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Lebanon's insoluble electricity crisis (Part Two)

Lebanon's insoluble electricity crisis (Part Two)

Regulation of the Electricity Sector-Law No. 462
In order to strengthen the electricity sector and involve the private sector in the process of electricity generation, Law No. 462 was adopted in 2002 but has not yet been implemented. 
 
General Provisions 
Article 1: Definition of terms
The following terms whenever used throughout this law have the following meanings:
  • Ministry: The Ministry of Energy and Water 
  • Minister: The Minister of Energy and Water
  • Authority: The Electricity Regulatory Authority 
  • Council: The Higher Council for Privatization created by virtue of the Privatization Law. 
  • Generation: Production of electrical power from thermal, hydraulic and renewable energies or other sources.
  • Transmission: Consists of (1) high-voltage electrical networks, which connect generating power plants to the main transformer stations and (2) international equipment for the transport of electrical energy connected to foreign countries’ electrical networks. By definition, high-voltage lines are those operating at more than 24 KV. Networks of international electrical energy transportation equipment are those extending from the connection point between foreign countries’ electrical networks up to the main transformer stations. 
  • Distribution: Consists of medium and low-voltage networks, as well as the distribution networks aimed at distributing power to consumers. Medium and low voltage networks are those functioning at 24 KV and below.
  • License: An official document issued by the Authority to joint-stock companies, granting by virtue of the present law a concession for a maximum period of 50 years to create, equip, develop, acquire, operate, manage or market equipment entering in the scope of public services in the fields of production, transport and distribution of a power exceeding 10 MW, or the right to use the above-mentioned equipment by virtue of a financing leasing contract.
  • Licensee: The holder of a valid license granted by the Authority. 
  • Permit: An official document issued by the Authority, granting the right to create, equip, develop, acquire, operate or ensure the maintenance of production facilities for private use with a capacity varying between 1.5 and 10 MW. 
  • Transmission Company: The Electricity Establishment or any other state-owned company to which the ownership of energy transport equipment is transferred. 
  • Electricity Establishment: The public establishment known as “Electricité du Liban” (EDL). 
  • Consumer: Any natural person or legal entity whose electricity consuming installations are connected to the electricity network through a connection point and by virtue of a subscription contract. 
  • Privatization Law: Law No. 228 dated May 31, 2000, governing the privatization operations and specifying their conditions and scope of implementation.
  • Privatized Company: Defined in Article 4 below.
Article 2: Scope of the Law
The present law sets forth the rules and principles governing the electricity sector, including the Government’s role in this sector, the principles and bases regulating it, and the basis of transferring the mentioned sector or its management, totally or partially, to the private sector.
Article 3: Principle of independence for electricity production, transmission, and distribution activities 
Electrical power is considered a vital, strategic, and economic commodity. As for the activities related to its production, transmission and distribution, they are deemed public utilities and shall be functionally, administratively and financially independent from one another, provided that such independence does not prevent the Company after being converted to a Privatized Company from carrying out more than one of the three abovementioned activities. 
The principles of this independence are determined pursuant to decrees taken by the Council of Ministers upon the Minister’s proposal.
Article 4: Foundation of Privatized Companies 
  • By virtue of a decree issued by the Council of Ministers upon the proposal of the Higher Council for Privatization, one or more joint-stock companies may be established as “Privatized Companies” whose object is to carry out all or part of the production and distribution activities. These companies shall be governed by the provisions of the Commercial Code, with the exception of Article 78 and the provisions not included therein. Each Privatized Company shall practice its business after obtaining a license issued pursuant to the provisions of this law. 
  • The value of assets, liabilities, obligations and works in progress whose ownership or right to benefit from is to be transferred to any Privatized Company, shall be determined by the Council and an international financial or accounting company that the Council appoints and determines its basis and principles of assessment. 
  • The establishment decree shall determine the capital, which can be in a foreign currency, for each Privatized Company as well as the assets and liabilities to be transferred. It shall also ratify its statute proposed by the Council, taking into consideration that the shares of each Privatized Company upon establishment, shall become fully owned by the Lebanese Government or any other public entity, which shall remain the sole shareholder until the Company is totally or partially privatized. 
  • The shares of the Privatized Company shall be registered shares. Notwithstanding any other provision to the contrary, the shares of a Privatized Company, including the shares representing contributions in kind, shall be instantly circulated and may be wholly owned by non-Lebanese persons.
  • As long as the Privatized Company is totally owned by the Lebanese Government or any other public entity, the Board of Directors of each Privatized Company shall comprise a chairman and board members appointed by the Council of Ministers. The general assembly shall, following the total or partial privatization, appoint the members of the Board of Directors without complying with the nationality condition specified in Article 144 of the Commercial Code, provided that the Government, throughout its contribution to the capital of a Privatized Company, is represented by at least one member designated by the Council of Ministers. If the Chairman-General Manager is non-Lebanese, he shall then be exempted from the obligation of obtaining a work permit. 
  • Each Privatized Company shall be exempted from paying the notary public fees duly returning to the government, registration fees with the commercial register, including the fees related to the judges’ mutual assistance fund, the bar association , and the stamp duty on the capital. Contributions in kind shall be exempted from all transfer taxes. A Privatized Company shall be exempted from all taxes and duties, as long as its shares are totally owned by the Government or any other public entity. 
  • Each Privatized Company shall appoint a principle statutory auditor for a three-year period, and shall be exempted from the obligation of appointing an additional statutory auditor.

Article 5: Privatization principles
A. Existing equipment and installations
By virtue of the Privatization Law (Law No. 228 of May 31, 2000, regulating privatization operations and defining its terms and fields of implementation) and the present law, the Council is entitled to propose privatizing all or part of the activities or production and distribution equipment through a tender or bid, in accordance to the following: 
  • The Government may, pursuant to a decree taken by the Council of Ministers and within a maximum period of two years as of the foundation date of any Privatized Company, sell only 40% of the shares of any Privatized Company to a private investor having experience, competence and knowledge in the electricity sector. The sale is made through an international tender and according to a Terms of Reference (TOR) prepared by the Council after consulting the Authority’s opinion, and adopted by the Council of Ministers’ decree upon the Minister’s proposal. 
  • The investor, who comes first in the bid, is nominated the strategic partner. He shall manage the Privatized Company as long as, (i) he remains the owner of at least half of the shares initially acquired, (ii) he complies with the obligations set forth in the TOR, and (iii) the Lebanese Government remains the owner of the Company’s majority shares. 
  • The Council of Ministers shall, upon the Ministers’ proposal, set the dates for exposing the government-owned shares.
 B. The licenses 
The Authority shall issue licenses for a period up to 50 years in accordance with the following: 
  • Through: 
1- Public tenders for power output of more than 25 MW and for power distribution in regions with more than 50,000 consumers. 
2- Invitations to tender for power output of less than 25 MW and for distribution in regions with less than 50,000 consumers. 
C. The Transmission Company 
The transmission of electric power shall remain the duty of the Transmission Company. By virtue of a decree taken by the Council of Ministers, upon the proposal of the Minister, agreements for managing, operating, developing, or equipping of the transmission activities may be signed with the private sector, including any Privatized Company or private company.
Article 6: The Ministry’s powers and functions 
1- In addition to the other powers and functions stipulated in this law, the Ministry shall undertake the following powers and functions:
a- Formulate the general policy of the sector as well as the general master plan, discuss the studies, put them in final forms and submit them to the Council of Ministers for adoption. 
b- Propose the overall policy for the regulation of the electric power production, transmission and distribution services, and oversee the implementation through the reports submitted to it by the Authority. 
c- Propose draft laws and decrees governing the electricity sector. 
d- Propose public safety and environmental guidelines and technical specifications that should be available in the electrical facilities and installations, provided that they are issued by virtue of a decree taken by the Council of Ministers upon the competent Minister’s proposal and after consulting the Authority and the other competent parties, and issue the required instructions. 
e- Carry out the necessary contacts with other countries for establishing electrical interconnections and exchanging electric power, and sign the necessary agreements after obtaining Parliament’s approval.
 f- Take all authorized measures including assurances that electricity distribution is carried out according to the laws and contracts signed by the Government to deal with any failure in energy related activities, which may have a negative impact on the sector’s interest or consumers’ rights and interests. 

g- Propose the designation of the Chairman and members of the Board of Directors of the Authority.
2- The structure of the Ministry shall be determined pursuant to a specific law issued for this purpose.
Article 7: Establishment of the Authority 
A regulatory authority referred to as “The Electricity Regulatory Authority” shall be established by virtue of the present law and shall be in charge of regulating and controlling the electricity sector in accordance with the provisions of the present law. The Authority shall have legal personality and technical, administrative and financial autonomy and shall be based in Beirut. Yet, it shall not be governed by the provisions of decree No. 4517 dated 13/12/1972 (the Public Law for Public Institutions).
Article 8: Management of the Authority
  • The Authority shall consist of a Chairman and four Lebanese full-time members, appointed for a non-renewable or extendable term of five years by virtue of a decree taken by the Council of Ministers upon the Minister’s proposal. The five members shall hold a university degree in the field of electricity, electronics, economics, business administration, law, finance, or engineering and have a relevant experience, and it is not allowed to revoke or terminate their services except for the reasons stipulated in this law. 
  • Meetings and decisions of the Authority shall require the absolute majority of the members. 
Article 9: Appointment conditions and preventions 
Respecting the appointment conditions laid down in Article 4 of the Legislative Decree No. 112/59 of June 16, 1959 (Employees’ Regulations), with the exception of both age and competition conditions, it is prohibited to appoint the Authority’s Chairman and members from the following categories: 
  • Persons having a direct or indirect interest with an entity providing in Lebanon or to Lebanon electricity services or equipment, or providing subscribers with private equipment, or experiencing direct or indirect relationship with the electricity sector in Lebanon. 
  • Persons declared insolvent or bankrupt by the court. 
  • Persons against whom a disciplinary judgment has been pronounced resulting in a sanction other than warning or reproach.
Licenses and Permits 
Article 19: Equality and competition principle 
In order to guarantee equality and competition, licenses and permits shall be granted to those who satisfy the prerequisite conditions specified by the Authority, without discriminating or imposing restrictions on the provision of services. In addition, it is not allowed to impose such restrictions on the acquisition or operation of the underlying infrastructure needed to provide those services. Abiding by the provisions of the present law and the Authority’s rules shall be considered as a condition of each granted license, even if not expressly mentioned in the license.
Article 24: Generation definition 
Generation consists of every activity leading to the local generation of electrical power, and which is of two kinds:
  • Public production, which is intended for sale. 
  • Private production, which is intended for the use of private producers.

Article 25: Energy of nuclear origin 
The energy of nuclear origin is not governed by the provisions of this law. 
Article 26: Generation for private usage of a power less than 1.5 MW 
The installation of generation equipment for private usage of a power less than 1.5 megawatts shall not be subject to permit condition, provided that the environment, public health, and public safety requirements are respected pursuant to the specific standards adopted by the Authority after consulting the Ministry of Environment and the concerned administrations and institutions.
Article 27: Transmission definition 
The transmission network starts from the transmission outputs of the generation plants to end at the medium voltage cell outputs in the main transformer stations. It consists of aerial lines, underground cables, main transformer stations, and alike electrical components of high voltage, and of any other facilities contributing in the transmission activities and the international linking operations of whatever voltage. The transmission network also comprises all connection, protection, communication, and surveillance equipment, as well as the national control center and other services, lands, buildings and all that is necessary for the good exploitation of any electrical or non-electrical transmission network facilities.
Article 32: Distribution functions 
The distribution functions include: 
1- Equipping and installing the aerial and underground low- and medium-voltage networks, equipping the distribution stations and the ground and aerial outputs from the distribution stations up to subscribers’ buildings and public lighting, and using advanced metering devices for remote reading and billing.
2- Receiving and executing subscribers’ requests properly. 
3- Supplying subscribers with power as quickly as possible. In case of failure by the distribution company to supply subscribers with power, it shall be responsible for the said failure. 
4- Ensuring the maintenance of distribution networks and stations, subscribers’ connection points, electrical meter rooms, and metering and switching-off equipment.
5- Ensuring the installation, maintenance and periodical control of subscribers’ electric meters connected to network, as well as meter reading, billing and collection.
6- Controlling and removing the network breaches and violations in accordance to the regulations and laws in force without incurring any liability on the distribution company in case of cutting off supplying the consumer from the network for his failure to pay the fee of the services offered, provided that, for the purpose of implementing the present clause, a grace period specified by the distribution companies in agreement with the Authority is applied. The contravening consumer is held accountable for settling the fee of reconnection to the network and for the consumed electrical power fee, based on the reading of electric meters that comply with the regulations set by the Authority.
7- Performing operations and maneuvers through an operations room and ensuring network and operational safety and environmental protection. 
8- Enabling each consumer to benefit from the distribution network without any discrimination. The distribution companies are also bound to ensure power distribution and conveyance to the specified area according to the conditions set in the agreement signed with the consumer, the license conditions and this law provisions, in addition to the regulations issued by the Authority. 
9- Ensuring distribution without any unjustified delay or discrimination, by expanding the network to be connected with other licensees and consumers, following the requirements relating to the financial contributions necessary for the construction of this equipment, and subject to the Authority’s approval upon periodic review. 
10- Should the company fails to provide the service in one or several regions after being notified in writing, the Authority may grant a non-exclusive license to any applicant in order to provide this service included in the exclusive right of the company. 

The President’s Attitude toward Electricity 
Under General Michel Aoun, the Presidency of the Lebanese Republic produced a report on the issue of electricity in Lebanon and the ways of addressing it. It was distributed to ministers during the Council of Ministers meeting on March 7, 2018. 
The report’s summary highlights the following:
The Accumulated Electricity Deficit and its Negative Effects on the Economy
  • The total accumulated electricity deficit over 26 years (from 1992 to 2017) accounted for USD 36 billion, of which USD 20.6 billion are funds and USD 15.4 billion are interests at an annual rate of 6.8%. 
  • This deficit represents about 45% of the gross public debt, which ended 2017 at USD 79.5 billion. 
  • Conversely, cash transfers from Banque du Liban (BDL) to cover the electricity deficit amounted to USD 1.295 billion in 2017, i.e. 2.4% of GDP (estimated at around USD 54 billion) or 6.8% if debt servicing payments estimated at USD 2.4 billion annually were added.
  • The 2018 budget has a deficit of USD 1.4 billion that is likely to increase if the government agrees to buy 850 megawatts to secure the bulk of the present power shortfall. 

A solution to the electricity problem in the mid-1990s could have:
  • Reduced the public debt to USD 43 billion by the end of 2017. 
  • Helped citizens save a huge additional cost of more than USD 17 billion since the early 1990s. This cost is currently estimated at between USD 1.1 and 1.2 billion per year (in recent years averaging USD 1.15 billion) being paid to private generator owners.
  • Reduced environmental damage and problems. 
  • Pushed the national economy to grow faster at an annual rate of between 1 and 1.5%, according to a World Bank report. 
Finally, the gross public debt to GDP ratio would have been around 80% and not 147% in 2017. 
 
Volume of Electricity Production and Consumption 
The average annual energy demand is estimated at 2,350 MW. 
The current volume of produced electricity is broken down as follows:
  • 1,800 MW as the current production capacity of power plants, including domestic power purchase.
  • 115 MW as the capacity imported from Syria. 
  • 385 MW as the capacity of energy purchased from the Fatmagul Sultan and Orhan Bey ships.
  • The total volume of electricity produced and purchased amounts to 2,300 MW, of which 13% (300 MW) is lost in transmission and distribution.
  • The amount of electricity currently distributed to Lebanese residents (including displaced persons and Palestinian refugee camps) is 2,000 MW, of which 82% (1,640 MW) is billed (part of which is not levied from citizens and UNRWA) and 18% (360 MW) is non-technical loss (about one third is illegally used by Syrian refugees). Non-technical losses have been gradually reduced from 26% in 2001 to about 12% presently. 
  • Lebanon’s energy needs are estimated to rise to 3,450 MW during the peak hours of August 2018. 
  • If there is no technical loss, the shortfall in the energy needed to meet consumer demand will be 1,450 MW (3,450-2,000). However, if the losses in transmission and distribution (13%) still persist, Lebanon needs to produce an additional 1,666 MW.
The construction of additional power plants capable of covering this quantity (1,666 MW) will take at least three years, of which six to nine months are needed just to prepare the Terms of Reference (TOR) and launch the tenders. During this period, the only solution to cover the bulk of the deficit would be the quick purchase of best-value electricity from any source. 
As market demand is likely to increase over the coming years by about 3% per annum, the peak demand would reach 4,153 MW by 2023 according to the master plan prepared in cooperation with EDF. In order to keep up with this annual increase (3%), EDL is supposed to increase power production capacity by using renewable energy (wind and solar energy). 
The purchase of 850 MW at USD 700 million per year aims at immediately addressing consumption needs at least during the first 10 months of the year. 
As for the remaining two months, the period of peak demand, most of the additional need can be covered through renewable energy and energy efficiency. 
At present, the cost of purchasing energy from ships amounts to about 12.5 cents per kWh, which is about 1 cent less than the plants’ production cost if based on oil price of USD 65 per barrel. The higher the price of oil, the greater the benefit from purchasing energy from ships as part of the purchase cost is fixed.
It should be noted that the political parties’ suggestion to install Siemens or General Motors generators with a production capacity lesser than that of current plants has no clear financial or technical advantage but a negative impact on the environment. It requires a complex infrastructure for fuel transportation and disturbs citizens on roads. As for the EDL power production plants and the purchase of power from ships, the fuel is provided directly though the plants and ships can operate on gas. 

Total Cost of Power Production and Purchase in Lebanon
The total cost of electricity consumption in Lebanon exceeds USD 3.35 billion. It is broken down as follows:
  • The annual deficit borne by the treasury represents around 39% of the total cost. 
  • The levies collected by EDL represent around 26% of the total cost. 
  • The cost of private generators paid by citizens represents around 35% of the total cost. 
This means that the Lebanese citizens pay around USD 2.05 billion per year (61% of the total bill) and the Lebanese treasury bears a cost of around USD 1.3 billion per year (39% of the total bill). 
Although the price of a crude oil barrel has increased significantly, exceeding USD 130 in recent years, Lebanon’s official electricity tariff is still based on the late 1990s average price of a barrel, which is nearly USD 24. Today, a barrel costs USD 65. 

Compared to the power cost (16.5 cents per kWh), of which 13.5 cents represents the average cost of power production and purchase, and 3 cents the average cost of power transmission and distribution, the average power price is below 9 cents per kWh. This cost reached 22.7 cents in 2014. 
Representing around one-third of electricity consumption, the shortfall in the quantity needed to meet market demand and in the availability of plants to produce electricity is covered by private generators. These generators cost the citizens 22 to 24 cents, i.e. two-and-a-half times the official electricity tariff (9 cents per kWh). 
If Lebanon were to purchase 850 MW at USD 700 million per year (USD 300 million as royalties + USD 400 million as fuel at USD 65 per barrel) to cover the consumption shortfall for at least the first 10 months of the year, the total electricity bill would decrease by about USD 190 million during 2018 and USD 250 million in 2019 as a result of:
  • Reducing the private generator bill by USD 540 million (USD 700 million in 2019)
  • Collecting additional levies of USD 200 million for EDL. They may reach USD 280 million in 2019
  • Adding USD 150 million to the treasury (USD 200 million out of the total deficit in 2019
  • Reducing the total electricity bill by USD 190 million in 2018
  • Reducing the total electricity bill by USD 250 million in 2019 
After reconsidering the electricity tariff, the distribution of the total electricity bill in 2019 would be as follows: 
  • USD 900 million, the amount of levies collected by EDL (USD 850 million as levies + USD 50 million as other revenues)
  • USD 280 million, the amount of additional levies resulting from the purchase of 850 MW
  • USD 470 million, the amount of additional levies resulting from the increased tariff 
  • USD 450 million, the value of private generators’ bill in 2019 (USD 1,150 million at present)
  • USD 2,100 million, the value of total bill paid by citizens for providing 22-hour power supply 
  • USD 1,000 million , the deficit that the treasury entails in 2019 until operating the ships and power plants on gas
  • USD 3,100 million, the value of the total electricity bill borne by the citizens and the government (USD 3,350 million at present)
The operation of power production plants and ships on gas, the establishment of new plants, as well as the implementation of a gas network project along the coast from the north to the south, and the construction of a liquefied natural gas (LNG) plant in 2019 will erase the annual electricity deficit borne by the treasury by 2020, notwithstanding that  the project implementation cost is equal to the annual electricity deficit that has accumulated for more than a quarter of a century.

 

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