Lebanon’s Electricity: The Need for Market Solutions

A version of this article appeared in the print edition of The Daily Star on September 22, 2016, on page 4.

Lebanon’s half absent electricity remains a major source of social and financial distress for the country. Despite the national electricity company’s (Electricite Du Liban, EdL) failure to supply enough power since the 1990s, the government’s divergent parties could not consent over a rehab or a privatization plan. Instead, the government restricted its role to a draining, indefinite- annual financing of more than 90% of EdL’s purchases of fuel at a fat bill of $1.8 billion. The market meanwhile was left to its own devices. Between private generators, consolidated electricity generation, sleazy borrowing, and investments in alternative energies, Lebanese citizens are almost getting by, but not without terrible costs on wealth and health.

EdL’s combined capacity to generate electricity stands at 1800MW, leaving a gap with the actual demand of around 1600MW, currently filled by unregulated private generators.

Although closely linked to GDP output and income growth which have been ill growing in Lebanon since the beginning of the crisis in Syria (average real growth of 1.7% in 2011-2015), demand for electricity continued to grow in Lebanon, more so coming from the individuals’ use than the industrial.

Typically in recession times, households tend to buy smaller houses -confirmed by the recent real estate’s trends in Lebanon- and therefore use electricity less, and purchase less electric appliances. However, no such decrease was noted, presumably due to the prevalence of private power generators which supply electricity against fixed amounts per amperes rather than according to actual usage, giving fewer incentives for households to rethink consumption. Moreover, an actual increase in demand came with the settling of around 2 million Syrian refugees in the country during the past 5 years.

On the other hand, demand for electricity from Lebanese industries stabilized during the past few years. The industrial sector’s usage of electricity is estimated at around 60% of total consumption (World Bank, 2009), with large scale manufacturers relying on their own generators to ensure an uninterrupted current. Losses from the intermittent electricity, the tariffs structure of private generators, and the self-sufficiency ventures, all tighten profit margins, and contribute to a loss of competitiveness in pricing and exports.

Dr. Fadi Gemayel, president of the Association of Lebanese Industrialists, notes that the average energy factor cost is 5.7% of the companies’ selling price, but it reaches as high as 35% for energy-intensive industries, mainly manufacturing sectors such as plastics, paper, glass, steel, and others, adding to the challenges and tough operating conditions of industrialists in Lebanon.

Despite the lack of studies on sectors’ energy consumption, the ones depending directly on electricity, mainly manufacturing, contribute to 11% of Lebanon’s GDP, and represent 15% of the country’s exports. The deteriorating economic situation and the complications arising from the Syrian war have already led to a whopping 54% fall in exports between 2011 and 2015, totaling $2.9 billion last year. An additional decrease of 5.6% is recorded as at July 2016.

The economic indicator BLOM PMI, or purchasing managers’ index, has been showing continuous declines in the private sector’s activity, with output taking the hardest hit while input cost remaining stickily high. By August 2016, the output’s index was the lowest among the other indices, at 41.5. Meanwhile on the cost’s side, and despite generally lower oil prices and cheaper foreign currencies, overall input costs at Lebanese companies remained above 50, the neutral point, reflecting the companies’ trouble at contracting their costs proportionally to the decrease in demand, thus leading to lower profits.

Regular power cuts and intermittent supply are not only a daily annoyance and work disturbance, the inefficient company is also causing direct losses on the macro level. Subsidies to this sector are wearing out the government’s budget, deterring spending on more efficient infrastructure, and heightening the public debt.

During the period 2011-2015, a total of $9.2 billion was spent to cover the fuel purchases of EdL, an average of $1.8 billion per year, or 3.8% of GDP. The government posted a budget deficit of $3.5 billion in 2015. The recent lower oil prices have contributed to a lower annual bill of $1.1 billion in 2015, reducing the burden of electricity from 21% of current expenditures in 2014 to 12.8% of current expenditures in 2015, but still occupying the largest weight on the government’s budget after debt service and public wages.

Many experts question the use of transfers made to a company failing to cover more than 50% of the market demand. The government has made no capital investments in this sector in almost a decade, and the substantial governmental subsidies target only EdL’s current expenses, which can be expected to continue indefinitely and fluctuate according to oil prices.

The revenues collected by the EdL through the 3 contracted main distributors, BUTEC, KVA, and NEU, remain a mystery. There are no public figures regarding EdL’s financial standing, nor audit reports. The only indication available to EdL’s current funds is its own contribution to the bill of oil imports, $25 million in 2015.

Naturally, the market has responded with some creative solutions, but not without negative implications. The private power generators were the first to emerge and live off the electricity crisis. Tariffs of private generators remain uncontrolled and unregulated, and are set randomly despite a general weekly pricing guidance published by the government. Bills from generators are more than double EdL’s, which hasn’t changed its fixed pricing since 1992 when the oil barrel was at 24$; but contrary to the EdL’s bills, they are efficiently collected with no recorded problems. The ecological footprint of these generators has yet to be studied.

The privatization of the electricity company faces political blockades. Recently, however, the private sector came back in more robust ways. Electricite de Zahle (EdZ), independently generating electricity for Zahle and its neighboring towns, promised and delivered constant current by replacing all the private generators with one power station supplying electricity to consumers. The impact of the new model on households was very positive, but less so on industrialists. Households’ bills were reduced as electricity was billed according to usage based on smart meters instead of the “by ampere” system applied by private generators. Industrial companies, however, found the system more costly, especially that the tariff wasn’t based on a progressive consumption basis. Several industrial sources in Zahle confirmed moving back to their own generators to ensure continuous operations, and many are studying the use of solar power and other alternative energies to reduce their costs.

The World Bank recommends that electricity cost should not exceed 10-15% of the household’s disposable income. Although no estimates are available for households’ disposable income in Lebanon, a survey by the Central Administration of Statistics on households’ expenditures in 2012 found that a Lebanese family of 4 spends on average $2000/year on electricity bills. This is no doubt high by international standards, especially in a country whose per capita income averaged $7,140 in 2014.

The tariffs for electricity have to cater both for the households’ capacity and the industrial companies’ cost structure, all the while covering the production cost of electricity and ensuring an acceptable profit margin. This remains the responsibility of the government who is set to regulate and monitor these practices.

Perhaps the government should start looking more seriously at consolidating the generators’ market, a step that may have the cost of rendering several investments obsolete, but will guarantee an immediate full day supply of electricity. Once the Lebanese citizen trusts the 24h/7 electricity promise, raising EdL’s tariffs may become less protested, and could benefit from the forecasted long term oil prices.

The government should also tend to similar initiatives to EdZ by regulating the licensing process, and standardizing operating conditions, taking into account the needs of citizens and industrialists alike. Uncostly procedures for the government also include improving collection, unifying and monitoring price lists, and requiring smart meters and isolated electric rooms in new buildings. Even the municipalities’ use of electricity needs revisiting, as it so far remains dependent on private initiatives.

In the meantime, one of the most hailed solutions remains power generation from renewable energies. Renewable energy options in Lebanon start with tides and waves, geothermal energy, solar energy, wind energy, hydro-power, and don’t end with biomass and energy from non-separated waste – a double score solution as it also resolves part of the ongoing waste crisis. However, these resources are barely used. Power generation in Lebanon is mainly concentrated around thermal energy production, and Hydro-power produced from plants does not exceed 4.5% from the total generation capacity.

Eco-friendly, low cost, and efficient, the generation of electricity through renewable sources is also an encouraged investment. The BdL subsidizes loans in this field, and many international funding organizations such as the International Finance Coep, the World Bank, and the European investment bank, are well poised to contribute through loans and equity alike.

As an example, Hawa Akkar, a wind farm seeking to secure cleaner energy at a cheap cost, 60% less than EdL’s production costs, comes from a region experiencing 18 hours of power cuts per day. The company aims at reaching 12% of Lebanon’s energy needs by 2020.

The government cannot leave this ship to sink. If allocating funds for investments in this sector to rehabilitate the plants or increase them adds burden to a deficit already worn out by the operational transfers, it may be time to regulate and encourage private sector’s initiatives. This will ensure at least the basic need for continuous electricity at affordable costs to citizens and companies, and relieve the government budget to benefit other urgent reforms. All these short and medium term solutions don’t waive the necessity of putting a long term plan in place. In this regard, some form of a private-public partnership are most recommended, taking into consideration the possibility of the production of gas from Lebanon’s offshore.


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