An exercise in trust
Lebanon’s new electricity plan
On April 8, the Council of Ministers adopted a new electricity policy paper, aimed at reforming the sector. However, the plan is lacking the key components it aims to address—the financial analysis and the impact on the economy—and also highlights structural issues in the government decision-making process.
The electricity sector is a heavy contributor to Lebanon’s public debt and a significant burden on the economy, causing tremendous losses in the value of the lost load, the fiscal deficit, and the overall lack of competitiveness. The public utility, Electricité du Liban (EDL), is estimated to cost the state somewhere between $1.5 and $2 billion a year.
Fiscal reforms are on the government’s priority agenda as the debt to GDP ratio has surpassed 150 percent, the country’s credit rating has dropped, and the international community is seeking serious reform in exchange for unlocking the $11 billion pledged toward Lebanese infrastructure by donors at CEDRE last April.
Given the electricity sector’s impact on the public debt, it has been placed at the heart of fiscal reforms, and urgent action has been sought. However, in the absence of clear decision-making pillars and an optimized strategy, urgency can compromise sustainability.
The implementation of the policy paper entails the procurement of a combined solution comprising temporary and permanent units. Two goals lay behind the decision: increasing power generation and reducing the fiscal deficit. The urgency of “fixing” the power sector meant that decision-makers established the need for a fast, temporary solution. However, a temporary solution alone may have not been widely acceptable to the Lebanese—on the basis that they are often expensive and, in Lebanon, the fear is always that a temporary solution could morph into a permanent one.
The cost of temporary generation is typically substantially higher than permanent generation, ranging between 13.5 to 17 US cents per kilowatt hour (USc/kWh), compared to less than 9 USc/kWh for permanent generation. Policy-makers have often resorted to the use of EDL’s average generation cost—approximately 16 USc/kWh—as a benchmark of an expensive versus cheap solution, but this is not a valid benchmark as EDL’s generation cost is high, driven by some of the most inefficient power plants and the most expensive fossil fuels. The temporary generation cost would decrease when combined with a permanent solution, spread over a long period of time, but would maintain non-competitive prices over that period—at a time when other countries are identifying ways to reduce the cost. Along with the temporary generation, some temporary transmission enhancements are also necessary to improve the grid’s ability to handle additional power.
As soon as power generation increases, there would be a corresponding hike in the electricity tariff from the current average of 9.5 USc/kWh. According to the paper, this is expected to take place as early as 2020, and the average tariff would become 14.38 USc/ kWh (see graph page 47). In general, subsidies are detrimental to any sector, hindering its growth; there is no question that the electricity tariff should reflect the costs incurred in electricity provision. However, there are shortcomings in the paper’s tariff estimates and its comparison to the current total costs of EDL and generator bills (which it estimates will be reduced by 10-14 percent). These shortcoming are: 1) the approach appears simplistic, as it reduces the subsidies issue to a purely fiscal matter, which it is not—otherwise why do a significant number of customers pay their full generator bill, but not the bill for state electricity?; 2) according to the plan’s chart, the tariff is fixed until at least 2025—the year the chart ends. One of the major issues of the Lebanese economy is its lack of competitiveness; this is driven by several factors, one of which is high operation and production costs, driven by the high costs of energy—the paper is largely maintaining these high costs and the economy’s lack of competitiveness, for years to come.
When accounting for all the direct and indirect costs associated with the procurement of temporary generation, the cost is indeed high, raising the question: Does Lebanon definitely need a
temporary solution? On this matter, it is important to note that the main issue in Lebanon’s fiscal deficit is the weak governance and the wasteful spending, across all areas. Could some other measures reducing the fiscal deficit be implemented for the around two yearsperiod necessary for the implementation of permanent solutions? Is the full 1,450 Megawatts (MW) necessary for the temporary generation period?
Most important to ask is: What is the optimal, sustainable solution and how will it impact the economy? Given that the solution is tied to long-term contracts—as of yet unspecified but most likely to be power purchase agreements (PPAs)—spanning over approximately 20 years. The policy paper does not answer this question.
In fact, the plan does not include macro modeling and fiscal analysis. While it does comprise estimated savings and revenues, it does not reflect the forecasts, modeling, and investment costs that should be informing optimal decision-making. It also does not allow for an understanding of the potential cost, should any of these ambitious measures fail. Optimizing solutions entails the assessment of some scenarios, such as: the impact of implementing a permanent solution alone with cutting down on losses; the impact of a combined solution including the full 1,450 MW temporary generation; and the impact of a combined solution with only 800 MW temporary generation, which would enable a gradual increase in the tariff.
The Ministry of Energy and Water may have done this assessment and found that the chosen solution is optimal—but this has not been presented in the paper. In the best case scenario, the majority of the decision-makers, entrusted by the Lebanese people on their public investments, have endorsed a plan without having the right decision-making tools, the full assessment, and the financial analysis. Talk about trust.