financial viability and capacity to support the investments needed to meet future demand. Three scenarios were developed to examine the sector future financial performance assuming that fuel prices are adjusted to international parity levels. The second and third scenarios would require strong schemes to protect low-income consumers: 0 First scenario: no real tariffincreuses. As a result, the sector's operating cash f l o w would become minus US$ 1.5 billion by 2010 and minus US$2.7 billion by 2020. Under this scenario, the financial subsidy needed from the Government would be a staggering U S $ 33.6 billion during 2008-2020 to support the cash f l o w requirement o f the sector and finance its investments. 8 Second scenario: accelerated tariff increases (90% in 2010 and 20% in 201 I),assuming fuel prices to the power sector are adjusted to international parity price. Afterwards the tariff would need to be maintained at the 201 1 level in real terms. Under this scenario, the financial subsidy through 2012 needed from the Government would be limited to US$ 1.3 billion. Third scenario: 20% per annum increases through 2013 and 10% in 2014. The sector's cash flow equilibrium level would be reached by 20 15. The Government would have to subsidize some o f the investment costs o f the sector through 2015 in the amount o f US$ 4.4 billion. Recommendations: The sector's ability to finance almost US$10.5 billion in investments from i t s own resources and through private sector financing requires both loss reduction as well as coordinated adjustment o f electricity tariffs and input fuel prices; Tariff increases o f at least 20% per annum through 2013 and 10% in 2015 will be necessary to reach the cash f l o w equilibrium level for the sector by 2016 at the latest; The subsidy to higher income residential consumers should be reduced by applying the social tariff to monthly consumption below, e.g., 300 kWh; Input fuel prices should be set either based on the domestic marginal production cost (all fuels are mainly produced domestically) or at the export parity price for fuel o i l and diesel and at the import parity price for gas. Fuel prices at full cost recovery (or economic) levels would benefit the gas and o i l producing companies and would therefore enable them to invest in exploration and production. This should eventually make more gas available to the power generation sector. Role o f the Private Sector The enormous investment needs o f the electricity sector would be an intolerable drain o n the government budget if they were to be met by public financing. Therefore, in addition to making the sector able to self-finance a portion o f these investments, the Government needs to attract private sector investment in the power sector. Attracting private equity or commercial loans will require firm commitments from the Government to improve the financial performance o f the power sector. Private sector participation in Syria would most likely be focused on the generation sector through Independent Power Producers (IPPs). In the longer t e r m private investment in the distribution sector could also be considered. Because o f i t s pivotal role, the transmission sector would remain in state hands, as is the case in most countries. Recommendations: T o attract private sector participation in building new generating capacity the Government will need to do the following: 9 Develop and implement a strategy that lays out the policy and regulatory frameworks and recommends measures necessary to ensure an environment conducive to private sector involvement, competitiveness, and transparency. 0 Establish a government PPP Unit6 in charge o f management o f private sector participation in developing infrastructure (economic and social) and in implementation o f necessary regulations. Designate a working team in the Ministry o f Electricity to coordinate with the PPP Unit the development o f new IPPs. The working team will also: o Prepare feasibility studies for a pipeline o f generating projects that could be offered to private investors; o Assess with the PPP Unit and the Ministry o f Finance the need for, and level of, guarantee packages or other credit enhancement instruments that may need to be provided by the Government to attract private investment; and o Prepare IPP bidding packages for the selected generating plants and carry out a transparent bidding process. Electricity Sector Restructuring The high level o f technical and commercial losses, poor quality o f service, poor financial performance (partly due to the absence o f adequate tariff increases), and the absence o f accrual accounting and financial management systems are posing formidable challenges to the electricity sector. To improve the efficiency and productivity o f the power sector and the quality o f service, i t s structure and the operational relationships between units should be revised. A road map for sector restructuring i s proposed for consideration by the Government. The principal sector restructuring measure in the short term would consist o f "functional unbundling" (Exhibit 6) o f generation and transmission, Le., creating separate units under the Ministry o f Electricity (the distribution units are already unbundled). This includes allocating management, staff, assets and liabilities to each unit and introducing commercial accounting and management systems. Exhibit 6: Functional Unbundling o f the Electricity Sector (2010-11) Ministry of Electricity Ministry of Electricity PEEGT PEDEEE PEEG PEET PEDEEE .Generation *Transmission *Distribution Generation .Transmission 1 *Trade Chstnbution .Trade -Supply *System Operator *System Operator .suPP'Y i PPP Unit: I s a government dedicated Public-Private Participation Unit that could operate as part o f the Prime Minister Office with responsibility for Economic Development. 10 Once this has been achieved, the generation, transmission, and distribution units would be incorporated as state-owned companies operating on a commercial basis, possibly under a holding company structure (Exhibit 7). Such a commercial reorientation would: (i) ensure that management o f the incorporated entities would have the incentive to improve efficiency and productivity; (ii) facilitate better supervision and monitoring o f sector performance; and (iii) facilitate attracting private investment into the sector. Performance contracts between the Government and the sector companies would help to hold the companies accountable for their performance. Under this restructuring model a state-owned Power Purchasing Entity would be established to act as a single buyer to contract electricity wholesale from the generation companies and then resell it to the distribution companies. The single buyer could be part o f the Transmission Company (PEET) or be established as a separate company. The advantage o f the latter arrangement, shown in Exhibit 7 , i s that if wholesale tariffs are set below cost recovery and Government subsidies are not forthcoming, PEET would not be affected and would continue to be able to fulfill its vital functions o f system operation and transmission expansion Exhibit 7: Corporatization Under One Holding Company I I 1 I Power Purchasing Entity (Single Buyer) PEET *Transmission .Trade *System Operator 1T PEDEEE Distribution .Supply Sector restructuring requires also the separation o f the sector ownership/policy and the regulatory functions. This can be achieved through the creation o f an electricity sector regulator, set up either as an autonomous entity within the Ministry o f Electricity or as an independent regulatory agency. The regulator's functions would consist mainly of: (i) monitoring sector operations to ensure efficient and non-discriminatory functioning o f the market; (ii) developing price setting methodologies and tariff systems; (iii) issuing licenses to market operators and monitoring compliance; and (iv) benchmarking the performance o f the licensees to ensure economic 11 operation o f the systems. The Ministry o f Electricity would remain responsible notably for setting sector policy, ensuring strategic planning and providing overall sector oversight. Energy Efficiency and Renewable Energy Strategy: Making progress in energy efficiency (EE) and renewable energy (RE) i s critical and requires a comprehensive approach. In that context the Government should ensure not only that specific E E / E policies and legislation are formulated, but also see to it that these are actually implemented and enforced. The principal recommended steps are: (i) formulating an EE/RE policy; (ii) adopting comprehensive and consistent supporting legislation; (iii) establishing a specialized agency (NERC could be transformed into such an agency); (iv) preparing strategies and action plans; and (v) establishing a dedicated fund for EE and RE development and put in place special financial incentives. Most importantly, electricity tariffs should be restructured and adjusted to provide consumers with the appropriate signals and incentives. Gas-to-Power Coordination: L o w gas prices and inadequate coordination between natural gas production plans and electricity generation requirements have led to constraints in the present gas supply to the electricity sector. This situation needs to be urgently addressed. Therefore a gas-to-power strategy must be developed and a coordination mechanism (the joint coordination committee) between the Ministry o f Electricity and Ministry o f Petroleum and Mineral Resources should be established. That committee should coordinate: (i) development o f the investment programs for both sectors; (ii) funding and implementation o f the investments; and (iii) pricing and supply contracts between the gas and power sectors, because the gas price the directly impacts the gas sector's investment capacity and electricity production cost. Recommendations: 0 The objective o f sector restructuring i s to ensure that sector management has both the autonomy and the incentives to address existing sector shortcomings and to potentially enable i t to attract private participation; The first restructuring measure should consist of "functional unbundling" o f generation and transmission, i.e., creating separate units under the Ministry o f Electricity. The distribution units are already unbundled; 0 As a next step, the generation, transmission, and distribution units should be incorporated as state-owned companies operating o n a commercial basis, possibly under a holding company structure. Separation o f the ownership/policy and the regulatory functions i s necessary and can be achieved through the creation o f an electricity sector regulator; 0 To promote EE and RE, the Government should ensure that specific EE/RE policies and legislation are formulated and that these are actually implemented and enforced. Most importantly, electricity tariffs should be restructured and adjusted to provide consumers with the proper signals and incentives; and 0 A gas-to-power strategy must be developed and a coordination mechanism should be established between the Ministry o f Electricity and Ministry o f Petroleum and Mineral Resources. 12 13 I 2.8 3 .O 3.1 5.8 18 0.3 43 JIS3J- J@l p j l pJ /e%) 10.6 15.9 13.1 11.0 2.0 7.0 4.42 Gslh+ /&-Pi 6) (LLbl, & 14 2007 2006 2005 2004 2003 2002 427 345.1 55.0 103.8 83.4 86.3 ~ k # ~ ~ j d l SJ,j.dl J& I 1 1 66 226 Residential ConinierciJl I I Street lighting Government I Religion Power sectof Industry I j j 10 8 $ 6 $ c 4 c a 2 8 2) 0 20 21 22 23 Ministry of Electricity 1 Ministry of Electricity PEEGT PEDEEE PEEG PEET PEDEEE Generation *Transmission 4 *Transmission *Distribution Generation -0stnbution .Trade *Trade -System Operator .supply .System Operator .suPP'Y 1 24 l c Power Purchasing Entity (Single Buyer) I 0 n S op PEET 0 0 *Transmission 3 *Trade x *System Operator 3 PEDEEE Distribution *Supply I I I I I I J t 25 26 Chapter 1. ELECTRICITY DEMAND This chapter first reviews existing patterns o f electricity demand in Syria and then provides a forecast o f the development o f demand through 2020 under various scenarios. These scenarios include an assessment o f the reduction o f peak demand if strong energy efficiency programs were to be implemented, including load management measures. I. Evolution o f Demand Through 2007 Since 2002, electricity demand in Syria has grown rapidly due t o several factors: 0 An acceleration o f the country's industrialization combined with strong growth in the commercial and service sectors and increased penetration o f appliances and air conditioning in households as the economy modernized and living standards increased; Electricity tariffs that are below cost recovery level (at present f u e l prices) despite periodic adjustments, and therefore do not encourage efficient consumption o f electricity; 0 Lack o f implementation o f energy efficiency programs, since energy conservation policy in Syria is s t i l l in an early stage o f development; and 0 A significant inflow o f refugees from Iraq. Over the past six years, the consumption o f electricity in Syria increased on an average by a very high rate o f 7.4% per year: from 21.7 TWh in 2002 to 31.1 TWh in 2007 (Exhibit 1.1). The increase in the peak demand was also high at an average rate o f 6.5% per year: from 4791 M W in 2002 to 6566 M W in 2007. Exhibit 1.1: Electricity Demand 2002-2007 Year Ele~tricity'~ Peak demand Available Consumption (MW) Capacity (MW) (GWh) 2002 21,737 4,791 5,490 2003 23,414 5,08 1 6,565 2004 25,173 5,770 6,480 2005 26.91 7 6.008 6.008 2006 29,055 6279 5,950 2007 31,151 6566 6 250 Source: MOE Reports Demand Structure The 2007 electricity demand structure (Exhibit 1.2) shows that residential and industrial consumers are the largest categories, constituting 47% and 37%, respectively, o f total electricity 13 Electricity consumption does not include technical losses, internal power consumptions o f generating plants and demand shedding but includes billed consumption o f all consumers and non-billed consumption (commercial losses of 10%) 27 consumption. In contrast, the commercial sector constituted only 9% o f total demand. Compared to other intermediate income countries, the demand from industry i s high and the demand from commercial activities i s relatively low. Conimcrcial Street lighting Govemmcnt Religion ti POWPI sector 1Powci sectot Industry Source: MOE Reports and World Bank Calculations Network Technical and Non-technical Losses: In 2007 total technical losses (including transmission and distribution losses) represented about 17% o f total demand in Syria, which i s very high by international standards for comparable power systems and should not exceed 10% for total technical losses in the transmission and distribution power networks. The 2007 demand also includes 10% o f non-billed demand representing non-technical 10sses'~. This i s also higher than the non-technical losses accepted b y commercially operated power utilities and which are in the order o f 2% or less. l4 These losses are typically caused by energy theft, poor quality energy meters, defective energy meters, or errors in meter reading and billing. 28 Load shedding: The increasing difficulties experienced by the power system to meet the demand o f the growing economy are shown by the level o f un-served load in GWh reported by PEDEEE. Load shedding sharply increased from 2006 onward (see Exhibit 1.3 below). Exhibit 1.3: Unserved Load Due to Load Shedding (in GWh) I 2002 I 2003 I 2004 I 2005 1 2006 I 2007 Unserved load I 86.3 I 83.4 I 103.8 I 55.0 I 345.1 1 427 Source: MOE Reports Peak demand: In terms o f capacity demand, Exhibit 1.4 shows that during system peak residential users had by far the largest demand with 4,760 MW, followed by industry with 1,016 MW. Residential consumers typically use a great deal o f capacity but only during relatively short peak periods, while industry uses a given capacity on a more continuous basis throughout the day. Exhibit 1.4: 2007 Demand Structure During System Peak (in MW and YO) 66 Residential : 22G Comnicrcial Street lighting GOVCI t1ment Religion Power icLtor 1 lnduatry Residential Comrncrtisl E Street lighttii1: Government Religion & Powcr sector lnditsiry I Source: MOE Reports and World Bank Calculations 29 A comparison between energy demand and peak demand shows that the load factor'j varies significantly b y consumer category (Exhibit 1S ) . Residential consumers have a load factor o f 3 8%, which i s l o w by international standards, suggesting short but pronounced peak demand periods and a high utilization rate o f inefficient appliances. In contrast, the industrial sector has a high load factor o f 86% suggesting strong and continuous electricity demand o f Syrian heavy industry. Because o f the weight o f industry in total demand, the overall system load factor i s s t i l l relatively high at 67.2%. As the Syrian economy modernizes, the role o f heavy industry may decrease in relative terms, as has been the case in many other countries. This implies that the system load factor may decrease as the demand from residential consumers with a l o w load factor increases. In that case significant investment in additional capacity will be needed to meet a fast growing peak demand. Therefore, the Government may consider targeting the largest consumption categories through load management and energy efficiency programs to improve and/or retain their load factor (see the Energy Efficiency section in this chapter). Exhibit 1.5: 2007 Consumer Load Factors I 90% 80% 70% 60% 509" 40% 30% 201 LOA 0% Source: MOE Reports and World Bank Calculations Quality o Service f The Investment Climate Assessment (ICA) conducted by the World Bank in 2005 shows (Exhibit 1.6) that the quality o f electricity supply to industry in Syria i s poor compared to similar W Load factor i s defined as total energy produced plus net importlexports in M h divided by peak demand (MW) times 8760 (hours). The load factor i s an indication o f h o w intensively and efficiently capacity i s being used. A l o w load factor requires that a significant generation capacity i s used only for short periods o f time t o meet high peak demand while sitting idle most o f the time. I t requires the construction o f expensive generation capacity used only intermittently. This represents a major financial burden for a power utility when the tariff for residential consumers do not include full cost covering peak and off-peak tariffs. 30 countries in terms o f economic development. The level o f un-served load has further increased in 2006 and 2007 indicating that the quality o f services has not improved after 2005. Exhibit 1.6: Electricity Power Supply Indicators: Syria and Comparators Source: World Bank ICA, 2005 According to the ICA, the frequency o f power outages encountered by Syrian f i r m s was 43 days during 2005 while their comparators in Egypt suffered 18 days o f outages and in Malaysia only one day. Similarly, output losses resulting from frequent power shortages are estimated at 9.6% o f f i r m s ' turnover in Syria, as opposed to 6.1% in Egypt and 1.8% in Malaysia. A lack o f reliability in the supply o f electricity i s undermining the competitiveness o f Syrian firms, because o f output losses and the additional cost o f running private generators. As the Syrian economy grows and new industrial complexes are being established around several cities, addressing the issue o f power shortages to industries should be a top priority for the Government o f Syria to attract private investments and increase the competitiveness o f the Syrian economy. 1 1 . Demand Forecast The key variables for future demand projections are GDP growth by sector, sectoral GDP elasticity o f demand, tariff increases by category o f consumers, and price elasticity by sector. Energy demand projections were prepared for the base case, high case and l o w case GDP scenarios. Annex 1.1 includes assumptions made in developing the base case, l o w case and high case demand projections. The base case projection i s summarized below (Exhibit 1.7). 31 2007 2010 2015 2020 (actual) Non-industrial 19,619 22,928 28,903 36,474 Industrv 11.531 12.794 14.508 16.296 Total Consumption 31,151 35,722 43,412 52,770 Total Unconstrained System Demand16 39,379 45,346 54,498 65,752 Annual Growth Rate 5.0% 6.0% 4.7% 3.3% The forecasts show that in the base case the average unconstrained electricity system demand growth rate during 2007-2020 i s 4.0% per annum in the base case (67% over the entire period). Corresponding numbers are 5.8% in the high case (106% over the entire period) and 3% in the l o w case (45% over the entire period). These various forecasts are graphically plotted in Exhibit 1.8 and tabulated in Annex 1.2 Exhibit 1.8: Three Electricity Total System Demand Scenarios (in GWh) -System Demand Base Case (GWh) -..-System Demand Low Case (GWh) Ss e - ytm Demand High Case ( G W ) Source: PEDEEE and PEEGT Statistics to 2007; World Bank projections 2007-2020 The forecasts suggest a slow-down in the growth o f total demand after 2010. This i s due to the moderate projected GDP growth, the expected modernization o f the structure o f the Syrian economy, a shift toward less energy intensive activities over time and the projected reduction in Includes demand from all consumers, technical and commercial losses, the power sector's own consumption, net import and amount o f load shedding. 32 technical losses. Nevertheless, needed generation will s t i l l grow strongly to meet system demand the projected total demand. During 2007 -2020, electricity generation is projected to increase by 26.4 TWh in the base case, 41.6 TWh in the high case, and 17.8 TWh in the l o w case, respectively. Therefore, significant investments in new generating capacity and in expansion o f the transmission and distribution networks would be needed (Chapters 3 and 4). This underlines the importance o f promoting and implementing energy efficiency programs to slow the growth o f electricity demand. I t also highlights the need for a vigorous program to reduce technical and commercial losses. Peak Demand The generating capacity needed to meet peak demand (excluding reserve margin) depends on demand growth and the evolution o f the system load factor. Even assuming that the load factor o f each consumer category remains constant, the shift in the structure o f the economy will involve a faster growth o f consumer categories with a lower load factor (residential and commercial) compared to consumer categories with a high load factor, such as a industry. This could result in a decrease in the overall system load factor from 67.2 in 2007 to 64.5% in 2015 and 61.4% by 2020. Exhibit 1.9: Three Capacity Demand Scenarios (in MW) I I 1 14,000 I ' I 12,000 10,000 - - $ 8,000 - 6,000 j 4,000 j 2,000 0 - Source: PEEGT and PEDEEE stalistics through 2007, World Bank projections after 2007 Demand forecasts show that in the base case peak demand i s projected to increase from 6,566 M W in 2007 to 12,245MW by 2020 (Exhibit 1.10 and Annex 1.2). The system will therefore need a minimum'7 o f additional generating capacity o f 5,680 M W by 2020 compared to 8,576 M W in the high case and 4,059 M W by 2020 in the l o w case. The average growth rate o f the system capacity during 2007-2020 i s therefore 4.9% p.a. in the base case, 6.6% p.a. in the high l7Without consideration for requirement o f reserve margin or expected retirement o f existing generation plants. 33 case and 3.8% p.a. in the l o w case. The challenges o f meeting future demand through development o f new generating capacity are addressed in Chapter 5. Exhibit 1.10: Peak Demand through 2020 - The Base Case 2007 2010 2015 2020 Peak Demand (MW) 6566 7,678 9,675 12,245 Growth rate (% in the year) 4.6% 6.8% 5.3% 4.7% Source: MOE Reports and World Bank Calculations 111. Curbing Demand: Syria's Energy Efficiency Potential Energy Efficiency Energy intensity in Syria i s among the highest in the Middle East and North Africa (MENA) region and i s also higher than several EU countries as shown in Exhibit 1.1 1. Although these numbers need to be interpreted with caution, as the industrial structure o f each country i s specific, it suggests that there may be a considerable potential for energy efficiency improvement in Syria. In addition to the potential for improving energy efficiency in the industry sector, it i s also clear that there i s a vast potential for energy efficiency improvement in the residential sector. Exhibit 1.11: Energy Intensity in Syria and Selected MENA and EU countries 16,000 1 - 14,000 8 8 12,000 + 0 10,000 tft 0 o 8,000 0" ; 6,000 (Y P 3 4,000 m 2,000 0 Countries Source: EIA statistics, 2006. The Government o f Syria has recently established the National Energy Research Center (NERC) which i s to be responsible for formulating, proposing, and coordinating policies, plans 34 and programs in the areas o f renewable energy and energy efficiency. The Government has also commenced developing specific legislation to promote energy efficiency in Syria including: 0 The Energy Conservation L a w (enacted); The Labels and Standards L a w (enacted ); and 0 The Insulation Code for Buildings (enacted). Several pilot energy efficiency programs have been initiated in Syria, including: 0 Programs for using high-efficiency compact fluorescent light (CFL) bulbs"; 0 Introduction o f solar water heating technology for residential and industrial sectors; and 0 Energy audits and efficiency improvement in selected public sector buildings. In addition, a long t e r m preliminary plan for implementation o f efficiency programs has been presented by NERC to the Ministry o f Electricity. The plan forecasts reducing electricity demand by 19% by 2030 compared to a business-as-usual scenario. This i s a very ambitious goal considering the limited track record o f the existing embryonic institutions to develop energy efficiency programs and scale up their implementation, and given the absence o f an energy efficiency "infrastructure" in Syria. Chapter 6 reviews necessary institutional development and implementation mechanisms that need to be developed in Syria to promote and implement energy efficiency programs. Nevertheless, based o n estimates o f the potential for energy efficiency in Syria prepared by N E R C and on World Bank experience in the Region", it i s estimated that industrial sector electricity demand could be reduced by up to 15% over the next t e n years and residential demand by about 10%. Both are in comparison with a business-as-usual scenario, Le., one without action to improve energy efficiency. The overall impact i s a reduction o f demand by about 3000 GWh by 2015 (6% o f total demand), increasing to 5,600 GWh by 2020 (8.5% o f total system demand). The equivalent energy efficiency "negawatts" (i.e., capacity that does not need to be built or is freed up for other uses) are estimated at 5 19 M W by 2015 and 93 1 M W by 2020. A tender has been prepared (but not yet issued) for one million Compact Fluorescent Lights (CFLs) with a cost of around U S $ 1 million to be distributed mainly in the residential and public building sectors. The plan i s to scale up this program to 6-10 million CFLs to make a significant impact on energy consumption. A n important aspect for the success o f the CFL program i s the design o f the distribution mechanism, which, based on international experience, could be best managed by the utility which has a consumer database and ongoing contacts with each consumer. Another important aspect i s how the operation i s planned and staged. Experience suggests that the f i r s t batch o f CFLs could be subsidized, while the next batches could be distributed on a full cost recovery basis, preferably through a surcharge in the electricity bill. Experience suggests that quality tests should be performed and found satisfactory before CFLs are distributed or marketed, as the distribution o f sub-standard products would damage future prospects for CFL development and negatively affect public perceptions about energy efficiency products in general. '' Source: Evaluation o f the potential for energy conservation carried out in Morocco, Sidi Bernoussi Project (2006) and Tunisia (2008) under ESMAP financing. 35 Load Management Load management i s a special subset o f an array o f energy efficiency measures. It i s typically implemented by the utility at the request o f consumers, in exchange for favorable tariff treatment. It consists either o f the utility switching o f f the supply o f electricity for selected consumers and/or for specified appliances or equipment during periods o f peak demand, or by consumers using electricity for major appliances (e.g., laundry machines, air conditioning) during off-peak hours. This usually has a significant impact o n the system capacity needed and therefore reduces the peak capacity that needs to be built. Residential consumers could be targeted by load management and energy efficiency programs to shift the load during peak hours and to promote efficient consumption o f electricity. Load management o f household consumption could also be encouraged by the application o f time-of- day2' pricing o f electricity to consumers whose metering systems are upgraded to modern electronic or smart meters. The largest consumer and industrial categories could be targeted through load management and energy efficiency programs to improve and/or retain their load factor. Such programs include for example mandatory or voluntary energy audits and special tax incentives (e.g. accelerated depreciation, exoneration o f import tax on energy efficient equipment) to encourage investments in energy efficiency programs. Although the impact o f load management i s difficult to evaluate, considering that the load factor o f residential consumers could increase by 0.25% per annum from 38% to 40.5% by 2020, the impact on system peak demand would be to free up 160 M W by 20 10,448 M W by 20 15 and 866 M W by 2020. Taken together, if Syria could fully realize the estimated potential for energy efficiency gains and load management, it would require about 1,797 M W less o f capacity (14%) by 2020 than without implementation o f energy efficiency and load management programs as shown Exhibit 1.12. Exhibit 1.12: Impact of Energy Efficiency (EE) and Load Management (LM)on Peak Demand (in MW) Source: World Bank estimates 2o Time-of-day tariffs provide incentives t o consumers to shift part o f their electricity consumption during on-peak hours t o off-peak hours. 36 Tariff Measures Inadequate energy prices and structures, and distortions in prices between fuels, are a major barrier to energy efficiency investments. Consumers, manufacturers and service providers have little incentive t o invest in energy efficiency unless energy prices are right. E v e n m o r e important than absolute price levels from a n energy efficiency point o f v i e w i s that consumers' expenditures on energy must b e significant enough as a percentage o f their disposable income to m a k e t h e m take autonomous action. In this context, and f o r other reasons such as the financial viability o f the utility, the Government should seriously consider revising the electricity tariff structure and level where appropriate, t o ensure that each consumer category receives the proper signal and has an incentive to undertake energy efficiency investments. Tariffs issues are m o r e extensively analyzed in Chapter 4. 37 Chapter 2. ELECTRICITY SUPPLY I. Sector Organization The electricity sector in Syria i s organized under the Ministry o f Electricity which regulates and manages the sector. The Public Establishment for Electricity Generation and Transmission (PEEGT) operating as part o f the Ministry i s responsible for planning, development, operation and maintenance o f the generating plants and transmission networks. The Public Establishment for Distribution and Exploitation o f Electric Energy (PEDEEE) and i t s fourteen regional branches have similar responsibilities for the distribution network. Exhibit 2.1 shows a basic organization chart for the electricity sector in Syria. Sector organization and restructuring are discussed in detail in Chapter 6. Exhibit 2.1: Organization Chart o f the Electricity Sector in Syria ~ 1 Ministry of Electricity 1 Electromechanical Public Company for Electricity Intermediate Institutes &Telecomm. Works This chapter provides a review o f the operational performance o f the electricity sector and identifies key challenges which will be addressed in subsequent chapters o f this note. 11. Electric Power Generation Installed Capacity In 2007 the total installed power generating capacity in Syria was 7,459MW o f which 76.4% was supplied by PEEGT, 20.2% by the General Establishment o f Euphrates Dam (Thawra, Baath, and Tishreen plants reporting to the Ministry o f Irrigation), 1.6% by Syrian Petroleum Company, 0.9% b y Homs refinery, 0.6% by Banias Refinery and 0.3% b y PEDEEE. The generation m i x consists o f plants with different technologies including steam (47.6%), hydro (20.5%), gas open cycle turbines (9.5%) and combined-cycle turbines (22.5%), as illustrated in Exhibit 2.2 and Annex 2.1. 38 Exhibit 2.2: Power Generation Mix: Ownership and Technology 0 3% 2; 3 ' 0 76 4" 1 Other Publlc Sector Total PEDEEE 1 Source: MOE Reports and World Bank Calculations Load Factor Performance indices for the Syrian generating plants are summarized in Exhibit 2.3. The load factor according to plant type indicates that Syria relied primarily o n steam power plants and to a lesser extent on CCGTs for meeting the system's base load demand, and on gas turbine and hydro power plants for peaking. Exhibit 2.3: Generation Performance Indices, 2007 Installed Available Production Load Availability Steam 3,435 2,995 22,55 1 76% 87% Gas 587 404 7,302 44% 69% CCGT 1677 1600 5,263 65% 95% Total -PEEGT 5699 4999 35,116 61% 88% Hydro 1,528 1,151 3,526 42% 75% System Total 7,227 6,150 38,642 52% 82% Other Public Sector2' 232 100 TOTAL 7,459 6,250 Source: MOE Reports and World Bank Calculations Syrian Petroleum Company, Homs refmery, Banias Refinery and PEDEEE 39 Availability Exhibit 2.3 shows that the total available generation capacity in 2007 was 6,250 M W out of 7,459 M W installed capacity due mainly to lack o f investments in overhaul maintenance and rehabilitation o f existing power plants. The average availability factors o f different types of available generating plants in Syria were in 2007 at acceptable levels o f above 85% and reaching 95% for the CCGT plant; gas plants were the exception at 69%. However, despite an average 88% availability factor, the total available capacity o f 6,250 M W was inadequate to meet peak demand o f 7,007 M W in 2007. Exhibit 2.4 shows, available generating capacity has declined on average 3.2% per annum during 2003-2006, compared to about 7.4% per annum growth in peak demand in the same period. Although available capacity increased by 5% in 200722, the shortfall in available capacity remained high at 3 16 M W compared to 329 M W in 2006 due to growing demand. Even with new addition o f generation capacity planned for 2009, the shortfall o f generating capacity, unless major investments in new generation capacity are carried out, i s expected to continue to rise during 2009-2020 due to retirement o f an estimated 2476 M W o f older generating units (Annex 2.2). Exhibit 2.4: Peak Demand and Installed and Available Generating Capacity (1997-2007) Source: MOE Reports and World Bank Calculations The above exhibit shows that starting in 2005 demand outstripped available capacity. This means that the power system i s operating without any reserve margin, which leads to frequent 22 300 M W of new generation capacity was added in 2007 due to converting Nassrieh and Zayzoon open-cycle power plants to combined-cycle power plants. 40 load shedding. Generally, a capacity reserve margin o f about a minimum 10% i s considered necessary for reliable operation o f the power system and security o f the electricity supply. Fuel Consumption PEEGT's power plants burn heavy fuel oil (HFO), natural gas, and a small amount o f diesel (Exhibit 2.5). Since 1996, HFO consumption has increased on average by 12% per annum, compared to 4% for natural gas. HFO consumption was virtually equal to gas consumption in 2004 and exceeded it by increasingly wide margins starting in 2005. This i s partly due to the shortage o f gas, which imposed an increasing reliance on HFO for base load steam power plants to meet growing demand. Even though the Nassrieh and Zayzoon power plants have been converted to combined-cycle in 2007, natural gas consumption has considerably declined by 11% compared to 2006. The potential o f operating dual fuel power plants on natural gas has not been fully exploited since 2002 because o f the unreliability o f the natural gas supply. This i s a critical issue to consider for future generating plant expansion (see Chapter 3). Exhibit 2.5: Equivalent o f Fuel Consumption by PEEGT's Power Plants 4,000 f 3,000 3 2,000 1,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 H E A V Y FUEL OIL CONSUMPTION INATURAL GAS CONSUMPTION E L = 011 CONSUMPTION Source: MOE Reports and World Bank Calculations Short-term Additional Capacity N o new generating capacity has been added to the system between 2001 and 2006. The conversion o f the open cycle gas units at the Nasrieh and Zayzoon plants to combined-cycle with an additional capacity o f 150 M W steam unit in each power plant was completed by the end of 2007. One o f the major new plants that PEEGT counts on i s the new 750 M W combined-cycle power plant at Deir Ali which would use natural gas as i t s main fuel. The Deir Ali power plant i s expected to become fully operational during 2009. Expansion o f the Tashreen power plant by 41 450 M W and the Banias power plant by 300 M W i s also expected to be completed by end 2009 as summarized in Exhibit 2.6. Exhibit 2.6: Power Generation Projects under Construction Power Plant Ty Pe Capacity Status Full Operation (MW) Year (estimated) Deir A l i Combined Cycle 750 Partially Operation 2009 in 2008 Tishreen Combined Cycle 450 Under Construction 2010 extension Banias Extension Gas Turbine 3 00 Under Construction 2009 1II.Transmission and Distribution Transmission The transmission system in Syria i s planned, operated, and maintained by PEEGT. The main transmission network consists o f 5,420 km o f 230kV lines and 1,188 km o f 400kV lines, plus associated substations and transformers. As illustrated in Exhibit 2.8, the 400 kV south-north transmission interface connects major generating plants with the transmission grid, while the load centers in the country's five regions are supplied by the major 230kV network. Internal constraints within the 230 kV transmission network exist, primarily due to limited transformer capacity in substations that are feeding major load centers. In addition, reliability problems exist in some parts o f the network due to limited redundancy in equipment and lines. Therefore, PEEGT i s planning to expand the 400 kV transmission network to reinforce the transmission capacity o f i t s national transmission network (Exhibit 2.7). Exhibit 2.7: Transmission Network in Syria (Existing and Planned) I Source: A UPTDE 42 Distribution The Syrian distribution system i s planned, operated, and maintained by PEDEEE and i t s fourteen regional companies. By end 2007 PEDEEE had about 4.6 million customers. Over the last 30 years Syria has undertaken rural electrification programs to connect communities to the national network, thus increasing access to electricity to an impressive estimated 99% o f the population. In 2007, the electricity supply delivered to the distribution networksz3 reached 34.9 TWh. Electricity sales to 57 large consumers (2.2 TWh) at 66kV represented 8.6% o f the total energy billed, while sales to all other consumers below 66kV were 23.9 TWh. Billed electricity accounted for 75 YO f the total delivered energy. The remaining 25% represents technical (15%) o and non-technical losses (10%) which have been decreasing from 27.2% in 2002, but remain high. In 2007, the collection rate as reported by PEDEEE was about 95%, mainly due to low payment levels by government entities. Exhibit 2.8 shows network losses in the governorate distributional companies. Given that the largest losses exist in the regions o f Damascus, Rural Damascus, and Aleppo which have the largest consumption; PEDEE should focus i t s loss reduction programs on those three regions in order to gain maximum benefit. Source: MOE Reports and World Bank Calculations These very large losses (25%)24 and non-payment o f bills equaling (up to 5%) together amount to about 30% o f energy delivered to PEDEEE. This weighs heavily on PEDEEE's financial 23 Electricity Supply to 66kV networks and below. 24 25% i s the distribution losses. Total system losses including transmission i s losses i s about 27% 43 performance. At an average tariff o f U S Cents 4 . 4 2 k W h and assuming 10% as an acceptable level o f technical losses and 2% for non-payment o f bills, the equivalent financial loss to PEDEEE was about U S $ 278 million in 2007 alone". This i s a clear indication that the metering and billing systems o f PEDEEE are in need o f a major overhaul to reduce non-technical losses including: (i) replacement o f outdated consumer meters by modern electronic meters26and; (ii) upgrading o f customer information systems including the client data base to improve billing and customer services. In addition, major investments for rehabilitation and expansion o f the distribution networks will be needed to reduce technical losses. IV. Regional Integration Syria's power system i s the second largest in the Arab Mashreq region, after Iraq. Due to i t s pivotal geographic location, Syria i s positioned to play an important role in the development o f regional Mashreq energy (electricity and gas) markets. In the longer t e r m these markets could be integrated with the Turkish and EU energy markets. Electricity Syria i s a member o f the Seven-Consortium Interconnection (EIJLLST) that l i n k s the power grid o f Egypt, Iraq, Jordan, Lebanon, Libya, Syria, and Turkey at the 400kV and 500kV level. The Syrian transmission system i s connected to the power systems o f Iraq, Jordan, Lebanon and Turkey with 9 interconnections, at voltages ranging from 66 kV to 400 K V (Annex 2.3). Syria's cross-border energy imports and exports have developed through bilateral agreements. Exhibit 2.9 shows annual electricity imports and exports between Syria and neighboring countries. The present situation, where countries in the sub-region have a shortage o f electricity and the technical limitation in the network have kept utilization o f interconnection capacities to minimal levels (Annex 2.3). Therefore, exchanges are essentially limited to emergency operations to serve the grids during critical conditions only. 25 S Calculated as 30-12=18% o f combined losses times 34,926 GWh times U Cents 4.42kWh. 26 Such modem electronic meters can also facilitate energy efficiency measures such as load management. 44 Exhibit 2.9: Syria Electricity Imports and Exports (1997-2007) I 3,000 2,500 1 2,000 5 s 1,500 1,000 500 7-- I 2000 2001 2002 2003 2004 2005 2006 2007 I IMPORTS EXPORTS Source: MOE Reports Natural Gas The capacity expansion plan for the power generation sector in Syria relies on natural gas as the main source o f fuel. Syria's proven reserves estimated at 270 bcm are the lowest compared with other countries in the region as shown in Exhibit 2.10, but theoretically would be sufficient to supply all new generating capacity to be built during the next 10 years. However, inadequate investment in bringing new gas reserves into production have made domestic gas supply insufficient to meet the gas demand o f the power sector. The latter needs to increasingly rely, at least in the short to medium term, on other types o f fuel (such as HFO or diesel) or greater imports o f natural gas from the regional market. 45 Exhibit 2.10: Regional Proven Gas Reserves (ZOOS) - P e 2 u J , R a rn B P W 1 BProven Reserves (2008) .Annual r- o4 Pd" Source: IEA (2008) With technical assistance from the EU, Egypt, Jordan, Lebanon, and S y i have err,,arkeL o n the ~ establishment o f a regional gas market which will ultimately be integrated with the EU internal gas market. The objective o f the project i s to interlink the respective countries through the 1,300 km long Arab Gas Pipeline (AGP27) to tap the proven gas reserves in the region. Therefore, in the longer term, once the sections o f the AGP from Homs t o Kilis are completed, Syria may be in a position to supplement i t s domestic gas supply with imports from countries other than only Egypt28. The potential for regional energy integration i s significant for Syria due to i t s strategic location in the middle o f the Mashreq region. Syria could benefit from future development o f a Mashreq regional energy market, integrated in the long t e r m with the Turkish and EU markets. Benefits to Syria include securing necessary gas imports for i t s power sector, enhancing opportunities for bilateral power exchanges with neighboring countries, and receiving wheeling charges for energy exchanges between countries in the region. Benefits for the whole region also include energy 27 The AGP i s being constructed with the objective o f exporting gas from Egypt to Jordan, Syria and Lebanon and in the long term from Egypt and possibly Iraq via Turkey to Europe through its future connection to the Turkish network and pipelines (including the planned NABUCCO pipeline). The first three phases o f the AGP have been completed connecting Egypt, Jordan, Syria and Lebanon. Tendering for stage 1 o f the last phase o f extending the pipeline to Turkey has been initiated. The pipeline has a 36" diameter, with an ultimate capacity o f 10 bcdyr.. '* Syria has signed an agreement with Egypt to purchase gas for its new 750 M W Deir Ali CCGT plant. However, given the emerging constraints in the supply of Egyptian gas due to the increase o f its own domestic gas demand and growing LNG export commitments, Egypt may not be in a position to supply additional gas to Syria. 46 supply security through the enhanced ability o f each country to access additional natural gas resources and electricity available in the region, better utilization o f the region's enormous gas reserves and development o f renewable resources. Potential for Development o Regional Interconnection with Syria f To enhance future integration o f Syria within the Mashreq region and eventually with EU energy markets, several electricity and gas regional projects could be considered for development including: Complete the final two stages o f the AGP, from Aleppo to Kilis and from Furglus to Aleppo. The first stage i s already being tendered. Complete the AGP link f i o m Kilis to the Turkish gas transmission network. Syria needs the connection to be able to import gas through Turkey; Development o f a gas pipeline from central Iraq through Syria to the AGP for domestic consumption and for export, the latter either via an LNG terminal or to Europe through Turkey. The opportunity o f this gas pipeline i s to allow Iraq develop and export gas from the Akass gas field. The field i s close to the border with Syria and about 50 km from the Syrian gas network. Syria has also spare processing capacity at the nearby Deir Ezzor and Omar plants which also could be used to process Akass gas. Reinforcement o f existing 400 kV transmission interconnection between Syria and Turkey including assessment o f requirements o f eventual synchronization o f the their two power grids; Development o f 400 kV transmission interconnection capacity with Iraq and explore the potential o f development o f regional generation plant(s) supplied by gas from Akass gas field to supply electricity to Iraq, Syria and Jordan as well. I The development o f these projects would however require close cooperation between countries in the region. 47 Chapter 3. GENERATION EXPANSION STRATEGY The energy balance projections in Chapter 2 show that Syria needs 3800 M W o f additional generating capacity by 2015 or about 7000 MW o f additional capacity by 2020. This i s needed to meet the increase in peak demand, replace older units gradually being retired, and restore a reserve capacity o f about 10% o f peak demand. At present no reserve capacity i s available, which leads to frequent power outages. Exhibit 3.1: Capacity Needed to Meet Demand Through 2020 (in MW) 2007 (actual) 2010 2015 2020 Peak demand2' 6,566 7518 8709 10448 Existing installed capacity with retirement 625030 7376 5771 4650 Additional capacity with 10% reserve 894 3808 6843 T o build this capacity, the Government o f Syria has a number o f alternatives to consider, including fuel mix, plant technology and risk profiles. It also needs to examine the economics o f each option. This chapter provides an assessment o f these alternatives and recommends a strategy to develop this new capacity. The investments needed and their financial implications are discussed in Chapters 4 and 5. I. Fuel Sourcing Options Syria has several fuel sourcing options for i t s power sector. Each fuel has a different risk profile, which needs to be carefully weighed in choosing the technologies to be used for development o f generating capacity. The fuels considered for new power generation in Syria are: (i) natural gas (domestic and imported); (ii) heavy f u e l o i l (HFO); (iii) diesel; and (iv) imported coal. The following subsections discuss the availability and price risks associated with each type fuel. A. Availability Risk Natural Gas At present, the annual gas consumption o f the power sector is about 4 bcm3I. Gas consumption i s expected to increase to 13.2 bcm by 2020, assuming that all new generating capacity will be gas $red, as shown in Exhibit 3.2. 2007 2010 2015 2020 Gas consumption (bcm) 4.2 5.8 9.1 13.2 29 Assuming implementation o f energy efficiency and load management programs 30 In 2007 out o f 7459 M W o f installed capacity on 5250 MW o f capacity was actually available 31 Billion cubic meter 48 Domestic Gas: The Syrian Gas Company (SGC) reportedly plans to provide the power sector about 7 bcm o f gas by 2012 and beyond3'. However, since the power sector's gas demand for the same year i s projected to be 7.5 bcm, gas imports o f at least 0.5 b c m would be required to supply the power sector b y 2012 and increasing thereafter. Further complicating the picture, gas storage capacity i s limited so far. This adds to the gas availability risk, since gas production has to be adjusted to power sector demand on a real time basis. Therefore, in the medium term the availability risk o f domestic gas to the power sector i s rated moderate, subject to successful development and operation o f new gas production facilities under development by SGC. Despite adequate proven gas reserves, however, in the longer t e r m the availability risk o f domestic gas to fully supply the gas needs o f the power sector could become high in case of: (i) shortcomings in translating supply-demand plans into investment programs and in funding them as needed; and (ii)insufficient focus o n development o f new gas fields. Imported Gas: The availability risk o imported gas i s moderate in the medium term as supply will be based on long term contracts with exporting countries and agreements have been signed with Egypt to supply about 1 bcm starting 2009. In addition, with the completion o f the Arab Gas Pipeline and i t s interconnection with Turkey and possibly in the long term with Iraq, several sources o f imported gas (e.g. Iran and Iraq) could become available to Syria. However, the expected increase in demand for gas in the entire region, combined with possible delays in development o f a regional gas network and market, could make the availability risk o f imported gas for Syria high in the long term. Therefore, depending o n the prospect o f regional supply o f piped gas, Syria may in the long t e r m consider mitigating availability risk o f gas through development o f a re-gasification facility for imported Liquefied Natural Gas (LNG), provided the logistics cost i s found acceptable and a reliable supply i s secured under a long t e r m supply contract. HFO and Diesel Exhibit 3.3 shows the forecasts for H F O and diesel consumption by the power generation sector through 2020. These projections also assume that all new generating capacity will be gas fired. Exhibit 3.3: HFO and diesel Consumption by Power Generation through 2020 (`000 tons) 2007 2010 2015 2020 Heavy fuel o i l 4,532 4,073 4,073 3,138 Diesel 3 .O 2.9 2.8 2.2 The availability risk for H F O and diesel i s low, as Syria has i t s own refining capacity, using domestic oil. In addition, these products are available on the spot market or under long term supply agreements. The infrastructure risk i s also low, as only limited investment in infrastructure i s needed, except for rather inexpensive storage and unloading facilities. 32 This would be feasible after the completion o f four new gas production facilities currently under development and are expected to come in operation during 2009-2011. Production level after 20 12 and beyond 7 bcndyear depends on further investment in new gas fields and production facilities. 49 Imported Coal The availability risk i s low, as coal i s readily available on the international market under spot or long term contracts. However, the physical infrastructure risk i s rated as l o w to moderate since irreversible investment in unloading facilities and transport capacity would be needed if it i s decided to use coal as a source o f f u e l for part o f the new generating capacity. B. Economic Price and Risk In addition to availability risks, the price risks associated with specific fuel options are key factors in determining the preferred mix o f the new generating capacity. Fuel price risks reflect the dependence o f the price o f f u e l delivered at the plant o n international prices and the volatility o f the price o f each fuel. The economic value o f the various fuels may differ from the price paid by the power sector, as fuel prices in Syria are set with significant Government involvement. The economic value o f each fuel should be considered when comparing the cost to the Syrian economy o f alternative power generation policies. That value depends on whether the fuel i s traded on the regional energy market or not as follows: 0 HFO and diesel are produced in Syria. They can be either exported or used in the domestic power sector. The economic value o f HFO and diesel i s therefore the export price, which represents the value the Syrian economy would forego by using these fuels in power plants rather than exporting them. 0 Gas is produced domestically, but it i s also imported. Since additional demand will have to be met by imported gas, the economic cost o f consuming an additional unit o f gas in a power plant i s the value o f the import o f that unit o f gas. The economic cost to the power sector i s therefore the gas import price plus the domestic transport cost. Coal i s for Syria only available on the international market. The economic cost i s therefore the import price plus handling and transport cost to the plant. The actual price o f each fuel to the power sector may, however, differ from the economic value because o f Government fuel taxation, subsidization, and/or price control policies. In the future, fuel prices paid by the power sector should converge towards economic costs to ensure that investment and trading decisions in the sector are economically sound and not distorted. Natural Gas The economic price o f the gas used by the Syrian power sector should be determined by the import price plus the transport cost to the plant, which is estimated at U S $ 2.0/mmbtu, for a total cost o f U S $ 6.7/mmbtu (in 2009) to US$ 8.5/mmbtu (in 2015). Since gas import contracts are typically largely linked to international o i l prices, the price risk on gas i s similar to the price risk o n oil, though slightly lower. Therefore, the price risk for imported gas i s moderate to high depending on availability o f regional gas, while the price risk for domestic gas will remain moderate as gas will probably continue to be supplied and regulated b y state-owned SGC. 50 HFO and Diesel The economic value o f H F O and diesel i s the sum o f the export price and transport cost to the plant. The export price i s taken as equal to the spot market price o f diesel and H F O for the Mediterranean area. The transport cost from the refinery to the plant i s estimated as US$ 20 per t o d l 0 0 km. The economic value o f H F O for 2008 i s therefore U S $ 388/ton (average international price for 2008 plus US$ 20) 33, For diesel, the 2008 international reference price i s US$l,377/ton including transport Prices o f these two products are highly correlated to price o f o i l as well as to variations in the seasonal demand. Price volatility and therefore price risk i s high for both products, although more for diesel than HFO. Imported Coal International coal prices are generally quoted FOB35. A freight cost o f U S $ lO/ton should be added. The cost o f logistics and delivery to the plant i s estimated as U S $ 15 per ton, including the infrastructure cost. In 2008, the economic cost o f coal at the plant was U S $ 79 plus US$ 10 for freight plus US$ 15 for local logistics, for a total o f U S $ 104/ton. Coal price volatility has increased in recent years, although it remains less volatile than that o f petroleum products. Therefore, the price risk for coal i s moderate. C. Summary - Fuel Risk Matrix Altogether, the fuel risk for the power sector i s significant in the short term, but could improve in the longer term with the development o f domestic gas sources, the construction o f a regional gas pipeline system, and the development o f multiple-fuel power plants. The risk matrix o f each o f the fuel options i s summarized in Exhibit 3.4. Exhibit 3.4: Fuel Risk Matrix Fuel Availability Infrastructure Price Risk Overall risk risk Risk Domestic gas Moderaternigh Moderate/High Moderate Moderate/High Imported gas Moderate Moderate Moderate Moderate Coal Low Low Moderate Low HFO/diesel -Low Low High Moderate 11. Generation Technology Options The generation technology options available to Syria for meeting i t s future power demand differ regarding their suitability for meeting peak or base load demand, their flexibility in terms o f fuel- switching capacity, their environmental performance, and their cost. 33 Average price for the f i r s t six months o f 2008. Based on Bloomberg price quotes. 34 Average price for the first six months o f 2008. Based on Bloomberg fuel price quotes 35 Source: Bloomberg fuel price quotes 51 Peak Load Generation Peak generation technology includes hydro, diesel engines (low or medium speed), and open cycle gas turbines. New hydro i s not considered to be a feasible option in Syria, because o f the limited number o f potential new sites. Medium-speed diesel engines could be considered as an option for peaking generation because o f their relatively l o w investment cost and fuel flexibility, since they can run o n gas, diesel o i l or fuel o i l for extended periods o f time without significant technical penalty. In addition, their construction cost i s short. The typical investment cost for diesel engines i s US$ 700-900/kW installed at a typical size o f 30-40 MW. Gas turbines provide the flexibility needed to meet peak demand and intermediate demand following the daily and weekly load curves. They also have a l o w upfront investment cost o f US$500-800/kW, depending upon the size o f the unit. O n the other hand, gas turbines can run only on gas or on diesel as a costly alternative fuel and have a l o w efficiency o f about 33% to 35%. Base Load Generation T o meet base load demand, Syria has the choice between combined-cycle gas turbines (CCGTs), low-speed diesel engines, and steam turbines. CCGTs have a higher fuel efficiency o f about 48% to 50% and a lower capital investment cost o f about US$ 1000/kW installed, but they have a narrower fuel flexibility range. CCGTs can burn gas or diesel at a much higher fuel cost. They can also burn H F O but only for short periods o f time under exceptional circumstances and leading to a penalty on efficiency, maintenance cost and plant availability. CCGT typically operate in a load range o f 85-60%. Steam plants, o n the other hand, are the most versatile in terms o f f u e l use, although with an efficiency slightly lower than CCGTs. They can burn gas at a f u e l cost o f U S Cents 5.9/kWh, H F O at a fuel cost o f U S 6Cents 5.2/kWh, coal at a f u e l cost o f U S Cents 2.0/kWh, and diesel at a fuel cost o f U S Cents 15.0/kWh. The capital cost for steam plants ranges from US$ 1,25O/kW installed for HFO-fired plants to US$ 1700/kW installed for coal-fired plants36. Low-speed diesel engines are flexible and can operate in a load range o f 85% to 40%; they are f u e l flexible and can burn gas, diesel o i l or HFO. Their construction cost i s US$ 600-800/KW installed for units up to 80-100 M W o f capacity, with a short construction time. 111. Generation M i x Options Ultimately, the choice o f the best combination o f technologies and fuels for meeting peaking and base load demand in Syria should be based on their comparative costs and risks. A generation costing model has been used to determine the preferred new generation m i x to meet the growing demand in Syria. The model includes detailed assumptions for fuel price projections, generation capital costs, and financing charges. 36 Capital costs for typical units in the 300-500 MW range. 52 Fuel prices The price scenario used in this note to determine a preferred generation mix assumes future international prices that are based on current trends in o i l prices and the impact o f the world economic slow-down. Under this scenario, shown in Exhibit 3.5, o i l prices retreat from their 2007 peak level in the second half o f 2008 and are assumed to stabilize at US$ 80harrel (in current U S $) by 2020. Exhibit 3.5: Fuel Price Scenarios Through 2020 (current US$) Year Oil HFO Diesel Gas Coal (imports) US$/bbl US$/tonne USWonne US$/tcmj7 US$/tonne 2010 53 220 900 240 55 2015 80 360 1400 340 75 I2020 I 82 410 1600 3 90 80 Generation Investment Costs Investment or capital expenditures (capex) for various types o f generating technology used in the financial model are shown in Exhibit 3.6. The construction costs increased significantly for all technologies in the past three years, but prices seemed to be stabilizing as o f late 2008. The investment costs used in the calculations below include installation cost and ancillary f a c i l i t i e ~ . ~ ' Gross Output CAPEX (MW) US$/Kw Medium Gas Turbine 150 M W 150 700 Source: World BanldESMP 37 The conversion factor o f thousand cubic meters (tcm) o f gas to m i l l i o n British thermal units (mmbtu) i s 38.33 mmbtu per tcm. A price o f $260/tcm i s therefore equivalent t o $6.78/mmbtu 38 Source: W o r l d Bank - ESMAP "Study o Equipment Prices in the Power Sector", Technical Paper, 2008. f Construction costs are projected t o decrease in 2010 compared to the 2008 peak level, as the international demand for new plants weakens due t o the international economic crisis. As the world economy recovers, it i s likely that the demand for new plants will accelerate again and price will increase back t o 2007 level. 53 Financing Costs The full plant cost, based on international construction costs and fuel prices as discussed above, also depends o n the cost o f capital. The evaluation o f generating plant options below compares only public sector financed plants, Le., using softer financing provided by the Government. The financing terms assumed for the public sector option are given in Exhibit 3.7. Public Sector Financing Debt to Equity ratio 100% debt Return on equity N/A Interest on debt LlBOR +50 bps Guarantee fee N/A Profit tax 0Yo Optionsfor Meeting Peak Demand The comparative cost o f the various options available to the Government suggests that for units running at a load factor o f 35% or less (i.e., peaking plant), the preferred option i s gas or HFO fired diesel engines or, at similar levelized cost, gas turbines as shown in Exhibit 3.8. Exhibit 3.8: Levelized Generation Cost - Peak Load Plant (US CentskWh) Fuel Typical Public Financing Peaking. Generation Size Load Factor sol4rrce: World Bank calculations If gas i s not adequately available then HFO-fired diesel engines i s the best option for peaking plant. Considering the large cost difference between gas-fired and diesel/HFO-fired turbine units, the conclusion i s that gas should be allocated o n a priority basis to new peaking units, as alternative fuel solutions exist for base load plant as discussed below. Optionsfor Meeting Base Load Levelized generation costs for different types o f base load plant are summarized in Exhibit 3-9. 54 Exhibit 3.9: Levelized Generation Cost - Base Load Plant (US Cents/kWh) Public Financin Base Generation Low Speed Diesel Gas 80 9.1 8.9 8.7 Low Speed Diesel HFO 80 8.5 8.3 8.1 Low Speed Diesel Diesel 80 24.8 24.5 24.3 The exhibit shows that the two least cost options for meeting base load are gas-fired CCGTs and coal fired steam units followed by gas or H F O steam or l o w speed diesel units. Gas-fired CCGTs have a significant environmental advantage compared to coal-fired units, but coal-fired steam units would help diversify the f u e l consumption o f Syria and enhance i t s security o f supply. Low-speed diesel engines are an interesting alternative to gas fired CCGTs, although slightly more expensive, because o f i t s fuel flexibility with little cost penalty. Therefore, if gas is available CCGTs look like a good option, but if there i s uncertainty regarding the availability o f gas, then CCGTs would have to run on diesel, at a high cost and then steam plants or l o w speed diesel engines become attractive. Therefore, it i s recommended that new generating capacity developed in the medium t e r m should have a combination o f CCGT operating o n gas and thermal steam plants with dual fuel capability to run on gas, if available, or HFO and l o w speed diesel engines operating on gas or HFO. For longer term new generating capacity and depending on the availability o f domestic and imported gas, Syria may consider the option o f developing coal-fired steam power plants. These plants have more f u e l flexibility and can switch with limited conversion cost from coal to gas or HFO. While coal has certain environmental disadvantages compared to gas, these can be effectively minimized by using modern technologies and high-grade coal. Modern coal-fired plants using supercritical technologies have an efficiency o f about 45%, thus reducing both fuel costs as well as emission o f the greenhouse gas CO2 per MWh produced, Annex 3.1 describes possible configurations and uses for such a coal-fired power plant that could increase i t s total efficiency to an even higher level. IV. Generation Expansion Plan A preliminary concept generation expansion plan3' has been developed to outline options for meeting the demand while maintaining adequate reserve margin. The plan calls for the development o f up to about 1640 MW o f new peaking generation capacity, about 5300 M W o f 39This generation expansion plan is preliminary and developed t o provide indicative information o n the magnitude and types o f generation capacity that can be considered for development in Syria. However, resource planning and least cost methodologies must be employed by PEEGT t o develop a Master Expansion Plan for the electricity sector. 55 base load generation capacity and 120 M W o f wind power plants to maintain up to 10% of reserve margin by 2020 as summarized in Exhibit 3.10. Exhibit 3.10: Concept Generation ExpansionPlan (in MW) Source: World Bank estimates The additional peaking capacity i s recommended to comprise a combination o f medium speed diesel and gas turbines while the new base load capacity w i l l comprise mainly combination o f CCGTs operating on gas and thermal steam plants with at least dual fuel capability. Given the present shortage o f supply in Syria, some low speed diesel engines could also considered for development as a base load taking advantage o f their fast track development. The total cost for the development o f the new generation capacity i s estimated at US$ 7.0 billion. In addition, a total o f US$3.5 billion i s assumed to be needed to rehabilitate and expand the transmission and distribution networks4'. V. Renewable Energy (RE) Syria has so far paid only limited attention to the development o f i t s renewable energy resources. This was largely due to the perceived abundance o f fossil fuels for power generation. However, energy demand (electricity and other final energy demand) has been ra idly catching up with the domestic supply o f energy and the "external energy dependency ratio"" has decreased from 18 1 in 1995 to 34 in 2005. On current assumptions, domestic demand and supply are expected to reach equilibrium around 2011 and the dependency ratio i s forecast to be -48 by 2020. This means that almost 50% o f the energy necessary to meet demand would need to be imported by that time (Exhibit 3.1 1). - Exhibit 3.11: Syria Energy Dependency, 1995-2020 1995 2000 2005 2010 2015 2020 Domestic Supply (MTOE) 34.7 33.6 28.3 26.7 24.9 23.7 Domestic Demand (MTOE) 12.3 15.8 21.1 26.5 34.6 45.2 Energy Dependency Ratio (YO) +181 +113 +34 +8 -28 -48 40 Investments in transmission as distributions are assumed to about 30-35% o f the total electricity sector investment. 4 ' Expressed as the number o f times supply exceeds demand. A positive number indicates that energy supply exceeds demand, a negative number indicates that part o f the energy needs to be imported. 56 While Syria has in principle enough natural gas reserves to last at least another 20-30 years, natural gas production and availability constraints have limited the full potential o f using domestic gas in the power sector. Therefore, the increasing dependence o n external sources o f energy represents a security o f supply issue for Syria. Benefits o RE f There are several reasons why Syria ought to carefully investigate and develop i t s renewable energy potential: 0 by using domestic renewable energy sources Syria would diversify i t s fuel sources for power generation and enhance i t s security o f energy supply; 0 increased use o f renewable energy would reduce Syria's greenhouse gas emissions and enable it to profit from Clean Development Mechanism renewable energy generates local employment opportunities, both in manufacturing (e.g., solar heaters and solar cells) as well as in agriculture (biomass collection); and the use o f renewable energy would extend the life o f Syria's fossil fuel reserves. Status and Potentials Current usage o f renewable energy resources in Syria i s limited to hydropower and biomass, and both represent only a small share o f total energy demand (i.e., electricity and other final energy demand). Most other RE applications such as solar water heating and wind power are s t i l l in their pilot phases. In 2006, hydropower generation accounted for 0.88 MTOE43 or 4.1% o f energy demand, while biomass accounted for 0.6 M T O E (2.8% o f demand) for a combined total o f 6.9%. Regrettably, few studies have been made about Syria's RE potential and having such studies done should be one o f the Government's main priorities in this area. Only with solid data being available can a realistic national renewable energy strategy be formulated. The sources o f renewable energy with the greatest potential are likely to be: Solar: The solar radiation level in Syria i s about 2,820-3,270 hourdyear and the intensity i s 5-6 kWWm2. This level i s good for solar heating, photovoltaic applications and probably for power generation based on the evolving concentrated solar power technologies. In comparison, Egypt (one o f the regional leaders in solar energy), has an average o f 3,600 hourdyear and 5-7 kWWm2. Wind: A good wind atlas needs to be developed for Syria. At this stage, the regions o f Homs and Darra are believed to be promising sites, but there may be many others; Hydropower: While the large hydropower potential o f Syria i s exhausted, there may be small or mini hydropower potential in the country that has not yet been assessed; and Biomass: Often considered a somewhat backward rural fuel, biomass i s being used increasingly (in North Western Europe in particular) either as the main fuel to fire power and/or heating plants, or as a supplemental fuel in a gas or coal-fired generating plant (co- 42 Syria ratified the Kyoto Protocol in 2005. 43 Million Tons o f Oil Equivalent 57 firing). Syria's agricultural sector should be able to generate a reliable supply o f biomass for many decades, especially from large crops such as cotton, wheat and barley; RE projects under consideration for implementation in Syria are shown in Annex 3.2. Most o f these projects have yet to be developed into implementable projects either through public or private sectors financing. Scale up targets shown in Annex 3.3 for some RE (wind power) appear unrealistic to achieve. Solar water heating appears to be the l o w hanging fruit and vigorous promotion o f this technology should be a top priority for the Government. However, as i s the case for energy efficiency, efforts in this regard will not go far unless the Government i s willing to undertake fundamental electricity tariff reform. Syria is also participating in the Mediterranean Solar Plan (MSP) and could benefit from technical assistance that may become available under the MSP for development o f renewable projects. Proposed RE Strategy Renewable energy lends i t s e l f well to private sector participation. T o encourage the development o f i t s renewable energy resources the Government should: Take a policy decision that renewable energy should be developed as a matter o f national priority; Fund through N E R C the studies and collect the data necessary to prepare a comprehensive renewable energy resource study assessing potential o f renewable resources including identifying concept projects for feasible renewable resources projects; Adopt a renewable energy Action Plan; Establish a stable and predictable regulatory framework for RE. Most important for private investors will be the tariff that specifies that renewable energy will be purchased by the grid (if grid-connected) against fixed prices for pre-determined periods o f time. That way the investor can be sure to earn a reasonable return on his investment (if equipment i s operated well and weather conditions are favorable) and commercial banks would be willing to provide financing; Tax credits and/or investment credits are also tools frequently used by E governments to encourage R ! investment by the private sector; If availability o f funding i s an issue creation o f a special funding mechanism should be considered; and Identify Carbon Financing opportunities under the Clean Development Mechanism (CDM) for developed RE projects. Annex 3.3 includes a summary note on the C D M Opportunities in the Syrian Power Sector. Renewable energy cannot displace the need for large conventional fossil fuel-fired power plants. However, the aggressive introduction o f RE technologies can substantially reduce the need for more fossil fuel-fired generating capacity. While some o f these technologies are s t i l l relatively expensive compared to conventional power generation, it should be borne in mind that costs are expected to come down with increased applications and that conventional power plants benefit from many direct and indirect subsidies that hide their true costs to society. These factors must be taken into consideration and calculated when comparing the different options. 58 Chapter 4. FINANCIAL PERFORMANCE Chapter 3 concludes that Syria needs to invest about US$ 10.5 billion during 2008-2020 to rehabilitate and expand i t s power generation capacity and transmission and distribution networks as summarized in Exhibit 4.1 : Exhibit 4.1: Power Sector Investment Expenditures Through 2020 (US$ billions) 2008-10 2011-15 2016-20 Total Generation 1.o 2.8 3.2 7.0 Transmission and Distribution 0.5 1.4 1.6 3.5 Total 1.5 4.2 4.8 10.5 The Syrian power sector's ability to finance from i t s own resources the sector investment needs and to attract private sector financing through Independent Power Producers (IPPs) depends on the magnitude and stability o f i t s future cash flow. This requires: (i) coordinated gradual but the relatively rapid adjustment o electricity tarfls and power sector input fuel prices; and (ii) f the capacity o f the sector to improve billing, strengthen payment discipline and reduce network losses. I. Electricity tariffs Tariff level The average tariff level in Syria i s low by regional standards, with an average level o f approximately U S Cents 4.4/kWh. This i s comparable to the tariffs in oil and gas exporting countries such as Algeria, Abu Dhabi (UAE), and Qatar, but significantly lower than the tariffs in regional non-oil rich countries such as Jordan, Lebanon, Morocco as well as Dubai (UAE), the EU and the U S (Exhibit 4.2). 59 Exhibit 4.2: Electricity Tariffs in Syria Compared to Regional Tariffs I 12 I 10 8 6 4 L CI 0 Even after allowing for the l o w cost o f o i l and gas in Syria until 2009 and assuming efficient operation o f the system, this average tariff level i s not enough to cover the operating costs and investment needs o f power generation, transmission and distribution. I t is also below what i s needed to generate a cash flow sufficient to meet financial commitments under IPP's Power Purchase Agreements. The electricity tariff in Syria differentiates between the various consumer categories as shown in Exhibit 4.3. Exhibit 4.3: 2007 Electricity Tariffs by Consumer Category InUS Centskwh 7 L 1 I J I 8 7 6 5 4 3 2 1 Source: PEDEEE, Annual Report 2007 Exhibit 4.3 shows that the tariff i s lower for high voltage industrial consumers (US Cents 4.5 l/kWh) than for lower voltage industrial consumers (US Cents 5.60-7.51/kWh), reflecting the lower cost o f supplying electricity to the former. However, the tariff i s very l o w for residential 60 S l o w voltage consumers at an average o f U Cents 2.73/kWh44, even though they are more expensive to supply than large consumers. Tariff structure The Syrian electricity tariffs for medium and high voltage consumers (20 kV, 66 kV and 230 kV) are appropriately structured o n a time-of-day basis. This provides in principle the right incentive for those consumers to shift demand from peak to off-peak periods, which i s an essential * requirement for load management and energy efficiency. The time-of-day tariff does not apply to l o w voltage consumers (residential and commercial at 0.4 kV), although they represent 65% o f the demand and are responsible for most o f the peak demand. Therefore, it i s recommended that future tariff revisions extend time-of -day differentiation to l o w voltage consumers as permitted by their metering systems. The tariff structure for residential consumers comprising several blocks with a tariff ranging from U S Cents 0.52/kWh for the first 100 kWh per two-month period to U S Cents 8.33kWh for consumption above 2000 kWh per two-month period (Exhibit 4.4). Exhibit 4.4: Block Structure of Electricity T a r i f f for Residential Consumers (Per two months) In USCentsikWh per two months .- 14 5 8 14 12 10 8 6 4 2 0 The tariff for consumption up to 300 kWh per month (or 600 kWh per two month) i s much below the level o f the average tariff and could be considered to fall under the lifeline tariff for subsidizing consumption o f basic electricity needs, although it i s in line with the threshold for basic electricity needs i s usually about 300 kWh per month. However, the rates for consumptions within this block are extremely low, as shown in Exhibit 4.4, indicating high amount o f subsidy which may not be needed. In addition, such a "lifeline" block o f 300 kWh per month also benefits the medium and large residential consumers, who use far more than the basic electricity needs and who, at the same time, could pay higher tariffs. The affordability o f electricity o f low-income households and the burden that necessary future tariff increases and collection enforcement will impose on them i s an important issue to consider by the Government. In principle this i s best addressed through targeted support programs 44 Calculated on the basis o f a bi- monthly consumption o f 1000 kWh. 61 through cast transfer programs (social safety net) to eligible needy households. Shifting the burden to the utility by means o f lower tariffs undermines the financial viability o f the utility and discourages energy conservation. However, in many countries, including Syria, the administrative capacity to identify eligible recipients o f a subsidy on a means-tested basis and administer a subsidy program i s limited. The next best method is to continue with the electricity lifeline tariff until the capacity to administer a cash transfer program is in place. The tariff structure should nevertheless be revised to achieve a better targeting o f the lifeline tariff for l o w income residential customers including considering the exclusion from the social tariff o f the first 600 KWh o f consumers with bi-monthly consumption in excess o f 600 KWh and a reduction o f number blocks including the gap in the tariff between the average tariff and the lifeline block. An example o f a tariff block structure that could be considered i s a three block tariff which would allow a better targeting o f tariff subsidy to lower income consumers. Such a structure would allow the tariff subsidy to be provided at lower rates for the first block assumed necessary to meet basic needs (e.g. 300 kwhlmonth). The second block could be between 3 0 0 k W m o n t h and say 600 kwhlmonth and would be set closer to the level o f cost recovery o f the electricity supply to the residential consumers. The third block o f 600 k W m o n t h and above could be set at a higher level to encourage efficient consumption o f electricity by consumers. A final appropriate tariff structure should be determined by a more comprehensive assessment evaluating revenue requirements for full recovery o f the cost o f electricity supply, demand patterns by consumer category, and options for tariff design that will eliminate cross subsidies between and within different consumer categories while at the same time take into account affordability considerations. Annex 4.1 provides examples o f international experience with block tariffs. In revising the tariff structure, Syria may also consider incorporating a pass through mechanism to allow for regular adjustments o f the tariff t o account for changes in the prices o f fuel used b y the power generation plants. 1 1. Fuel Prices Until 2008, all fuels used in the power generation sector were domestically produced. Fuel prices to the power sector are also set by the Government. Prices offered by the domestic refineries and the gas company did not refer directly to international prices. As the domestic refineries export HFO and diesel, therefore, supplies to the domestic power industries could be priced o n the basis o f the opportunity cost o f export o f the same product. Gas i s not exported and i t s price was set without reference to import or export price. Actual (2006-09) fuel prices for the power sector are shown in Exhibit 4.5. HFO (US$/ton) Gas (US$/tcm) Diesel (US$/ton) Source: PEEGT 62 Domestic heavy fuel o i l (HFO) prices to the power industry are significantly below international price parity, even after the envisaged 2009 adjustment. The international price o f HFO was about US$ 400iton in 2008, expected to decrease to US$ 222/ton in 2009 but recover to around US$360/ton in current U S $ by 2015 and US$410/ton by 2020. Diesel i s priced to the power sector at U S $ 625/ton. The current level i s significantly below the 2008 export parity price o f about US$ 1,30O/ton, projected to decrease to about $790/ton in 2009 and to recover to about US$1,400/ton in current U S $ by 2015 and US$1600/ton by 2020. The domestic gasprice was about US$2l/tcm but in 2007 this was adjusted to US$ l04/tcm in 2008 and to US$ 387/tcm for 2009. The 2008 gas price was below the European gas price, but the 2009 price i s well above the European gas price and the regional gas import price o f about US$ 260/tcm (including local pipeline transport cost). The 2009 gas price to the power sector i s too high and above international parity prices. It i s recommended that prices paid by the power sector for gas should converge toward import parity price, and not higher, to ensure that investment and trading decisions in the sector are economically sound and not distorted. The Government should clarify i t s fuel pricing policy for the power sector and, in particular, decide whether fuel prices would be based on the domestic marginal production cost (all fuels are mainly produced domestically) or at the export parity price for f u e l o i l and diesel, and import party price for gas. Considering the inability o f the gas sector to meet the needs o f the power sector, despite sufficient reserves, the gas sector should retain a larger share o f the rent to finance accelerated development o f i t s production capacity without calling on budgetary support. The gas price to the power sector, however, should not exceed the gas import parity price to avoid distorting generation costs, thereby sending incorrect signals regarding future plant technology choices and power dispatch. 111. Financial Performance 45 Current Situation Based o n the information received, the sector's financial performance was sustainable between 2000 and 2004, with a cash f l o w on operations ranging from US$ 100 million to U S $ 240 million per year under fairly stable fuel prices and tariffs (Exhibit 4.6). The positive cash f l o w on operations was used for the sector's own contribution to capital investment, financing consumers' unpaid bills, and increases in short term receivables. Exhibit 4.6: Past financial performance, 2000-2008 (US$million) Source: World Bank calculations 45 The power sector's consolidated financial performance (PEEGT and PEDEEE) has been evaluated on a cash flow basis. The financial model for the sector i s an approximation used for general assessment o f the sector financial performance. 63 During 2004-2006, the financial situation o f the sector deteriorated as fuel prices started escalating faster than tariffs. Cash f l o w on Operations decreased during the same period from US$ 240 million to a mere US$ 29 million. I t deteriorated further in 2007 as fuel prices were increased without equivalent increase in electricity tariffs to reach an estimated deficit o f US$ 152 m i l l i o n by 2008. As o f 2007, the sector's revenues were barely sufficient to cover cash operating expenses and are projected to be insufficient in 2008. From 2007 onward, the sector could not contribute to capital investment and i t s borrowing capacity has become non-existent. Action i s therefore urgently needed to restore the sector's financial viability and capacity to support the capital investment needed to meet future demand. Future Financial Performance without Real Tariff Increases First scenario: no real increases: This base case scenario assumes that the announced 2009 domestic fuel prices for the power sector are used for 2009 cash f l o w calculation but projected international fuel prices (Exhibit 3.5) will be used thereafter. At the same time, power tariffs would be revised based on projected inflation only. Exhibit 4.7 shows the sector's financial performance without any real tariff increases. Exhibit 4.7: Projected cash flow without real tariff increase, 2008-2020 (US$ million) I I 2008 I 2010 I 2012 I 2014 I 2016 I 2018 1 2020 I I Total Revenues I 1,344 ] 1,738 I 2.097 I 2,512 I 3,048 I 3,710 I 4,562 I Operating Expenses 1,497 2,742 3,598 4,766 5,517 6,242 7,187 Operating Cash F l o w -152 -1,004 -1,501 -2,254 -2,469 -2,531 -2,624 Source: World Bank calculations Under the base case scenario (no tariff increase in real terms and fuel prices based on the 2009 level adjusted for future o i l prices), the sector's operating cash f l o w will sharply deteriorate in 2010 and become minus US$ 1.01 billion. This i s due to the envisaged increase in the gas price and the increase in gas demand. The impact o f the fuel price increase would be to increase the fuel bill to the power sector from about US$ 1.1 billion in 2008 to US$ 3.1 billion in 20 10. In the longer term, the sector cash f l o w from operations will deteriorate to minus U S $ 2.5 billion by 2016 and to US$ 2.6 billion by 2020 because fuel prices remain relatively high while tariff adjustments are limited. The financial support needed from the Government would be a staggering US$ 33.6 billion for the 2008-2020 period to support the cash f l o w requirement o f the sector and finance i t s expected needs for capital investments. Consequently, it i s clear that in the absence o f changes in the power tariff and assuming international fuel prices, the sector will not be credit worthy in the future. A s a result i t would not be in a position to meet sector investment requirements, or to be a commercially acceptable counterpart for private sector financing in the absence o f Government guarantee. 64 Suggested scenarios to restore sector credit worthiness Scenarios for restoring power sector credit worthiness needs to be developed considering in parallel the cash f l o w requirements o f the gas sector, which depends largely on the prices it can charge to the power sector. The present analysis did not have access to an evaluation o f the cash f l o w needs o f the gas sector. It was assumed that import parity price for gas would generate a sufficient cash f l o w in the gas sector to sustain i t s investment needs to meet the rapidly increasing gas demand. In the second and third scenarios it i s also assumed that the sector will self-finance 30% o f investment and borrow 70% at terms comparable to those charged by the International Financial Institution (IFIs) Second scenario: accelerated tariff increases (900/, in 2010 and 20% in 2011). If fuel prices to the power sector are adjusted to international parity price, the electricity tariff would need to be increased by about 90% o n average in 20 10 and another 20% in 20 11 for the sector to meet after 2012 all i t s operating costs, capital investment needs and debt service obligations. Afterward, the tariff would need to be maintained at the 201 1 level in real terms. Under this scenario, the total financial support needed from the Government would be limited to US$ 1.3 billion over the period after which the sector's cash f l o w equilibrium level would be reached (by 2012). An immediate 90% increase in the electricity tariff may, however, not be feasible or acceptable to the government due to i t s social and political impact, especially if adequate social protection schemes are not in place to protect l o w income electricity consumers. Therefore an alternative gradual increase o f the tariff may be considered. Third scenario: 20% p e r annum increases through 2014. In the event the socially acceptable annual real tariff increase i s capped at 20% per year from 2010 to 2013 and 10% in 2014, the financial equilibrium level i s reached in 2015 instead o f 2012 as in the previous scenario. The Government would have to bear some o f the investment cost o f the sector in the amount o f US$ 4.4 billion over the period after which the sector's cash f l o w equilibrium level would be reached (by 20 15). 65 Chapter 5. ROLE OF THE PRIVATE S E C T O R Chapter 3 concluded that Syria needs to invest almost US$10.5 billion to rehabilitate and expand i t s power generation capacity and transmission and distribution networks. Chapter 4 demonstrated that an average tariff increase o f about 110% would make the electricity sector financially sustainable and allow i t to self-finance 30% o f capital investments during 2008-2020. Even with such tariff increases government subsidies for operations and investments would be needed in the amount o f U S $ 1.3 billion in case tariff is increased by 90% and 20% in 2010 and 201 1 as the cash injection would s t i l l be needed prior to 2012. While a gradual tariff increases (20%per year from 2010 to 2013 and 10% in 2014) will require higher government subsidy in the amount o f 4.4 billion until cash f l o w equilibrium level i s reached in 201 5. These financing needs o f the electricity sector and the amount o f needed subsidy to finance sector investments are enormous and would be an intolerable drain on the government budget if they were to be met by public financing. Therefore, in addition to making the sector able to self- finance a portion o f i t s investments, the Government i s keen to attract private sector investment in Syria's power sector. This chapter discusses some major aspects associated with such private sector involvement. I. Private sector Participation in the Power Sector to Date Private sector participation in the power sector is at an early conceptual stage in Syria. It has been envisaged as part o f an overall strategy to attract private sector participation in the Syrian economy and as a stand-alone objective, regulated by the general legislation on foreign investment. The Government, however, has yet to develop a vision and necessary regulatory framework for private sector participation in the electricity sector which could, for instance, specify requirements regarding the private sector's role and investment targets. At the moment, Government expectations with regard to private investment in the power sector are s t i l l very generic and limited to generation only. They are: Mobilize funding required for capacity expansion without increasing pressure on the Government budget; Ensure more efficient operation o f generating units by attracting highly qualified staff; Accelerate project implementation, with a lower risk o f delays and cost overruns. 1 1. M a j o r Considerations for Private Sector Participation Private sector participation in the power sector has several major advantages. Chief among these are: (i) private financing i s under normal circumstances readily available and eases the immediate pressure o n the Government budget; (ii) private sector sponsored projects are in general implemented faster than public sector projects and thus less prone to construction delays and cost overruns; (iii) private investors generally operate plant and equipment more efficiently and commercially than state-owned enterprises; and (iv) they introduce modern management techniques into the sector that eventually may spread to the state-owned part o f the sector as well. 66 On the other hand, the mobilization o f private equity or commercial loans will require very firm commitments from the Government to improve the operational and financial performance o f the electricity sector. This i s necessary in order to generate the cash f l o w required to repay the commercial debts and the return on equity expected by private investors. However, in the absence o f creditworthiness electricity sector, private lenders, and investors will require some form o f Government guarantee for the payments expected from the state-owned power purchaser. Those guarantees will appear as contingent liabilities o n the balance sheet o f the G~vernment~~. Privately sponsored generation projects will also require more preparation time than what i s generally needed for public sector projects because of: (i) need to design and implement a the transparent and competitive bidding process for the selection o f the private sponsor; and (ii) negotiation o f such projects entails the review and finalization o f complex legal agreements and EPC (turnkey) contracts47required to provide comfort to the investors. There i s a learning curve here, in that as Governments gains experience with such projects and private investors gain confidence in the regulatory system and political environment in a country, these lead times tend to become shorter. Nevertheless, the time required for the preparation o f a privately sponsored power project i s on average at least 24 months prior to the start o f construction though the risk o f subsequent delays and cost overruns i s lower than for a state-owned entity. 1. 11 Potential Areas for Private Sector Involvement Private participation in the power sector may take several forms, which have been tested in various countries, and meet different goals o f the Government. Options for private sector participation in Syria could be in the generation sector and in the longer term in the distribution sector. Because o f i t s critical role, the transmission sector remains in most countries in state hands. IPPs for the Construction o New Generation Capacity f Independent Power Producers (IPPs) investing in the generation sector can have several structures (see Annex 5.1). If tendering i s transparent the IPP approach has the advantage that i t stimulates competition between investors for entry in the market. The cornerstone o f an IPP i s a long term Power Purchase Agreement (PPA). PPAs are generally characterized by "take or pay" clauses, i.e., an obligation to pay for a certain amount o f electricity regardless o f consumption. The agreement i s generally between the IPP developer and the national power company (typically the transmission company, which would be PEEGT under the present Syrian power sector structure). Since the credit standing o f PEEGT i s weak, a Government guarantee backing i t s payment obligations will be required. Because the fuel supply i s critical to an IPP, two alternatives are usually considered: 46 The financi'al markets will factor these contingent liabilities into their pricing o f sovereign debt and also consider that they reduce the Government's ability to borrow correspondingly. 47 Under Engineering, Procurement and Construction (EPC) contract the contractor agrees to deliver the keys o f the plant once commissioned to the owner for an agreed amount. This way o f contracting has gained worldwide acceptance among private strategic investors in the power sector 67 the IPP i s responsible for procuring all the fuel it needs. This structure i s suitable when fuel can be procured on the international market, or when the domestic fuel market i s liberalized; or the f u e l i s supplied by the electricity off-taker or by the Government. This i s known as the "tolling plant" model under which the IPP receives a "toll", i.e., a fixed markup per kWh, for transforming fuel into electricity under an Energy Conversion Agreement. In the case o f Syria, if an IPP i s gas-fired the tolling approach should be considered since the gas supply i s under Government control. However, the Government would s t i l l need to pay the contractual capacity fee to the investor if the fuel supply were to be interrupted and the plant cannot produce power. If an IPP were to use imported coal, it would be appropriate to let the IPP carry the fuel risk. Regardless o f the fuel supply arrangement, however, the investors should be held responsible for the plant heat rate, Le., the efficiency o f fuel usage. Exhibit 5.1: Advantages and Disadvantages o f the IPP Model ~~ ~ Advantages Disadvantages Mobilization o f financing L o n g term Power Purchase Agreements introduce an element o f rigidity in the market. This can be mitigated by ensuring that IPPs do not represent more than 30% o f the power generated in a country. Requires minimal sector restructuring IPPs may complicate future sector restructuring, as IPP agreements generally have clauses limiting the rights o f Governments to make any structural change in the sector which may affect the credit worthiness o f the power purchaser or i t s guarantor without the assent o f the IPP owner or suitable compensation. IPPs can be regulated entirely through Power generated under IPP arrangements can contractual agreements between the parties be expensive because commercial financing with an option for international arbitration in under limited recourse can be expensive, and case o f disputes. the expected return o n equity may be in excess o f 20% for countries perceived by the market as high risk. Given the intention to create a more competitive wholesale power market, care should be taken in designing the Syrian P P program in a manner that does not interfere with further power market reform. The problem, essentially, i s that IPPs with long-term PPAs can distort power markets, and make effective competition more difficult to achieve48. This issue i s discussed in more detail in Chapter 6. 48 A good discussion o f this problem and the solutions attempted in other countries can be found in the World Bank Policy Research Working Paper No. 2703, Integrating Independent Power Producers into Emerging Wholesale Power Markets, available at http:llrm.worldbank.org/PapersLinkslOpen.aspx?id==575. Much o f this paper deals with the integration o f existing IPPs with long-term PPAs into newly established competitive markets. However, the 68 To attract private sector participation in building new generating capacity the Government o f Syria w i l l need to do the following: Develop and implement a strategy that lays out the policy and regulatory frameworks and recommends measures necessary to ensure an environment conducive to private sector involvement, competitiveness and transparency. Establish a government PPP4' Unit in charge o f management o f private sector participation developing in infrastructure (economic and social) and in implementation o f necessary regulations. Designate a working team in the Ministry o f Electricity to coordinate with the PPP Unit the development o f new IPPs. The working team w i l l also: o Prepare feasibility studies for a pipeline o f generating projects that could be offered to private investors; o Assess with the Ministry o f Finance the need for, and level of, guarantee packages or other credit enhancement instruments that may need to be provided by the Government to attract private investment; and o Prepare IPP bidding packages for the selected generating plants and carry out a transparent bidding process. Given the sophistication and experience o f private investors i t i s strongly recommended that the Government engage highly qualified transaction and legal advisors with broad international experience to develop an IPP strategy and conduct a pilot IPP. f Privatization o Existing Entities in the Sector This approach has been followed in a number o f East European countries, including Lithuania and the Czech Republic. Under this form o f private sector involvement, the Government can bring in private investors either as minority or majority shareholders in the companies. The number o f shares sold to private investors should be set either below the level o f a blocking minority (partial privatization, Exhibit 5.2) or above (full privatization). paper also touches on designing new PPAs that contemplate the development o f such markets. Such PPAs could contain provisions designed to encourage IPPs to participate in the market for the purpose o f supplying ancillary services and relieving congestion; provisions designed to mandate the gradual entry o f the IPP into the market; and provisions designed to achieve greater balance or "symmetry" in the buyout and termination clauses. 49 PPP: Public Private Participation 69 Exhibit 5.2: Partial privatization of existing entities Disadvantages The management o f the partially privatized entity has to be commercial and the Government loses some o f i t s controlling power. The partial privatization will require limited The presence o f a minority shareholder limits preliminary sector restructuring i s needed (only the capacity o f the Government to further the corporatization o f the power company as a restructure the company, as the rights o f the j o i n t stock company i s required minority shareholders have to be preserved The presence o f a minority or majority private investor increases transparency, reporting and management discipline because management becomes accountable to Drivate shareholders. In Syria, full or partial privatization o f existing sector entities (generation and distribution) i s currently not a priority. This option o f private sector participation may be considered in the longer term for the distribution entities after commercialization and restructuring o f the sector are completed (see Chapter 6). Privatization o f existing generation plants is also not a priority as both the Government and private investors are more interested in the development o f new generation capacity. IV. Key Risks for Private Investors The Government and the power sector management should be aware that, as seen through the eyes o f a (foreign) private investor, entry into the power market o f any given country i s a risky proposition. The risks for private investors in the Syrian power sector have to be identified and strategies to manage them have to be developed. The key risks are: Political risk This risk i s significant with the present political situation in the sub-region, generating considerable uncertainty for potential private investors in capital intensive infrastructure. Potential investors and lenders will take this risk into account in the pricing o f their financing and expected return on equity rather than considering it as an insurmountable obstacle, provided all other risks are satisfactorily dealt with. Private investors often indicate that political risk management instruments, which can be provided by bilateral or multilateral finance institutions5', would be necessary. Credit risk This i s a major risk in the medium term. The financial situation o f the power sector is not fully transparent, because o f it structure and lack o f commercial accounting system and consolidated accounts. I t s creditworthiness depends currently entirely on Government decisions regarding 50 For example, the World Bank Group offers partial risk guarantees (PRGs) to lenders through the World Bank; guarantees to lenders and investors through the Multilateral Investment Guarantee Agency (MIGA); and guarantees directly to investors by the International Finance Corporation (IFC). 70 fuel subsidies and future tariff adjustments. Private investors would not be willing to provide financing, as debt or equity, to a sector which may become unable to meet i t s payment obligations unless that risk i s properly mitigated. Acknowledging that fact, the Government could: (i) make a commitment regarding h o w the power tariffs will be set and revised in the future and set targets for the sector's financial performance; and (ii)guarantee directly the power sector's financial obligations to investors and lenders -mainly in foreign currency- until there i s a good track record over several years with tariff adjustments and improved financial performance o f the sector. Foreign exchange risk This is a major risk in the medium term. Potential lenders will be reluctant to lend in Syrian Pounds because o f the depreciation risk but, provided other risks are addressed, they will provide long t e r m financing in foreign currency (usually US$ or e). For the power sector, the scarcity o f financing in local currency i s a challenge, as sector revenues are denominated in local currency. The resulting mismatch between the revenue currency and the currency used to finance investments by the private sector i s a major issue for raising private financing for the power sector. Possible mitigating measures can be based on the "stripping" or unbundling o f the foreign-exchange risk by distinguishing between risks which are controlled by the sovereign (e.g., exchange rate, convertibility, transferability), and those which are beyond the control o f the sovereign (e.g., international fuel prices). Exchange rate risk can be mitigated to some extent through currency swap operations and hedging. In addition, special lending instruments with a reverse indexation on selected fuel prices could be used. Fuel supply risk The Syrian gas market i s entirely controlled by the Government, both for its own gas production and imported Egyptian gas. Because o f that, a private investor in new generating capacity will probably insist on a tolling agreement. Tolling (or energy conversion) agreements are used where fuel supply i s under a monopoly and/or the risk o f fuel supply i s considered to be substantial. Under such an arrangement the investor i s only responsible for converting the fuel provided to him into electricity. Any interruption o f the fuel supply i s not h i s responsibility and may cause him to claim liquidated damages from the monopoly supplier or Government. Worldwide, the large majority o f IPPs are responsible for procuring their own fuel, but in the case o f Syria a tolling agreement may be more appropriate. Domestic Investors While foreign investors bring international experience and offshore financing, there are significant benefits that domestic investors could bring. For example: Exposing electricity consumers to foreign exchange rate fluctuation risks should, if possible, be avoided or mitigated. This argues strongly for financing in local currency, which i s possible only in larger economies with well-developed banking sectors or capital markets; In developing a project, investors need access to long-term funding at a reasonable interest rate. To avoid exposing consumers to interest rate fluctuations, investors are also 71 typically required to fix interest rates. Here, domestic investors may have an advantage over foreign investors through their ability to accept local treasury management instruments such as short-term hedging, ability to absorb the country risk, and their relationships with local financiers; and Domestic investors can invest in local currency and may accept local currency tariffs. This allows for a larger component o f the IPP tariff to be denominated in local currency (especially the non-fuel costs). The mismatch o f foreign-currency denominated project costs and local currency sources o f funds can be more easily managed by domestic investors. 72 Chapter 6. S E C T O R REFORM The sector issues identified in the previous chapters call for a number o f sector reforms and associated institutional changes. The main issues to be addressed are: introducing commercial management o f the power sector to reduce large technical and non-technical losses. This would improve the sector's cash f l o w and reduce the need for new capacity as well as the need for State budget support; improving efficiency in energy utilization on the demand side to further reduce the need for future capacity investment; enhancing security o f energy supply through diversification o f the sources o f energy, including renewable energy, thereby also extending the life o f Syria's hydrocarbon reserves; and coordinating and optimizing the development and operation o f the electricity and hydrocarbon sectors to ensure consistency between gas production and the fuel sourcing strategy o f the power sector. These issues are discussed in the sections below. I. Electricity Sector Restructuring The high level o f technical and commercial losses, poor quality o f service, poor financial performance (partly due to the absence o f adequate tariff increases), and the absence o f accrual accounting and financial management systems are posing formidable challenges. To improve the efficiency and productivity o f the power sector and the quality o f service, i t s structure and the operational relationships between units should be revised. The objective o f this restructuring would be to ensure that sector management has both the autonomy and the incentives to address a range o f existing shortcomings and to facilitate private participation in the sector. Road Map: Given the above, a road map for sector reform should be developed to achieve optimal restructuring o f the electricity sector and i t s transition to market opening if and when conditions for real competition have been met. A road map proposed for consideration b y the Government o f Syria could consist o f three phases o f reform, as outlined below. Phase I:Short Term Sector Restructuring (2010-1 1) Sector restructuring during this first phase would lay the foundation for the reforms in Phases I1 and 111. Major measures during this phase, which i s expected to take about two years, would include: 0 Functional unbundling o f the generation and transmission functions into separate operational units under the Ministry o f Electricity (the distribution units are already unbundled). This includes allocating management, staff, assets and liabilities to each unit and introducing commercial accounting and management systems for them; 73 Development o f an action plan for the restructuring o f the electricity sector over the medium and long t e r m (Phases I1 and 111). Exhibit 6.1 shows the current sector organization and compares it with the organization o f the electricity sector after completing the functional unbundling o f the generation, transmission and distribution businesses. Exhibit 6.1: Functional Unbundlingof the Electricity Sector (2010-11) Ministry of Electricity I Ministry of Electricity PEEGT PEDEEE PEEG PEET PEDEEE I *Generation .Transmission I *Transmission *Distribution Generation *Wstnbution *Trade .Trade .supply *suPP'Y .System Operator .System Operator I 1 Phase 1 :Medium Term Sector Restructuring (2012-1 5) Incorporation: During this phase, which i s expected to take about three years, the three electricity entities (generation, transmission, and distribution) should be incorporated as state- owned companies operating o n a commercial basis. Such a commercial reorientation would: 0 ensure that management o f the incorporated entities would have the incentive to improve efficiency and productivity. As part o f this, management would be given authority and responsibility to improve operations and service quality. At the same time, management would have an incentive to increase cash f l o w for reinvestment in the system, control costs and set-up financial management systems based on commercial practices; ensure that the management o f the sector entities i s accountable for their performance to their respective Boards o f Directors; 0 facilitate better supervision and monitoring o f the sector performance, firstly by the Ministry o f Electricity as the policy maker and, secondly, by a regulatory body to be established for the sector; and 0 facilitate attracting private investment into the sector. Private sector involvement would be probably only focused o n building new generation capacity. To correctly implement corporatization a series o f actions are required. One o f the most important o f these i s the introduction o f performance contracts between the Government and the sector companies, supported by a carefully designed incentive system linked to the achievement o f performance targets. Such contracts will help to hold the companies accountable for their performance. 74 Market Structure: They are several alternative options for the restructuring o f the electricity sector during this phase. The simplest and easiest option to implement i s to incorporate the generation5', transmission and distribution entities as subsidiaries o f a state-owned holding company as shown in Exhibit 6.2. This model will also be sufficient to facilitate private sector participation in new generation capacity Exhibit 6.2: Sector CorporatizationUnder One Holding Company I Power Purchasing Entity (Single Buyer) PEET *Transmission *Trade *System Operator PEDEEE Distribution *Supply In this phase, a state-owned Power Purchasing Entity will be established to act as a single buyer to contract wholesale electricity t o the distribution companies from the generation companies. In the classical model during this phase, the single buyer i s usually included as part o f the transmission company as shown in Exhibit 6.3 and could be also considered. Advantages, however, o f having the PPE separate from the transmission company are discussed in a subsection to follow. ~ 51 Further unbundling and grouping of generation plants (for example o f similar operational efficiencies and type of fuel supply) into business units under the generation companies i s encouraged to allow efficient implementation o f operational and management improvement programs and to also allow comparative competition between them. 75 Exhibit 6.3: One Holding Company Including Single Buyer within Transmission Company PEET Tra ns miss io n *Trade *System Operator *Wholesale Power Purchasing (Single Buyer) r I *Distribution I I PEDEEE *Supply Other advanced options for sector corporatization which may be considered include the following: Option 2: generation and distribution are incorporated as subsidiaries o f a state owned holding company, while transmission i s incorporated as a separate state-owned company; and Option 3 : generation, transmission and distribution are separately incorporated as state owned companies. Market structure under these two options and the advantages and disadvantages o f each o f the options considered for Phase I1 are summarized in Annex 6.1. Electricity Sector Regulator: Sector restructuring under Phase I1 requires the separation o f the ownership, sector policy and regulatory functions through the creation o f an electricity sector regulator. This could be set up as an autonomous entity within the Ministry o f Electricity or as an independent regulatory agency. The regulator's functions would consist notably of: 0 monitoring sector operations to ensure efficient and non-discriminatory functioning o f the market; 0 developing price setting methodologies and tariff systems for different types o f electricity services; 76 issuing licenses to market operators and monitoring the compliance o f the licensees with the provisions o f the licenses, notably those related to quality o f service; and benchmarking the performance o f the licensees against each other and possibly against similar companies in the region, to keep costs under control. This would prevent unnecessary tariff increases by imposing economic operation o f the systems Sector Policy: The Ministry o f Electricity would exercise the following functions: setting policy for the sector, including formulation o f laws and strategy; ensuring strategic planning for future investment in generation and transmission capacity; deciding on the mode o f service provision, such as development o f new generation capacity through IPPs; proposing the extent and modes o f sector subsidies to the Ministry o f Finance. One o f the key underlying principles when tariffs do not fully reflect costs; and 0 Providing overall oversight o f the sector, including monitoring o f key performance indicators under a performance contract. Independent Power Producers (IPPs): IPPs can be supported under all the three Phase I 1 sector restructuring options described above. IPPs are often the first private investors in a power market dominated by state-owned power utilities, and they can enter the wholesale power market under any o f the sector restructuring alternatives discussed above. In the case o f Syria, IPPs can represent a timely solution to supply shortages, by adding supply capacity. Where IPPs signed long-term Power Purchase Agreements (PPAs), they were generally allocated construction and operating risks. IPPs are generally insulated under the terms o f their PPAs against demand risk through take-or-pay provisions, dispatch risk, price risk, fuel risk, and exchange rate risk. However, special attention should be paid to IPP contracts in general and power purchase agreements (PPAs) in particular as they are not easy to reconcile with the introduction o f competitive wholesale markets. Power Purchasing Entity: T o ensure that the transmission company does not experience recurring financial problems if wholesale tariffs are set below cost recovery and subsidies are not allocated immediately when needed, i t i s recommended that the single buyer function be assigned to a separate state-owned Power Purchase Entity (PPE), instead o f the transmission company as in the classical single buyer model. Therefore it is recommended that a state-owned Power Purchasing Entity (PPE) i s created and function until the transition o f any o f these Phase I1 options to a more competitive market structure (the long term target under Phase 111). I t s objective would be to contract energy for the distribution companies and large consumers from all generation companies. To that end it would design bilateral contracts and/or Power Purchase Agreements, administer procurement o f electricity, and negotiate contracts. The PPE would also determine when the system needs additional capacity, and issue a request for proposals for any new capacity needed. 77 To mitigate problems associated with the PPE model (whether separate from the transmission company or part o f it), it i s highly desirable not to grant monopoly rights to the PPE, as they may be difficult to eliminate in the future. Avoiding monopoly rights can be achieved by: Establishing from the start the right o f the distribution company and large consumers above a certain energy demand level to contract their electricity directly as they become financially creditworthy ("eligible consumers"). Such consumers will want to contract for electricity directly if they can obtain lower electricity prices than through the PPE; Giving the distribution company and large consumers the prerogative to buy a growing portion o f their energy needs o n the market as the power sector evolves; and Progressively lowering the energy demand threshold level at which consumers can become eligible consumers. Phase III:Long Term Restructuring (22020) Competitive wholesale electricity market: Introduction o f such a market in Syria can only be considered once all electricity market opening conditions have been met, the regulations have been developed, and the market participants (especially the distribution company) have become creditworthy. Such a market would be based on: (i) bilateral contracts between distribution companies and large consumers, respectively, with generation companies; and (ii) balancing a market. Exhibit 6.4 shows a conceptual diagram o f such a competitive wholesale electricity market. Exhibit 6.4: Long T e r m M o v e towards a Competitive Wholesale Electricity M a r k e t ~ IPPS 11 Hydro 1 ~ PEEG Company Generation I Wholesale Market Operator PEET Company *Transmission *Trade *System Operator PEDEEE Company Distribution `SUPPlY 78 A move towards a competitive wholesale market entails the introduction o f an organized market of generation entities, distribution entities and large users in which power i s traded competitively, supported by a transmission entity, a power system operator and a power market administrator. This market structure allows distributors and large users o f electricity to purchase electricity directly from generators they choose -either through a power exchange or bilaterally- and to transmit this electricity under open access arrangements over the power networks to the points o f electricity consumption. Independent power suppliers ( f i r m s that specialize in energy trading, but do not own or operate distribution networks) are allowed to compete with distributors for the business o f large users. 11. Energy Efficiency and Renewable Energy The importance o f energy efficiency (EE) and renewable energy (RE) has been highlighted in previous chapters. However, making progress in these two fields can be complex and requires a comprehensive approach. In that context the Government should ensure not only that policies and legislation on EE and RE are formulated, but also see to it that these are actually implemented and enforced. The principal recommended steps are: Adopting comprehensive and consistent EE and R E legislation: The legislation should start with an EE and RE Framework Law. This L a w would provide the overarching legal structure for all existing and future secondary legislation (laws and decrees) on EE and RE. The L a w will also need to be complemented by regulations on load management, building codes, equipment and fuel efficiency standards, energy audits for large energy consumers, legislation o n import and labeling o f appliances, regulation for renewable energy development including feed-in tariffs, etc.; Establishing an EE and R E Agency: The agency would be supervised by the Ministry of Electricity but with operational independence. I t would help formulate policy and legislation in these areas and ensure implementation. The establishment o f N E R C was intended for this purpose and NERC could be empowered with financial resources and operation capacity to be transformed into such an agency; Preparing EE and R E Strategies and Action Plans: The EE and RE Agency should take the lead in developing these strategies and action plans; Development o Financing Mechanism for EE and RE: Most countries who promote f EE and RE have put in place special financial incentives. A menu o f actions has been tested in various countries. Measures which have proven to be effective are: o Favorable tax regimes for the import o f qualifying EE and RE equipment; o Direct subsidies for selected EE and RE programs, provided stable financing o f these subsidies can be secured through surcharges o n electricity or gasoline; o Creation o f a compensation mechanism to finance the cost difference between renewable energy (usually wind and solar) and least-cost conventional energy, under a tariff system or a competitive tendering system; o Investment credits and/or tax credits to induce consumers to buy energy efficient equipment and to encourage development o f various forms o f renewable energy; o Dedicated credit lines with selected commercial banks that are interested in investing in these areas (possibly accompanied by technical assistance for project and risk appraisal); and 79 o Guarantee schemes to cover specific EE and RE risks, provided the banks' risk perception i s indeed a significant obstacle to EE and RE lending. A checklist for Government o f measures to promote energy efficiency i s attached in Annex 6.2. 1. 11 Gas-Power Coordination L o w gas prices and inadequate coordination between natural gas production plans and electricity generation requirements have led to constraints in the present gas supply t o the electricity sector. This situation needs to be urgently addressed. Projections o f future electricity sector capacity demand indicate that gas needs to be used increasingly by the electricity sector for generation. Therefore a gas to power strategy must be developed and a coordination mechanism (hereafter called the joint coordination committee) between the Ministry o f Electricity and Ministry of Petroleum and Mineral Resources must be established. Issues that should be considered by the joint coordination committee are: 0 The power sector will be by far the most important consumer o f gas in the foreseeable future. Therefore, the development o f the investment programs for both sectors need to be fully coordinated in order to achieve an integrated approach to the fuel sourcing strategy on the supply and demand side. 0 Implementation o f the investment plans o f the Syrian Gas Company and the power sector to ensure full coordination o f funding and implementation o f investment programs. 0 Pricing and supply contracts between the gas and power sectors should also be coordinated because the gas price directly impacts gas sector investment capacity and electricity production cost. Therefore, it cannot be set independently o f electricity prices and the investment programs o f both sectors. 80 ANNEXES 81 Annex 1.1 GDP growth scenarios retained for demand projections GDP Growth Scenarios 2009 2010 2011 2012 2013 2014 2015 I 2016 I 2017 I 2018 1 2019 I 2020 High Case 59% 67% 55% 55% 55% 55% 55% 55% 55% 55% 55% 55% Base case 4.4% 5.2% 4.0% 40% 4.0% 4.0% 40% 4.0% 4.0% 4.0% 4,O'h 4.0% Law Case 34% 4246 30% 30% 30% 3.0% 30% 30% 30% 30% 30% 30% GDP elasticity o f electricity demand by Sector Demand Elasticity Assumptions 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Price Elasticity 6 2 -02 -02 -02 -02 -02 -02 -02 -02 6 2 6 2 "02 income (GDP) Elasticities Rasidenhal 13 13 13 13 13 13 13 33 13 13 13 Commercial 12 12 12 12 12 12 12 12 12 12 12 S h a d Lightmg 13 13 13 13 13 13 13 13 13 13 13 Government 11 11 13 11 11 11 11 11 11 11 I? Religion 11 I t 11 11 11 11 11 11 11 11 Power sector 11 11 $1 11 11 21 13 11 11 14 Industry 115 115 115 115 115 115 115 115 115 115 135 115 The GDP elasticity o f electricity demand assumptions are based on estimates given by SwedPower in the 2004 Power Sector Action Program for Syria and the Bank team experience in Ukraine, Czech republic, Egypt and Cameroon. 82 m 00 Annex 2.1 Plant Organization # of Capacity (MW) Units Unit Installed Available Banias TPP Gas Turbine 1 30 30 0 Steam Turbine 170 680 340 Mehardeh TPP Gas Turbine 30 30 0 Steam Turbine 165 330 290 150 300 240 Tishreen TPP Gas Turbine 112.5 225 200 PEEGT Steam Turbine 200 400 400 Nassrieh CCPP Gas Turbine 112.5 337.5 330 Steam Turbine 1 150 150 150 Jandar CCPP Gas Turbine 118.5 474 440 Steam Turbine 114 228 200 Zayzoon CCPP Gas Turbine 112.5 337.5 330 Steam Turbine 150 150 150 Aleppo TPP (Halab) Gas Turbine 1 30 30 0 Steam Turbine 213 1065 1,065 Tayyem GTPP Gas Turbine 34 102 68 Swedieh GTPP Gas Turbine 34 170 136 Alzara TPP Steam Turbine 220 660 660 Syrian Petroleum Gas Turbine 20 120 60 Company Other public sector Homs Refinery Steam Turbine 32 Banias Refinery Steam Turbine 12 Thawra Dam Hydro 100 Baath Dam Hvdro 25 Tishreen Dam Hvdro 105 63 0 450 PEDEEE PEDEEE Hydro 8 16 0 System Total - 7,459 7 7 0 6,250 PEEGT Total 5,699 4,999 Other Public Sector 1,737 1,25 1 Total PEDEEE 23 0 Steam Turbine Total 3,547 3,035 Gas Turbine Total 707 464 Combined-Cycle 1677 1600 Turbine Total Hydro Turbine Total 1,528 1,151 84 Annex 2.2 Estimated Generating Capacity Retirement 600 568 500 430 400 338 g 300 200 100 2006 2007 2W8 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 85 Annex 2.3 Syria Regional Power Interconnections Estimated Thermal Operation Capacity 2006 Interconnection a1 Year (Mw) Utilization Syria-Lebanon, double-circuit, 66kV, 11OMVA 1973 94 1.5% Svria-Lebanon. single-circuit. 230kV. 267MVA 1977 227 3.6% * Assuming load factor o f 0.85 86 Annex 3.1 Coal-fired steam plant While coal has certain environmental disadvantages compared to gas, these can be effectively minimized by using modern technologies and high-grade coal. Modem coal-fired plants using supercritical technologies have an efficiency o f about 45%, thus reducing both fuel cost as well as emission o f the greenhouse gas CO2 per MWh produced. Furthermore, in Syria it might be possible to capture the CO2 and inject it into working o i l wells. This would enhance o i l production and save precious domestic natural gas that i s currently used for that purpose. Carbon Capture and Storage (CCS) may also be possible in Syria, since the country may have many geologically suitable underground sites for that purpose such as abandoned o i l wells, etc. Finally, co-$ring o coal and biomass (e.g., straw) in a proportion o f about 80/20 o n an energy f basis i s a technique that i s increasingly used in the EU and other developed economies, thus reducing coal consumption and greenhouse gas emissions while increasing the use o f locally available renewable energy sources. Collecting and transporting biomass also has significant local revenue and employment creation impacts. In terms o f technology options, supercritical Circulating Fluidized Bed (CFB) technology that i s at least CCS-ready i s relatively easy to implement. Integral Gasification Combined Cycle (IGCC) technology i s based on a CFB coal gasifier and the CCS option there is straightforward. Steam coal i s suitable for any o f these options. Biomass co-firing will be easy with CFB but almost impossible with IGCC. So if the objective i s coalhiomass co-firing, supercritical CFB i s likely to be the only option. If built as CCS ready, supercritical CFB will go below zero in terms o f greenhouse gas emissions, since it will store some COz from biomass as well. This i s probably the most cost efficient option and the least demanding in terms o f skills and maintenance. If so desired, such a plant could be linked to a water desalination process by making use o f the waste heat o f the plant. The following arrangement might be feasible in Syria: (i) CFB based power plant with a solar- a thermal assisted steam cycle plus utilization o f about 20% o f biomass; (ii) CCS ready (to be implemented when storage space becomes available); (iii) utilization o f the plant's waste heat for drying o f biomass and water desalination (these two processes could be solar assisted as well). Water desalination (for drinking water or irrigation) would play provide further flexibility to the plant, since waste heat can be used for evaporation during peak hours, while electricity can be used for reverse osmosis during off-peak hours. This configuration might also qualify the plant for Clean Development Mechanism credits5*. 52To make even better use o f the plant it could be used for district cooling o f entire city areas, especially commercial districts, using cold sea water as a medium and heat exchangers. Compared to individual window air conditioners this reduces electricity consumption by a factor of 8-10. 87 Annex 3.2 Syria - Renewable Energy Plans Renewable Energy ActivitiesRrojects under Consideration or Implementation Installing a 6 M W wind farm as a pilot project, fmanced by the Spanish government. Installing a 12.5 M W wind farm as an experimental project, financed by investors. Preparing terms ofreference for a 100 M W wind farm. Establish a National Fund o f US$500 million for domestic solar water heating systems. Half the cost of these systems will be subsidized from this Government-financed Fund Negotiations with investors are in progress to implement a 500 M W wind farm by 2010 Preparation o f a feasibility study to establish a solar trough and electrocell manufacturing facility with a capacity o f 11 MWiyear. Ukrainian-Syrian joint venture. Start in 2009 Agreement with a German company to install a 10 M W PV power plant. Cooperation with GTZ on the SOLARTERM project (launched end-2006). Aims to transfer technical expertise in the use o f solar energy and to develop strategies and policies to generalize i t s application Implementation of 19 small rural biomass projects and preparation o f a large farm waste biodigester to generate electricity Sources: Renewable Energy and Energy Efficieniy, Presentation, NERC Renewable Energy Plans in Syria, 2010-2030 Description Units 2010 2015 2020 2025 2030 Solar Hot Water Systems `000 480 1,500 3,000 3,500 4,000 Solar Thermal Industrial Process Heat `000 75 325 550 800 1,000 Photo Voltaics (installed capacity) MWh .6 70 140 220 300 Wind Power (installed capacity) MW 500 1,000 1,500 2,000 2,500 Mediterranean Solar Plan - Potential o f Projects for Syria 2009-2010 Install 20 M W o f wind power Install 20 M W o f PV power Install 300 M W o f concentrated solar power Source: Solar Plan for the Mediterranean, Presentation, Philippe Lorec 88 Annex 3.3 Clean Development Mechanism Opportunities in the Syrian Power Sector Introduction The Syrian Arab Republic confirmed i t s adhesion to the Kyoto Protocol o n the 05 September 2005 by the Presidential Decree No73 which was entered into force for the country on the 27th o f April 2006. Syria i s classified as a non-Anne1 country, that is, a country without binding limits to emitting greenhouse gases (GHG). Under the Clean Development Mechanism (CDM) o f the Kyoto Protocol, Syria can reap carbon finance (CF) credits for new investment projects with potentials to reduce the emissions o f GHG. The emission reduction (ER) credits generated from C D M projects can be sold to Annex 1 countries to meet their compliance obligations under the Kyoto Protocol. Institutional Framework The obligation to coordinate and implement the Kyoto Protocol resides with the Designated National Authority (DNA), which was established in Syria under the General Commission for Environmental Affairs o f the Ministry o f Local Administration and Environment. The Technical Committee o f the DNA includes representative from o f the Ministry o f Electricity. The DNA i s responsible for developing and promulgating standard procedures to ensure that the required Kyoto Protocol documentation processes are consistent with international practices as agreed with the Executive Board (EB) o f the Kyoto Protocol. Project developers are required to adhere to the K P documentation processes in order for their C D M projects to qualify for registration and the ER credits to be sold in the compliance market. Therefore, it will be necessary to speed up the operationalization o f the DNA to have i t s share in the C D M process Roles and Functions: Importance o Coordination o the DNA53 f f The DNA i s responsible for ensuring that the proposed CF projects o f the country. As envisioned, the KP facilitates resource transfers, including technology transfers, from developed countries (primarily Annex 1 countries) to developing countries (non-Annex 1 countries). The DNA assumes the important responsibility to be the main interlocutor and the coordinating agency o f the Government vis-a-vis the project developers and the buyers o f the CERs. In addition, the DNA will help ensure that CF projects comply with the laws and regulations o f the country. For instance, before a CF project can be registered as a C D M project with the KP Secretariat, a letter o f authorization (LOA) i s required for that particular project to be issued by the DNA o f Syria. . Given such core C D M role for the DNA, therefore, it will be necessary to speed up i t s operationalization to have i t s share in the C D M process. Syria also has the National Energy Research Center (NERC) that provides technical support in the assessment o f C D M projects submitted to the DNA Secretariat. The Government has designated the N E R C as the main institution that will determine the acceptability o f any CF projects and provide the required technical input, if necessary, to the project. 53"Draft Proposal for the Operation o f the CDM-Designated National Authority o f the Syrian Arab Republic" (June 2008). 89 Carbon Trading - Growing Market As o f 2007, the global carbon market has grown to about $64 billion' from US$ 31 billion in 2006.54 There are two primary carbon trading markets: the compliance market and the voluntary market. The rapid growth o f the compliance market i s driven by the active trading in the certified emission reduction (CER) credits. This compliance market primarily dominated by C D M project-based transactions grew from US$5.8 billion in 2006 to US$7.4 billion in 2007. The ER credits, registered under the KP, are traded globally and sold at relatively higher prices as CER credits. Private investment firms buy CERs as investment assets to be sold to other buyers who are unable to meet their KP commitments. This secondary market o f C D M project- based transactions also grew from US$0.4 billion in 2006 to US$5.4 billion in 2007. In the voluntary market, the buyers are mostly private entities who are interested to promote corporate social responsibility (CSR) o f their enterprise. Other buyers include enterprises in the countries who have not ratified the KP and, therefore, ineligible to carry out carbon finance transactions in the compliance market. The growth o f the voluntary market i s not expected to be as high as that o f the compliance market as the Verified Emission Reduction (VER) credits are priced lower than CER and o f smaller volume. Nonetheless, the voluntary market i s growing, from US$146 million in 2006 to US$265 m i l l i o n in 2007. Opportunities in the Power Sector for Carbon Finance Transactions Based on the proposed direction and draft investment plans in the energy sector, several opportunities for carbon finance transactions can be identified. Although additional analyses will. be required to pinpoint specific investment projects with potentials for carbon finance overlay, opportunities in the energy sector can be identified a priori on the supply-side management and o n the demand-side management. Based o n international experience under the Kyoto Protocol C D M projects, carbon finance projects can be developed in the power generation sub-sector and in the transmission and distribution sub-sector. Investments that improve efficiency in power generation and transmission and distributions that lead to lower consumption o f fossil fuels have potentials for carbon finance transactions or ER credits. Syria has identified supply deficiencies in her power-generating capacity and potential investment requirements. One major planned rehabilitation investment identified i s to move from open-cycle to close-cycle thermal power plants, for instance, the planned transformation o f the open cycle units at Nasrieh and Zayzoon. This technological change can certainly improve power generation efficiencies, which will likely result in lower GHG emissions from the power plants. Investments are also being considered for fuel switch o f the power plants o f the Public Establishment for Electricity Generation and Transmission (PEEGT). The investments to rehabilitate and switch the power plants from heavy f u e l o i l (HFO) to natural gas have potentials for caibon finance transactions. Renewable Energy Sources (RES) To meet the country's energy requirement, Syria plans to augment i t s energy supply from renewable sources of energy, namely, hydropower, solar and wind. The geographic location o f 54 World Bank. State and Trends o f the Carbon Market 2008. May 2008. 90 the country makes these RES as attractive options. Although hydropower potential may be restricted, solar and wind power generation opportunities may be large. The ability to generate carbon finance transactions by the investment projects in solar and wind power generation capacities will greatly depend o n the ability to substitute power generated from fossil fuel sources or GHG emitting energy sources. I f investment projects in R E S can substitute for investment in the less efficient thermal power plants using HFO, then, there i s potential for carbon finance transactions for these investments in RES. More important, the carbon revenue credits from these R E S investments may make them financially viable in the long run since these ER credits will become CERs and will command higher prices in the compliance market. The CER revenues will be additional income streams to these RES projects. Transmissions and Distribution Systems Power distribution network o f Syria i s relatively inefficient. The network technical loss i s about 15% o f the total electricity supply while about 10% comes from non-technical loss. Future rehabilitation and investments in the distribution networks will likely have CF transaction potentials if these can lead to efficiency improvement that will reduce power supply generated from fossil fuels. The use o f more efficient transformers and efficiency enhancing measures in the distribution networks have potentials for carbon finance transactions. Demand-side Management: Energy Efficiency by the Power Users Energy intensive industries, such as metallurgy and cement production, tend to be major emitters o f GHG, thus they have big potentials for carbon finance transactions. Upgrading their technology, either through materials or processes that can lead to lower energy intensities, will likely lead to carbon finance transactions. Steel and chemical firms in China and Ukraine, for example, have benefited from carbon finance when their investments contributed to more efficient processes that reduce their energy utilization rates. Additionally, carbon finance transactions resulted in more revenues. It should be considered that most o f the investments in energy efficiency can be financially justified even without carbon finance. However, there are also instances when carbon finance revenues made these energy efficiency investments financially viable especially when normally non-commercially viable technologies are used. A more important challenge for the Government i s the impact on the supply-side management at the household level. Based o n the present estimates, residential consumers have a load factor o f 34%, which i s relatively l o w by international standards, while industries have a relatively high load factor o f 82%, indicating high electricity demand by the industrial sector. The load factor among households i s likely due to the predominant use o f inefficient household appliances. Parallel to the energy efficient investment in the industrial sector i s the promulgation o f policies and programs for a more energy efficient use at the household level, which can have potential for carbon finance transactions. Programs to replace incandescent light bulbs with compact fluorescent lamp (CFL), in China, Uganda, and Argentina, for example, have provided these countries with carbon credit revenues. Similarly, projects and programs that replace less energy efficient household appliances, such as more efficient chillers in the Philippines and in China, have generated carbon revenues to the project developers. Energy efficiency programs targeted at the household level, which are implemented and bundled by the Ministry o f Electricity, can likewise generate additional carbon finance revenues for Syria. The Executive Board (EB) under the Kyoto Protocol has approved programmatic C D M to qualify for registration. Programmatic C D M is comprised o f a Program o f Activities (PoA) o f 91 related C D M projects that use the same methodology to estimate ER generated from the program. Non-Annex 1 countries have started to look into the potential carbon finance transaction opportunities under the newly approved programmatic CDM, especially those that will cover the whole country or a sector. Weather proofing and enhanced design standards o f houses and buildings can lead to programmatic C D M transactions. Improving the housing design and construction standards in Syria with the goal o f becoming more energy efficient to reduce power use at the household level can have potentials for carbon finance transactions. Additional Considerations in the Power Sector Proiect Feasibility Studies. Given the number o f opportunities for potential carbon finance transactions in the power sector, resources will be required`to develop project feasibility studies for each o f these projects. The resulting project feasibility studies are necessary to provide the input for the Kyoto Protocol documentation. The Project Idea Note (PIN,) which i s the first document in a carbon finance project, will depend o n the information generated from these project feasibility studies. The final Kyoto Protocol document and the Project Design Document (PDD) cannot be completed without the feasibility studies o f the identified investment project o f the Ministry o f Energy. The P I N and the P D D will determine whether the carbon finance project can be registered under the Kyoto Protocol. The information generated from these project additionality and (ii) feasibility studies will help address the C D M requirements o f (i) monitoring verification reporting plan. Grid Emission Factor (GEF). T o estimate the ER credits in CF power projects, a grid emission factor will be needed. The GEF i s used to estimate the baseline o f the grid and h o w the energy sources are generated. The GEF will determine the amount o f ER credits generated from a CF power project. Summary and Conclusions Syria's power sector has potentials for carbon finance transactions that can be offered in the compliance market. Planned investments in power generation and transmission and distribution networks to improve efficiencies will be attractive carbon finance projects. As a non-Annex 1 country, CF projects can offer CERs up to 2012 crediting period, or beyond 2012 if there i s a follow-up international agreement to the Kyoto Protocol. The sooner the projects start generating ER, the more carbon revenues can be accumulated for these projects. Therefore, to accelerate the processing for these potential carbon finance transactions, the project feasibility studies and the GEF study need to be completed quickly. One should consider that CF project registration i s a lengthy process.55 CF projects that do not generate sufficient volume o f ERs and may not attract buyers in the compliance market can s t i l l benefit from the Kyoto Protocol by offering these in the voluntary market. In certain circumstances, there are buyers in the voluntary market who are willing to pay CERs and VERs with relatively higher prices than those in the compliance market.56 55 CF project registration can take as long as two years or more especially if a new methodology i s required. The availability o f project-related data i s one major cause o f delays in completing the K y o t o Protocol documentation process. 56 CF projects selling their ERs in the voluntary market are not subjected t o the more stringent KP CDM requirements. 92 An institutional mechanism needs to be developed to effectively coordinate between the Ministry o f Electricity and the Ministry o f Local Administration and Environment the preparation o f a power sector project pipeline which could be considered for carbon financing. The sector emission factor estimation i s an important activity and should be completed. Most important, project developers in Syria will need to closely coordinate their project development with the DNA to facilitate the issuance o f the Letter o f Authorization (LOA), which i s required for registration with the C D M Secretariat. 93 Annex 4.1 International Experience with Block Tariffs57 Block tariffs generally include either two or three tariff blocks that have varying costs per energy unit. Block tariff systems are widely used for various reasons. They are well suited to providing incentives for the implementation o f energy efficiency in households due to the increasing cost o f energy units within a block as consumption increases. They have, however, also been utilized in order to provide protection from energy poverty for socially vulnerable groups when targeted social protection schemes have not yet be developed.. In order to provide protection against energy poverty in a block tariff it is necessary that the lowest block i s affordable for all consumers and o f a size that covers the energy requirements o f vulnerable households. This makes it very difficult to target the intended group, especially if electric heating i s used by vulnerable groups, as block tariffs will generally favor those that have the economic ability to change their heating source. However, a different form o f block tariff can also be utilized, whereby the price per kWh i s determined by which block the last kWh i s consumed in. If, for example, the final kWh consumed falls in the block with the highest tariff, then all kWh are paid at this tariff. This system has the effect o f increasing the incentive to reduce energy consumption amongst users as well as reducing the risk o f free riders benefiting from the l o w tariff designed for socially vulnerable groups. Block tariffs intended as social protection tools generally result in a number o f groups benefiting from the program that do not require the assistance. This does, however, play a role in making this tariff form more politically attractive. Experience from other countries indicate that it can be difficult to determine an effective block tariff design, since it can lead to negative consequences for the power sector, energy efficiency and unintendedbenefits to higher income groups. Experience w i t h block tariffs in Bulgaria In 2002 Bulgaria introduced energy reforms initiated by i t s Energy Strategy. This included amongst other things the commercialization and restructuring o f utilities, the introduction o f a modern legal and regulatory framework and the introduction o f cost-reflective tariffs. Bulgaria realized that energy reforms and the introduction o f a cost-reflective tariff should be implemented in tandem with a social safety program in order to protect socially vulnerable groups from the necessary tariff increases. Bulgaria utilized block tariffs as a temporary measure to protect vulnerable customers from sudden tariff increases. This resulted in a two block system being introduced from 2002 to 2006. The first block consisted o f 75 kWh per month at a stable price for the whole period while the second block had indicative price increases with predetermined dates and levels o f increase throughout the period. It was estimated that the 75kWh per month covers needs for lighting, a radio or television and some cooking. From October 2006 onwards the block tariff was replaced by a series o f tariffs that consumers can choose between according to their consumption patterns. A two-block tariff system for district heating was also implemented in Bulgaria. The first block covers a monthly consumption o f up to 250kWh while the second block covered consumption above 250kWh. This was combined with a monthly capacity payment with a fixed charge per square meter heating space. From October 2006 on the block tariff was replaced by a flat rate tariff. 57 Adapted from "Social Protection Against Energy Poverty ", Ministry o Economy, Macedonia. March 2007. f 94 Eventually the block tariff system was phased out in Bulgaria and targeted social assistance payments and energy efficiency targets have been introduced, as these methods are generally more effective in the long-term than a block tariff system. Experience with block tariffs in Serbia Serbia introduced a block tariff system in 2001 in order to move towards cost recovery in the power sector as the power sector was one o f the main sources o f fiscal deficit for the Serbian economy due to i t s l o w operational efficiency, high levels o f financial losses and debt service defaults caused in part by energy prices being lower than the cost o f supply. The Serbian tariff system i s divided into the following three monthly tariff blocks; 0 -600kWh, 60 1kWh - 1600kWh and consumption above 160 1kWh. The average household consumption in Serbia at the time o f introducing the block tariff system was approximately 400kWh per month. The price o f electricity has been raised substantially and o n a regular basis in conjunction with the introduction o f the three block tariff in Serbia. This has led to the aggregate price o f electricity for households increasing from 0.9 U S cents/kWh in October 2000 to 5 U S centslkWh at the end o f 2005. Initially the highest tariff block was substantially more expensive than the cheapest tariff block, but tariff increases have been directed at leveling the difference between tariff blocks as once tariffs achieve cost recovery the block tariff will be reformed. There are also time-of-day tariffs within the Serbian block tariff. The block tariff in Serbia i s seen as a temporary measure that can ease the transition for the customer from subsidized electricity prices to full cost recovery, whilst also encouraging energy consumption to become more efficient. The three block tariff in Serbia was introduced along with targeted subsidies for socially vulnerable groups. 95 Annex 5.1 Common Ownership Models for Private Power Build-Own-Operate (BOO). This common model calls for an investor to take responsibility for construction, ownership, and operation o f the plant on an indefinite basis. I t i s normally initiated by a contract for the output o f the power plant. Also known as the perpetual franchise model, the Build-Own-Operate model entails a private entity building, financing and operating the project under a perpetual franchise from the host government. The project developer retains title to the assets. Within this model, all financial support for project-related borrowings i s provided by the private entity. The government regulates safety, quality o f service and, possibly, user charges or profits. The BOO model can accommodate financing in the public securities market. However, in view o f the innovative nature o f many projects and the attendant economic risks, the public securities markets, both for debt and equity, will usually be available only after a project has operated successfully for a few years and has established an acceptable record o f profitability. Build-Own-Operate-Transfer (BOT o r BOOT). This scheme i s similar to BOO but has a future transfer o f ownership to a designee. The future transfer can be very important where a project has unique characteristics that preclude permanent private ownership, such as hydroelectric power stations. The private entity receives a franchise to finance, build and operate the project for a fixed period o f time, after which ownership reverts to the host government (or some local or regional public authority administered by the host government). Ownership reversion i s planned to occur only after the private sector entity receives the repayment of, and a satisfactory return on, the capital it has invested in the project. In return for the ownership reversion, the host government might be asked to furnish some limited credit support for project borrowings. The BOT structure i s attractive to the host government because o f the ownership reversion feature. Build-Transfer-Operate (BTO). This scheme i s used in jurisdictions where private ownership i s not permissible, but private operation i s desirable. A private entity designs, finances, and builds the project. The entity then transfers the legal title to the host government (or some local or regional public authority) immediately after the project facility passes i t s completion tests. The private entity then leases the project facility back from the public authority for a fixed term. A long-term lease agreement gives the private entity the right to operate the project facility and to collect revenues for its own account during the t e r m o f the lease. At the end o f the lease term, the public authority operates the project facility itself or hires someone else (possibly the private entity originally involved) to operate it. Under this model, the host government or public authority has, at most, only a very limited responsibility for the project's financial obligations; the project company carries the principal responsibility. 96 . 2012- : Option 2: Full Vertical unbundling: 5 P 3 E a Alternative Options for Sector Corporatization *Transmission .Trade *System Operator Distribution *Supply Power Purchasing Entity (Single Buyer) PEET Company PEDEEE 2012- : Option 3: Extensive Vertical and Horizontal Unbundling: Power Purchasing Entity (Single Buyer) *Transmission *Trade *System Operator PEET Company 1 I Annex 6.1 PEDEEE Company - *Distribution *Supply 97 Annex 6.1 Market Structure Option Comparison Option 1 Option 2 Option 3 Administrative Low Medium High requirements Easy model to be 0 Implementation 0 Implementation implemented. requirements are requirements are slightly more very demanding demanding both on the regulatory side as well as from the development o f creditworthy companies Ability to attract Low Medium: High private Private participation 0 Medium, as it allows 0 Very high, as it also investment limited to P P s in introducing allows to attract generation. This competitive pressures non-traditional may however be in the supply chain service providers to sufficient for Syria through a probably enter the market during the medium larger number o f PPs. term as no other This is due to forms o f private perceived fair third sector participation party access due to are envisaged separation of the transmission company Transparency o f Low Medium High prices and costs 0 Low in terms o f 0 Increased transparency 0 Each company i s control o f different in costs, transfer prices governed by a elements o f the and corporate separate value chain structures management and 0 Better control o f the Board o f Directors, different elements o f reducing conflict o f the value chain via interests between benchmarking by the the different Ministry and the segments o f the regulator market 98 Annex 6.2 Energy Efficiency (EE) Checklist A. Legislation & Strategy Energy L a w Energy Efficiency L a w Energy Efficiency Strategy and Action Plan Other enabling legislation B. Institutional Energy Efficiency Agency C. Energy Prices Relative energy prices right Absolute energy price levels cost-reflective D. Financing Mechanisms Energy Efficiency Fund Utility D S M Energy Services Companies (ESCOs) Commercial bank lending E. Public Sector Champion Role Public buildings EE program Energy Poverty Reduction EE program EE Information campaigns National Spatial Plan w. EE focus Urban Development Plans w. EE focus F. Codes and Standards Buildings Building codes Effective enfoncement (e.g. usage License) Appliance standards Lighting standards Industry Voluntary agreements Mandatory review o f cogeneration potential Transport Vehicle fuel efficiency standards Periodic vehicle inspections Fuel taxes Labels Cars Appliances Homes G. Economic Incentives Tax reductions Vehicle Fuel Taxes Interest rate subsidies Investment grants 99