ExecutiveMagazine - 10/8/2019 3:10:19 PM - GMT (+2 )
The September 15 attack on Saudi oil facilities that temporarily wiped out 5 percent of global supply did more than trigger a short-term oil trading frenzy with wild price jumps on international markets. It put into sharp relief the issue of Lebanon’s dependency on fossil fuel and—most important in the context of dismal fiscal health—its vulnerability to price increases in the market for refined oil. To question what effect a potential rise in oil prices would have on Lebanese access to energy is not just a potential problem of a 10 or 20 percent hike of gasoline prices for motorists (although such would be painful enough for many households in this car-infatuated country). The attack on the Aramco facilities in Saudi Arabia is a hint at how utterly urgent it is that Lebanon solves the problem of producing insufficient amounts of electricity at aging power plants in a fiscally costly, environmentally unsound, technically inefficient, and economically wasteful manner.
It was simply of utmost expediency that the Lebanese government has committed itself to revamping the electricity sector, as documented in frequent announcements on the primacy of electricity production and distribution solutions in conjunction with the plans linked to CEDRE, the investment conference 18 months ago. These plans have since been developed in both discussions with private sector partners and public sector stakeholders. In her opening remarks at the Beirut Energy Forum (BEF) on September 25, energy minister Nada Boustani said that she wanted to highlight the partnership with Banque du Liban (BDL), Lebanon’s central bank, that helps finance renewable energy projects, and added that this partnership along with those of donors such as the European Investment Bank and the European Bank for Redevelopment and Construction were an important cornerstone of these projects. According to the 2018 Capital Investment Plan (CIP), renewable energy projects are expected to total $1.3 to $1.4 billion of the total $3.5 billion planned for the sector.
Since the end of the civil war, the electricity sector has been plagued by mismanagement, non-technical and technical losses—the latter of which in some part stem from old infrastructure built in the late 1990s and early 2000s—theft, a fixed tariff set below the cost of generation, and a reliance on fuel and gas oil rather than making the switch to the cheaper, cleaner natural gas.
These deficiencies have left the state-run utility company Electricité du Liban’s (EDL) financial situation in a dire state with the EDL deficit last year totaling $1.8 billion. Transfers from the treasury to EDL equaled LL1.35 trillion ($889.62 million) in January to September 2017, and LL1.86 trillion ($1.22 billion) in the same time period in 2018. EDL contributed just 0.3 percent to the total oil bill of LL1.84 trillion ($1.21 billion) of gas oil and fuel oil in the first nine months of 2018, with the central government footing the bill for the rest.Structures for new infrastructure
New structural mechanisms are needed after years of the electricity sector’s inability to right its own wrongs. Emphasis appears to be on awarding large-scale infrastructure projects on various contracts combining public and local or international private initiatives whether as build-operate-transfer (BOT) or independent power producer (IPP) contracts in an effort to shift some responsibility and assumption of risk to the private sector. In a BOT, a supplier provides and installs the infrastructure and is responsible for operations for a certain number of years before the facility and operations are transferred to the state. IPPs are private entities that own and operate a facility, but sell electricity to a utility or central government. Under BOTs and IPPs, a power purchase agreement (PPA) is required that sets terms for how much the offtaker will pay for electricity generated and under what conditions those prices may change. Unfortunately, such contracts and processes have become the source of seemingly endless delays, such as the PPA for the Akkar wind farms and other infrastructure projects. Permits were issued to three companies in July 2017 for wind farms, with PPAs supposed to be signed within the following three months. However, the PPAs were only signed in February 2018, and works on the ground are yet to begin—instilling little confidence in potential investors.
Electricity infrastructure projects, such as the Deir Ammar II plant, two new power plants, and floating storage and regasification units (FSRUs) to be built or imported on these types of contracts have all faced delays. The Deir Ammar II project, granted in 2013 to Greek-Cyrpiot firm JP Avax under an engineering, procurement, and construction (EPC) contract, was controversially transferred to a BOT in 2018. Prior to this revised agreement, construction had been held up for years, with JP Avax filing an international arbitration suit—since dropped, following the revised agreement—against the Lebanese government due to a dispute between the Ministry of Energy and Water and the Ministry of Finance over whether VAT would be part of the contract. On the short term, the plant is supposed to provide 450 megawatts (MW), on the long term 550 MW. It was announced on September 9 by Martin Parker, a member of the project’s management team that engineering works would begin that week. However, in a late September interview (see box below), Boustani told Executive that construction would begin in December.
Tender documents for two new 550 MW thermal power plants— which run on diesel oil, fuel oil, or natural gas—at Zahrani and Selaata, to be contracted through an IPP with a PPA, were completed on September 11 by engineering consultancy Fichtner. The tenders were supposed to be announced in September, but as of writing they had not been issued. Boustani told Executive that she was waiting on a final answer from the ministerial committee before these tenders could be moved on to the next stage.
Both plants will be capable of operating on natural gas, which is cleaner and cheaper than fuel oil or gas oil, but currently the country lacks FSRUs—which take gas and turn it into liquefied natural gas (LNG) and back into gas again—that are needed to supply power plants with said natural gas. According to one 2018 Business News report that cites adviser to the MoEW Zaher Sleiman, an FSRU could cost up to $400 million. A May 20 deadline for selecting companies to import such infrastructure was extended 90 days. One hundred and twenty days later, no announcement has been made. Boustani says discussions on the results of the FSRU bids were currently happening. A statement released on September 27 by the Council of Ministers confirmed the ministerial committee in charge of studying the terms of the electricity tender met, saying a technical team will study the options, and a decision will be made as early as the first week of October.Delays, delays, delays
Reforms in the sector seem to be plagued by delays. Currently behind schedule are the power plant projects and FSRUs, as well as the construction of three wind farms in Akkar, originally tendered in 2013 to generate 180 MW and vital to reaching the goal of 12 percent renewable energy by 2020. Ministerial Decision No. 43 (2017) said selected companies would be given 18 months to complete necessary preparations to begin Akkar project implementation. And in February 2018, contracts were awarded on what would be the country’s first issued PPA agreements. A June 21 news report in The Daily Star said work would begin in July or August, and the farms would be fully operational by summer 2020. Speaking at the Beirut Energy Forum September 25, Boustani said that construction on the wind farms would begin in 2020, but she did not say when they were to be completed. The terms for a further set of wind farms to generate 500 MW were also announced at the forum on September 27.
These delays, specifically those on generation projects, such as Zahrani and Deir Ammar II, which were supposed to boost short-term generation to 1150 MW, threaten to leave Lebanon with no increased generation capacity heading into 2020, the date for which the April 2019 updated policy paper, a follow-up to the one adopted in 2010, ambitiously predicted 24-hour power. When asked about the timetable set out in policy paper, Boustani tells Executive that while her ministry was on schedule, decisions not under her control had delayed progress, knocking them off the timetable.
Increasing generation capacity, decreasing technical and non-technical losses, beginning the switch to natural gas, and reducing the sector’s deficit were of the main goals set forward in the updated policy plan. Reforms in the updated policy paper are designed to appeal to CEDRE donors, who pledged more than $11 billion in soft loans at the April 2018 conference.
When Prime Minister Saad Hariri met French President Emmanuel Macron September 20, Hariri said he would speed up structural, economic, and fiscal reforms to meet international donors’ demands. The following day, Hariri and Saudi Finance Minister Mohammed al-Jadaan discussed Saudi private sector engagement in CEDRE projects, but funds are contingent on the international community seeing fiscal reform from the government. Without any tangible progress to reform made, money pledged to the electricity sector at the conference remains locked.
While estimations on actual capacity and demand vary depending on report, the April policy paper puts EDL’s current installed generation capacity at 2,449 MW, peak demand at 3,669 MW, and actual capacity at 1,823 MW. This excludes two temporary power barges with a combined installed capacity of 374 MW, according to the CIP. By 2020, the updated policy paper predicts actual capacity will be 3,990 MW and peak demand will decrease to 3,476 MW. According to World Bank estimates, 24-hour supply and an increased tariff will lead to a decrease in demand by 8 percent. As Lebanese are already accustomed to paying two electricity bills, this rationale is questionable, says energy consultant Jessica Obeid. With three months left in 2020, and no work on the ground yet seen, achieving the 2020 generation capacity goal seems unlikely.
These delayed projects have implications on generation capacity, which is needed before the tariff can be raised, and on the confidence of the private sector looking to invest in infrastructure projects.A need for confidence
In her opening remarks at the BEF, Boustani addressed the need for creating an attractive environment for investors. Improving the current environment would require the government to keep projects running on schedule and avoid years-long contract negotiations delayed by the inefficient bureaucracy or internal politicking that keeps tenders and contracts from being awarded on time. Continual delays are a bad signal to other companies contemplating bidding for similar projects, especially foreign investors looking to make a bid for the new Zahrani and Selaata projects.
Further, in an IPP contract with a PPA, risk is assumed by both the private and public entities. Private entities will want some guarantee from the state that power will be purchased at a certain price for the duration of the contract period, usually 20 to 25 years. Ramy Torbey, managing partner at Aziz Torbey law firm, which co-founded the Lebanese Association of Public Private Partnership, says that typically in such a contract, a price is agreed upon per kilowatt hour (kWh) between the public and private entity and includes an agreed upon adjustment system to take into consideration market fluctuations, operation and maintenance charges, inflation, etc. The recent attacks in Saudi saw oil prices fluctuate, and regional tensions are still high. Another attack would likely send prices up again, which under a PPA would constitute a higher risk for the private partner. How risk for price increase is distributed in these scenarios will be a determining factor in how attractive an IPP is to a bidder. For PPAs on solar and wind renewable energy, such as those on the Akkar wind farms, additional risks include the variability and the uncertainty of generation, given the sometimes fickle nature of, well, nature, according to a 2018 International Renewable Energy Agency publication.
While renewable energy sources have the ability to help reform the sector in the medium to long term, measures, such as increasing the tariff, need to happen in the short term to help alleviate EDL’s debt burden. Increasing the tariff from the current 9.5 US cents per kilowatt hour (USc/kWh) to 14.38 USc/kWh in 2020, was another important part of the updated policy plan, according to Obeid. “The tariff restructure is really important and should account for the socio-political context, but we don’t have information about it yet,” she tells Executive mid-September. On the sidelines of the BEF later that month, Boustani said talks were in progress with the World Bank (see box below). Obeid argues that tariffs cannot be increased unless EDL can provide at least 21 hours electricity all over Lebanon, given that currently citizens already pay a dual electricity bill—one to EDL and a diesel generator bill because of power cuts ranging from three hours in the capital to 18 hours in other areas. In 2008, the average household consolidated energy bill was approximately 180 percent higher than the average EDL bill at the time. In late 2018, the government mandated that generator operators install meters by October 1 to regulate the informal industry. This decree was met with protests from generator operators, with some demanding the government subsidize diesel as a result of lower set prices for hourly generator use. As of September, the Ministry of Economy and Trade said that almost 80 percent of generator owners had complied with the new regulation, which should lower household generator bills across the country helping alleviate additional expenditure.Modest progress
Some visible progress has been made especially on the transmission networks since the transmission master plan was implemented in 2017, even though little has been done to address specific CEDRE donor-demanded reforms. In June, the final link located in Mansourieh of the 220 kilovolt (kv) loop went live after a 17-year delay, which alone reduced technical losses on the network by 1 percent, says Ramzi Dobeissy, the head of the high-voltage transmission lines department at EDL. The 66 kv Bikfaya-Faytroun-Halata line also went live July 30, reducing losses by less than a percent. The 66kv Hermel-Qobayat line, after facing some opposition from local residents, is expected to go live by the end of September or early October. Dobeissy says this line is on track, but could be delayed a week. The final 66kv line in southern Wadi Jilo is still facing opposition from one resident, and progress has stalled, but EDL is in talks with the government and the opposed resident to resolve the issue. While transmission projects have been stalled in the past, a series of upgrades on the network this year are a positive sign that at least one aspect of the electricity plan and the transmission master plan launched in 2017 is moving forward mostly on schedule. Whether the government will meet its stated target of reducing losses from 34 percent to 25 percent by the end of 2019, however, remains to be seen.
Since 2017, $16.5 million has been spent on transmission projects of a budgeted 690 million euros ($757 million, as of writing) to be spent by 2030, including substations, overhead lines, and underground cables, Dobeissy says. The updated policy plan sets aside LL405 billion ($268 million) for transmission projects in 2019.
Even with progress on transmission networks, the 2019 updated policy plan requires generation projects to move along simultaneously with generation projects. With delays on the latter projects, which are, in part, a result of the inability to resolve contract issues, Lebanon risks being in the dark for days, months, and probably years to come. Furthermore, these delays along with current economic conditions might as well be a neon signal to foreign investors that reads “BEWARE OF HIGH RISK.” It is likely that local investors, such as the three companies awarded licenses for the Akkar wind farm projects (Hawa Akkar, Sustainable Akkar, and Lebanon Wind Power) will continue to bid for these contracts and adjust their reward expectations to include high-risk premiums; if the resulting contracts will be socially feasible for the Lebanese population, and especially the vast group of impoverished no-income, low-income, and lower middle-income earning households, will largely depend on how the numerous risks attached to the electricity plan are mitigated and distributed between local and public entities. With the country’s economy in a bad state and EDL’s financial situation already in ruin, the question beckons as to which players will be able to shoulder such high risk and at what price to the taxpayers, even with the local private entity partnering with various financing partners, such as local and international banks and multilateral development institutions. The other big and daunting unknown variable in this equation of power and risk is that the people will be the ones to be stuck with the bill if the plan does not come to reasonable fruition.
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