## THE ELECTRICITY SECTOR IN LEBANON: A NEW PLAN TO ADDRESS LONG-STANDING INEFFICIENCIES ## Source details **Canonical URL:** [THE ELECTRICITY SECTOR IN LEBANON: A NEW PLAN TO ADDRESS LONG-STANDING INEFFICIENCIES](https://www.imf.org/-/media/files/publications/cr/2019/1lbnea2019002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1lbnea2019002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1lbnea2019002.pdf.json) --- ### Background - Key challenges for Electricité du Liban (EdL): - Production capacity is well below consumers’ demand; installed generating capacity of 3,017 MW is estimated to fall short of demand by about 1,500 MW. - Losses (technical, non-technical and non-collection) are estimated at 43 percent of production—i.e. only 57 percent of electricity produced is actually transmitted, billed, and collected. - Electricity tariffs are well below cost recovery, and EdL’s large financial losses impose a heavy burden on the government budget. - Installed capacity details: - Thermal power plants: 2,764 MW. - Hydroelectric power plants: 252.6 MW. - Demand dynamics: - Demand for electricity is estimated to grow by 500 MW every five years. - Power barges used for temporary power generation since 2012 are scheduled to exit the market in 2021. - Tariffs and costs: - Consumers currently pay an average of 9.6 cents/kWh to EdL. - Private generators charge 22 cents/kWh on average. - Break-even tariff to cover production and distribution costs: 23 cents/kWh. - Break-even tariff including capital expenditures: 28 cents/kWh. - Loss composition and arrears: - Losses: 43 percent of production = 17 percent technical losses, 21 percent non-technical losses, 5 percent billed but non-collected losses. - Technical losses could be reduced toward 10 percent with transmission investment. - Current stock of payment arrears from private consumers: USD 0.4 billion (0.7 percent of GDP). - Total unpaid dues—including central government, municipalities, public institutions—estimated at USD 2 billion (3.6 percent of GDP). - Fiscal transfers: - Transfers to EdL amounted to an estimated USD 1.8 billion in 2018 (3.1 percent of GDP). ### Electricity Provision and Business Competitiveness - Business perceptions (World Bank Enterprise Survey): - Electricity shortages are the second constraint to competitiveness reported by businesses in Lebanon. - 55 percent of businesses report electricity as an impediment; 61 percent report corruption as a constraint. - Outage incidence and duration: - 97 percent of businesses report experiencing an electrical outage (compared to MENA average of 55 percent). - Average duration of daily shortages: 5.4 hours (MENA average: 3.7 hours). - Reliance on private generators: - 84 percent of surveyed businesses report using private generators, which supply almost half of their electricity. - In MENA average: 36 percent of businesses report using a private generator for 32 percent of supply. - Private generators cost on average 22 cents/kWh versus EdL tariffs averaging 9.6 cents/kWh. - Implication: - Costly private generation represents an important share of businesses’ electricity expenses and reduces competitiveness. ### Electricity Provision and Household Income Disparities - Regional disparities in EdL supply (hours per day): - Beirut urban area receives 21.2 hours/day. - Bekaa receives 12 hours/day. - Cost distribution and tariff structure: - EdL’s tariff structure (variable costs) is progressive across consumption tranches but overall cost is regressive due to high fixed costs. - Fixed costs—including stamp, rehabilitation and a subscription to Amps—amount to USD 6.40 monthly for most households. - Stamp fee: USD 0.70. - Rehabilitation fee: USD 3.30. - Subscription to 15 Amps: USD 2.40. - Fixed costs represent between 40 and 76 percent of EdL’s electricity bill for the smallest consumers (consuming less than 300 kWh per month). - Distributional impact of private generator spending: - Households in the South (poorest region; household average monthly income = 69 percent of the national average) devote 12 percent of their income to pay for private generators. - Households in Mount Lebanon (richest region; household average monthly income = 1.3 times the national average) pay 2 percent of their income to private generators. ### A New Reform Proposal (approved April 9, 2019; ratified April 17, 2019) - Four components of the plan: 1. Reduce losses - Two projects: (i) improve the Distribution Service Provider (DSP) framework and the distribution grid to reduce technical losses; (ii) install smart meters to reduce non-technical losses. - Technical losses reduced by 1 percentage point through installation and electrification of a high voltage line in Mansourieh; additional lines expected in three other cities by end of year. - Subscription price temporarily reduced by 75 percent to increase number of new subscriptions. - Smart meters’ installation cost: USD 200 million, expected to be supported by a World Bank loan Program for Results (PforR), disbursed when implementation is successful (indicator: losses). - Test phase aims at installing around 30,000 smart meters by end August 2019 with support from the National Electric Utility Company (NEUC). - Goal: reduce technical and non-technical losses from 34 percent to 12 percent by 2023. - Staff realistic estimate: reduction to 20 percent is more realistic in the medium-term. 2. Increase capacity - Short-term temporary solutions: modular power plants, power barges, alongside permanent plants to reach 24/7 supply in 2020. - Combining temporary and permanent solutions via a Power Purchasing Agreement (PPA) to backload cost; EdL would pay a fixed price per kWh. - Production cost estimates: - Temporary solution (power barges): around 14 cents/kWh. - New power plants: expected to range between 8–9 cents/kWh. - Staff estimate: increase in capacity could start by end 2020 and fixed price under the PPA could be around 10 cents/kWh. 3. Reduce production costs (fuel switch) - Plan to import LNG by ship, build three Floating Storage Regasification Units (FSRUs) and an underwater pipeline from ship to shore. - Bidding process completed; contract needs to be signed by end of year to supply all existing power plants by 2021. - Staff assessment: gas could be used as input starting in 2022 given possible delays. 4. Increase tariffs - Authorities plan to raise tariffs to 14.4 cents/kWh after capacity increase (i.e. after 24/7 supply achieved) and to adopt an automatic fuel indexation mechanism thereafter. - Authorities’ claim: 14.4 cents/kWh closes EdL’s operating deficit (excluding capital expenditures) once reform components implemented. - IMF staff estimate: a higher tariff of about USD 16.2 cents/kWh would be necessary to close EdL’s deficit after implementation of the plan when accounting for (i) projected capital expenditures; and (ii) a more realistic reduction in technical and non-technical losses. - Staff implementation and outcome assumptions: - After implementation, losses are expected to be reduced from 43 to 20 percent of production by 2025. - Capacity to be increased to achieve zero outage by end-2020. - Production costs to be reduced through the use of gas as input by 2023. ### Key quantitative figures and targets - Installed generating capacity: 3,017 MW. - Estimated capacity shortfall: about 1,500 MW. - Demand growth: 500 MW every five years. - Average EdL tariff paid by consumers: 9.6 cents/kWh. - Average private generator charge: 22 cents/kWh. - Losses: 43 percent of production (17 percent technical, 21 percent non-technical, 5 percent billed but non-collected). - Break-even tariff (operating & distribution costs): 23 cents/kWh. - Break-even tariff (including capital expenditures): 28 cents/kWh. - Payment arrears from private consumers: USD 0.4 billion (0.7 percent of GDP). - Total unpaid dues: USD 2 billion (3.6 percent of GDP). - Transfers to EdL in 2018: estimated USD 1.8 billion (3.1 percent of GDP). - Fixed household electricity fee: USD 6.40 monthly. - Smart meters installation cost: USD 200 million. - Target loss reduction in plan: from 34 percent to 12 percent by 2023 (staff realistic medium-term target: 20 percent). - Temporary solution production cost estimate: around 14 cents/kWh. - New power plants production cost estimate: 8–9 cents/kWh. - Estimated PPA fixed price under staff assumptions: around 10 cents/kWh. - Authorities’ planned tariff after reform: 14.4 cents/kWh. - IMF staff tariff estimate needed to close deficit including capital expenditures: USD 16.2 cents/kWh. - Staff timeline assumptions: - Capacity increase to zero outage by end-2020. - Gas input used by 2022 (authorities’ objective: supply all existing power plants by 2021; staff assesses possible start 2022). - Losses reduced to 20 percent of production by 2025 under staff assumptions. ### Projected fiscal impact of the electricity reform plan - If fully implemented, the plan could start reducing EdL’s deficit by 0.1 percent of GDP in 2020 and 0.9 percent of GDP in 2021. - Annual savings would increase gradually and amount to 1.9 percent of GDP in 2025. - EdL’s deficit would still be positive at around 0.4 percent of GDP in 2025. - Main contributors to the deficit reduction in 2025: - Use of gas as input to production: 0.7 percent of GDP. - Increase in tariffs: 0.6 percent of GDP. - Reduction of losses to 20 percent of production in 2025: 0.5 percent of GDP. - Note: The four components of the reform interact significantly, so the sum of individual savings is not equal to the overall gains of the reform plan. ### Tariff requirements and design - Staff estimates suggest that an increase in tariffs to USD 16.2 cents would then be necessary to close EdL’s primary deficit. - Including capital expenditures, tariffs of at least 16.2 cents/kWh are implied for EdL’s finances to be balanced, after taking into account the impact of the reforms. - The tariff increase should take place as soon as possible to start relieving the strain on public finances, possibly targeting the largest consumers (industrials) first. - Tariff structure recommendations: - Simplify the tariff structure to improve fairness. - Design tariffs to incentivize consumers to reduce their consumption while supporting the most vulnerable. - Index consumer tariffs on the evolution of input prices to guarantee that they will not be negatively impacted by future developments in fuel or gas prices. ### Social protection and sequencing - Introduce well-targeted measures, such as cash transfers, to help protect the most vulnerable households from the tariff increase. - Prioritize decisive implementation of the plan while enhancing it further to fully restore EdL’s viability. *Prepared by Constance de Soyres and Najla Nakhle; Jawed Sakhi and Laila Azoor provided research and editorial support.* ### Section 1 ### THE ELECTRICITY SECTOR IN LEBANON: A NEW PLAN TO ADDRESS LONG-STANDING INEFFICIENCIES ### Background - Key challenges for Electricité du Liban (EdL): - Production capacity is well below consumers’ demand; installed generating capacity of 3,017 MW is estimated to fall short of demand by about 1,500 MW. - Losses (technical, non-technical and non-collection) are estimated at 43 percent of production—i.e. only 57 percent of electricity produced is actually transmitted, billed, and collected. - Electricity tariffs are well below cost recovery, and EdL’s large financial losses impose a heavy burden on the government budget. - Installed capacity details: - Thermal power plants: 2,764 MW. - Hydroelectric power plants: 252.6 MW. - Demand dynamics: - Demand for electricity is estimated to grow by 500 MW every five years. - Power barges used for temporary power generation since 2012 are scheduled to exit the market in 2021. - Tariffs and costs: - Consumers currently pay an average of 9.6 cents/kWh to EdL. - Private generators charge 22 cents/kWh on average. - Break-even tariff to cover production and distribution costs: 23 cents/kWh. - Break-even tariff including capital expenditures: 28 cents/kWh. - Loss composition and arrears: - Losses: 43 percent of production = 17 percent technical losses, 21 percent non-technical losses, 5 percent billed but non-collected losses. - Technical losses could be reduced toward 10 percent with transmission investment. - Current stock of payment arrears from private consumers: USD 0.4 billion (0.7 percent of GDP). - Total unpaid dues—including central government, municipalities, public institutions—estimated at USD 2 billion (3.6 percent of GDP). - Fiscal transfers: - Transfers to EdL amounted to an estimated USD 1.8 billion in 2018 (3.1 percent of GDP). ### Electricity Provision and Business Competitiveness - Business perceptions (World Bank Enterprise Survey): - Electricity shortages are the second constraint to competitiveness reported by businesses in Lebanon. - 55 percent of businesses report electricity as an impediment; 61 percent report corruption as a constraint. - Outage incidence and duration: - 97 percent of businesses report experiencing an electrical outage (compared to MENA average of 55 percent). - Average duration of daily shortages: 5.4 hours (MENA average: 3.7 hours). - Reliance on private generators: - 84 percent of surveyed businesses report using private generators, which supply almost half of their electricity. - In MENA average: 36 percent of businesses report using a private generator for 32 percent of supply. - Private generators cost on average 22 cents/kWh versus EdL tariffs averaging 9.6 cents/kWh. - Implication: - Costly private generation represents an important share of businesses’ electricity expenses and reduces competitiveness. ### Electricity Provision and Household Income Disparities - Regional disparities in EdL supply (hours per day): - Beirut urban area receives 21.2 hours/day. - Bekaa receives 12 hours/day. - Cost distribution and tariff structure: - EdL’s tariff structure (variable costs) is progressive across consumption tranches but overall cost is regressive due to high fixed costs. - Fixed costs—including stamp, rehabilitation and a subscription to Amps—amount to USD 6.40 monthly for most households. - Stamp fee: USD 0.70. - Rehabilitation fee: USD 3.30. - Subscription to 15 Amps: USD 2.40. - Fixed costs represent between 40 and 76 percent of EdL’s electricity bill for the smallest consumers (consuming less than 300 kWh per month). - Distributional impact of private generator spending: - Households in the South (poorest region; household average monthly income = 69 percent of the national average) devote 12 percent of their income to pay for private generators. - Households in Mount Lebanon (richest region; household average monthly income = 1.3 times the national average) pay 2 percent of their income to private generators. ### A New Reform Proposal (approved April 9, 2019; ratified April 17, 2019) - Four components of the plan: 1. Reduce losses - Two projects: (i) improve the Distribution Service Provider (DSP) framework and the distribution grid to reduce technical losses; (ii) install smart meters to reduce non-technical losses. - Technical losses reduced by 1 percentage point through installation and electrification of a high voltage line in Mansourieh; additional lines expected in three other cities by end of year. - Subscription price temporarily reduced by 75 percent to increase number of new subscriptions. - Smart meters’ installation cost: USD 200 million, expected to be supported by a World Bank loan Program for Results (PforR), disbursed when implementation is successful (indicator: losses). - Test phase aims at installing around 30,000 smart meters by end August 2019 with support from the National Electric Utility Company (NEUC). - Goal: reduce technical and non-technical losses from 34 percent to 12 percent by 2023. - Staff realistic estimate: reduction to 20 percent is more realistic in the medium-term. 2. Increase capacity - Short-term temporary solutions: modular power plants, power barges, alongside permanent plants to reach 24/7 supply in 2020. - Combining temporary and permanent solutions via a Power Purchasing Agreement (PPA) to backload cost; EdL would pay a fixed price per kWh. - Production cost estimates: - Temporary solution (power barges): around 14 cents/kWh. - New power plants: expected to range between 8–9 cents/kWh. - Staff estimate: increase in capacity could start by end 2020 and fixed price under the PPA could be around 10 cents/kWh. 3. Reduce production costs (fuel switch) - Plan to import LNG by ship, build three Floating Storage Regasification Units (FSRUs) and an underwater pipeline from ship to shore. - Bidding process completed; contract needs to be signed by end of year to supply all existing power plants by 2021. - Staff assessment: gas could be used as input starting in 2022 given possible delays. 4. Increase tariffs - Authorities plan to raise tariffs to 14.4 cents/kWh after capacity increase (i.e. after 24/7 supply achieved) and to adopt an automatic fuel indexation mechanism thereafter. - Authorities’ claim: 14.4 cents/kWh closes EdL’s operating deficit (excluding capital expenditures) once reform components implemented. - IMF staff estimate: a higher tariff of about USD 16.2 cents/kWh would be necessary to close EdL’s deficit after implementation of the plan when accounting for (i) projected capital expenditures; and (ii) a more realistic reduction in technical and non-technical losses. - Staff implementation and outcome assumptions: - After implementation, losses are expected to be reduced from 43 to 20 percent of production by 2025. - Capacity to be increased to achieve zero outage by end-2020. - Production costs to be reduced through the use of gas as input by 2023. ### Key quantitative figures and targets - Installed generating capacity: 3,017 MW. - Estimated capacity shortfall: about 1,500 MW. - Demand growth: 500 MW every five years. - Average EdL tariff paid by consumers: 9.6 cents/kWh. - Average private generator charge: 22 cents/kWh. - Losses: 43 percent of production (17 percent technical, 21 percent non-technical, 5 percent billed but non-collected). - Break-even tariff (operating & distribution costs): 23 cents/kWh. - Break-even tariff (including capital expenditures): 28 cents/kWh. - Payment arrears from private consumers: USD 0.4 billion (0.7 percent of GDP). - Total unpaid dues: USD 2 billion (3.6 percent of GDP). - Transfers to EdL in 2018: estimated USD 1.8 billion (3.1 percent of GDP). - Fixed household electricity fee: USD 6.40 monthly. - Smart meters installation cost: USD 200 million. - Target loss reduction in plan: from 34 percent to 12 percent by 2023 (staff realistic medium-term target: 20 percent). - Temporary solution production cost estimate: around 14 cents/kWh. - New power plants production cost estimate: 8–9 cents/kWh. - Estimated PPA fixed price under staff assumptions: around 10 cents/kWh. - Authorities’ planned tariff after reform: 14.4 cents/kWh. - IMF staff tariff estimate needed to close deficit including capital expenditures: USD 16.2 cents/kWh. - Staff timeline assumptions: - Capacity increase to zero outage by end-2020. - Gas input used by 2022 (authorities’ objective: supply all existing power plants by 2021; staff assesses possible start 2022). - Losses reduced to 20 percent of production by 2025 under staff assumptions. *Prepared by Constance de Soyres and Najla Nakhle; Jawed Sakhi and Laila Azoor provided research and editorial support.* ### Section 2 ### Section 2 ### Projected fiscal impact of the electricity reform plan - If fully implemented, the plan could start reducing EdL’s deficit by 0.1 percent of GDP in 2020 and 0.9 percent of GDP in 2021. - Annual savings would increase gradually and amount to 1.9 percent of GDP in 2025. - EdL’s deficit would still be positive at around 0.4 percent of GDP in 2025. - Main contributors to the deficit reduction in 2025: - Use of gas as input to production: 0.7 percent of GDP. - Increase in tariffs: 0.6 percent of GDP. - Reduction of losses to 20 percent of production in 2025: 0.5 percent of GDP. - The four components of the reform interact significantly, so the sum of individual savings is not equal to the overall gains of the reform plan. ### Tariff requirements and design - Staff estimates suggest that an increase in tariffs to USD 16.2 cents would then be necessary to close EdL’s primary deficit. - Including capital expenditures, tariffs of at least 16.2 cents/kWh are implied for EdL’s finances to be balanced, after taking into account the impact of the reforms. - The tariff increase should take place as soon as possible to start relieving the strain on public finances, possibly targeting the largest consumers (industrials) first. - Tariff structure recommendations: - Simplify the tariff structure to improve fairness. - Design tariffs to incentivize consumers to reduce their consumption while supporting the most vulnerable. - Index consumer tariffs on the evolution of input prices to guarantee that they will not be negatively impacted by future developments in fuel or gas prices. ### Social protection and sequencing - Introduce well-targeted measures, such as cash transfers, to help protect the most vulnerable households from the tariff increase. - Prioritize decisive implementation of the plan while enhancing it further to fully restore EdL’s viability. *Source: 1lbnea2019002 - Section 2* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1lbnea2019002.pdf_