Lebanon’s electricity sector teeters on the brink of collapse

Power cuts increase as country’s financial crisis hits fuel imports and payments to power plants

Lebanon's heavily urbanised Mediterranean coastline is dotted with giant storage tanks. Many store low-quality, heavy fuel oil that is burned for electricity production. This outdated and polluting practice stems from decades of wasteful and expensive management of the sector by successive governments.

But more of these tanks are now empty. The government lacks the money and organisational capacity to fill them up again. Private contractors for the country's power plants, some of which have been operating for months without pay, told The National that Lebanon is headed towards a total blackout.

Yahya Mawloud, the representative of a joint venture between a Lebanese company, Middle East Power (MEP), and two Indian ones, Arkay and OEG. Courtesy Finabar

"We have one tank that's 50 per cent full. The other is empty," said Yahya Mawloud, the representative of a joint venture between a Lebanese company, Middle East Power, and two Indian ones, Arkay and OEG, that operates power plants in seaside towns Zouk Mikael, north of the capital, and Jiyeh, to the south.

"We have enough fuel for 10 days. If the government doesn't bring in new fuel, we won't have any after that," he told The National, during a visit to the Zouk plant last week.

The government has been scrambling to find a new source of heavy fuel oil since it allowed its contract with Algerian oil company Sonatrach to expire in December, after 15 years and five renewals. This came amid a corruption scandal over tainted fuel involving private sub-contractors with links to senior Lebanese politicians.

Mr Mawloud, who said he helped uncover the scandal, realised the fuel was contaminated after the power plants' engines started breaking down regularly.

“Politicians are irresponsible and corrupt. They just want to throw the blame on everyone else and escape from any liability,” he said.

“In the end, everything will collapse if there is no action from officials."

The government owes the joint venture about $10 million.

Mr Mawloud is not confident about caretaker Energy Minister Raymond Ghajar's recent attempted solution to the fuel shortage: to import 500,000 tonnes of heavy fuel oil from Iraq each year.

This would meet 25 per cent of Lebanon’s needs, while the rest is expected to be imported by spot cargoes. This would involve buying oil in one-off transactions for near-time delivery.

The opaque agreement involves payment in "lollars" – dollars stuck in Lebanese banks that cannot be used abroad since the beginning of the country's financial crisis.

Unsuitable fuel

Mr Mawloud said that the main problem lies with the quality of Iraqi fuel and its high sulphur content. In addition to harming the environment, it could damage the power plants’ engines.

"I have a contractual obligation to ensure the quality of the fuel we're using. So if lab test results are not up to standard, I will definitely refuse it," he said.

As Lebanon does not operate oil refineries, the fuel would have to be refined "either in Iraq or in another country, or by exchanging it for oil that matches Lebanese specifications with another company", Mr Ghajar told the Iraqi state-run newspaper Al Sabah on Thursday.

Should Mr Mawloud not be able to operate his power plants with Iraqi fuel, that would represent a decrease of Lebanon's electricity output of 270 megawatts – about 15 per cent of the country's total.

But several other plants also operate on heavy fuel oil, and together they produce a little under half of the country’s electricity.

'Lollars' not acceptable

The rest of the national output comes from two power plants located in the northern coastal town of Deir Ammar and in the region of Zahrani, near the southern city of Saida. They are operated by US company Primesouth and run on imported diesel.

Primesouth is also struggling with the Lebanese government, which owes it $45m. Six months before its five-year contract ended on February 16, the government contacted Primesouth to ask for a one-year extension that the company priced at $60m.

Negotiations dragged on until the day the contract expired, when Primesouth chief executive Khalid Al Alamy received a phone call from caretaker Prime Minister Hassan Diab.

"The prime minister said: 'We are sitting here right now and talking with the central bank governor. We need a few more days to resolve the issue. Do not worry and carry on your work,'" Mr Al Alamy told The National.

But the situation remains unchanged.

“If they don’t come up with a plan, we kindly ask to do a handover to them and a proper way to get our dues. We hope for something amicable and civilised,” he said.

In recent months, the government has forced other contractors to accept lollars, but Primesouth said this was not an option.

“We need to import spare parts. How can we pay a contractor with money they can’t use?" Mr Al Alamy said.

"We don't want litigation."

The two Primesouth power plants are currently running at half their capacity because of fuel shortages. Supplies of many kinds of goods – from diesel to baby formula – are running low as the money dries up.

Coupled with difficulties in importing spare parts, oils and filters, fuel shortages have decreased electricity output in Zouk Mikael and Jiyeh by between 30 per cent and 50 per cent a month over the past year, said Mr Mawloud.

That is the equivalent of about an hour and a half of electricity a day across the country.

Power cuts have increased noticeably in the past weeks. The state power firm Electricite du Liban schedules daily cuts, as the power supply has not been able to keep up with demand since the end of the 15-year civil war in 1990.

Beirut typically experiences three hours of power cuts each day, but they can be much longer outside the capital. Most residents rely on highly polluting private generators.

Heavy cost of EDL

Lebanon's electricity sector may be dysfunctional, but it costs the government around $1.5 billion a year in subsidies. Electricity tariffs remain unchanged since 1993 at 9.3 US cents per kilowatt hour, while the real cost has reached 24 cents per kilowatt hour.

Energy consultant Jessica Obeid said this was the fault of successive governments that failed to implement sustainable, cost-effective solutions, despite repeated calls to act.

"The government generates expensive electricity, in addition to suffering from losses caused by the ageing grid, non-billing, the non-collection of bills and electricity theft," she told The National.

“There are vested interests across the entire value chain which benefit so many different players that no one in power has the incentive to change the status quo.”

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The government has used a sense of urgency to compromise sustainability and avoid any cost-effective solution

This year, several other contracts with private operators, including with two power barges leased from Turkey, are scheduled to come to an end.

Ms Obeid believes the government will push the central bank to dip into its diminishing reserves, which stand at $17.9bn, with only $800m available for subsidising fuel, wheat and medicine.
"For the past decades, the government has used a sense of urgency to compromise sustainability and avoid any cost-effective solution. They're saying: 'We're going towards a blackout and you need to give us money to maintain the status quo,'" Ms Obeid said.

She said that despite their complaints, private companies are reluctant to give up lucrative contracts.

“No company would stay unless they had promises of a future payment, and this goes back to the government putting pressure on the central bank’s reserves.”

“The longer the problem lingers, the harder it will be to find a solution. What we’re looking at in the future is a complete collapse of the entire electricity infrastructure," Ms Obeid said.

Mr Ghajar declined a request for an interview.

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