by Vahakn Kabakian – Executive — Lebanon’s energy sector is characterized by a significant supply-demand imbalance, continuing growth in demand
(5 percent per year), high generation costs (partly due to aging
infrastructure), and a lack of financial sustainability. Electricité du
Liban (EDL) cannot recover its operating costs and depends on the
Lebanese government to subsidize operations. In 2013, EDL received
transfers amounting to around $2 billion, corresponding to 4.5 percent
of the GDP – creating a significant strain on the country’s budget and
economy. Lebanon’s baseline energy mix is dominated by oil,
accounting for over 95 percent of generation. Renewable energy currently
accounts for 4 percent of the electricity produced in Lebanon,
predominantly hydropower, with less than 0.2 percent from solar
photovoltaic (PV).

Renewable energy resources

The climate change case for investing in renewable energy
is well known. A global and local shift to renewable energies, requiring
both public and private resources, is essential to achieve the outcomes stipulated in the Paris Agreement.

Lebanon has significant wind and solar
energy potential. The Ministry of Energy and Water (MoEW) started a wind
energy procurement process in March 2013, requesting that wind farms be
built and operated under a power purchase agreement (PPA). Three bids
from local developers have been considered, and while the procurement
process remains ongoing, there is optimism that agreements could be
signed by mid-2017, which would bring with them a total of 180 megawatts
(MW) worth of wind energy.

As for PV, most of the capacity installed
to date is distributed on a small-scale (10 MW by the end of 2015),
with an estimated 30 MW installed capacity by the end of 2016. Lebanon
has two large-scale PV projects: the Beirut River Solar Snake (1.1 MW)
and a second PV plant located within the Zahrani Oil Refinery
Installation (1.1 MW), which are both connected to the EDL grid. The MoEW
issued a call in January 2017 for parties interested in building solar
PV farms in various regions of Lebanon, with the aim of installing an
additional 120-180 MW of solar energy. The ministry received a total of
173 expressions of interest.

A risky matter still

A great deal of the recent advances in
renewable energy can be attributed to increased political will and
rapidly declining technology costs. However, financing costs for wind
energy and solar PV in Lebanon today are estimated at 16 percent for the
cost of equity (CoE), and 9 percent for the cost of debt (CoD).  These
are substantially higher than in the best-in-class country, Germany,
where they are estimated at 7 percent CoE, and 3 percent CoD. Given the
longevity of energy assets and the capital intensity of renewable energy
investments in particular, the impact of Lebanon’s higher financing
costs on the competitiveness of wind energy and solar PV is significant
compared to traditional fossil fuel powered technologies.

This means that high financing costs are a
key factor hindering investment in renewable energy. Interviews with
investors in Lebanon have shown that there is considerable interest
today from domestic private sector actors, despite the slow pace of
power sector reform and procurement activities to date. The high
financing costs reflect a range of technical, regulatory, financial and
institutional barriers, and their associated investment risks. The graph
below shows how a range of investment risks currently contribute to
higher financing costs in Lebanon. The risk categories with the largest
impact on elevated financing costs are: 1) power market risk, which
relates to accessing power markets and the price paid for renewable
energy; 2) grid and transmission risk, which concerns the failure-free
feed-in of the electricity produced; 3) counterparty risk, which
concerns the credit-worthiness of the electricity off-taker (i.e., EDL);
and 4) political risk, which concerns a country’s general intra and
international stability.

By addressing these risks, Lebanon can
create an environment conducive to investment and effectively address
the concerns of private sector investors. This requires a targeted
approach, which could include instruments such as: well-designed power
market regulations, which reduce risk by removing the underlying
barriers that create it; financial de-risking instruments, such as loan
guarantees offered by development or central banks, which transfer risk
from private to public sector; and financial incentives, such as direct
subsidies for sustainable energy, which compensate investors for risk.

While challenging, these barriers are not
insurmountable, especially if policymakers seeking to promote renewable
energy assemble combinations of public measures to systematically
address these underlying risks.

Public instrument selection

In order to specifically address the risk
categories identified in the financing costs, a package of public
instruments, containing both policy and financial de-risking
instruments, needs to be developed and implemented (shown in Table 1).
These measures would reduce the cost to the private sector, which in
turn would be reflected in lower cost premiums quoted by the private
sector when responding to government requests for wind and PV bids.

The ‘take or pay clause in PPA’ and
‘government guarantee for PPA’ are estimated to cost $55.1 million for
wind and $25 million for PV. Taking a reserved approach, the ‘public
loans’ and ‘political risk insurance’ are estimated to be $36.3 million
for wind and $16 million for PV. This means that for financial
de-risking of both wind and PV technologies, $91.4 million and $40.9
million are needed respectively. Policy de-risking instruments are
estimated to cost $6.7 million for wind and $4.8 million for PV.

These represent costs (or expenditures)
that would be incurred by the Lebanese government to de-risk (or uptake
the risk) from the investors. This would allow for the further
development of the sector and reduce the cost on future PPAs, as the
investors would be bidding in a de-risked environment, and therefore,
reduce the long-term cost on the government. This is obvious when the
business-as-usual case (i.e., with the current risks) is compared to the
post-de-risking environment (i.e., after implementing the policy and
financial instruments mentioned above), where lower financing costs can
be guaranteed.

In the business-as-usual scenario, wind energy and solar
PV are more expensive than the baseline. The baseline technology mix
consists primarily of combined cycle gas turbine (CCGT) plants, which
Lebanon will likely use to increase its electricity
generation capacity, and to a smaller extent the existing power
generation fleet, which could be partly replaced by wind energy or solar
PV. This approach results in baseline generation costs of $0.074 per
kWh, assuming unsubsidized fuel cost for the CCGT technology. Therefore,
the aim is to bring the cost of the wind and PV technologies closer to
the CCGT technology.

To meet the 2030 National Renewable
Energy Action Plan targets, the de-risking report estimates that $426
million and $140 million are required (in terms of price premium) for
wind and PV technologies respectively.

However, the government could spend a total of $98 million
and $46 million respectively to de-risk the wind and PV sectors. The
de-risking would bring down the wind energy price premium to $205
million, thereby saving the government $221 million in generation costs
over the next 20 years and resulting in a net savings of $123 million.
The same holds true for PV energy, where the solar PV price premium is
reduced to $43 million, thereby saving $97 million in generation costs
over the next 20 years and achieving a net savings of $51 million. As
such, following government interventions to de-risk the investment
environment, and taking into account the resulting lower financing
costs, the price premium for wind energy and solar PV would be reduced
by roughly 50 percent and 70 percent respectively.

The above clearly demonstrates that investing in
de-risking measures is good value for money when compared to paying a
premium price for wind and solar PV energy. However, the majority of
these measures could take time to implement. In the meantime, the
government can offer subsidies to encourage immediate investments in the
renewable energy sector. The ultimate risk, especially when generous
subsidies are provided, is that the subsidy scheme itself might be
vulnerable to a policy reversal. There are a great deal of complex
trade-offs involved, and what seems to be of more importance is having
continuous and consistent progress toward expanding the renewable energy
portfolio. The thermal and renewable energy portfolios should  proceed
in tandem by introducing renewable energy portfolio requirements for
any future independent power producer (IPP) schemes in order to pursue
the national 15 percent renewable energy target for 2030.

Click on image to view table