Lebanon defaulted on its debt for the first time in the country’s history. Many factors have contributed to this economic and fiscal crisis, but at the heart of them is the electricity sector, accountable for more than $39.5 billion, equivalent to 43 percent of the public debt, and embodying the core structural issues of Lebanon; a non-functioning confessional system built on the foundation of vested interests.
The small country with electricity demand of 3,600MW, insignificant compared to the other Middle Eastern countries, has been having a chronic electricity shortage for almost three decades, and has a current power generation capacity of approximately 2,060MW. The shortcomings reported in the 1990s have remained unresolved in the year 2020: acute supply shortage, dominance of expensive and pollutant heavy fuel oil and diesel oil, weak grid, lack of access to data, high non-technical losses including non-billing, non-collection and electricity theft. All these issues are resulting in a fiscal deficit of the state-owned electricity utility, Electricité du Liban (EDL), that has averaged $1.6 billion per year within the past decade, depending on oil prices, and reached $2.3 billion in 2012 when the oil price crossed the $111 per barrel threshold.
The technical solution is quite simple: Lebanon needs to add a power generation capacity of at least 1,500MW, enhance the distribution and transmission grid, switch to the use of natural gas in power generation, drastically cut down on illegal connections, fix the billing and collection system, and add renewables to the energy mix.
Yet, the last thermal power plant was implemented in the year 1999. Twenty years later, only a total of 270MW of reciprocating engines have been added to two power plants, and two power barges of 198MW each have been rented since the year 2013. Renewable energy plants have been planned for several years, and wind and solar plants were tendered in 2017, three wind farms of a total capacity of 220MW were awarded in 2018, but no utility-scale renewable energy plant is yet implemented. Plans to switch to natural gas have been official since the parliament approved the electricity policy paper in 2010, but no infrastructure is yet in sight, pending the corresponding contract signature.
What went wrong? Simply put, the political system. Following the Lebanese civil war, a confessional political system based on power-sharing emerged as an impediment to any potential future conflicts. In fact, the system’s design aimed to ensure that major parties had no incentive to engage in violent clashes, mostly because of their various vested interests across the different sectors. While the system did achieve its target, it has hindered any economic growth or sectorial reforms, and nowhere is this more evident than in the power sector.
The technical and fiscal issues are therefore deeply rooted in the governance and institutional structure, and that governance structure is often omitted from any electricity sector solution.
All sectors need competition to thrive and the electricity sector is no different. When political influence is high and hinders any reforms, the obvious move is to dilute the political interference and reduce the impact of the central governance through decentralised, local mechanisms.
The opposite remains true in Lebanon despite the 3-decade impossible reforms. The electricity utility is a vertically-integrated monopoly, the role of the private sector is so far marginal, and competition is minimal. The wind farms were the first Independent Power Producers (IPPs) licensed in 2018 to sell power to the single buyer EDL, under Power Purchase Agreements (PPAs) through Public Private Partnership (PPP). While IPPs promote the role of the private sector, it’s their regulatory and procurement framework that promotes competition in the sector, rather than their sole existence. In 2017, Lebanon issued PPP Law 48 to govern all such projects, including the electricity sector, but the law has been bypassed in electricity procurement.
In fact, cherry-picking which laws and articles to implement is a characteristic of the sector, which also lacks a solid regulatory framework and consistent policy. In 2002, Law 462 was issued consisting of the establishment of a regulatory authority with the key mandate of issuing and canceling licenses and restructuring the electricity utility. Ideally, a regulator should be independent and have enough mandates to mitigate the political agendas and the political influence in the sector, but that's exactly why political powers are usually reluctant to cede power in favor of the regulator. Law 462 was therefore never implemented.
The policy inconsistency signals high risk to investors, in addition to the country’s heightened political and economic risk, driving risk premiums and subsequently high electricity purchase costs. The most apparent policy inconsistency is in power purchase licensing. As the electricity regulatory authority was never established, in 2014 the parliament adopted Law 288, enabling the Council of Ministers (COM) to grant licenses for a 2-year period. In 2015, Law 54 was passed, extending the duration of Law 288 until April 2018. Following that and for a one-year period, no entity had the authority to grant licenses, until Law 129 was issued on April 2019, again renewing the COM’s licensing authority for 3 years.
The longer the problems lingered, the more the vested interests grew in the sector. The fuel economy, the sectarian procurement segregation, the informal generators’ market, to name a few. Private neighborhood generators started proliferating mostly after 1994, growing exponentially with the shortage in electricity supply. As they are spread throughout neighborhoods across the entire country, they do not have a centralised focus or leadership. But can be affiliated with different political parties, depending on the dominant parties in their areas of operation, as are average citizens. Yet, as they grew into their current $2 billion informal industry, they may have figured out ways to ensure their security and the security of their parallel electricity networks.
The issues are endless and the electricity sector needs an urgent, comprehensive and sustainable plan. There’s no shortage of technical solutions, but at the heart of any solution should be a solid regulatory framework, consistent policy and most importantly, robust governance that reduces the political influence of the non-functioning system, increases competition and promotes decentralization.