Walking through Beirut’s shopping malls, it is not uncommon to be plunged into darkness for a few seconds.

Then the click and whir of the generators kicking in is greeted with applause from unruffled shoppers.

The Lebanese have long been accustomed to power cuts, and the country’s power supply is set to remain intermittent.

Lebanon’s power sector has reached a critical stage. Thanks to the subsidies the government pays to keep power cheap, it is a massive drain on public resources - estimated at 4 per cent of gross domestic product (GDP) for 2007.

The power shortages result in revenue losses for industry and commerce, and the public spending huge sums on back-up generators.

Lebanon’s current generating capacity is about 1,500MW, some 800MW short of the estimated peak demand of 2,500MW, resulting in supply shortages.

The World Bank forecasts demand for power in Lebanon will increase by 60 per cent by 2015.

Output has been drastically hit over the past few years following a series of major events, including a fire at the Zouk plant.

However, the most significant disruption resulted from the hostilities with Israel in July 2006, which resulted in the destruction of the fuel tanks at the Jieh plant.

Capacity drop

In November 2007, part of the Beddawi plant was also destroyed as the Lebanese army engaged with militants in the Nahr el-Bared refugee camp.

Following the conflict, available capacity was reported by state energy company Electricite du Liban (EDL) to be just 1,100MW.

By January this year, the figure had risen to 1,562MW. At the end of 2006, EDL’s total installed capacity was 2,100MW, according to the World Bank, of which 300MW was from hydro-electric power, with the remainder coming from the country’s seven oil-burning thermal power stations.

Getting Lebanon’s power generation cap-acity up to optimum rates to meet growing demand will be a challenge. Not only is the republic’s infrastructure inadequate, but it is deteriorating.

More worrying is Lebanon’s limited supply of gas feedstock. The two gas-fired plants built in 1996 under the tenure of former prime minister Rafiq Hariri at a cost of $1.4bn have been running on fuel oil, which is far less efficient, as gas supplies have not been secured.

As a result, not only do they run well below their stated installed capacities, but the fuel itself is damaging the plants.

To compound the problem, electricity generation continues to be outpaced by consumption.

In place of government-built plants, there has been a massive investment by the public and industry into back-up arrangements, namely generators.

The World Bank estimates this form of energy security costs the population an additional 25 per cent in monthly spending on electricity. Interrupted supply from EDL is estimated to cost the company $400m in lost sales.

But Beirut could at least be close to finding a solution. In August, a deal was struck with Egypt by Lebanon’s Prime Minister Fouad Siniora for the supply of 150-450MW from a regional power grid connecting Egypt and seven other countries, including Jordan and Syria.

Under the agreement, which begins next year, Egypt will also provide Lebanon with 30 million cubic metres a day of gas through the pan-Arab pipeline.

This will supply only one of the two power units at the Beddawi plant, which generates a third of Lebanon’s total production. The new supply will reduce its reliance on fuel oil as a feedstock.

Beirut is also in negotiations with Jordan over the leasing of a 60MW Jordanian power plant, according to Energy & Water Minister Alan Tabourian.

While the help of Lebanon’s neighbours is most welcome and will ease the burden, the combined output of Egyptian and Jordanian electricity coming on to the Lebanese grid would provide more of a respite than a solution.

It should give “between two and three years’ grace to build more power plants to meet the local demand”, Tabourian said in September.

Daunting task

Building more Lebanese power plants will require massive investment from the government, perhaps as much as $2bn.

“There is no real development if you do not have proper power back-up,” says Nabil el-Jisr president of the Council for Development & Reconstruction (CDR).

“We arrived at a solution, through the political turmoil. Instead of full-throttle privatisation, we will go for semi-privatisation, through the IPP [independent power plant] programme.”

The political, legal and regulatory environment in Lebanon has hardly been conducive to attracting the sort of private investment that could alleviate some of the country’s power problems.

Nonetheless, there is an appetite for investment in the Lebanese power sector, in particular for IPP projects, according to Ziad Hayek, secretary general of the Higher Council for Privatization (HCP), a body whose role is to promote the legal framework to allow public-private partnerships (PPPs) in the power sector.

Francois Bassil, chairman of Byblos Bank and head of the Lebanese Banking Association, says Lebanon’s banks would be willing to help the power sector.

But this help would be conditional upon the government loosening its grip on the power sector and allowing greater private sector involvement in the management of the industry.

The interested investors naturally include Lebanese power-distribution companies, as well as private investors and renewable-energy companies.

The plan for increasing generation capacity comprises three phases. The first is an IPP project at Deir Amaar for a 450MW plant. The tender for this project has not yet been launched.

As with many of the resolutions to Lebanon’s infrastructure problems, the tender is still awaiting government sanction.

Little progress is expected, pending the co-ordination of policy with the Energy Ministry.

Phase two the plan is to rehabilitate of the existing power plants at Zouk and Jieh. “We have done lots of studies into the power needs - basic, immediate and future - and new production is not enough,” says El-Jisr.

“It does not eliminate the fact that we need fresh investment for the rehabilitation of existing plants.”

Given the scale of Lebanon’s power shortfall, it is difficult to envisage how EDL could undertake any major expansion of the sector without the involvement of the private sector.

However, the involvement of private companies should not be seen as a substitute for the long-delayed sector reforms.

El-Jisr says IPPs alone will not be enough. “It has to be a combination of the three: new and improved power plants, improving transmission lines and increasing the number of transformer stations,” he says. “We cannot just depend on the IPPs.”

Private deals

In December 2007, the government signed a series of memorandums of understanding with private companies, which acknowledge the companies’ interest in producing electricity but effectively say they will have to wait until a licence is granted.

Three were with private companies that have held concessions to distribute electricity in their respective regions on behalf of EDL.

The third phase of the plan to increase Lebanon’s generating capacity involves building a series of 50-60MW plants with various Lebanese private sector parties interested in PPPs.

“We have proposed to the government to finance, design, build and operate a 60MW power plant south of Beirut that would supply the national grid,” says Albert Khoury, deputy general manager of local power company Electricite de Aley (EDA).

Khoury estimates the project would save EDL and the Finance Ministry, which subsidises it, $20-100m dollars a year.

EDA’s performance, in terms of collection and losses in the Aley region, is impressive compared with those regularly attributed to EDL. Total losses on its distribution grid are below 8 per cent, compared with 18-22 per cent at EDL.

Reform of the distribution business is also critical. Under HCP’s supervision, and subject to an official tender, proposals have been submitted for the provision, installation, operation and maintenance of up to 1.2 million digital electricity meters, as well as for billing and collection. “We received five bids on 30 April for the digital meters,” says Hayek.

“These have not yet been opened, pending the appointment of a consulting firm to evaluate the bids.”

This was done at the beginning of September after the government approved a contract with Bahrain-based CRA International. “Work on the project should now resume,” says Hayek.

Meeting demand is more than building new power plants - the framework for managing and regulating the power sector needs to be strengthened, says Roudi Baroudi, energy consultant and former adviser to the finance minister. “EDL needs to free itself from political control,” he adds.

Regulating power

As usual in Lebanon, plans to develop the power sector must wait for the politicians. “What is needed is a clear statement from the government outlining the long-term objectives for the sector,” says Baroudi. “This declaration of intentions will provide the basis of fundamental changes.”

He adds that it must “state clearly the role of government as policymaker and regulator of the sector, and the role of the operators, including the private sector, and the forms of private sector participation”.

Once the regulatory body has a clearly defined role, licences can be granted. But the government must guarantee returns to investors.

“[It must] give every investor a guarantee that they will be paid on time and as agreed,” says Khoury. “Because, as you can imagine, EDL is not creditworthy.”

Assuming these conditions are met, and the plans proceed, the power sector will none-theless remain a burden for the state.

“The cost of electricity is about $0.20 a kilowatt, while the most optimistic sale price is $0.08,” says Khoury.

“So unless the price of oil keeps coming down, the government will have to keep subsidising the sector.”

Most people in the country would agree that new plants and transformers are critical, but following just behind is the need to reform the subsidy and tariff system, which currently favours those who consume the most.

“There is huge potential in Lebanon and much interest in this sector, but the government needs to take steps before the private sector will become involved,” says Khoury.

“It needs to create a regulatory authority and a clear framework for private sector involvement. If it does not, regardless of the political situation in the country, the private sector won’t get involved.”

Key fact

1,500MW

Lebanon’s total installed power capacity