LEBANON 2020 POWER SECTOR EMERGENCY ACTION PLAN LEBANON POWER SECTOR EMERGENCY ACTION PLAN 2020 2 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 STANDARD DISCLAIMER: This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. COPYRIGHT STATEMENT: The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. 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Cover photos: © World Bank ACRONYMS AFD Agence Française de Développement AGP Arab Gas Pipeline AMI Advanced Metering Infrastructure BDL Banque du Liban CMS Commercial Management Systems COM Council of Ministers CSC Civil Service Council DCUs Data Concentrator Units DSPs Distribution Service Providers EBRD European Bank for Reconstruction and Development EDF Electricité de France EDL Electricité du Liban EE Energy Efficiency EIB European Investment Bank EPA Exploration and Production Agreement ERP Enterprise Resource Planning FSRUs Floating Storage Regasification Units GDP Gross Domestic Product GEFF Green Economy Financing Facility GRM Grievance Redress Mechanism HFO Heavy Fuel Oil HV High Voltage ICDF International Cooperation and Development Fund IFRS International Financial Reporting Standards IPP Independent Power Producer IT Information Technology KTONS Kilo Tons KWH Kilowatt Hour LCEC Lebanese Center for Energy Conservation LEEREFF Lebanon Energy Efficiency & Renewable Energy Finance Facility LOI Lebanese Oil Installations LV Low Voltage MENA Middle East and North Africa MEW Ministry of Energy and Water MFA Ministry of Foreign Affairs MOF Ministry of Finance MOU Memorandum of Understanding MV Medium Voltage NEEAP National Energy Efficiency Action Plan NEEREA National Energy Efficiency and Renewable Energy Action NREAP National Renewable Energy Action Plan PPAs Power Purchase Agreements RE Renewal Energy RFP Request for Proposal 3 4 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 TABLE OF CONTENTS ACRONYMS 3 ACKNOWLEDGMENTS 6 PREFACE 7 KEY MESSAGES 8 GOVERNANCE 10 SECURITY 12 STABILITY 12 SUSTAINABILITY 12 SECTOR CHALLENGES 16 Weak governance 16 Underinvestment in supply 18 Lack of financial viability 19 THE WAY FORWARD 22 GOVERNANCE 25 1.1 Establish Sector Regulatory Framework 25 1.2 Strengthen Integrated Energy Infrastructure Planning 26 1.3 Modernize EDL 27 SECURITY 30 2.1 Increase Utility-Scale Renewable Energy 30 2.2 Increase Thermal Power Generation Capacity 31 2.3 Accelerate Introduction of Gas for Power Generation 36 2.4 Expand and Refurbish the Transmission Network 40 2.5 Promote Regional Electricity and Gas Trade 41 STABILITY 42 3.1 Reform Electricity Tariffs 42 3.2 Reduce Distribution Network Losses and Strengthen EDL’s Revenue Collection 44 SUSTAINABILITY 47 4.1 Promote Decentralized Renewable Energy Applications 47 4.2 Implement Wider Energy Efficiency Measures 48 5 6 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 ACKNOWLEDGMENTS The World Bank team would like to thank the Ministry of Energy and Water (MEW) of the Lebanese Republic for the fruitful cooperation on this Paper. The team also wishes to thank the current and former Ministers for upholding the long-term partnership with the World Bank and for their trust in the World Bank’s technical assistance. Additionally, the team wishes to extend their gratitude to the Electricité du Liban, the Distribution Service Providers, the Lebanese Center for Energy Conservation, and other Lebanese agencies who provided information for the underlying analyses of this Paper. The contributors to this Paper include the World Bank’s Energy team led by Sameh Mobarek (Senior Energy Specialist) and composed of Vladislav Vucetic (Lead Energy Specialist), Tu Chi Nguyen (Energy Economist), Rita Ghorayeb (Consultant), and Soraya El Khalil (Consultant). World Bank’s Country Office in Lebanon, including Saroj Kumar Jha (Regional Director, Mashreq Region, MENA Department), Paul Welton (Lead Financial Management Specialist), Rima Koteiche (Senior Financial Management Specialist), and Lina Fares (Senior Procurement Specialist), has provided the utmost support and valuable insights which have enriched this Paper. The team are grateful to Paul Noumba Um (Regional Director, MENA Infrastructure) and Erik Fernstrom (Practice Manager, MENA Energy) who gave detailed and actionable guidance on the Paper. Last but not least, the team would like to extend their acknowledgements to Zeina El Khalil (External Affairs Officer, World Bank’s Lebanon Office) and Nada Abou-Rizk (Senior Program Assistant, World Bank’s Lebanon Office) who facilitated the publication of this Paper. PREFACE Lebanon has significant potential for economic growth but has historically had to contend with a myriad of economic, social, and geopolitical challenges on the path to fully achieving this potential. The latest crisis created by the coronavirus only compounds difficulties facing the country. The economic and financial crisis that the country was dealing with before the current pandemic hit had its roots in years of inaction in the face of a developing storm. Although not the cause of this storm, challenges in the power sector have significantly contributed to this storm and emerged as symptomatic of the governance issues at the heart of the storm. While the governance issues require deeper public introspective about the country’s direction and its cultural and social underpinnings, power sector challenges, which have ripple effects throughout Lebanon’s economy and society, must be addressed effectively to reduce the fiscal pressures they create on the economy. Chronic power shortages affect household welfare and business activities, and reliance on heavy fuel oil and diesel for Electricity production by both the national utility and private generators has harmful health and environmental effects. The large subsidies to the sector drain public resources and add to unsustainable debt levels. These issues are interlinked and create a vicious cycle which also causes widespread mistrust among the population. Inaction, therefore, is not an option. This Paper is a summary of the World Bank’s analysis of the prevailing challenges in Lebanon’s power sector and proposal for a way forward to address them. The priority actions are recommended from a technical perspective, that is, they are based on the World Bank’s own assessment, its knowledge of international best practices as they apply to Lebanon’s particularly complex environment, and its experience working with other countries on similar issues. Ultimately, the choices made and trade-off between priority actions should be developed further by the government in close consultation with the Lebanese Citizens and embedded within a comprehensive agenda to tackle the country’s broader economic, fiscal, and social challenges. While the technical problems facing Lebanon’s power sector are not unique, past experience shows that Lebanon has been unable to mobilize the political commitment needed to take swift action. Many of the past failures are linked to the lack of transparency, poor sector governance and weak institutional oversight of the Energy Sector, leading to frequent policy reversals and inability to sustain implementation of multi-year reform and investment programs. The Paper, therefore, tackles Governance and institutional capacity head-on as it recommends a comprehensive plan to turn around the sector along four dimensions: (i) Governance; (ii) Security of supply; (iii) Financial stability; and (iv) Environmental sustainability. Setting a strong foundation for transparent governance in the sector requires: an autonomous regulator empowered to safeguard the sector’s transparency and accountability, an efficient utility accountable to the public, and a Ministry with sufficient capacity to provide long-term planning and effective oversight. Ensuring security of supply means that new efficient thermal and renewable power plants should be procured immediately under a credible least-cost plan using transparent and competitive procurement processes. Recovering financial stability, which would ensure that the sector is no long dependent on state subsidies, depends on switching to less expensive fuel – natural gas – and reducing fraud and non-payment. Finally, the sector can transition toward a sustainable pathway by integrating renewable and energy efficiency options. Elements of these actions were part of the Government’s 2010 and 2019 updated Sector Policy, but many have not been implemented. These actions are to be implemented within the first 100 days and 12 months of the new Government coming to office and a priority for both the sector and Lebanon’s political and socio-economic stability. Delays and omission of any action would risk returning the sector to the vicious cycle that is now threatening to cripple the economy. The Paper, nevertheless, only proposes the broad direction and options for each action. The concrete design of the actions needs to be further elaborated by the Government initially in a vision statement that would then be expanded into a concrete time-bound reform plan through an inclusive consultative process with technical experts and the wider public. The World Bank Group stands ready to support Lebanon implement this bold but urgently needed reform program, through both technical and financial assistance, so that this vital sector can be set on a sustainable path and contribute again to the socio-economic development of the country. 7 KEY MESSAGES » Lebanon’s power sector has long been at the center of the country’s economic and fiscal challenges as it adds to the high fiscal and trade deficits, requiring significant government subsidies due to inefficient costs and underpricing; » The power sector has been unable to secure adequate supply to electricity consumers, severely impacting economic and social development, and creating a public trust deficit that goes far beyond the technical and fiscal challenges; » Solutions to the sector’s challenges have been extensively studied and largely agreed on at a technical level, but political will remains the key missing ingredient in progressing these solutions; » Prior actions in the sector amounted largely to crisis management, prioritizing speed over addressing the structural issues and sector sustainability based on proper planning and timely decision-making that are at the heart of sector woes; » The new Government should expeditiously confirm its own sector program initially through a vision statement, which this paper and the following suggested timeline are intended to inform, that would later be expanded to a full plan after extensive public consultations to ensure public support; » Communication, public consultations, and information disclosure are vital to regaining public trust in the sector; » Increasing the sector’s transparency and accountability requires implementing the long-stalled vision of Law 462 for more » Tariff reform needs to be pursued under private sector participation in the distribution a clear action plan to address interrelated and generation sub-sectors. A clear and time- sector challenges in parallel with a framework bound plan for putting this vision into effect to eliminate subsidies through efficient is urgently needed; and cost-reflective tariffs while protecting the poor; » Focus has traditionally been on increasing generation capacity, which is important, but it » Both Egypt and Jordan currently enjoy needs to be accompanied with fuel switching, significant power (and, in the case of Egypt, gas) reducing losses on the electricity network surpluses and are willing to export electricity and improving end-use energy efficiency to and gas to Lebanon, but an agreement with reduce supply costs and ensure sustainable Syria is needed to allow wheeling this power solutions; and gas on existing infrastructure that goes through Syria; » Work on installing floating storage regasification units (FSRUs) to import gas at » If the reform measures outlined in the Zahrani and Deir Amar, and launching separate priority actions below are implemented, the tender processes for additional temporary cost of electricity could decrease from as and permanent generation capacity need to high as US¢27/kWh (billed) today to around be significantly accelerated; US¢16.4/kWh by 2022. Supply could increase to provide all customers with reliable 24 » Renewable energy (RE) generation, which hours of electricity, eliminating the need played a secondary role in the sector so far, to rely on expensive and polluting private needs to be mainstreamed and scaled up diesel generation. Even if tariffs are increased significantly within a time-bound plan that to recover costs, hence removing subsidies starts in 2020 to reduce dependency on costly and saving the Government US$1-2 billion a imported fuels. Over 4,700 MW of additional RE year, they would be at the current weighted capacity is needed in the next 10 years to meet average cost to consumers (the current costs the Government’s target of 30 percent of RE average consumers pay for both public and generation by 2030. This will not just address private electricity). This would result in almost cost and environmental considerations, but neutral impact on poverty and may even lead also safeguard the country’s energy security. to positive economic impact for customers who rely more on private generators, which » Sector governance needs to be significantly cost up to US¢30/kWh. strengthened, with competence and relevant experience driving the selection of those who In the first 100 days in office, the Government lead it; should consider the following priority actions: » While Electricité du Liban (EDL) reforms, Priority Action 1 - Prepare and disclose a policy including its external and internal governance, statement that outlines the Government’s may not have immediate fiscal returns, they vision for reforming the sector and the are vitally important to ensure the sector’s underlying principles, objectives and timeline economic efficiency and its long-term it expects to rely on to implement this vision. sustainability; Priority Action 2 - Revise and reissue the » Modernization of all EDL’s core business areas Request for Proposals (RfP) to focus on FSRUs and administrative processes are urgently for Zahrani and Deir Amar to the prequalified needed as the basis for improving EDL’s bidders. operational and financial performance and as a foundation for attracting private sector participation; Key Messages 9 10 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 Priority Action 3 - Launch transparent and competitive procurement processes for new permanent power plant at Zahrani. Priority Action 4 - Adopt indexation for fuel price and foreign exchange fluctuations in EDL’s retail tariff to apply with immediate effect. Priority Action 5 - Establish the Electricity Regulatory Authority (ERA) and appoint its members using a transparent process, based on their relevant expertise, qualifications and lack of conflicts of interest. Priority Action 6 - Appoint at least 7 independent members of EDL’s board of directors selected based on their relevant expertise and lack of conflicts of interest, after public consultations. » In the first 12 months in office, the Government should consider the following priority actions under 4 strategic pillars to urgently improve sector performance: GOVERNANCE Priority Action 7 - Adopt a time-bound plan for restructuring the sector to privatize EDL’s generation plants and establish private concessions for distribution services, starting 2022 after expiry of the existing distribution service provider (DSP) contracts. Priority Action 8 - Establish a planning department at the Ministry of Energy and Water (MEW) to prepare least-cost generation and transmission plan for all types of generation, including thermal and renewable energy. Priority Action 9 - Develop a contract between the Government and EDL to set specific performance targets and compliance conditions for EDL’s operations over the next 4-5 years. Priority Action 10 - Adopt a time-bound plan to modernize EDL’s operations, in line with the sector restructuring plan. Key Messages 11 12 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 Priority Action 11 - Significantly increase public Priority Action 19 - Reinforce policy, regulatory, communications regarding the Government’s infrastructure, financing and capacity building plans in the sector, including, but not mechanisms to scale up distributed RE and EE limited to, the rationale underpinning those measures by large consumers. plans, timeframe expected to accomplish the anticipated milestones, and the The following is brief outline of these priority associated costs. actions with an illustrative timeline for their implementation. SECURITY Priority Action 12 - Launch procurement for the Salaata plant (after completing necessary environmental and social assessments in compliance with international standards). Priority Action 13 - Assess competitiveness of Deir Amar II proposals to determine whether a competitive procurement process is needed. Priority Action 14 - Secure financing for transmission system expansion and upgrades. STABILITY Priority Action 15 - Adjust the tariff methodology and prepare public consultations to raise tariffs in a progressive manner, in line with the improvement of supply. Priority Action 16 - Accelerate rollout of smart meters and improve bill collection. Priority Action 17 - Establish mechanism for timely payment of electricity charges by public institutions. SUSTAINABILITY Priority Action 18 - Adopt a utility-scale RE program that reflects best practices and provides annual targeted capacity segregated by technology to implement the Government’s announced 2030 RE policy objectives. 2019 2020 2021 2022 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 GOVERNANCE 1. Prepare and Disclose a policy statement that outlines the Government’s vision for reforming the sector Jun 30 ‘20 5. Establish ERA and Appoint its members Sep 30 ‘20 6. Appoint at least 7 independent members of EDL’s BOD Jun 30 ‘20 7. Adopt a time-bound plan to privatize EDL’s generation plants and establish private concessions for distribution services 8. Establish a planning department at MEW 9. Develop a performance contract between the Government and EDL 10. Adopt a time-bound plan to modernize EDL’s operations 11. Significantly increase public communications SECURITY 2. Revise and Reissue the RfP to focus on FSRUs for Zahrani and Deir Amar to the prequalified bidders Jun 30 ‘20 3. Launch transparent & competitive procurement processes for new permanent power plant at Zahrani Jun 30 ‘20 12. Launch procurement for the Salaata plant after completing necessary environmental and social assessments 13. Assess competitiveness of Deir Amar II proposals 14. Secure financing for transmission system expansion and upgrades STABILITY 4. Adopt tariff indexation for fuel price and foreign exchange fluctuations in EDL’s retail tariff Sep 30 ‘20 15. Adjust the tariff methodology and Prepare public consultations to raise tariffs in a progressive manner 16. Accelerate rollout of smart meters and Improve bill collection 17. Establish mechanism for timely payment of electricity charges by public institutions SUSTAINABILITY 18. Adopt a utility-scale RE program 19. Reinforce policy, regulatory, infrastructure, financing & capacity building mechanisms to scale up distributed RE & EE Strategic Pillar Name Action in the first 100 days Action in the first 12 months Key Messages 13 ‫‪14 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020‬‬ ‫األولوية ‪ :9‬إعداد عقد بين الحكومة ومؤسسة‬ ‫ّ‬ ‫ت�أثير اقتصادي إي�جابي للعمالء الذين يعتمدون بشكل‬ ‫حددة‬ ‫م ّ‬ ‫كهرباء لبنان من أجل تحديد أهداف أداء ُ‬ ‫أكبرعلى المولدات الخاصة ‪ ،‬والتي تصل ت�كلفتها إلى‬ ‫لعمليات المؤسسة للسنوات األربع‪-‬‬ ‫ّ‬ ‫وشروط امت�ثال‬ ‫‪ / $ 0.30‬كيلوواط ساعة؛‬ ‫الخمس المقبلة‪.‬‬ ‫في األيام المئة األولى من والية الحكومة الجديدة‪،‬‬ ‫حددة زمن ًّ‬ ‫يا لتحديث‬ ‫م ّ‬‫األولوية ‪ :10‬إعتماد خطة ُ‬ ‫ّ‬ ‫األولوية‬ ‫ّ‬ ‫على الحكومة النظر في اإلجراءات ذات‬ ‫ا مع خطة‬ ‫عمليات مؤسسة كهرباء لبنان‪ ،‬تماشي ً‬ ‫ّ‬ ‫التالية‪:‬‬ ‫إعادة هيكلة القطاع‪.‬‬ ‫يحدد‬ ‫ّ‬ ‫األولوية ‪ :1‬إعداد وكشف البرنامج الذي‬ ‫ّ‬ ‫األولوية ‪ :11‬ت�كثيف جهود التواصل واإلعالم العام‬ ‫ّ‬ ‫رؤية الحكومة إلصالح القطاع والمبادئ واألهداف‬ ‫حول خطط الحكومة في هذا القطاع‪ ،‬بما في ذلك‬ ‫والجدول الزمني الذي ت�توقع أن تعتمد عليه لتنفيذ‬ ‫عرض األسباب الموجبة لهذه الخطط‪ ،‬واإلطار الزمني‬ ‫هذه الرؤية‪.‬‬ ‫المتوقع لتحقيق اإلنجازات المتوقعة والت�كاليف‬‫ّ‬ ‫األولوية ‪ :2‬مراجعة وإعادة إصدار طلب تقديم‬ ‫ّ‬ ‫المتعلقة بها‪ ،‬على سبيل المثال ال الحصر‪.‬‬ ‫العروض (‪ )RfP‬للتركيز على ‪ FSRUs‬للزهراني ودير‬ ‫عمار لمقدمي العروض المؤهلين‪.‬‬ ‫األمن‬ ‫األولوية ‪ :3‬إطالق عمليات شراء شفافة وتنافسية‬ ‫ّ‬ ‫لمعمل دائم وجديد في الزهراني‪.‬‬ ‫األولوية ‪ :12‬إطالق عملية التوريد لمعمل سلعاتا‬ ‫ّ‬ ‫(بعد است�كمال عمليات التقي�يم اإلجتماعي والبيئي‬ ‫األولوية ‪ :4‬اعتماد مؤشرات لمواجهة تق ّ‬ ‫لبات أسعار‬ ‫ّ‬ ‫الضرورية وفق المعاي�ير الدولية)‪.‬‬ ‫الوقود وسعر الصرف في تعرفة مؤسسة كهرباء‬ ‫لبنان للتطبيق بأثر فوري‪.‬‬ ‫األولويــة ‪ :13‬تقي�يــم القــدرة علــى التنافــس‬ ‫ّ‬ ‫لمقترحــات ديــر ّ‬ ‫عمــار اا لتحديــد ضــرورة تنظيــم عمليــة‬ ‫تنظيميــة للكهربــاء‬ ‫األولويــة ‪ :5‬ت�أســيس هيئــة‬ ‫ّ‬ ‫ّ‬ ‫توريــد تنافســية‪.‬‬ ‫عمليــة شــفافة علــى‬ ‫وتعي�يــن أعضائهــا مــن خــال‬ ‫ّ‬ ‫ومؤهالتهــم ذات الصلــة والحــرص‬ ‫ّ‬ ‫أســاس خبراتهــم‬ ‫األولوية ‪ :14‬ت�أمين التموي�ل لتوسيع قطاع النقل‬ ‫ّ‬ ‫علــى عــدم وجــود التضــارب فــي المصالــح‪.‬‬ ‫وإدخال التحسينات عليه‪.‬‬ ‫لين‬ ‫األولويــة ‪ :6‬تعي�يــن مــا ال يقــل عــن ‪ 7‬أعضــاء مســتق ّ‬ ‫االستقرار‬ ‫يتــم‬ ‫ّ‬ ‫فــي مجلــس إدارة مؤسســة كهربــاء لبنــان‬ ‫اختيارهــم علــى أســاس خبراتهــم ذات الصلــة مــع‬ ‫األولوية ‪ :15‬تعديل منهجية التعرفة وإعداد‬ ‫الحــرص علــى عــدم وجــود تضــارب فــي المصالــح‪ ،‬بعــد‬ ‫ّ‬ ‫المشاورات العامة لزيادة التعرفة بشكل تدري�جي بما‬ ‫إجــراء استشــارات عامــة‪.‬‬ ‫يتماشى مع تحسين اإلنتاج‪.‬‬ ‫»في غضون األشهر االثني عشرة األولى من والية‬ ‫ ‬ ‫الحكومة الجديدة‪ ،‬على الحكومة النظر في أولويات‬ ‫األولوية ‪ :16‬تسريع تركيب العدادات الذكية وتحسين‬ ‫ّ‬ ‫استراتيجية أربع من أجل‬ ‫ّ‬ ‫العمل التالية ضمن ركائز‬ ‫جباية الفواتير‪.‬‬ ‫تحسين أداء القطاع بشكل طارئ‪:‬‬ ‫األولوية ‪ :17‬وضع آلية من أجل تحصيل فواتير‬ ‫ّ‬ ‫الكهرباء من قبل المؤسسات العامة‪.‬‬ ‫الحوكمة‬ ‫االستدامة‬ ‫يا إلعادة هيكلة‬ ‫حددة زمن ًّ‬ ‫م ّ‬‫األولوية ‪ :7‬إعتماد خطة ُ‬ ‫ّ‬ ‫القطاع من أجل خصخصة معامل إنتاج الطاقة التابعة‬ ‫المتجددة على‬ ‫ّ‬ ‫األولوية ‪ :18‬اعتماد برنامج للطاقة‬ ‫ّ‬ ‫لمؤسسة كهرباء لبنان وت�أسيس امتيازات خاصة‬ ‫مستوى المنشأة يعكس أفضل الممارسات وي�وفر‬ ‫بدءا من العام ‪ 2022‬بعد انتهاء ّ‬ ‫مدة‬ ‫لخدمات التوزيع‪ً ،‬‬ ‫الموزعة بحسب‬ ‫ّ‬ ‫القدرة المستهدفة السنوية‬ ‫عقود مقدمي خدمات التوزيع الحالي�ين‪.‬‬ ‫الت�كنولوجيا من أجل تنفيذ أهداف سياسة الطاقة‬ ‫األولوية ‪ :8‬ت�أسيس قسم للتخطيط في وزارة‬ ‫ّ‬ ‫المتجددة المعلن عنها للعام ‪.2030‬‬ ‫ّ‬ ‫الطاقة والمياه إلعداد خطة الكلفة األدنى لإلنتاج‬ ‫األولوية ‪ :19‬تعزي�ز اآلليات المتعلقة بالسياسات‬ ‫ّ‬ ‫والنقل لجميع أنواع اإلنتاج‪ ،‬بما في ذلك الطاقة‬ ‫والتنظيم والبنية التحتية والتموي�ل وبناء القدرات‬ ‫والمتجددة‪.‬‬ ‫ّ‬ ‫الحرارية‬ ‫لزيادة اعتماد الطاقة المتجددة الموزعة وتدابير‬ ‫كفاءة الطاقة من قبل كبار المستهلكين‪.‬‬ ‫دورا‬ ‫ً‬ ‫المتجددة‪ ،‬التي تلعب‬ ‫ّ‬ ‫»يجب تعزي�ز توليد الطاقة‬ ‫ ‬ ‫»لطالما كان قطاع الطاقة في لبنان في قلب‬ ‫ ‬ ‫يا في القطاع حتى اليوم‪ ،‬وإدراجها ضمن خطة‬ ‫ثانو ًّ‬ ‫والمالية التي يواجهها البلد‪،‬‬ ‫ّ‬ ‫االقتصادية‬ ‫ّ‬ ‫التحديات‬ ‫الحد من‬ ‫ّ‬ ‫أجل‬ ‫من‬ ‫‪2020‬‬ ‫العام‬ ‫في‬ ‫تبدأ‬ ‫ا‬ ‫ي‬ ‫ًّ‬ ‫زمن‬ ‫دة‬ ‫م ّ‬ ‫حد‬ ‫ُ‬ ‫مما‬ ‫ّ‬ ‫المرتفع‪،‬‬ ‫والتجاري‬ ‫المالي‬ ‫العجز‬ ‫�ثقل‬ ‫ت‬ ‫ُ‬ ‫نها‬‫بما أ ّ‬ ‫والمكلف‪ .‬في‬ ‫ُ‬ ‫المستورد‬ ‫الوقود‬ ‫على‬ ‫االعتماد‬ ‫ا من قبل الحكومة بسبب‬ ‫ا مادي ً‬ ‫ا كبير ً‬ ‫يستلزم دعم ً‬ ‫الواقع‪ ،‬هناك حاجة إلى أكثر من ‪ 4700‬ميغا واط من‬ ‫التعرفة المتدنية والت�كاليف غير الفعالة؛‬ ‫المتجددة في السنوات‬ ‫ّ‬ ‫اإلضافية للطاقة‬ ‫ّ‬ ‫القدرة‬ ‫»لم يتمكن قطاع الطاقة من ت�أمين الكهرباء الكافية‬ ‫ ‬ ‫المقبلة من أجل تحقيق هدف الحكومة بأن‬ ‫العشرة ُ‬ ‫بشدة على التنمية االقتصادية‬ ‫ّ‬ ‫مما أ ّ‬ ‫ثر‬ ‫للمستهلكين‪ّ ،‬‬ ‫تجددة نسبة ‪ 30‬في المئة من‬ ‫الم ّ‬ ‫ُ‬ ‫تشكل الطاقة‬ ‫وسبب أزمة ثقة لدى الرأي العام‬ ‫ّ‬ ‫واالجتماعية‬ ‫ّ‬ ‫مجمل قدرة اإلنتاج مع حلول العام ‪ .2030‬وهذا لن‬ ‫والفنية إلى ّ‬ ‫حد بعيد؛‬ ‫ّ‬ ‫المالية‬ ‫ّ‬ ‫ت�تجاوز التحديات‬ ‫البيئية فحسب‪،‬‬‫ّ‬ ‫يعالج اعتبارات الكلفة واالعتبارات‬ ‫أيضا حماية أمن الطاقة في البلد؛‬ ‫نما سيضمن ً‬ ‫إّ‬ ‫تمت دراسة الحلول لتحديات قطاع الطاقة بشكل‬ ‫» ّ‬ ‫ ‬ ‫وتم االتفاق عليها إلى حد كبير على‬‫ّ‬ ‫ق‬ ‫م ّ‬ ‫عم‬ ‫ُ‬ ‫»يجب تعزي�ز حوكمة قطاع الطاقة بشكل جذري‪ ،‬باعتماد‬ ‫ ‬ ‫السياسية‬ ‫ّ‬ ‫المستوى الفني‪ ،‬لكن تبقى اإلرادة‬ ‫الكفاءة والخبرة ذات الصلة‪ ،‬كعنصران أساسيان في‬ ‫العنصر الغائب األساسي لتطبيق هذه الحلول؛‬ ‫اختيار القادة في القطاع؛‬ ‫»شملت المعالجات السابقة في القطاع بشكل عام‬ ‫ ‬ ‫لعل إصالحات مؤسسة كهرباء لبنان‪ ،‬بما في ذلك‬ ‫» ّ‬ ‫ ‬ ‫إدارة األزمات‪ ،‬حيث أعطت األولوية للسرعة على‬ ‫الحوكمة الخارجية والداخلية‪ ،‬قد ال تو ّ‬ ‫لد عوائد مالية‬ ‫البنيوية واستدامة القطاع‬ ‫ّ‬ ‫حساب معالجة المسائل‬ ‫ا من أجل ضمان الكفاءة‬ ‫جد ً‬ ‫ّ‬ ‫مهمة‬ ‫ّ‬ ‫نها‬‫فورية‪ ،‬لك ّ‬ ‫المالئم‬ ‫ُ‬ ‫بناء على التخطيط‬ ‫ً‬ ‫على المدى الطوي�ل‬ ‫اإلقتصادية واإلستدامة الطويلة األمد للقطاع؛‬ ‫واتخاذ القرارات في الوقت المناسب‪ ،‬التي تقع في‬ ‫»هناك حاجة ماسة إلى تحديث جميع مجاالت العمل‬ ‫ ‬ ‫صلب الصعوبات التي يواجهها القطاع؛‬ ‫والعمليات اإلدارية األساسية لمؤسسة كهرباء لبنان‬ ‫»على الحكومة الجديدة أن تصادق في البداية بشكل‬ ‫ ‬ ‫من أجل تحسين األداء التشغيلي والمالي للمؤسسة‬ ‫سريع على برنامج قطاع الطاقة الخاص بها‪ ،‬التي‬ ‫وكأساس إلجتذاب مشاركة القطاع الخاص؛‬ ‫تهدف هذه الورقة والجدول الزمني المقترح أعاله‬ ‫»يجب السعي إلى إصالح التعرفة ضمن خطة عمل‬ ‫ ‬ ‫إلى تغذيته‪ ،‬ومن ثم توسيعه إلى خطة كاملة بعد‬ ‫واضحة للتصدي لتحديات القطاع المترابطة بالتوازي‬ ‫إجراء استشارات عامة مكثفة من أجل ت�أمين الدعم‬ ‫مع إطار يهدف إلى إزالة الدعم المالي من خالل‬ ‫العام؛‬ ‫تحديد تعرفة فعالة تعكس الت�كاليف بشكل صحيح‪ ،‬مع‬ ‫عتبر التواصل‪ ،‬واالستشارات العامة‪ ،‬والكشف عن‬ ‫»ُ‬ ‫ي َ‬ ‫ ‬ ‫ت�أمين الحماية الالزمة للفقراء؛‬ ‫األساسية من أجل استعادة‬ ‫ّ‬ ‫نات‬ ‫المكو‬ ‫ّ‬ ‫من‬ ‫المعلومات‬ ‫تع كل من مصر واألردن بفائض كبير في الطاقة‬ ‫»يتم ّ‬ ‫ ‬ ‫ثقة الرأي العام في القطاع؛‬ ‫في الوقت الحاضر (وفي حالة مصر فائض في‬ ‫»تستلزم زيادة الشفافية والمساءلة في القطاع‬ ‫ ‬ ‫مستعدان لتصدير الكهرباء والغاز إلى‬ ‫ّ‬ ‫الغاز) وهما‬ ‫تنفيذ رؤيا قانون ‪ 462‬العالقة منذ زمن بعيد من أجل‬ ‫بد من اتفاق مع سوريا للسماح بإمداد‬ ‫لبنان‪ ،‬لكن ال ّ‬ ‫الفرعي ْ‬ ‫�ين‬ ‫َ‬ ‫القطاع ْ‬ ‫ين‬ ‫َ‬ ‫مشاركة أكبر للقطاع الخاص في‬ ‫الطاقة والغاز من خالل البنى التحتية القائمة التي‬ ‫للتوزيع واإلنتاج‪ .‬فال بد من وضع خطة واضحة‬ ‫تمر عبرها؛‬ ‫ّ‬ ‫ومحددة زمن ًّ‬ ‫يا من أجل تنفيذ هذه الرؤيا بشكل طارئ؛‬ ‫ّ‬ ‫تم تنفيذ التدابير اإلصالحية الموضحة أدناه في‬ ‫»إذا ّ‬ ‫ ‬ ‫»لطالما تم التركيز تقليدي ً‬ ‫ا على زيادة قدرة اإلنتاج‬ ‫ ‬ ‫اإلجراءات ذات األولوية‪ ،‬فقد تنخفض كلفة الكهرباء‬ ‫مهمة لكنها يجب أن ت�ترافق مع‬ ‫ّ‬ ‫وهي مسألة‬ ‫حد عال ٍ يصل اليوم إلى ‪ / $ 0.27‬كيلوواط ساعة‬ ‫من ّ‬ ‫استبدال نوعية الوقود‪ ،‬الحد من الخسائر على شبكة‬ ‫(مفوترة) إلى حوالي ‪ / $ 0.164‬كيلوواط ساعة بحلول‬ ‫الكهرباء وتحسين كفاءة الطاقة لالستخدام النهائي‬ ‫عام ‪ .2022‬يمكن أن يزداد إنتاج الطاقة لت�أمين ‪ 24‬ساعة‬ ‫من أجل تخفيض ت�كاليف ت�أمين التيار وضمان حلول‬ ‫من الكهرباء للعمالء‪ ،‬مما يلغي الحاجة إلى اإلعتماد‬ ‫مستدامة؛‬ ‫على المولدات الكهربائية الخاصة المكلفة والملوثة‪.‬‬ ‫حد إسترداد الت�كاليف‪،‬‬ ‫تم زيادة التعرفة الى ّ‬ ‫حتى ولو ّ‬ ‫»كما يجب تسريع وتيرة العمل بشكل كبير على إنشاء‬ ‫ ‬ ‫وبالتالي إزالة الدعم المالي وتوفير الحكومة من‬ ‫وحدات عائمة للتخزي�ن وإعادة التغوي�ز ‪Floating‬‬ ‫سنويا‪ ،‬فست�كون التعرفة‬ ‫ً‬ ‫‪ 1‬إلى ‪ 2‬مليار دوالر أمريكي‬ ‫‪ Storage Regasification Units FSRUs‬من أجل‬ ‫في المتوسط المرجح للت�كلفة الحالية للمستهلكين‬ ‫استيراد الغاز في الزهراني ودير عمار وإطالق‬ ‫(متوسط الت�كلفة الحالية التي يدفعها المستهلكون‬ ‫عمليات استدراج عروض منفصلة من أجل توليد قدرة‬ ‫مقابل الكهرباء من مؤسسة كهرباء لبنان ومن‬ ‫إنتاج إضافية مؤقتة ودائمة؛‬ ‫المولدات الكهربائية الخاصة)‪ .‬سيؤدي هذا إلى‬ ‫�با على الفقر وقد يؤدي حتى إلى‬ ‫ت�أثير محايد تقري ً‬ ‫‪Key Messages 15‬‬ SECTOR CHALLENGES 1. The electricity sector has been at the heart of Lebanon’s fiscal imbalances for decades. Annual budgetary transfers to the national electricity utility, EDL, averaged 3.8 percent of the country’s Gross Domestic Product (GDP) over the last decade, amounting to close to half of the overall fiscal deficit. At its peak in 2012, the Government transferred US$2.2 billion to EDL, equivalent to 5.1 percent of GDP. 2. Despite these subsidies, EDL supplied only 55-64 percent of Lebanon’s electricity needs in 2018.1 The balance of electricity needs was supplied by private diesel generators with an estimated cost of up to US¢30 per kilowatt hour (kWh). As such, the combined average cost to consumers from EDL and private generators is estimated to be approximately US¢16.8/kWh.2 Failure to solve this problem for decades also led to an acute confidence crisis in the sector that goes far beyond the fiscal impacts and service issues. 3. There are three key challenges underlying the sector’s woefully inadequate performance: (i) weak governance; (ii) underinvestment in supply; and (iii) lack of financial stability. Weak governance 4. EDL is significantly hampered by challenges in its (and the sector’s) governance structure. It is subject to the MEW and the Ministry of 1 Depending on which electricity demand assumption is used. 2 Consumer cost depend on the number of hours of EDL- supplied electricity. Consumers in Beirut, for example, where EDL supplies up to 21 hours of electricity likely pay less than this average in comparison to consumers in the Bekaa and Akkar that receive far less EDL power. Finance’s (MOF) administrative and financial approval of only MEW and MOF is required oversight, respectively. Existing financial for such modifications, these requests are and organizational authorities of EDL’s routinely escalated to (and denied by) the management and its board of directors are not Council of Ministers (COM), even if the MEW balanced with their responsibilities, limiting and MOF agree to support them. The result is accountability for performance. Management an environment where EDL is disincentivized reporting, as a result, is mainly focused on from increasing generation supplies, which operations, with limited consideration for will only increase its operating deficit and indicators of the utility’s financial, human subsidy needs. resources or administrative performance. 9. Moreover, EDL’s processes (finance, human 5. EDL’s board of directors currently consists of 3 resources, procurement, accounting, members, two independent directors and the technical planning, etc.) lack transparency utility’s Director General. This small size limits and promote control and risk-avoidance the board’s ability to create committees of at the expense of flexibility and efficiency. independent members for proper oversight of Delays due to rigid and arcane processes are audits, compensation, finance, procurement, exacerbated by significant deficiencies in and other critical areas of EDL’s business. EDL’s information systems and the almost complete absence of process automation 6. While the board had more members in the that have become standard in many utilities past (EDL’s current legal framework allows around the world for decades. Suboptimal up to 7 independent members), board customer information and billing systems appointments were historically made by hinder the ability to analyze and improve political parties based on Lebanon’s sectarian- customer service and collections or provide based governance system rather than strictly accurate data for the board, MEW and MOF competence. This approach naturally limits to ensure appropriate monitoring of the the board’s ability to ensure compliance with utility’s performance. The annual audited typical board duties to pursue the interests of financial report has been outstanding since the utility and its customers without even the 2011, with the last report reflecting significant appearance of conflicts of interest (political or qualifications. Chronic underinvestment in personal). these systems and processes are ostensibly caused by EDL’s seemingly perpetual negative 7. EDL’s limited control over its budget dilutes operating revenue and continued reliance its focus on (much less accountability for) on Government transfers for financial improving operations and services, making equilibrium. utility administration largely an exercise in daily crisis management. Even though EDL’s 10. EDL also has significant human resource annual budget is subject to review and approval challenges. EDL employees are considered by MEW and MOF, spending authority by EDL’s civil servants subject to rules and regulations board and management within this approved of the country’s Civil Service Council (CSC), budget is significantly curtailed. This requires which is part of the Prime Minister’s Office. regular interventions by MEW, MOF or both While the recruitment process is competitive in EDL’s core business, which creates ample and done in consultations with EDL, CSC’s delays and space for rent-seeking, whether for recruitment procedures are lengthy and political or personal gain. cumbersome, and require approvals from MEW and the COM. As a result, EDL remains 8. There is no systematic, transparent process understaffed, with several critical positions for determining just and reasonable tariffs vacant, forcing the utility to rely on contracted that ensure the utility’s financial equilibrium. employees that may not have the requisite The utility has requested changes in its tariffs skills or commitment needed. many times in the past. Although review and Sector Challenges 17 18 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 11. On the other hand, because EDL’s employees Underinvestment in supply are considered civil servants, they enjoy protections from retaliation afforded to 13. The supply shortfall is mostly due to chronic them under CSC rules, which also limits underinvestment in new generation capacity. EDL’s flexibility to manage and incentivize To bridge this gap, EDL has been reliant on performance. Perhaps to deal with this temporary generation (power barges under inflexibility, EDL’s management has opted contracts that expire in 2021), which comprises to delay promotions of its senior staff that approximately 20 percent of EDL’s available meet the applicable requirements for higher capacity. The old power plants at Zouk, Jieh, positions. Instead, senior staff are required to Sour, Baalbak, and Hrayche have outputs that assume responsibilities of higher positions are significantly less than their design capacity in an ‘Acting’ capacity, which provides and are operating at much lower efficiency management more control over them and (36 to 68 percent) than newer reciprocating perversely disincentivizes staff’s independent engines at Zouk and Jieh, and the combined- decision-making for fear of retaliation. This cycle plants at Deir Amar and Zahrani. fear of retaliation makes staff more beholden to their political leaders for job security than 14. EDL’s existing generation resources are to the organization or its customers. dominated by thermal power plants that are currently running on HFO or diesel (gas 12. The resulting confluence of these factors oil) - see Figure 1. Most of these generation combine to create an inefficient system that resources, including the rented power barges, requires micro-management at EDL’s highest are tri-fueled and can run on the much less level and disincentivizes initiative at the expensive and more environmentally friendly staff level. natural gas. However, due to the lack of gas, they run on the more expensive liquid fuels (HFO and diesel). FIGURE 1 – BREAKDOWN OF EDL ENERGY GENERATED (2017) 1% 2% 1% 2% 2% 3% 21% 4% Deir Ammar I CCPP Deir Ammar I CCPP 5% Power Barge Zouk Power Barge Zouk Zahrani I CCPP Zahrani I CCPP Zouk 1 Thermal Power Plant Zouk 1 Thermal Power Plant Zouk 2 ICE Power Plant Zouk 2 ICE Power Plant 8% Jieh 1 Thermal Power Plant Jieh 1 Thermal Power Plant Imports from Syria Imports from Syria Jieh 2 ICE Power Plant Jieh 2 ICE Power Plant Tyre (Open Cycle) GT Tyre (Open Cycle) GT Litani Hydro Litani Hydro Hrayche Thermal Power Plant Hrayche Thermal Power Plant 21% Baalbeck Open Cycle GT Baalbeck Open Cycle GT 13% Other Hydro Other Hydro 17% FIGURE 2 – TARIFF COMPARISON FIGURE 3 – BREAKDOWN OF IN THE MENA REGION (2013) SECTOR COSTS (2018) SM US¢ / kWh Average end-user tariff $3,000 40 Cost recovery tariff $21 35 $2,500 30 $686 $2,000 25 $216 20 $1,500 15 $1,000 10 $1,667 5 $500 $884 0 $‑ Tunisia Qatar West Bank Morocco Bahrain Oman Iraq Algeria Egypt, Arab Rep. Saudi Arabia Jordan Yemen, Rep. Lebanon Djibouti Costs Revenue Financing Cost of fuel O&M Billed electricity sales Cost of Power Purchases Source: Shedding Light on electricity Utilities in the Middle East Notes: (i) Cost of fuel includes fuel used for temporary generation and North Africa: Insights from a Performance Diagnostic, (barges); (ii) Cost of power purchases includes imports from Syria, World Bank (2017) IPP costs, and temporary generation (barges). Lack of financial viability overall financial equilibrium extremely sensitive to fluctuations in international fuel 15. The sector’s financial deficit stems from the prices. Remaining costs relate to other EDL consistently low electricity tariffs and high operating expenses, such as power purchases sector costs, which reflect both underpricing from Independent Power Producers (IPP) and the sector’s operational inefficiency. In (mostly small hydro plants), rented barges, a comparison of average end-user and cost- and imports from Syria (8 percent), operation recovery tariffs across the MENA region, and maintenance costs (27 percent), and Lebanon’s costs were second only to Djibouti’s, financing costs (1 percent).3 Revenues, on the but, unlike Djibouti and indeed all other other hand, covered only one third of these MENA countries, Lebanon had the largest gap expenditures. by far between cost and end-user tariffs (see Figure 2). 17. On the revenue side, EDL faces at least three significant challenges. First, in 2018, network 16. High sector costs are due to high costs of losses - technical losses on the transmission supply (primarily due to continuing reliance and distribution networks and non-technical on temporary generation and liquid fuels) and the sector’s operational inefficiency (primarily due to high network losses and 3 While it is difficult to fully assess EDL’s financial billing/collection challenges). In 2018, the position without audited financial statements (the last independent review was completed in 2010, resulting sector’s overall costs were estimated to be in a significantly qualified audit), an assessment of US$2.6 billion, with fuel accounting for by far the utility’s annual cashflow indicates that its staffing the largest portion of sector costs (around 64 and administrative costs represent a small amount of percent) (see Figure 3), making the sector’s the sector’s overall costs (US$ 139 million in 2018, or 5 percent of the sector’s operating costs). Sector Challenges 19 20 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 FIGURE 4 – EDL NETWORK LOSSES FIGURE 5 – REVENUE COLLECTION AND (2018) COLLECTION RATES (2015-2018) $m 1,000 120% 4% 9% 900 98% 100% 800 95% 700 80% 74% 600 500 66% 60% Transmission techinical losses 400 Distribution technical losses 23% 40% 64% Distribution non‑technical losses 300 Energy billed 200 20% 100 0 0% 2015 2016 2017 2018 Tariff revenue Estimated collection rate Tariff revenue after collection loss (excluding collections from public institutions & refugee camps) losses (primarily theft) on the distribution further increased EDL’s 2018 costs to US¢27/ network - were estimated to be 36 percent kWh (billed). of energy injected into EDL’s system. In other words, only 64 percent of the energy generated 19. Third, not only is revenue based on the tariff or purchased by EDL in 2018 was billed for (see level insufficient to cover EDL’s costs, but Figure 4). also the amount billed is not fully collected. Cash receipts for 2016 and 2017 reflect a 18. Second, EDL’s retail tariffs, which currently bill collection rate of 74 and 66 percent, stand at an average of US¢9.5/kWh, have not respectively. In 2016, strikes by some of changed since 1994.4 In comparison, in 2018, EDL’s staff halted billing. In 2017, one of the EDL’s fuel plus power purchase costs alone private sector DSPs, which were retained in added to US¢12/kWh. Once network losses 2012 to manage distribution operations on of 36 percent are added, this cost increases behalf of EDL, stopped its meter reading and to US¢20/kWh (billed), without accounting bill collection activities because its contract for collection challenges. Other operating expired in 2016 (the contract was extended costs (including operation and maintenance in 2018). of generation plants, staffing costs, network repairs and maintenance and financing costs) 20. To date, billing continues to lag approximately 12 months in some areas (in other words, bills are issued for consumption a year earlier) 4 Analysis indicates that the average tariff is more like US¢ so EDL has not yet fully recovered from the 8.7/kWh, which is the basis for the revenue calculations strikes’ impact (see Figure 5).5 Historical in this paper. However, because EDL and MEW have historically been relying on US¢ 9.5/kWh, a decision was taken to refer to the latter as the average tariff to 5 Low collection rate is also caused by historically avoid confusion. The conclusions reached are the same extremely low collections from public institutions and regardless. refugee camps. trends are significantly higher and estimates for 2018’s collection rate is close to 95 percent, excluding collections from state institutions and refugee camps that historically had extremely low collections rate. 21. In this respect, EDL’s high fuel costs are compounded by operating inefficiencies that significantly increase its costs; network losses that reduce the amount of electricity EDL can bill for to recover these costs; billing and collection challenges that reduce cash receipts from billed electricity; and retail tariffs that significantly under-recover operating costs. To effectively address the fiscal stress caused by the sector on public finances, these issues need to be urgently resolved. Sector Challenges 21 THE WAY FORWARD 22. The daunting challenges in the sector are not new. There have been many studies that analyzed the prevailing issues and provided recommendations for their resolution. In fact, the MEW developed a sector policy in 2010 (2010 Sector Policy) that provided solutions to address the generation deficit by increasing generation and transmission capacity, reducing sector costs by installing FSRUs to import natural gas to replace liquid fuels for power generation, and corporatizing EDL to modernize its functions and systems. Political disagreements and constraints resulted in little progress in implementing this plan. 23. In 2019, the MEW updated this plan to primarily add greater emphasis on reducing EDL’s network losses, recovery of billing arrears, and increasing electricity tariffs. The COM adopted this update in April of the same year. MEW and EDL made commendable progress since then on reducing technical and non-technical losses, but progress in implementing this updated plan stalled again when COM decisions were needed on several fronts. 24. It is urgent to proceed with stalled initiatives to help address the fiscal crisis. The fiscal crisis clearly requires prioritizing initiatives that have the most impact on sector finances in order to eliminate public subsidies as soon as possible. To that end, significant progress must be made in the short- to medium-term on initiatives that reduce sector costs and increase revenues. 25. This requires accelerating work on reducing network losses to reduce costs and ensure recovery of revenue due for electricity provided. It also requires accelerating work on increasing generation and transmission which follows the power sector reform capacity to improve EDL’s electricity services paradigm of the 1990s (discussed further in and provide the basis for increasing tariffs, as Section 1.1 below), remains unimplemented discussed further below. It further requires to date. It is thus imperative that the new reducing sector costs by accelerating work Government adopts a time-bound plan to on switching fuel to natural gas for power implement Law 462’s mandates in the short- generation. to medium-term. The initiatives proposed in this paper are intended to facilitate this 26. However, it is important to note that the process. current fiscal crisis has worsened initial conditions in the sector. Projections in this 29. Furthermore, the 1990s sector reform paper are based on conditions in 2018 or earlier, model emerged during a period of relative but 2019 has seem dramatic negative shifts on technological stability. In contrast, the many fronts. Network losses, for example, are electricity sector in the 21st century has likely to be far more than estimated as EDL’s found itself at the center of momentous ability to make progress on reducing theft technological change. Almost all new and improving collections are challenged by investments in generation will soon be real financial and economic constraints facing renewable, with implications for grid consumers. Access to foreign currency to pay operations, system planning, and market for fuel, spare parts and power plant services design. are also challenged as EDL is unable to find the support it previously had from BDL. This 30. Initially, this requires, as discussed further makes the starting point for reforms even below, revisiting some of the generation plans more dire than projected in this paper and set out in the 2010 Sector Policy and its 2019 further underlines the urgent need for specific update to ensure future capacity development reforms outlined. remains on a least-cost basis. It also requires accelerating implementation of the MEW’s 27. Furthermore, priority initiatives aimed at plans for rollout of energy efficiency (EE) and alleviating the short-term fiscal crisis are RE initiatives, and increasing resilience and insufficient without addressing the root flexibility of the transmission and distribution causes of the problem in the sector. The most networks to prepare for the evolution to come. basic tenet of sector operations is to provide consumers with good service at a reasonable 31. It is also worth noting that there has been price. International experience indicates that a significant communications gap in the dysfunctionality of the sector’s governance sector that needs to be urgently addressed. results in mismanaged systems that deliver There should be far more public consultations inadequate service, incur excessive costs, on critical issues affecting the sector’s or, as in the case of Lebanon, both. As such, development before decisions are made, and good governance is a necessary cross-cutting communications around sector priorities ingredient to ensuring the sector’s operational should be central to the Government’s efficiency and improved service delivery. initial message. The Government needs to communicate more on such topics as its plans 28. Experience has amply demonstrated that in the sector, the rationale behind them and the current sector governance structure related risks, the expected implementation has not worked. Much like the technical timeframe and milestones involved, etc. challenges in the sector, this is not new. In fact, Law 462, which was promulgated in 32. The MEW developed a comprehensive 2002, already envisioned restructuring the communications strategy to address this sector by unbundling it and increasing private issue but lacked funding to implement it. sector participation in EDL’s distribution and Nonetheless, there are some actions that generation operations. This prescription, can be taken now to improve access to The Way Forward 23 24 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 information without significant funding. consultations should be undertaken before These can be through a much-improved use translating this vision into a more detailed of the Ministry’s web site and social media to plan to be considered by the COM for adoption. disseminate data and sector plans, and more frequent public meetings with civil society, 34. The Government’s focus thus far has been the media and other stakeholders to explain largely on increasing the sector’s stability sector plans and their rationale as well as and security. While these are important provide a medium for a national dialogue on priorities for solving the short-term fiscal sector challenges. crisis, they are not enough. As noted above, the sector’s governance challenges are 33. Moreover, there is a need for coordination a critical underlying cause of its current within the Government itself on issues deficit, and, with the emergence of new related to the sector to avoid public confusion technologies and climate change concern, from conflicting statements or positions ensuring environmental sustainability should by public officials. This inter-governmental be included in the sector’s priorities. In this coordination should be undertaken at the respect, the concrete and actionable policy Prime Minister’s level to ensure consistency measures proposed in this paper, which are in of the Government’s messages. In addition, line with the 2010 Sector Policy and its 2019 the Government, in its first 100 days in office, update, are structured around these four should confirm its sector plans through energy policy pillars and should be pursued in a clear vision statement. To ensure public parallel (see Figure 6). buy-in, extensive stakeholder and public FIGURE 6 – FOUR SECTOR POLICY PILLARS AND PRIORITY OBJECTIVES » Establish regulatory framework for the sector GOVERNANCE » Ensure integrated energy infrastructure planning » Advance modernization of EDL » Increase utility-scale renewable energy development » Increase power generation capacity by over 3GW by 2025 SECURITY » Accelerate introduction of gas for power generation » Expand and refurbish EDL’s Transmission networks » Promote regional electricity and gas trade » Reform electricity tariffs STABILITY » Reduce distribution network losses and Strengthen EDL’s revenue collection » Promote decentralized renewable energy application SUSTAINABILITY » Implement wider energy efficiency measures GOVERNANCE future functioning of the electricity sector and market model. Unbundling of EDL into separate generation, transmission 1.1 Establish Sector Regulatory and distribution entities, (starting with unbundling at the accounting level to increase Framework transparency of financial flows in the sector) is 35. Law 462 has long envisioned the creation of a commendable objective that is aligned with an independent and autonomous Electricity best international practices. However, the law Regulatory Authority (ERA) to provide does not sufficiently define the respective technical oversight over a largely privatized roles of the incumbent players (created based generation and distribution subsectors. on the unbundled EDL) vis-a-vis newcomers This vision was based on a new paradigm in generation and distribution/supply, a that emerged in the early 1990s for power situation that results in legal uncertainty sector reforms. This paradigm emphasized likely to prevent entry of reputable operators. separation of power, with policymaking 38. The second key focus area of Law 462– creating remaining with the line ministry, service the ERA – needs to be strengthened. The Law provision done by an independent utility with envisaged creation of a regulator that is both commercial orientation, and an autonomous independent in structure and has decision- agency responsible for regulation. Within this making autonomy in several important areas. context, the regulator often had the mandate To better understand the related issues, it is of controlling market entry and setting tariffs important to note the difference between and minimum service standards, so consumers independence and autonomy of a regulator. receive adequate service quality. Regulatory independence is a concept that 36. In Lebanon’s case, Law 462’s general vision deals with how the regulator is established, of a more liberalized power sector is still primarily focused on the regulator’s legal, valid. The DSPs have largely been managing financial, and administrative independence, the distribution network for EDL since 2012, including insulation from political pressures and power plants at Zahrani and Deir Amar and from interests of the regulated entities. have been operated and maintained for years Regulatory autonomy, on the other hand, under contract with private sector companies. is focused on the autonomous nature of In 2018, the Government also announced its the regulator’s authority, primarily focused plan to limit future generation expansion to on decision-making that is transparent, IPPs. In this respect, there has already been predictable and accountable but requires no significant progress towards realizing Law approvals or concurrences from other public 462’s vision of privatized distribution and authorities. generation. What remains is completing and 39. International experience demonstrates that, formalizing the arrangements into a coherent under circumstances where autonomous market-based framework. regulatory regimes lack tradition (such 37. However, Law 462 needs to be strengthened as in Lebanon), a transition period during (whether through an amendment of the which the regulator formulates and adopts primary legislation or through regulations its necessary enabling internal rules and and decrees, as permissible under Lebanese procedures is essential to provide an orderly law) to address some significant gaps to transfer of powers and allow the nascent ensure its effective implementation. The first regulator to communicate its objectives and key focus area of the Law – restructuring new functions to the public to build trust and the sector and unbundling EDL – needs credibility. Law 462 does not provide for such to be clarified. Law 462 does not provide a transition. a clear and comprehensive picture of the The Way Forward 25 26 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 40. The MEW proposed amendments to Law 462 articulates its vision for sector reforms in a that adopts a transition period. However, the policy statement, which should be disclosed amendments also weaken the independence for broad public consultations before finalizing and autonomy of their proposed regulator. and expanding it to provide the sector’s reform plan. This policy should, among other 41. For example, while the Proposed Amendments things, outline the Government’s approach expressly provide for formation of a to sector transformation and implementing regulator that is technically, financially and a strong regulatory mechanism to ensure administratively independent, they propose transparency and accountability in the sector. to limit the regulator’s legal independence by The policy should also clearly indicate the requiring it to be part of the Ministry, which objectives the Government seeks to achieve raises question as to the regulator’s ability by such actions and the timeline within which to maintain its administrative independence. it expects to realize them. The proposed amendments also require the regulator’s funding from the general budget, 44. Accordingly, the Government should consider not from fees collected as envisioned in Law the following in the first 100 days in office: 462. This might be intended to ensure that the regulator is funded without having to i. Developing and disclosing for public depend on cashflow from sector entities (e.g., consultations a policy statement on its EDL) that historically had deep annual revenue approach to sector reform; shortfalls. However, relying on the general ii. Establishing criteria for selection of ERA budget for funding exposes the regulator members; to political influence, not just for approval of the annual budget but also for periodic iii. Forming a panel to identify and recommend disbursement of this approved budget from qualified candidates for membership to the Ministry of Finance’s accounts. ERA; and 42. Importantly, the proposed amendments do iv. Appointing ERA’s members and allocating not suggest transitioning this regulator to its an initial budget for the authority’s autonomous form originally envisaged in Law operation. 462, even as the enabling conditions in the sector become more supportive. As a result, 1.2 Strengthen Integrated while clarifications (through an amendment, regulations, or decrees, as permitted under Energy Infrastructure Planning Lebanese law) of the original Law 462 in this 45. While the sector is tied together in an area are necessary, these clarifications need interconnected value chain (see Figure 7), there to reflect an orderly transfer of authority are separate departments/entities within the to a fully functioning independent and MEW that are currently responsible for different autonomous regulator, which would be an aspects of sector planning and operations. The essential institution when Law 462’s vision for Lebanese Petroleum Administration (LPA) is a liberalized power market is realized at more responsible for upstream oil and gas activities; advanced stages of reforms. Moreover, there The Lebanese Oil Installations (LOI) is responsible should be a clear implementation schedule, with for domestic oil and gas purchases, storage, and deadlines and milestones. Notwithstanding, distribution; the Lebanese Center for Energy it is important to note that establishment of Conservation (LCEC) is responsible for EE and RE ERA should proceed in parallel while these activities; and EDL is responsible for generation, clarifications are formulated and adopted. transmission and distribution activities. 43. To ensure broad public support and clarity 46. Coordination among these stakeholders is ad with respect to the Government’s intentions, hoc and mainly undertaken by the Minister it would be advisable that the Government FIGURE 7 – ENERGY SECTOR VALUE CHAIN Fuel Fuel Power Electricity Electricity Sourcing Transportation Generation Transmission Distribution ELECTRICITY CONSUMER directly with the help of a team of consultants. 49. This process would therefore combine If the Minister (or the political party in charge of several existing planning documents (e.g., the Ministry) changes, there is a high likelihood Integrated Oil and Gas Plan prepared by LPA, these consultants and sector priorities would Transmission Masterplan prepared by EDL, be changed as well, which risks, among other the 2010 Sector Policy, its 2019 update and things, losing valuable institutional memory associated generation plan prepared by MEW, and planning stability. NREAP and NEEAP prepared by LCEC, etc.) and may make some obsolete. Clarity and 47. Coordination for planning needs to be transparency on energy planning can help streamlined and harmonized to provide a in attracting private sector investment and coherent, integrated and least-cost sector ensures a holistic view on the energy sector development plan. This plan will need to be across its sub-components. systematically updated every 3-5 years to reflect changes in demand, demographics, 50. In the first 12 months in office, the Government technology, environmental standards, and should therefore consider establishing this other policy initiatives/priorities. planning department in MEW. 48. In order to ensure consistency, the MEW 1.3 Modernize EDL should establish a single infrastructure planning department within the Ministry 51. Implementation of most of the measures in and develop a planning framework that any sector plan, including the quality of any involves and redefines the roles of all major governance framework, depends on the active stakeholders at various stages of the planning participation of EDL. Hence, it is critical to process. The planning process needs to be thoroughly strengthen EDL’s capacity to take transparent and participatory, and should on these important tasks. Although EDL does cover hydrocarbon infrastructure (upstream, not control tariffs, it can control other aspects midstream - LNG/transportation pipelines - of sector revenue (losses and nonpayment) and downstream), power generation (thermal and costs. EDL’s financial viability as well and RE) developments, electricity network as effectiveness of its transmission and investments (transmission and distribution) distribution networks are prerequisites to and off-grid developments and programs. developing additional generation capacity The Way Forward 27 28 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 through the private sector. Even if the future those targets, and EDL’s Board can integrate direction, as Law 462 largely envisions, is to them into performance contracts for EDL’s unbundle the sector and have EDL as a system senior management, which should then be operator providing transmission service to cascaded down into specific targets for EDL’s largely privatized generation and distribution middle management and staff. In addition, sub-sectors, reforming EDL is still critical to there should be an internal audit function ensure that it can be the off-taker of privately to track EDL’s finances on a continuous basis generated electricity. and inform management accordingly. Finally, EDL’s oversight should include regular public 52. EDL’s modernization requires strengthening disclosure of its operational and financial its governance structure, core business information, so that both the owners and operations, and administrative performance. customers of EDL could hold the company to This would help prepare EDL to be eventually account. commercialized and corporatized in the medium term. 55. However, such performance-based arrangements are unlikely to work without 53. First, EDL’s external and internal governance (a) strengthening EDL’s board structure arrangements need to be improved to to ensure proper internal oversight and transform it into an independent, accountable (b) significantly improving EDL’s internal and professional business. Towards that systems to ensure timely availability end, the division of responsibilities among of accurate data to facilitate board and EDL, MEW, MOF, and the contemplated regulatory oversight. As previously noted, regulator (see Section 1.1) in the future needs EDL’s current legal framework allows for the to be assessed to find the adequate balance appointment of up to 7 members to its board. between the degree of autonomy that allows With only 2 independent members and 1 the company to operate efficiently and the executive member, the current board is ill- degree of control that ensures that it is equipped to undertake its fiduciary duties. held accountable for its performance. There Additional members should be selected based are different ways of striking this balance: on their qualifications, relevant experience, typically, operational decision-making power lack of conflicts of interest, and willingness to belongs to the company while policy and dedicate enough time to carry out their duty of regulatory functions are handled by respective care to the organization. The Board members Government agencies (MEW and ERA); should have, among others, experience practical measures can consist of establishing related to energy and leadership in a private a (high) ceiling on particular expenditures or public sector organization and knowledge (usually of an investment nature) that require of the regulatory and business environments a sign-off by MEW or MOF, or designing the relevant to the Lebanese electricity sector. Board with MEW and MOF representatives They should also uphold the highest ethical that can reflect Government priorities in and integrity standards. To ensure that EDL’s those decisions. This of course would be corporate decisions reflect the public interest, accompanied by appropriate oversight by the a certain number of seats should be reserved regulator, with respect to EDL’s performance, for representatives of external stakeholders. and MEW, with respect to sector policies. 56. To select these members, the MEW should 54. A performance contract can be agreed identify a set of clear selection criteria, and between EDL and MEW, with clear form a panel chaired by a MEW representative performance indicators, targets, and and comprised of respected independent rewards/penalties to appropriately local and international experts in relevant incentivize progress. The MEW (then the fields. The candidate search should be publicly regulator once it is established) can then announced, and possibly involve the use of track and report on EDL’s progress in meeting recruitment agencies to ensure a thorough including procurement planning, market search. The panel would be tasked with analysis, development of procurement shortlisting the candidates and interviewing strategies and streamlined automated the shortlisted, then recommending qualified processes throughout the procurement cycle; candidates for the Minister’s consideration. and (iii) contract management needs to fairly With the Minister’s endorsement, the list of balance risks between the employer and qualified candidates, as well as the rationale the contractor such as defining settlement for their recommendation, can be disclosed of disputes in an escalated manner, from publicly and submitted to the COM for amicable settlement to the right for approval. The appointment should then be for arbitration until judicial adjudication. only a fixed period, after which the position is subject to re-election. 59. EDL’s financial policies and processes also need to be revamped, including adopting 57. Second, performance of EDL’s core business International Financial Reporting Standards functions needs to be improved. This would (IFRS) for financial reporting; developing require the Government to agree on the timing an asset registry; conducting fixed assets, of the sector’s restructuring and EDL’s role in receivables and inventory valuations; it. Assuming the privatization of generation developing opening balances; catching up on and distribution service (see Section 2.1 below), EDL’s overdue audited financial statements; EDL will evolve to be mainly a transmission and automating its financial directorate, and system operator (TSO). In this aspect, among others. EDL needs to strengthen its system planning, operation, and control, including integrating 60. Incorporating an Enterprise Resource state-of-the-art information technology (IT) Planning (ERP) system will be key to achieving systems such as planning software, National these objectives. ERP systems integrate areas, Control Center, and smart grid applications such as logistics, production, accounting, making use of smart meters at the substation finance, and human resources, so information levels. More critically, EDL needs to continue flow would be seamless and accurate. ERP to enhance its distribution function to get it systems improve information technology ready for transfer to the private sector. This (IT) and data services by providing greater link in the energy value chain is essentially transparency and tracking processes. the sector’s cash register, making challenges 61. For example, all contracts and purchases in this area reverberate through to the other could be tracked throughout the procurement links in the chain (see Section 3.2 for more cycle and converted to indicators to measure details). procurement efficiency. The related financial 58. Third, management of EDL’s corporate data would then enter the finance and resources needs to be improved by accounting system, and goods purchased reengineering processes and activities in into the inventory management system. key business areas to maximize efficiency, Such integration would contribute to greater transparency and accountability. In accountability by tracking decisions and procurement, for example, (i) current providing information on who is responsible policies need to be upgraded by enhancing for those decisions at each step. transparency through the incorporation 62. Moreover, successful implementation of of such measures as an independent a modernization plan will depend on a procurement complaints mechanism allowing compatible human resources strategy. EDL bidders to challenge procurement decisions needs to carry out a needs assessment to map until contract award; (ii) a procurement existing staff capacities against the new needs procedures manual needs to be developed of the utility and identify reallocations and covering the whole procurement cycle, training requirements. Organizing EDL staff to The Way Forward 29 30 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 comply with the new management approach will require a thorough examination of roles SECURITY within the organization, job descriptions, and a remuneration policy that includes 2.1 Increase Utility-Scale performance incentives. Most importantly, to ensure staff participation and support, Renewable Energy EDL will need a robust change management 65. Preliminary analysis of EDL’s least-cost strategy, with regular internal communication generation expansion path indicates the between management and staff to keep need to significantly increase the share of RE everyone involved and informed. capacity in the system. This certainly supports 63. In the first 100 days in office, the Government the Government’s aggressive new target to should therefore consider the following: allow the country to meet 30 percent of the total electricity and heat from RE by 2030 and i. Establishing detailed and transparent is integral to Lebanon’s Nationally Determined criteria for the selection of EDL’s Contributions to the global climate change independent board members; agenda. However, to meet this target, which amounts to an almost 14-fold increase from ii. Forming a panel for identifying and 350 MW (including 282 MW of hydropower and recommending at least 7 qualified 7 MW from landfill gas) currently operating to candidates for EDL board membership; and 4,714 MW over 10 years, a significant ramp-up of investments in RE capacity is needed. iii. Appointing the new independent members to the board and tasking them and MEW 66. Scaling up renewables would have significant with developing performance contracts benefit for Lebanon, not only in terms of within 3-6 months to cover EDL targets and cost savings for the power sector, but also in improvement. terms of energy security and environmental sustainability for the country. On average the 64. In the first 12 months in office, the Government levelized cost of renewable energy is lower should also consider the following: than thermal generation, hence lowering i. Adopting a time-bound plan for the cost of supply overall. Renewables would restructuring the sector to privatize EDL’s also lower greenhouse gas emissions and air generation plants and establish private pollution, with associated health and social concessions for distribution services, benefits. Additional benefits include improved starting 2022 after expiry of the existing energy security through reduced fuel imports DSP contracts. and energy mix diversification, and promotion of domestic industries for manufacturing of ii. Adopting a time-bound plan to modernize components. EDL’s governance, core business functions, and operational performance; 67. The MEW (through LCEC) developed the National Renewable Energy Action Plan iii. Preparing a performance contract to (NREAP) for 2016-2020 that defines the target set targets and conditions for EDL’s by 2020 to implement RE projects equivalent performance improvement over the next to 12% of the projected total electricity and 4-5 years; and heating demand. The announced target within the NREAP are 331.5 MW hydro, 200 MW wind, iv. Requiring EDL to publicly disclose its 150 MW large-scale solar photovoltaic (PV), financial and operational information. 100 MW distributed solar, 1.1 m2 solar water heating (SWH) by 2020, and almost double that for 2030; and the potential for RE in Lebanon is significantly higher. 68. In 2017, LCEC launched its first auction for 12 overall risk profiles. These issues are equally 15-MW solar PV plants in the country’s four applicable to thermal generation expansion main regions, with the main concentration as they are to RE expansion. On the technical of proposals located in the Bekaa Valley side, resolving the challenge of land availability and Hermel region because of their higher and reinforcing the transmission grid would solar irradiance and lower land costs. The also be critical. procurement is now in the final stage. In 2018, the MEW and LCEC launched another bid to 72. Towards that end, there may be options install three PV farms of 100 MW combined offered by some international institutions with storage. The MEW also signed its first that provide the necessary packaged support power purchase agreements (PPAs) in 2019 for to move this process forward. For example, the 3 utility-scale wind power projects for a total World Bank Group’s “Scaling Solar” program capacity of 226 MW, which are in the financing brings together support for transactional stage. The second round of wind auctions advice, pre-packaged tender documents, fully was launched in April 2018 with significant developed and market-test legal agreements, interest. competitive financing and insurance, and risk management and credit enhancement 69. Successful realisation of large-scale RE mechanisms. Program preparation and deployment to meet the Government’s 2030 implementation for solar PV plants could span target requires significant adjustments to as little as 24 months, including procurement, the policy, regulatory, infrastructure and financing, and construction of a plant. financing mechanisms. The creation of the ERA and MEW planning department, as 73. In addition, the Global Solar Risk Mitigation discussed in Sections 1.1 and 1.2, should help to Initiative (SRMI), a new joint World Bank define an overarching regulatory framework and Agence Française de Développement for private sector investment. In addition, initiative, provides an integrated approach the Government will need to reinforce its to tackle policy, technical and financial issues commitment with individual target capacities associated with scaling up solar energy and timeframe for different technologies deployment. This effort supports developing (solar PV, wind, hydro, concentrated solar, the enabling policy environment, e-tendering biogas). platform to streamline the procurement process, and risk mitigation for smaller (< 20 70. This can be done within the context of a MW) projects. detailed least-cost plan that integrates EE, renewable and thermal generation, 74. Accordingly, in its first 12 months in office, the and transmission investments needed, to new Government should consider adopting a provide clarity on the additional capacity and least-cost generation plan that outlines RE generation mix in the next 10 years. Ostensibly, expansion path in the first 10 years. this plan should be developed by the MEW’s new planning department discussed in 2.2 Increase Thermal Power Section 1.2, with LCEC technical advice on RE. Generation Capacity 71. To secure low RE prices, which will help reduce 75. To rapidly expand supply, Lebanon needs to the cost of electricity, the Government will scale up both its thermal and RE capacity need to streamline administrative processes in parallel. In the short- to medium-term, and develop risk mitigation schemes to installation of new gas-fired generation attract developers. This would include capacity should be accelerated. These gas- eventually raising sector tariffs to reflect fired plants are needed to not only address costs, enhancing the creditworthiness of EDL the current generation deficit, but also to and providing adequate guarantees to reduce provide the necessary operating environment the off-taker’s risks and the transactions’ The Way Forward 31 32 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 to significantly scale-up RE generation. FIGURE 8 – PLANNED ENERGY Flexible gas-fired generation would help VS. FORECASTED DEMAND (MW) manage the increased intermittency inherent in RE resources, grid frequency stability to ensure the electric system’s reliability, 5000 and distribution network’s resilience to 4500 accommodate and manage stresses from 4000 increased distributed RE. 3500 3000 76. Estimates of EDL’s current generation deficit 2500 varies depending on estimates of demand. 2000 Analysis indicates that at least 1500-2000 MW of additional capacity is needed just to 1500 eliminate, or at least minimize, reliance on 1000 private generators and temporary generation 500 (see Figure 8). Towards that end, the 2010 0 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Sector Policy and its 2019 update identified several gas-fired generation plants, primarily EDL plants IPPs at Deir Amar, Salaata and Zahrani, that are Temporary generation (existing) Temporary generation (new) urgently needed to meet this generation Imports Peak load (baseline) Peak load (high estimate) shortfall. Of course, this plan will need to be verified by a least-cost analysis to determine the size, location and timing of these plants as RE scale-up takes place. 79. Given the fiscal imperative to significantly reduce subsidies as soon as possible, 77. In 2018, the Government announced its electricity supplies need to be increased to intention to develop new generation allow tariff increases. Current sector forecasts capacity, whether RE or thermal, under the assume that, if electricity tariffs can be private-sector independent power producer increased to the weighted average electricity (IPP) model. This would reduce demands on costs to consumers by 2021, subsidies can public financing for new generation plants, be almost eliminated. Even if one presumes thus reduce overall public debt, and promote procurement for the new plants can be private sector investments in the sector. immediately launched, it is unlikely that initial power from these plants can be available by 78. A typical gas-fired IPP secured on a 2021, particularly if a competitive process competitive basis and commercially financed for a commercially financed IPP is expected. generally takes 12-18 months for procurement Hence, temporary generation may need to and financing to be completed; 16-18 months be considered to provide power until the from start of construction for the plant to permanent plants can be brought online. generate power from its gas turbines; and an additional 8-12 months for the combined 80. Towards that end, a process to secure the cycle phase to be installed and the entire additional generation capacity needs to plant completed. In other words, it takes be urgently launched. In order to ensure approximately 28 to 36 months from the time transparency of this process, it should the procurement process is launched to the include such measures as public bid opening, time initial electricity from the plant’s gas an independent complaint mechanism to turbines can be injected into the grid (which allow bidders to challenge decisions during typically represents approximately 60 percent the bidding process until contract award, of the plant capacity). publication of short-listed companies and contract award (with details on the scope, amount, bidder name, period of contract, etc.). The Way Forward 33 34 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 81. The MEW prepared Requests for Proposals 85. If the political constraints underlying this (RfPs) that incorporate some of the foregoing packaged approach can be resolved, it measures. The RfPs are designed to solicit is strongly advisable to split temporary private sector proposals for two packages. The and permanent generation into separate first combines 650 MW permanent gas-fired transactions to avoid potential delays and IPP at Zahrani and temporary generation at costs involved with the packaged approach. Zahrani (400 MW), Jieh (100 MW), Jeb Jenine (50 MW), and Bint Jbeil (50 MW). The second 86. Furthermore, the RfP is expected to require combines 750 MW permanent gas-fired IPP bidders to submit a secondary proposal that at Salaata and temporary generation at Deir is optional for the Government, where bidders Amar (450 MW). The temporary generation propose gas-to-power permanent solutions in both packages are technology neutral and at both Zahrani and Salaata. In other words, provide bidders discretion to source their own the selected bidders would be responsible for fuel or, in the case of HFO, purchase it from designing, financing, constructing, owning the Government. and operating the permanent power plants at those locations, as well as arrange for all the 82. Combining permanent and temporary gas supplies needed for them. generation in a single package was done because of Lebanon’s historical experience of 87. This optional bid significantly increases delays in completing permanent generation, complexity of the procurement process (which thus extending temporary generation for remains geared towards an award based many years more than planned. There was a on providing only generation capacity) and political imperative to ensure that temporary brings into question the progress made on the generation can be removed as soon as ongoing FSRU procurement undertaken by possible so a decision was made to link it with LOI since May 2018. Given the urgent need for permanent generation to ensure that the the additional generation capacity, it is highly same private sector developer is committed advisable to simplify the bidding process and and incentivized to remove it. scope to focus on procuring permanent power plants in order to ensure availability of this 83. However, private sector companies involved power in the shortest possible time and at the in permanent and temporary generation tend most advantageous prices. The procurement to be different. Temporary generation is also of gas supply, through FSRUs, should be typically structured as a service with rented carried out in a separate process, as further equipment and little capital investments, discussed in Section 2.3 thus allowing for short mobilization periods. Permanent generation, on the other hand, 88. In addition to new permanent power plants at is capital intensive and requires complex Zahrani and Salaata, efforts are well underway financing that takes some time to arrange. to develop a third new one at Deir Amar. Originally, the second power plant at Deir 84. Combining the two in one transaction, an Amar (Deir Amar II) was to be constructed approach intended to solve essentially a several years ago on a publicly-financed political problem, delays mobilization of basis. The project was competitively awarded temporary generation that would have to to J&P Avax, a Greek-Cypriot engineering, await conclusion of permanent generation procurement and construction (EPC) company, commercial and financing arrangements. At and GE. However, disputes arose between the the same time, it complicates financing of EPC contractor and the Government with the permanent generation that would have to respect to payment of value-added taxes, so consider the developers’ obligations to provide Deir Amar II was never constructed. and remove the temporary generation. 89. As part of the process to resolve this dispute and proceed with construction of Deir Amar II quickly, the Government conceptually agreed timing of procurement processes for plants at to convert the plant into an IPP with private both Deir Amar and Zahrani (followed closely sector financing on a direct negotiation basis. by the Salaata plant) means that there will A new sponsor group was identified to design, be significant commercial financing needs finance, construct, own and operate the plant, (at least US$ 2 billion) in a very short span. and settle J&P Avax’s dispute. The sponsors This will also closely coincide with the FSRUs’ proposed a levelized capacity charge of financing process (which could add up to US$ US¢2.95/kWh (including the settlement costs 500 million to the financing needs). Given with J&P Avax and excluding the costs of fuel the current turbulence in Lebanon’s access to to be provided by the Government) from the commercial capital, it is unclear whether such new plant. Direct negotiations of an energy large financing needs can be accommodated conversion agreement have been ongoing on over a short period. Furthermore, the foreign this basis. exchange requirements for repayment of these loans can add to the macro-fiscal stress 90. In order to ensure transparency, fit-for- on the economy, particularly in the medium- purpose, and value-for-money, such term. These issues need to be carefully negotiated transactions need to be subjected evaluated and addressed in the transactions’ to independent competitive tests. Ideally, structure. the transaction should follow the same competitive process currently underway 94. Second, financing institutions will likely for permanent power plants at Zahrani and require adequate guarantees to backstop the Salaata. Alternatively, the transaction could public obligations of the power purchaser. be subjected to a Swiss Challenge, whereby Given the current economic conditions and the MEW discloses the technical, financial and the country’s deteriorating credit rating, commercial details agreed with the current government guarantees alone may not be sponsor group to invite competing proposals enough. Additional support may be needed, to beat it. The current sponsors would then which can be in the form of export credit have an opportunity to beat any competing support, sector cash-trap mechanisms, bid. multilateral guarantees, programmatic guarantees (e.g., Argentina’s Renewable 91. It is important to note, however, that Energy Guarantee Fund (FODER)), or, more generation forecasts currently anticipate likely, a combination of some of these options. Deir Amar II’s initial power to be available in It is vitally important that alternatives are 2021, with the balance of plant completed in quickly formulated with credible financial 2022. A competitive process is likely to delay advisors and tested through market sounding this schedule, which in turn will increase the to ensure availability of, and avoid delaying temporary capacity needs and its associated financing for, these critical investments. costs. In this respect, there are some trade- offs that will have to be considered. 95. In the medium-term, the 2019 update to the sector plan also calls for decommissioning of 92. At the very least, the transaction should the old plants at Zouk and Jieh, which, aside be reviewed by a credible independent from low efficiency, high operating costs, and third party hired specifically to assess significant environmental impacts, use HFO- and certify the economy and efficiency fired steam turbines that cannot be switched of the transaction terms against relevant to natural gas. The MEW plans to replace international benchmarks, with a summary of these old plants with new peaking capacity its conclusions publicly disclosed. using gas-fired open-cycle gas turbines, but additional analysis is needed to confirm the 93. Moreover, there are two other overarching key impacts scaling up RE can have on the timing issues that merit careful consideration and of this replacement. The loss of generation planning for all these transactions. First, the The Way Forward 35 36 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 capacity from these old plants, plus the on current capacity alone. As generation potential loss of rented barges at the same capacity increases, so would these savings. It locations in 2021 upon expiry of their current is projected that if fuel switching happens in purchase contracts, requires careful planning 2022 for the existing plants which can run on to avoid sudden drops in generation capacity. gas and for the temporary generation to be secured (see Section 2.1), costs can be lowered 96. In order to begin addressing some of the to the current weighted average cost of generation challenges facing the sector, the electricity to consumers, allowing for tariffs to Government should therefore consider the be raised to this level with limited impact on following in the first 100 days in office: customer welfare and eliminating subsidies. It is thus imperative to secure natural gas for i. Hiring credible financial advisors to assist power generation as soon as possible, but MEW in structuring the transactions and Lebanon’s options are limited. ensuring adequate cover for anticipated financing needs; 99. In 2017, Lebanon concluded the first competitive bidding round that awarded ii. Revising the RfPs to separate temporary exploration and production rights to a sole and permanent generation into two bidder making offers for only two of the separate procurement processes; and blocks (see Figure 9). The disappointing depth iii. Launching the procurement processes for of competition was somewhat mitigated by permanent generation at Zahrani. the caliber of the winning consortium, which consists of France’s Total (40 percent), Italy’s 97. In addition, the Government should consider ENI (40 percent), and Russia’s Novatek (20 the following in the first 12 months in office: percent). The COM approved the exploration and production agreement (EPA) in December i. Launching a transparent and competitive 2017, and work has already commenced on procurement process for temporary drilling initial exploratory wells. generation at Zahrani, Jieh, Jeb Jenin, Bint Jbeil and Deir Amar; and 100. Under the EPA, the consortium has the right to explore for oil and gas during a 5-year ii. Completing and publicly disclosing exploration phase, divided into 2 periods of 3 a preliminary assessment of the and 2 years each, which can be extended for environmental and social impacts, up to 10 years with COM approval. If oil or gas including associated public consultations, is discovered, the consortium must appraise of the proposed plant at Salaata that the commercial potential of the discovery meets International Financial Institutions’ and, assuming confirmation, propose a plan, standards, analyzes costs and impacts subject to COM approval, to develop the at each of the identified sites, and discovery and produce oil and gas. Once the recommends the most suitable location. plan is approved, the production phase lasts iii. Launching a competitive procurement up to 25 years, which can be extended by 5 process for Deir Amar II or an independent years if additional investments are made. review of the current transaction. 101. Assuming no external factors or force majeure, LPA projects that the exploration phase would 2.3 Accelerate Introduction of last 4-6 years (commencing in 2019), followed Gas for Power Generation by 1-2 years for evaluation of any discoveries and 1-3 years for any facility upgrades needed 98. Given the significance of fuel to EDL’s to operationalize commercial finds. In other operating costs, it is estimated that switching words, it would take another 6 to 11 years from liquid fuels to natural gas can save the before the production phase can start, making sector up to US$200 million per year based FIGURE 9 – LEBANON OIL AND GAS EXPLORATION BLOCKS domestic gas resources for power generation over the anticipated 10-year term of any gas more of a long-term prospect. purchase transaction, even if the first and second options materialize. 102. In the short- to medium term, Lebanon has 3 options for access to gas. The first 103. Several attempts have been made in the two options are discussed in more details in past to install FSRUs, without much success, Section 2.4 below. While these options should largely for political reasons. Prior discussions not be ignored for Lebanon’s medium- to on FSRUs focused on installing a unit offshore long-term gas supply needs, the fastest from the existing and planned power plants source for the gas volumes Lebanon needs at Zahrani. This assumed that gas can be remains the third option, namely liquified gas imported to supply current and planned power imported by ship to a receiving regasification plants at Deir Amar in the north through the terminal. As illustrated in Figure 10, there are Arab Gas Pipeline (AGP), which has not yet or is two main types of such receiving terminals: expected to pan out in the short- to medium- onshore terminals and FSRUs. These options term, as further discussed in Section 2.4. Plans were studied extensively over the past decade, then shifted to installing an FSRU in the north concluding that FSRUs are better for various at Deir Amar and constructing a gas pipeline reasons. Moreover, installation of FSRUs will linking Deir Amar with southern power plants also help diversify Lebanon’s energy sources at Zouk, Jieh, Zahrani, and Tyre. However, this The Way Forward 37 38 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 FIGURE 10 – COMPARISON OF ONSHORE TERMINALS AND FSRUS ONSHORE IMPORT TERMINAL FLOATING REGAS (FSRU) » Higher capital costs » Lower upfront capital costs » Long lead time (3-5 years) » Short lead time (2-3 years) » Significant upfront investment capital » Fewer environmental and social issues needed » Flexible and scalable » Complex regulatory approval processes » Unit deployed close offshore » Limited flexibility and scalability » Moveable or even used as LNG carrier » Requires large tracts of land » Flexible for shorter terms » Fixed location » Intended for long-term use too did not pan out primarily because of to all power plants. The biggest challenge political objections to installing an FSRU only of this coastal line is the link between Zouk in the north. and Jieh, which will have to go through or around Beirut. While more extensive analysis 104. In May 2018, a political compromise was is needed to firm up this option, preliminary reached so the MEW, through the LOI, launched assessment indicates that the associated an international competitive procurement cost and time to complete this link may process to select a private sector developer to be significant. Securing the rights-of-way design, finance, construct, own and operate through the densely populated Beirut or FSRUs and associated infrastructure. The installing a marine pipeline in that area, RfP called for non-binding bids to (a) install though eventually needed for a national gas FSRUs, terminals, and storage tanks at Deir transportation backbone, may be challenging. Amar, Zahrani, and Salaaata; and (b) construct At a minimum, this option would require 36-inch gas pipelines from Deir Amar to Zouk extensive additional studies to firm up and a and from Zahrani to Jieh and Tyre. The RfP new procurement process that would delay was designed for award of (a) and (b) as a availability of gas by at least 12-18 months. package (see Figure 11). In this respect, two FSRUs at Deir Amar and Zahrani seem reasonable. 105. There is rationale for installing FSRUs at Deir Amar and Zahrani. Installing only one unit 106. However, the basis for installing a third unit at either Deir Amar or Zahrani would require at Salaaata remains unclear. If an FSRU is construction of a north-to-south gas pipeline installed at Deir Amar and a gas pipeline is to ensure supply of gas along the coastline constructed to link it with Zouk, it is unclear why any future power plants at Salaaata could FIGURE 11 – PLANNED LOCATION OF FSRUS not be served through the same pipeline. Analysis of bids submitted in response to the RfP indicates that this third FSRU terminal at Salaaata would add US$1 billion to the overall net costs over the anticipated 10-year term of any gas supply arrangement without supporting any more generation capacity than the 2-FSRU solution. This additional cost, which amounts to approximately US$100 million per year, primarily consists of the FSRU lease (approximately US$54 million), amortization of the costs of the marine infrastructure and FSRU mooring, and operation and maintenance of the facilities. 107. Additionally, the rationale for the required 36-inch pipelines is also unclear. The volume required to serve anticipated demand at Salaaata and Zouk in the north and Jieh and Tyre in the south requires a 10-20-inch (Note, Beddawai below refers to the Deir Amar location) pipeline, an estimate in line with LOI’s own Source: Ministry of Energy and Water (2018). conclusion (12 inch). There is of course a valid argument to size the pipeline at 24-inch to match the size of the AGP in anticipation of for the new scope; (iii) request each of the 6 flowing gas to and from Lebanon regionally. prequalified bidder to resubmit offer for the Sizing the pipeline at 36 inches would new scope; and (iv) issue a new bid, but only unnecessarily increases the transaction costs for one FSRU at Deir Amar and a pipeline to and requirements for the pipeline rights- Tyr. The first two options risk complaints of-way, in the event the line is constructed from the other qualified bidders about the onshore. transparency and fairness of the process. The final option would prolong the process and, as 108. Changing the number of FSRUs required and explained above, risk increasing the costs and reducing the size of the pipeline in the RfP complexities of the project due to the pipeline would represent a significant deviation from going through or around Beirut. the original scope of the tender. Initially, 8 strong international consortia prequalified, 110. The recommended approach is therefore of which 2 were later disqualified at the Option 3, namely to revise and reissue the bid stage, leaving 6 providing credible bids. RfP to the same technically prequalified The technical evaluation was completed in bidders that participated in the bidding January 2019, and the financial evaluation was process. The revised scope would focus on 2 completed after a long delay in July 2019. The FSRUs at Deir Amar and Zahrani as a package, decision on how to proceed has been with the with construction of at most 24-inch pipelines COM since. from Beddawai to Zouk and from Zahrani to Jieh and Tyre. The process, from revising the 109. Given the need to adjust the RfP scope, the RfP to determining a preferred bidder based new Government should urgently settle this on the new bids, is expected to take 3 months. process. The options could include (i) negotiate This approach would ensure transparency with the preferred bidder to resubmit offer for and competition. It will also give an equal the new scope; (ii) negotiate with top three bidders to form a consortium to submit offer The Way Forward 39 40 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 opportunity to all bidders to participate, thus south in the coastal areas and loops through reducing the risk of complaints. the northern Bekaa valley toward Beirut area. 111. Once a preferred bidder(s) is identified, 114. EDL’s long-term technical strategy is to another process starts that would likely take transition away from the 150-kV voltage months to complete before any construction network and base the transmission system on can start (e.g., firming up technical and 66-kV and 220-kV equipment as standard sub- demand requirements, negotiating gas transmission/transmission voltages. This will supply agreements (GSAs), completing require both rehabilitating and strengthening the environmental and social impact due the 66-kV grid, and significantly expanding diligence, and financing). This process needs to the 220-kV network to become the country’s be carefully coordinated with the negotiations transmission backbone. The system can then of PPAs for planned IPPs at Zahrani, Deir Amar, better help meet increasing demand and and Salaata. There are many key common support the corresponding increasing power considerations for both FSRUs and IPPs, generation needs and its shifting technology including base import gas volumes, storage mix, and the need for stronger regional and backup supply, power plant dispatch integration. rates and seasonal variability that will impact gas demand, maintenance and dry-dock 115. Priority transmission investments in the scheduling, testing and commissioning, power short- to medium-term could thus be plant outages, force majeure, etc. generally organized into the following groups: 112. Towards that end, the new Government i. Investments related to connecting and should consider the following actions in the evacuating power from the planned first 100 days in office: thermal power plants at Deir Amar, Zahrani, and Salaata; i. Hiring (or extending existing contracts for) technical and legal consultants to ii. Investments related to new renewable assist the Government in completing the energy plants across the country; and procurement and negotiation process; iii. Investments driven by the need to supply ii. Resolving the procurement scope (e.g., growing load at the main population and gas pipeline, number of FSRUs, manner of economic centers in the country. award, etc.) in a transparent manner that 116. Transmission grid reinforcements are needed avoids risks of complaints from bidders; across the country to accommodate the and planned additional generation capacity, and iii. Completing and announcing selection of to ensure reliable supply to demand centers. preferred FSRU bidder(s) for Deir Amar and These investments are outlined in the 2019 Zahrani. update to the 2010 Sector Policy, which lists about 40 transmission projects for a total 2.4 Expand and Refurbish the investment of approximately US$470 million. The list is based on transmission studies Transmission Network conducted by Electricité de France (EDF) in 2013 and 2017 and currently being updated.6 113. EDL’s transmission network includes the older 66-kV grid, with country-wide coverage; some 150-kV transmission lines in the central coastal 6 “Republique du Liban, Electricité du Liban (EDL): Etude area around Beirut introduced once the 66-kV du Schéma Directeur Transport du Secteur Electrique au network started to experience bottlenecks as Liban, Plan d’Investissement”, EdF, Août 2013, Version the transmission system grew; and the newer Finale “Republique du Liban, Electricité du Liban (EDL): Update of the Transmission Master Plan”, EdF, Final 220-kV network that stretches from north to Report, May 2017. 117. Priority is given to strengthening the North both of which currently have excess generation and South Beirut Loops to ensure reliable capacity, through these existing transmission supply to the Beirut area. There is also the need lines. Both Egypt and Jordan are willing to sell to modernize and strengthen power system Lebanon electricity at competitive prices, but monitoring and control to improve security this potential requires an engagement on the and reliability of system operations, respond political level to activate or re-establish the to the challenge of the anticipated increase trading framework on the line, particularly of intermittent renewable generation on the through Syria. transmission system, and protect the power system against cyber-attacks. 122. Similarly, on the gas side, the cheapest source of gas for Lebanon is likely to be through the 118. Accordingly, in its first 12 months in office, AGP that links Egypt and Lebanon through the new Government should consider Jordan and Syria. The pipeline operated for securing financing for the identified priority only 1 year after it was completed in 2008, but investments to ensure security of supply to deliveries stopped shortly after when Egypt’s Beirut and integration of new generation available gas resources dwindled. Egypt has capacity. since made significant gas discoveries in the Mediterranean (Zohr field) and the Nile 2.5 Promote Regional Electricity Delta (West Nile field) and is able to export gas again. The Egyptian Government has and Gas Trade already indicated willingness to export gas 119. While regional electricity trade is unlikely to Lebanon, but this gas will have to transit in the short-term, such an option remains through Syria where the AGP’s condition critical for Lebanon’s medium- and long- after the country’s civil war remains unclear. term energy security. In 1988, Egypt, Iraq, There are also other geopolitical complexities Jordan, Syria and Turkey established a that will need to be addressed before any transmission link that was later expanded to commercial transactions can take place, include Lebanon, Palestine, and Libya. The making this option, while important, more of agreement among these countries required a medium- to long-term prospect. them to upgrade their electricity system to 123. Any such transactions (for both electricity ensure minimum standards to facilitate flows and gas on the existing infrastructure) require on this transmission line. cooperation and coordination at the political 120. In October 1992, the original 5 countries signed level first to facilitate transit through Syria. It a general trading agreement to cooperate would thus be advisable for the Government on trade, and to provide mutual assistance to task the Ministry of Foreign Affairs (MFA) and share benefits of surplus power they to work with MEW to address the broader may have. This agreement was followed in regional questions and explore the feasibility 1996 with a comprehensive agreement that of an agreement with Syria to wheel Egyptian outlines the terms and conditions for using and Jordanian power and gas to Lebanon. the transmission link. 124. Moreover, in 2019, the Governments of 121. Despite these developments, there has been Lebanon and Cyprus agreed to cooperate little trade on the transmission line since its in areas related to gas transportation. inception. The committees established under Production from Cyprus’s Aphrodite gas the various agreements do not appear fully field is expected to begin in 2024/25 functional, and terms and conditions of trade timeframe, giving Lebanon access to another have not been enforced. Nevertheless, in the regional gas supply source. However, to medium- to long-term, Lebanon can access access Cypriote gas, a marine gas pipeline lower cost electricity from Egypt and Jordan, needs to be installed to link the Aphrodite field to receiving facilities in Lebanon. The The Way Forward 41 42 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 complementary benefit from this pipeline is FIGURE 12 – ILLUSTRATIVE SCENARIO that it could also be used to export Lebanese FOR TARIFF ADJUSTMENTS gas, once off-shore discoveries are made, to markets in Europe through the planned East USD m USD / kWh Mediterranean pipeline linking Cyprus to Italy 1400 0.250 0.226 through Crete and Greece. It could also help 1200 1205 0.200 0.200 transport Lebanese gas to Egypt’s liquification 1000 facilities for export to European and other 0.168 0.164 0.160 0.150 800 0.160 markets by ship through the Suez Canal. 0.147 0.146 600 0.095 0.100 125. However, while this option should not be 400 460 ignored, prospects for this marine pipeline 200 0.050 from Lebanon remain in the conceptual 0 0.000 stage and still need extensive studies and 2020 2021 2022 2023 2024 2025 2026 discussions among stakeholders. There are Deficit (USD m) also other geopolitical considerations that Breakeven tariff (USD/kWh) may complicate prospects for linking to Weighted average cost to consumer in 2019 (USD/kWh) an energy hub in Cyprus that may require Suggested tariff (USD/kWh) coordination between MEW and MFA. This The breakeven tariff is estimated based on the oil price makes it more of a medium- to long-term of $60/barrel gas supply prospect for Lebanon’s power generation. operational costs, etc. Indexation would be carried out on a quarterly basis, based on the STABILITY difference between the average cost of fuel (plus working capital costs) for the previous 3 months and the baseline established at the beginning of the year. Thus, if at the 3.1 Reform Electricity Tariffs beginning of a given year, electricity tariffs are 126. As previously noted, electricity tariffs are calculated based on Brent oil price of US$60 far below EDL’s average cost of supply. The per barrel (bbl) and, during the first quarter, Government’s decision in the 2019 update of prices averaged US$65/bbl, the increased the sector policy to undertake tariff reforms costs to EDL of US$5/bbl (plus working capital is thus justifiable. costs) would be passed on to consumers in the second quarter through the indexation 127. As the first step, the update adopted, mechanism. Inversely, if prices were to fall in principle, indexation of EDL’s tariff to to US$55/bbl, tariff indexation would provide reflect fluctuations in market prices of fuel consumers a credit equivalent to EDL’s savings. purchased for power generation. Given the current financial crisis, it may be advisable 129. EDL should disclose quarterly the details of to also consider including indexation for these calculations to ensure full transparency, exchange rate fluctuations between the with a true-up calculation undertaken at the Lebanese lira that is the basis for EDL’s end of the year, subject to EDL’s annual audit revenue and US dollar, which is likely to be the and review by the MEW (and subsequently basis for EDL’s purchases of fuel, equipment, ERA, once it is operational). A similar approach and spare parts. can be adopted for fluctuations in foreign exchange (with respect to the portion of EDL’s 128. To illustrate, with respect to fuel, tariff costs that is in foreign currencies). Towards could be fixed at the beginning of the year that end, the Government should consider based on the estimated cost of supply, with in the first 100 days in office adopting the realistic assumptions on demand, fuel costs, mechanism that will operationalize these FIGURE 13 – DISAGGREGATED MONTHLY indexations. HOUSEHOLD ELECTRICITY CONSUMPTION 130. Further tariff adjustments in the short- to FROM PUBLIC GRID PER POPULATION medium-term will require focused efforts on QUINTILE (2011/12) increasing supply and reducing sector costs Quintiles by faithfully and timely implementing the policy initiatives outlined in this paper. EDL’s Top 673 average cost-reflective tariff is projected to be US¢22.6/kWh in 2020, assuming targets for 4 619 reducing network losses are met (see Figure 12). This leads to a subsidy requirement in 3 548 2020 of US$1.205 billion (US$205 million more than allocated in the 2020 budget) at 2 503 the current average EDL tariff of US¢9.5/kWh.7 Bottom 431 131. In 2021, subsidy requirements fall to US$460 million, assuming EDL’s average tariff can be 0 100 200 300 400 500 600 700 increased by then to the weighted average kWh / month cost of electricity to consumers (i.e., the combined cost of EDL and private generator- Source: World Bank staff calculations based on extrapolated supplied electricity to the average consumer) HBS 2011/2012 data of US¢16.8/kWh, which would still be below EDL’s average cost-reflective tariff. In 2022, subsidies would be eliminated entirely, 3.6/kWh) for the first 300 kWh of their assuming EDL completes the switch to natural consumption. This universal subsidy is highly gas for power generation and EDL’s average inefficient and costly. costs continue to decrease as new gas-fired and RE plants come online and progress is 133. An analysis of 2011/12 electricity consumption made on reducing losses. indicates that the poorest 20 percent of households in Lebanon consume on average 132. In addition, a new tariff methodology 430 kWh/month from the public grid (see is needed to more appropriately target Figure 13). This number increases to 503 kWh subsidies and ensure recovery of the sector’s when looking at the bottom two quintiles efficient costs while, at the same time, protect of the population (poorest 40 percent of customers from shouldering the burden of households). These consumption levels sector inefficiencies. The tariff methodology are significantly higher than international follows an incremental block structure that standards, emphasizing the need for makes the heavily subsidized rates for initial implementing demand-side energy efficiency consumption levels available to consumers in measures and adopting a tariff structure that higher consumption blocks. This means that incentivizes energy conservation.8 even commercial and residential customers whose consumption exceeds 500 kWh/month 134. In the short-term, however, it may be benefit from extremely cheap prices (US¢2.3- necessary to initially restrict low tariffs to those who consume up to 500 kWh/month in order to protect the welfare level of poor 7 Without an increase in the amount to cover the estimated US$205 million of additional sector costs, it is likely that the only recourse EDL has to manage its 8 In terms of quantity of electricity consumed, household cashflow is to increase load shedding to save on fuel consumption of electricity in Lebanon (public and expenditure and remain within the US$1 billion budget private) is high in comparison to relevant international envelop for subsidies. benchmarks, averaging around 744 kWh per month. The Way Forward 43 44 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 and most vulnerable households. With more commercial customers is one option for EDL recent economic challenges in the country, to increase revenues while better aligning the poverty level may have gotten worse, tariffs with different users. further emphasizing the need for gradual tariff adjustments at different consumption 138. On the one hand, this would restrict blocks. commercial businesses from receiving heavily subsidized tariffs for the first increments of 135. If tariff increases are progressive, combined monthly consumption, which is meant mainly with the increase in grid supply to replace for vulnerable households. On the other hand, private generators, the poverty and it would allow raising tariffs for very large distributional impact can be limited. Average residential customers (e.g., those consuming tariffs can be increased in 2021 to the current more than 1,000 kWh/month) while not average cost to consumers of US¢16.8/kWh affecting small businesses. Alternatively, in a progressive manner, with the highest energy charges could be varied by capacity of increases in tariffs gradually targeting higher customer connections. The guiding principles consumption blocks (501+ kWh/month). in this restructuring should be efficient price signaling and affordability. TABLE 1: ILLUSTRATIVE IMPACT OF PROGRESSIVE 139. It is worth noting that it is vitally important TARIFF INCREASE AND SHIFTING TO PUBLIC GRID for any changes in tariff levels, structure or methodology to be undertaken after Pre-Reform Post-Reform Change extensive public consultations. Aside from the (I) (II) (II-I) prevailing lack of trust in the sector, electricity Poverty (%) 32.30 33.08 0.78 has a pervasive impact on all walks of society. As such, it is critical that stakeholders Inequality (%) 32.14 32.12 -0.02 (including disadvantaged/marginalized Transfers 0 193,409 0 groups) understand how issues in the sector (LBP millions)* are being tackled and the rationale behind Note: Estimated impact of tariff increase to the current average adopted solutions. cost to consumers in a progressive manner (higher increase for higher consumption blocks) 140. Toward that end, in its first 12 months in office, *These are the universal transfers required to bring poverty levels the new Government should launch a public back to pre-tariff increase levels, which are a small fraction of the fiscal savings from tariff increase communication and consultation campaign to raise awareness about tariff issues and prepare a plan to adjust tariffs (including tariff 136. If grid supply could achieve almost 20-24 hours structure) as soon as supply improves. by 2021 based on current plans, households and businesses could shift their electricity use 3.2 Reduce Distribution Network from private generators to the public grid. This Losses and Strengthen EDL’s is estimated to almost cancel out the average welfare impact of tariff increases, even when Revenue Collection considering indirect impact of price increases 141. It is critical that ongoing work on reducing of other goods and services as businesses pass technical and non-technical losses on EDL’s on their tariff increase to consumers (Table 1). distribution network is accelerated. Upstream 137. Besides changes in the tariff’s level and investments in additional generation and methodology, the tariff categories need transmission capacity make little sense if to be reviewed. Currently, residential and the cost of the added energy in the network commercial low voltage customers pay cannot be recovered from those benefiting the same tariff, under a rising block tariff from it. While the 2019 update to the sector structure. Separating out residential and policy provides aggressive annual targets 144. For example, with respect to public FIGURE 14 – PROJECTED IMPROVEMENTS institutions, the Government could adopt ON EDL’S NETWORK direct payment of electricity bills by the MOF from budget allocations of the public 30.0% institutions involved or offsetting payment 27.1% arrears from taxes payable to the Government 25.0% 3.5% 24.1% by EDL. 3.5% 5.0% 19.1% 20.0% 145. To manage distribution network losses, EDL % Energy Supplied 4.6% 3.0% 15.0% 14.2% 14.2% 14.2% 14.2% must be able to locate them. This requires 3.9% 3.0% 3.0% 3.0% 3.0% deploying and operationalizing an Advanced 10.0% 18.7% 16.0% 3.9% 3.9% 3.9% 3.9% Metering Infrastructure (AMI) Program, 5.0% 12.2% which is already a major (albeit yet to be 7.3% 7.3% 7.3% 7.3% implemented) component of the private- 0.0% 2020 2021 2022 2023 2024 2025 2026 sector DSP contracts put in place in 2012 to effectively manage the distribution network Non Technical Losses Technical Losses (Transmission) on EDL’s behalf. Technical Losses (Distribution) Total Losses 146. The AMI Program provides for, among others, improved billing, loss and network outage reduction, and improved load management. towards this end, given the challenges in Smart meters, which are an integral part of implementing the necessary steps to achieve the AMI Program, would allow for timely these reductions, a more moderated (but still and accurate billing and detect location of ambitious) trajectory for loss reduction is distribution losses. Furthermore, these meters presented in Figure 14. would allow remote disconnect/reconnect of customers to strengthen enforcement 142. Losses are compounded the lack of payment actions for theft and nonpayment, which raise discipline of public institutions and refugee collection rates. camps. The MEW estimates that accumulated overdue invoices from these consumer groups 147. The installation of smart meters at the over the past 10 years are currently over US$1.2 levels of M1 (generation plant bus bar), M2 billion and US$300 million, respectively. (high voltage (HV)/medium voltage (MV) This significantly contributes to the sector’s substation), M3 (MV feeders), and private collection losses and, in the case of public M4 (MV/low voltage (LV) transformers) have institutions, represents what is, in essence, already been completed by the DSPs, each indirect extra-budgetary contributions. in its region. The next step is to fully deploy the AMI system by installing, commissioning 143. While recovery of these arrears would and operating all the remaining components, certainly be helpful in improving the sector’s including smart meters at the public M4 and finances, the bigger concern is the impact this all M5 level customers, data concentrator lack of payment discipline can have on future units (DCUs), starting from high consumption calculations of the sector’s cost-reflective customers, including public sector customers, tariffs. Without Government transfers, non- and eventually covering the majority of payment of these bills would need to be customers by the AMI Program completion.9 reflected in the tariffs, which would essentially require other consumers to subsidize public institutions and refugee camps’ electricity 9 Full deployment of meters at the customer level may not be possible due to security restrictions in some consumption. As such, the Government needs areas and resistance by a few customers without a clear to act decisively on this issue to avoid future Government policy decision on this deployment, backed distortions of sector tariffs. up with effective enforcement by security services. The Way Forward 45 46 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 148. At the heart of the AMI Program is an AMI 152. It is important to note, however, that the Center to be established by EDL. The Center DSP contracts currently expire on December would provide control over EDL’s revenue 31, 2021, without as yet a clear decision of cycle and customer service activities and what will happen afterwards. The policy consist of head meter management and direction on this point will have a profound Commercial Management Systems (CMS) for impact on how challenges on the distribution all commercial processes and activities of EDL, network will be addressed in the short- to including support for a customer Grievance medium-term. Law 462 (and its recently COM- Redress Mechanism (GRM). approved amendment) contemplate partially privatizing or more likely creating private 149. The CMS provides an integrated single- sector concessions around EDL’s distribution platform for commercial processes and operation. This seems to be the most practical activities (P&A), and fully eliminates the and technically sound solution for the unaccountable manual execution of key distribution network’s future, considering processes, such as transfer of data for billing, that the DSPs are already undertaking customer service, complaint management, etc. most of the work on the network. The DSP As a result, the CMS would enable detection framework, while reasonable for the purpose of billing errors and fraudulent behavior, it was created for, is unnecessarily complex maximize efficiency and transparency of and leaves ambiguities as to the roles of EDL commercial management P&A, and facilitate and the private sector for distribution services quick and efficient response to customers’ that would be resolved by converting it to a commercial requests. The CMS would also concession model. provide a central database of all customers to enable EDL’s effective oversight over the DSPs’ 153. The first step towards implementing Law performance. 462’s vision therefore would ostensibly be unbundling the distribution functions 150. Together with the incorporation of the AMI of EDL into separate companies. These system, focus should be on re-engineering of companies would then operate concessions all retail operations’ P&A and incorporating over geographic territories similar to the split state-of-the-art systems and supporting observed under the DSP contracts, and their tools. P&A should include commercial partial ownership sold to strategic partners in management processes and revenue cycle accordance with limits prescribed in Law 462. activities, including metering, billing, collections, disconnection/ reconnection, and 154. These strategic partners should be customer service. competitively selected based on a new procurement process set up within a 151. The AMI Program allows remote fraud new sector governance framework. The detection, but dealing with fraudulent implementation plan for this effort, which activities requires field enforcement, which should be disclosed for public consultations would mostly be undertaken by DSPs with before finalization, should be completed and support from EDL and law enforcement approved for execution 12-18 months prior organs of the state, when necessary. to expiry of the DSP contracts (i.e., by mid to However, the activities require an appropriate late 2020). This would allow enough time to framework to be agreed to incentivize DSPs transfer related businesses among the parties to achieve specific loss reduction targets. involved. It would also avoid the uncertainty This framework has already been a topic of that occurred at the end of the first phase of extensive discussions between MEW, EDL, and the DSP contracts in 2016 when they were the DSPs, and is expected to be included in a extended on a quarterly basis due to lack of memorandum of understanding (MOU) that clarity as to the Government’s disposition on should be urgently finalized. the topic. Even more importantly, it would avoid disruptions in distribution operations access to low interest rate loans (2.5%) for all and customer service and maintain RE applications and energy efficiency projects, momentum towards achieving loss reduction with a loan ceiling of US$10 million per project targets. and a maximum term of 14 years – including a grace period of between 6 months and four 155. In its first 12 months in office, the new years. To date, this initiative financed more Government should therefore consider the than 940 projects with a total investment following: amount of more than US$560 million, which include rooftop PV and public street lighting i. Adopting an MOU between EDL and PV. the DSPs to, among others, (a) improve allocation of roles and responsibilities 157. In 2018, 19 MW of solar PV capacity were among EDL and DSPs in executing added, bringing the total installed capacity to commercial operations and customer 56.37 MW, as compared to the NEEREA 2020 management, (b) define the baseline and target of 100 MW. Most (over 60 percent) of annual targets for the distribution loss key this installed capacity so far is funded through performance indicators for DSPs to achieve, NEEREA mechanisms. The industrial sector (c) streamline EDL’s process for DSP invoice continues to play an important role in this validation and payments, and (d) request market, with 18.38 MW of installed capacity, internal security and Ministry of Justice incentivized by cost savings resulting from the support, consistent with the COM’s decision increase in oil prices. approving the 2019 update to the sector policy, for treatment of illegal connections; 158. With regards to SWH, as of December 2018, LCEC indicated that the total installed ii. Adopting procedures to ensure surface area of SWHs is approximately 1 enforcement of timely payment of million m2. With this level of penetration, electricity bills by public institutions; LCEC estimated that SWH contributed to reducing electricity demand by 239,820 iii. Launching the procurement process for MWh per year, offset yearly greenhouse gas the AMI Center and accelerate rollout of emissions by 156 kilo tons (ktons) of carbon smart meters; and dioxide (CO2) and created more than 1,000 iv. Adopting a clear policy, with jobs in Lebanon since its launch in 2010. The implementation timeline, for creating successful implementation of NEEREA’s SWHs concessions to handle electricity objectives has largely been due to the plan’s distribution in Lebanon. loans and cash-back programs, which slowed in 2015. Further incentives and introduction of regulatory tools are crucial to regaining SUSTAINABILITY growth in this market. 159. However, as illustrated in Figure 15, the percentage of loan amount per year dropped 4.1 Promote Decentralized from 18 percent in 2017 (which amounted to Renewable Energy Applications US$101 million), to 7 percent in 2019 (which amounted to US$38 million). This is most likely 156. In addition to increasing utility-scale RE, due to the increase of the NEEREA interest sector plans should account for small-scale rates for these loans. However, it is important and distributed generation. One aspect to note that, because of the current fiscal of LCEC’s RE vision is the National Energy crisis, it is unclear whether this initiative is still Efficiency and Renewable Energy Action available with BDL support and whether there (NEEREA) initiative, developed in collaboration is actual demand for these loans anymore. with Banque du Liban (BDL), that provided The Way Forward 47 48 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 wish to monetize their direct investments in FIGURE 15 – NEEREA LOANS & PERCENTAGE solar systems. OF LOANS PER YEAR 161. The solution is therefore initially to design a $ million net billing policy, with an appropriate tariff $119 structure, that incentivizes decentralized $120 applications. In the short term, technical 21% $101 support can focus on community-scale $101 $100 systems, as well as projects that involve 18% 18% commercial and industrial clients, which are $83 $80 already financially viable. In the long term, $76 15% the Government can also consider a legal 13% framework that permits third-party access $60 and private-to-private arrangements. $44 $40 8% $38 4.2 Implement Wider Energy 7% Efficiency Measures $20 $1 162. In addition to increasing utility-scale RE, <1% small-scale and distributed generation, $0 implementation of EE measures to reduce 2012 2013 2014 2015 2016 2017 2018 2019 energy consumption and related operations Source: LCEC NEEREA costs should be reinforced. Synergy between renewable technologies and EE measures is required to increase the country’s energy security and sustainability, and to exploit the 160. The levelized cost of small-scale solar PV is low huge opportunities for development. and keeps decreasing, but, without storage, it will need to be used in conjunction with 163. The first National Energy Efficiency Action grid electricity. To make investment returns Plan (NEEAP) was developed in 2011 for the attractive, power purchase prices will need period 2011-2015, combining both RE and EE to be sufficiently high. While EDL has a net initiatives based on the 2010 Sector Policy. metering code to provide additional returns Creation of the NEEREA financing mechanism for RE power injected into its system, this code was the most successful achievement of the provides insufficient incentive. However, this is plan. One of the main identified gaps in this limited to industrial and commercial sectors. NEEAP was the lack of a clear baseline for There is lack of public knowledge about net energy savings. metering and EDL has limited capacity to process applications. Electricity sold to EDL 164. The second adopted NEEAP covers another under this code is compensated for by only five years from 2016 to 2020 and includes a credit against future consumption of EDL several EE initiatives dedicated to primary power. To make matters worse, credits cannot energy savings and end-use measures. The be rolled over from one year to another, end-use measures target mainly the building, and private-to-private wheeling on EDL’s industry, agriculture and public sectors, in distribution network is not currently allowed. addition to horizontal measures that have a These and other limitations significantly cross-sectoral impact on the economy. The disincentivize small-scale third-party primary proposed energy saving measures generators from developing solar systems to were on the supply side, primarily in the supply multiple consumers or consumers that generation, transmission, and distribution segments of the power sector. They mainly also offers free technical assistance funded FIGURE 16 - NEEREA LOANS AMOUNT by the European Union (EU) for project DISTRIBUTION PER SECTOR implementation. 10 166. The European Bank for Reconstruction and 30% Development (EBRD) also established the 1% 3% Green Economy Financing Facility (GEFF) agreement. GEFF includes funding of US$90 5% million loan, to be complemented by US$10 million in concessional funding from Taiwan’s Residential $168,840,380 International Cooperation and Development Industrial $35,633,777 Fund (ICDF), for financing and technical Commercial $302,689,964 Educational $27,443,127 6% assistance to private sector businesses to Agricultural $7,504,372 improve competitiveness, through high Non-Profit $17,250,124 performance EE and RE technologies and practices. The facility operates through only one bank in Lebanon.11 167. Distribution of NEEREA loans indicates 55% that some sectors are not sufficiently participating in EE & RE national roadmap (see Figure 16). As such, implementation of EE Source: LCEC NEEREA and RE measures across all sectors need to be reinforced, with special focus on the buildings sector, which is the main source of savings on the end-user side (up to US$46 million of tackle the upgrading OCGT to CCGT in Baalbeck savings per year). and Tyre power plants, increasing efficiency of 168. The participation of the industry sector in EDL transformers, reducing system reactive reducing its consumption is crucial to meet power, modifying distribution voltage level to the EE national plan energy savings target. 20 kV. The total estimated impact on energy Industrial facilities, with focus on the higher saving is 686.14 GWh, but, to date, no progress consumers, should conduct mandatory has been achieved on these measures. regular energy audits, and implement EE 165. New financing facilities were developed to measures to reduce their energy consumption encourage RE and EE financing. Under the and operation costs. “Financing Mechanism” horizontal measure, 169. Moreover, given the high energy consumption NEEAP builds on extending the action of of heating and cooling for both space and NEEREA mechanism and creating new credit water, integrating efficient and sustainable line facilities. The Lebanon Energy Efficiency & heating and cooling applications also needs Renewable Energy Finance Facility (LEEREFF) to be strengthened. Figure 17 illustrates that was established by European Investment Bank “Building Envelope” measure represents 45 (EIB), Agence Française de Développement percent of total measures, which emphasizes (AFD) and BDL consists of €80 million global the urgent need for promoting and deploying loan provided by EIB (€50 million) and AFD support programs to realize the full potential (€30 million) with interest rate subsidies provided by BDL to support small-scale investments between €40,000 and €15 million (total investment amount) in EE, RE and green 10 Reference: https://leereff.com/ buildings by private companies in Lebanon. It 11 Reference: https://ebrdgeff.com/lebanon/the- programme/the-facility-4/ The Way Forward 49 50 LEBANON POWER SECTOR EMERGENCY ACTION PLAN | 2020 of efficient equipment (SWHs and heat pumps FIGURE 17 - NEEREA EE MEASURES replacing the electric boilers and heaters) DISTRIBUTION and boost efficiency and sustainability in Lebanon’s heating and cooling sector. 2% 170. Updating the building code to force 9% developers to incorporate and accommodate 3% renewable and energy efficiency technologies 23% at the design phase should be considered. This, for example, results in better design of rooftops to accommodate RE equipment and 18% Biomass Boiler Lighting & Control eliminate the upfront cost of installing this Bulding Enveloppe technology at a later stage. The Government HVAC & System controls should also adopt an energy conservation Heat Pumps law that offers a legal framework for EE Other measures (e.g., standards and labels), financial incentives for EE appliances, banning imports of non-efficient appliances and equipment, incentivizing imports of efficient equipment, and mandating energy audits (even though 45% this measure was introduced in the action plans since 2011, it has not been implemented). Source: LCEC NEEREA 171. Reinforcing the NEEREA financing mechanism and other incentives and grants is essential. To make effective any law for EE, RE, and green buildings, the respective existing financing mechanisms should be competitively rebooted, and new credit lines and grants should be established. The public sector should also participate in conservation, which could be aided by, enforcing payment discipline for their EDL consumption as a start, and creating financing mechanisms that encourage investment in EE and RE projects (e.g., municipal investments in efficient public street lighting). 172. In addition, the Government should increase awareness, build capacity and gain trust of all stakeholders working in the EE and RE sectors through regular communication, consultations, and information disclosure.