Lebanon Power Overhaul Gathers Pace

After a contentious eight-month government formation that triggered multiple downgrades to the country’s economic outlook (MEES, 8 March), Lebanon has finally reached a ‘political consensus’ and is pushing forward to reassure international investors (MEES, 1 February). Prime Minister Saad Hariri’s confidence-building efforts are made doubly important by the fact that Lebanon will only receive the $11.5bn pledged at last year’s CEDRE donors’ conference in Paris if he can convince the international community that the new government is taking its renewed reform efforts seriously (MEES, 13 April 2018).

By any measure, these pledges (see table 1) are crucial to boosting growth from the average 1.6% annual GDP growth since 2011. With the world’s third-highest debt-to-GDP ratio (150%), the government is otherwise broke and unable to break the low-investment low-growth cycle that has long plagued it, especially since the 2011 outbreak of war in neighboring Syria in 2011.

Lebanon ran a deficit of $5-5.5bn for 2018. This equates to nearly 10% of GDP. Reducing this figure by one percentage point each year appears to be a key stipulation from international donors before they hand over cash. Mr Hariri has made electricity sector reform the key mechanism to achieve this.

“If we save the $2bn on energy, we have already made $2bn,” Mr Hariri says. “Our problem is energy and we need to bring the energy bill down from $2bn to zero.”

The ‘energy bill’ he is referring to is the $1-2bn/year Lebanon spends on ‘transfers’ to state electricity company Electricité du Liban (EdL). Due to pervasive electricity theft and massive subsidies EdL comes nowhere near to paying for itself. Electricity spending accounts for 10-20% of government spending, depending on oil prices (MEES, 21 December 2018). MEES estimates that electricity contributed $1.8bn to the country’s deficit last year.

Days after forming a new cabinet, Mr Hariri called for a $600mn cut to electricity subsidies (MEES, 8 February). If achieved this would reduce the deficit by more than 10% for 2019 and bring the deficit-to-GDP into line with lenders’ requirements.

That Lebanon still faces daily power cuts – 3-6 hours daily in Beirut and 12+ hours elsewhere – despite massive spending on electricity makes the situation look all the worse (MEES, 6 July 2018). Lebanon boasts one of the worst electricity sectors globally, and residents are forced to spend an additional $40-80 per month on local diesel generation, a sum usually higher than the monthly EdL bill.

POWER PLANS

So, with electricity supply vastly inadequate yet also draining government coffers, new Energy Minister Nada Boustani has her work cut out. Indeed, the minister immediately went to work with advisors in drafting an electricity overhaul after assuming the portfolio in late January.

MEES understands that the plan includes: modernization of the transmission grid; adding several gigawatts-worth of gas-fired powergen capacity whilst decommissioning old steam turbine plants; and shifting fuel supply away from fuel oil and expensive diesel imports toward cheaper (and cleaner) natural gas. Finally, the plan is expected to expedite long-delayed efforts to push forward with renewable energy.

Both Siemens and GE have been heavily linked to the master plan.

In all likelihood, the ministry will opt to pursue an overhaul very similar to that set out last year by the World Bank and the energy ministry (where Ms Boustani was then serving as an advisor) as part of the Capital Investment Plan (CIP) created for the CEDRE conference.

The plan aimed to close the country’s powergen deficit – MEES puts peak demand at 3.5GW versus around 2.05GW generating capacity – by 2024 primarily by adding several new CCGT gas-fired powerplants and adding several new substations optimize transmission. Spending was slated to occur in three ‘cycles’ with the first major powergen bump to happen in 2020.

A substantial capacity bump next year already looks optimistic. A long-delayed 570MW expansion at the Deir Ammar plant in north of Tripoli (see map) was supposed to be the main driver. Work on ‘Deir Ammar-2’ restarted last year after the energy ministry and contracting firm J&P Avax renegotiated a previous $435mn EPC deal into a 20-year BOT agreement, thus settling a scandalous multi-million-dollar arbitration dispute dating back to 2014. But the Athens-based firm entered ‘administration’ (pre-bankruptcy) after lenders rejected its restructuring proposal last October, effectively halting any work on the extension. Ms Boustani says the deal is currently being evaluated by the council of ministers.

Lebanon also signed three renewables contracts last year that will see wind farms developed at Akkar in the country’s north. Deals were with three separate JVs: Lebanon Wind Power (60MW), Sustainable Akkar (82.5MW) and Hawa Akkar (70MW). All are due online in early 2021.

Excluding the Deir Ammar-2 plant, the CIP calls for $4bn to be spent on additional CCGT plants (see chart). Proposed sites are along the Lebanese coastline. Two 500MW CCGT plants – one at Salaata and one at Zahrani – would in theory start up by end-2021. These would more than replace the power currently generated by two 203MW fuel oil-burning ‘powerships’ leased from Turkish firm Karadeniz (see MEES, 6 July 2018) when those contracts expire in 2021.

The plan is to then add two further 500MW plants in 2024 at Jieh and Salaata: this 1GW addition would finally see available capacity exceed demand. The World Bank estimates 5% annual demand growth through 2030.

Finally, three more 500MW CCGT plants are planned for the end of next decade. But for Lebanon, lacking installed capacity is only half the problem; an antiquated and damaged transmission network and absence of gas supply also mean the sector fails to achieve its own potential.

The inadequacy of Lebanon’s transmission grid was evidenced last summer when a 235MW-capacity powership was delivered to Jieh but could only provide 35MW due to grid problems. It was then relocated to Zouk where some 130MW could be delivered to end-users. To add substantial powergen capacity would require a total overhaul of the transmission system and completion of the 220kV loop at Mansourieh that has remained unfinished for years and is key to improving transmission.

Lebanon’s Power Infrastructure

GE, SIEMENS EYE KEY DEALS

The good news for Lebanon is that the much-needed overhaul (and sizeable pledged funds) has attracted interest from electricity titans GE and Siemens. GE presented Lebanon’s energy ministry with a comprehensive ‘roadmap’ last November to “improve the power sector from the point of generation to transmission, distribution and consumption.” GE has subsequently advertised its “Powering Lebanon Forward” plan on social media.

The roadmap calls for similar additional capacity and transmission upgrades to the CIP, whilst taking a gradual approach to adding power plants. The crux of the plan is to add 1.5GW of simple cycle ‘tri-fuel capable’ (HFO, diesel, gas) capacity of in the short-term, with the planned later upgrade of the plants to combined cycle slated to add an additional 1.3GW. An additional 2.7GW would be added long-term as older plants are phased out. The CIP also calls for an “integrated energy management system to identify network losses” and 17 new substations.

Germany’s Siemens has also pitched a fix-all solution to Beirut which itself has fallen subject to controversy. When Germany premier Angela Merkel visited Lebanon last June, word quietly leaked out that a Siemens representative presented Beirut with a comprehensive electricity solution. Asked about the incident on Twitter, Siemens CEO Joe Kaeser replied “Yes, we did. I did offer to help improve the whole electricity value chain and have our team come in and assess what’s best for the people. No response yet from Government. Our door is open!” to which then Energy Ministry Cesar Abi Khalil replied that no formal offer was made. Mr Abi Khalil, along with his party’s leader (and former energy minister himself) Gebran Bassil have often been accused of corruption. And their predilection for Turkish powerships hardly exonerates them.

Similar to GE’s and Siemens’ ‘roadmap’ proposals in Iraq (MEES, 28 September 2018), financial details are vague but both plans appear in-part self-financing. In the case of Iraq capturing flared gas is the elixir. In Lebanon’s case, gas is also the answer.

Lebanon’s electricity bill is so high in part because, rather than invest in infrastructure to import gas to burn in its CCGT and open cycle plants, it resorts to running more expensive diesel and fuel oil in the inefficient powerships. MEES estimates that some 75% of Lebanon’s non-powership available capacity could run on (cheaper and more efficient) gas, but long-mooted plans to install an FSRU to enable LNG imports have gone nowhere fast.

MEES estimates that Lebanon imported 1.9mn t/y of fuel oil (35,000 b/d) and 1.1mn t/y of diesel (23,000 b/d) for power generation last year with Algeria and Kuwait the key suppliers. Finance ministry numbers suggest this cost around $1.7bn, and failure to scrape together enough cash led to more severe blackout in recent months (MEES, 9 November 2018).

The energy ministry says switching to gas would cut costs by 40%. It estimates the country could save $600mn to $1bn a year by switching to gas – and that’s even without addressing subsidies.

The problem is infrastructure. Only one existing powerplant – the 460MW CCGT at Deir Ammar – has an installed gas supply. And that supply, running from Homs in Syria, is little use to Lebanon as Syria currently faces, and will face for some years, sizeable gas shortages (MEES, 4 January). Domestic gas production – even if the Total-led consortium finds commercial gas quantities in its upcoming drilling campaign (MEES, 1 March) – remain optimistically three-five years away.

Gas power will require a 160km coastal pipeline running from Deir Ammar in the north to Tyre in the south – or two separate pipelines, one in the south and one in the north – which the ministry expects to cost $465mn and take 28 months to complete. The CIP puts it at a substantially cheaper $140mn. Parliament still needs to approve the law.

FSRUs would then be needed to supply gas to the grid. The energy ministry in 2017 called for expressions of interest to supply LNG via three planned FSRUs (one at Deir Ammar, one at Selaata and one at Zahrani). Eight prequalified firms reportedly submitted proposals late last year. Petronas is linked to the reportedly $1.2bn project.

But again, entrenched interests remain a significant threat to every individual project, and for a smooth transition toward 24-hour gas-fired electricity generation, many unrelated steps will need to go to plan. Lebanon’s track record on this front provides little optimism. But with billions waiting to be invested, Lebanese elites just might get their act together to claim a rare victory. But the Lebanese public isn’t holding its collective breath.