World Bank Document

P -- pI )' I II( ) PoCrtugall:Issues and O)ptions in the Energy Sector Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

Report of the Joint UJNDP/WorldBank EnergySector Assessment Program 1 l1s (1O WIneint hd', a ddstrier( l)ultlon It, (ontents rnay not he d1iscloserd wilhout aiithorizathi,n imoti th(e Governmont, the UNDIP or th, VVorldi Bank. Public Disclosure Authorized J I t 4T I INI)/PW(,I. I) 8A;K: I I i.I'(;Y SI-()1 AS';I:;;SXM Ni' 1)ROc () A,I

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Report No. 4824-PO

PORTUGAL

ISSUES AND OPTIONS IN THE ENERGY SECTOR

April 1984

This is one of a series of reports of the Joint UNDP/World Bank Energy Sector Assessment Program. Finance for this work has been provided, in part, by the UNDP Energy Account, and the work has been carried out by the World Bank. This report has a restricted distribution. Its contents may not be disclosed without authorization from the Government, the UNDP or the World Bank. AESTRACT

Portugal's high energy import bill is a serious constraint to the development of its industrializingeconomy. The Government has made an impressive attempt to deal with the problem in its draft 1980-2010 national energy plan, which provides a sophisticated, flexible policy instrument. As agreed with the Government, the present report focuses on four specific issues in energy planning which have considerable bearing on the size and composition of the energy investment program: (a) the key assumptions underlying energy demand projections; (b) the level and structure of domestic energy prices, in view of their influence on energy demand and supply; (c) the comparative advantage to Portugal of importing liquified natural gas (LNG) as a substitute for petroleum products; and (d) the potential for improving energy efficiency in the transportation sector. The report makes a number of recommendations regarding the energy demand projectionsand the least-cost investment solution. Other recommendatd.onsinclude: (a) postponement of a final decision on the proposed LNG import scheme until the gas option has been more thoroughly evaluated; (b) closer alignment of relative retail prices for gasoline and gas oil; and (c) various administrative, technical, and fiscal measures to improve energy efficiency in the transportationsector. PREFACE

1. This report is not intended tc present a comprehensive assessment of the energy sector in Portugal. A large amount of work already has been done by the Portuguese with the assistance of the U.S. Depart- ment of Energy, 1/ culminating in the draft national energy plan of 1982, the subject of the present assessment, and by the Bank in connection with its own lending operations. Moreover, it should be emphasized that the level of technical expertise in Portugal is very high compared to most of the countries in which the Bank operates. For these reasons, it was decided, during discussions with the Government on the scope and purpose of the present assessment, that an across-the-boardapproach was neither necessary nor appropriate.

2. The mission and the Government agreed that the energy assessment could make a specific twofold contribution: (a) a second opinion on the major assumptions made in the 1982 draft energy plan which are crucial in determining the size and composition of the energy investment program, and (b) a review of important topics which the Government believes were not adequately covered in the plan, by reason of time constraints or lack of data. The timing of the assessment was considered particularly propitious as the plan document was under revision and it was expected that the assessment would contribute to the ongoing revision by pointing out the major issues and options warranting further study.

3. This report primarily addresses the following issues in the draft national energy plan and energy planning, as agreed with the Government:

(a) the key assumptions used in the energy demand projections, with particular reference to the electricity projections, given the dominance of electric power in the energy investment program (two-thirdsof proposed 1983-1995expenditure);

(b) the level and structure of existing energy prices, in view of their influence on energy demand and supply;

(c) the comparative advantage to Portugal of substituting imported natural gas for petroleum products, with particular reference to the liquified natural gas (LNG) program in the draft energy plan and feasible gas alternatives;and

(d) the potential for energy savings in the transportation sector, where there is no effective national conservation policy at present, despite the fact that the sector is second in importance only to industry in both petroleum and final energy consumption.

1/ USDOE/PortugalCooperative Energy Assessment, 1980. 4. In addressing these selected issues, the assessment touches upon two important related issues in the draft energy plan. These are (a) the nuclear power program, only as it relates to the mission's evaluation of the electricity demand projections and investment program, and (b) the proposed hydrocracking facility, which is under study by Portuguese experts, in connection with the projected market for petroleum products. Issues in renewable energy development are not dealt with in detail because of work already done in Portugal which indicates wood biomass and solar flat plate collectors for water heating to be the most viable options; further studies in these areas already have been included in the ongoing Bank project for energy conservation and diversification in industry. CURRENCY EQUIVALENTS

July 1983* 1 US Dollar = 121.0 Escudos 1 Escudo = 0.008 US DoLlars

1982 1 US Dollar = 78.5 Escudos 1 Escudo = 0.013 US Dollars

1981 1 US Dollar = 61.5 Escudos 1 Escudo = 0.016 US Dollars

1980 1 US Dollar = 50.062 Escudos I Escudo = 0.020 US Dollars

ACRONYMS

ANTR,AM National Association of Road Transport for Merchandise CARRIS Urban Transport Company of Lisbon CP Portuguese Railway DCP Departmento Central de Planeamento DFI Decision Focus Inc. (Final Energy Demand Model) DGE Direccao Geral de Energia DGGM Direccao Geral de Geologia e Mines DOOT Directorate General of Road Transport DGRAA Directorate General of Water Resource Development DGV Directorate General of Traffic ECD Empresa Carbonifera do Douro EDP Electricidade de Portugal EEC European Economic Community EMATC Energy Management Audit and Training Center ER Estrafegia de Referencia GEP Gabinete de Estudos e Planeamento do Ministerio da Industria Energia e Exportacao GPEP Cabinet for Petroleum Exploration IAEA International Atomic Energy Agency IEA International Energy Agency IAMPEI Institute for Assistance to Small Industrial Enterprises JAE Autonomous Road Authority LNETI National Laboratory for Industrial Engineering and Technology LOCAPOR Leasing Agency for Energy Conservation Equipment MEDEE2 Energy Demand Model Forecasts of Useful Energy MIEE Ministerio da Industria, Energia e Exportacao PEN Plano Energetico Nacional (National Energy Plan) PETROGAL Petroleos de Portugal

* Average value dutring the month in which the Energy Assessment Mission took place. ACRONYMS (con't)

PGP Petroquim:ca e Gas de Portugal RN Rodoviaria Nacional (National Road Services) VAI,ORACUA Planning Model for Hydro Based Power Systems WASP Wien Automatic System Planning (Electric Power Supply Model)

ABBREVIATIONS

bbl Barrel bd Barrel Per Day Btu British Thermal Unit c.i.f. Cost, Insurance and Freight C.V. Calorific Value esc. Escudo f.3.b. Free on Board ft Cubic Feet CDP Gross Domestic Product GW Gigawatt CWh Gigawatthour kcal Kilocalorie kg Kilogram kgoe Kilogram of Oil Equivalent km Kilometer kV Kilovolt kVA Kilovoltampere kW Kilowatt kWh Kilowatthour LNG Liquified Natural Gas LPG Liquified Petroleum Gas (propane, butane) LRMC Long Run Marginal Cost of Supply ml Cubic Meter t Metric Ton (tonne) MW Megawatt PWR Pressurized Water Reactor SNG Synthetic Natural Gas (from coal) toe Tonne of Oil Equivalent tpy Tonnes Per Year U3 08 Uranium Oxide WEIGHTS AND MEASURES a/

I bbl 42 US gallons or 158.98 litres I bpd 50 toe/year I BTU = 0.252 kcal 1 GWh 86 toe (heat value) or 234.8 toe (thermal replacement value) I kcalj 3,968 BTU 1 km 0.62 mixes 1rn3 35.3 ft I tonne 1,000 kg

This report is based on the findings of an energy assessment mission that visited Portugal in June/July, 1983. The mission comprised Jochen Schmedtje (Mission Leader), Matthew Mitchell (ResearchAssistant), and the following consultants: Bernard Russell (Energy Demand Projec- tions and the Power Subsector), David Pearce (Energy Pricer), Jean- Philippe Pillet (Energy Conservation in the Transportation Sector), and Peter King (LNG O)ption).

a/ Values used in the National Energy Plan. Table of Contents

PREFACE

MA4IN FINDINGS AND RECOMMENDATIONS*....*...... i-xvi

I. ENERGY IN THE ECONOMY,,*.,.... ,, ..., 0ee****,, .... 1

The Energy Problem.2...... , .., , 2 Past Energy Trends,... , ...... ,. 2 Electricity Trends, ...... , 4 Structure of Demand and Supply...... 5 Energy Conservation in Industry...... 6 Energy Investment.,, 7 Energy Resources...... , .. . 7

Coal and Lignite...... , * 7 Renewable Energies...... ,, , , ..... 8

PetroleumProspectse ...... 8 Institutional Framework...... 8

II. THE NATIONAL ENERGY PLAN - ENERGY, ELECTRIC POWER AND NATURAL ASP ROJECTI ONS ...... 10 The National Energy Plan ...... *, ...... 10 A. Energy Demand Projections...... 10 Methodology., ...... o oooooseo*.e"oe*o 10 Alternative ProJectionse...... O, ... 11 Reference Strategy 11 Reference Strategy Investment Requirements.,^,,.e ...... , ,,,,, ,.,13 . Foreign Exchange ...... 15 Increased Security of Supply Strategy...... 15 B. Electric Power Projections ...... e ...... 15 ReferenceStrategy ...... ,...... 15 Power System Development Program&n...... 16 High Growth Scenario...... 18 Electric Power Investment Requirements...... *....* 18 Medium Term Electricity Projections.jections...... 19 C. The LNG Option ...... 19 , Market Prospects...... *..... 20 Reference Strategy Cost Assumptions.o...... 20 Comparative Fuel Prices...... * 22 Increased Security of Supply Strategyo....,,...... 22 Pipeline Alternative...... , . . 22

III. ENERGY, ELECTRIC POWER AND NATURAL GAS PROJECTIONS - ISSUES and RECOMNENDATIONS...... 24 Energy Projections...... 24 Electric Power Projections...... 26 The Natural Gas Option ... e...... ,,.. .o 29 Page

OveNrviewYPIE ...... 32 Petroleum Products...... ,...... 32 Electricity. *.. . .*** **m*e.0.... ,*** . . ,.. . .*.. , , .,. 35 Coal ... 39 ,,,,.,,...... Town Gas...... , , ., ...... *. 40 Pricing Issues,,...... ,.,,.,.,,... 42 .. ,,, Recommendations...,...... , ,. .,,, .... .*, 43

V. ENERGYCONSERVATION IN THE TRANSPORTATIONSECTOR. .,...., 45 Overview,., ...... 45 ,, Road Transportation Trends.,., . , , 45 Private Cr,...... ,,, 46 ..... Public Road Transport...... ,.,e . , ...... 46 Road Freight Traffic...... 46 Fuel Consumption for Road Transportation...... 47 Railway Transportations99 .9..9 ...... 47 Transportation in the National Energy Plan...... 48 Major Isus...... 49 . .,,...... Recomi.,endations o.o*..*..*oeoooo.. .. *...... 51 Costs and Benefits ...... , 53 TAM9ES

1.1 Energy Trends, 3 1.2 Consumption of Petroleum Products, 1973-82...... 3 1.3 Electricity Supply and Consumption, 1971-82...... 5 1.4 Structure of Energy Supply and Demand, 1982 ...... 6 2.1 Reference Strategy Projections, 1980-2010...... ,... 12 2.2 Final Consumption of Petroleum Products, 1980-2010 ...... 13 2.3 Primary Energy Supply by Energy Source, 1980-2010...... 14 2.4 Reference Strategy Investment Requirements, 1983-2010 ...... ,.,.,.,...... 14 2.5 Reference Strategy Foreign Exchange Costs, 1983-2)10 ...... , , , , ... .. 15

2.6 Electricity Consumption * :d Supply, 1P30-2010 ...... ,...... 16 2.7 Electricity Consumption by Sector, 1980-2010 ...... 17 2.8 Public Electricity Supply by Energy Source, 1980-2010 ...... 18 2.9 Projected Electricity Investment, 1983-2010 ...... 19 2.10 Natural Gas Consumption, 1990-2010...... 21 2.11 Natural Gas Consumption, 1990-2000 - Comparison of PEN Reference Strategy and PGP Projectionse...... 21 2.12 Natural Gas Costs, 1980-2000 - Reference Strrttgygy *99999999999999999999999999999*999999.9999999 22 2.13 Comparative c.i.f. Fuel Prices, 1980-2010 Reference Strategy. r at.eg...... 23 Paoe

2.14 Comparative Useful Energy Costs of Natural Gas and Other Fuels in 1990 - Reference Strategy Estimates...... 23 4.1 Petroleum Product Prices, 1971-83.,...... 33 4.2 Petroleum Product Prices, Taxes and Subsidies...... 34 4.3 Ratio of Domestic to Border Prices of Petroleum Products...... , , . . .. .a*. . * .. a .*a * .. . a .. a * a . * a . * . . 36 4.4 Petroleum Product Price Structure: Selected Products, July 1983.....36 4.5 Electricity Prices, 1971-83...... *...o.,...... 37 4.6 ProjtictedElectricity Rate Increases, 1982-86...... 38 4.7 Coal Prices, 1979-83...... 41 5,1 Energy Consumption in the Transportation Sector, 1980...... ,.,. ,...... 45 5.2 Gas Oil Consumption in the Transportation Sector, 90...... 47 5.3 Energy Consumption in the Transportation Sector, 1980-2010...... , 48

NNEXES

1.1 Energy Consumption and Supply, 1965-82...... 54 1.2 Consumption of Petroleum Products, 1960-82...... o...... 57 1.3 Petroleum Refinery Output, 1978-82...... 0 58 1.4 Electricity Supply and Consumption, 1971-82 ...... 59 1.5 iEnergySector Investment, 1971-80...... 61 1.6 Portugal: Energy Sector Organization.....,...... ,, 62 2.1 PEN Assumptions for Energy Projections ...... 64 2.2 Energy Demand and Supply, 1980-2010 - Reference S t ra aa a at * .e*. .a.gy. aa ** a**. a. .a aa a a a * a 67 2.3 Structure of Final Energy Consumption in 2010 - Alternative Cases ...... , . . 70 2.4 Energy Consumption by Industry, 1980...... 71 2.5 Growth of Gross Value Added by Industry, 1980-2010 - Reference Strategyr a t e gy..s...... 72 2.6 Energy Sector Investment, 1983-2010, Reference Strategy...... a. 73 2.7 Estimated Foreign Exchange Costs, - Reference Case, Energy Projections...... *....S..*....*.S ...... 74 2.8 Energy Demand and Supply, 1980-2010 - Increased Security of Supply Strategy...... o.....e...... s..e.. 75 2.9 Electricity Consumption and Supply, 1980-2010 - Reference Strategy...... a...... 76 2.10 Electricity Consumption and Supply 1980-2010 - - Public Network...... , ,, ... , 78 2.11 Medium-Term Electricity Forecasting Mode d...... el.... 83 2.12 Final Consumption of Gas, 1980-2010...... 84 2.13 Household Gas Consumption, 1985-2005 - PGP/SOFREGAS Market Su r v e. 85 Page

2.14 Natural Gas Investment Costs...... 86 2.15 Final Costs of LNG 87 4.1 Petroleum Product Prices, 1960-83.6 0 - 83...... 89 4.2 Pricing Formula for Petrolaum FAoducts ...... 90 4.3 Electricity Prices, 1971-83 ...... 93 4.4 Relation of Electricity Prices to Marginal Costs of Supply,1983...... 94 4.5 Electricity Prices in Non Compliant Municipalities.... e.....*...c..*....*ecc .* .*.* 95 4.6 Imported Coal and Coke Prices, 1971-82cc.cc.cccecc.ceecc6, 96 4.7 Town Gas Sales, 1977-82.9 7 7 - 82...... ccc 97 4.8 Terms of Reference for Gas Oil/Gasoline Pricing btudy...... 6 l...... > eec.. ... ee.e.caa .e..a.. 98 4.9 Technical/Economic Study of Town Gas Supply Options in Lisbon...... e..c.*c*...... c.c*c..c. 99 9 7 7 3 5.1 New Vehicle Registrations, 1 8 c..... 100 9 7 9 5.2 Passenger and Goods Traffic by Mode, 1 ... c0cccc.ee..Gc.. 101 5.3 Gas Oil and Gasoline Consumption, 1 9 6 8 20-.cceecgceceeeccce 102 5.4 Trend of Gas Oil and Gasoline Prices and Compensatory Tax on Diesel Vehiclesc.0c.ec.cc.ee.c.. 103 5.5 Terms of Reference for Study to Establish the Feasibility of an Energy Management Policy in the TransportationSector.. .. eee...... c....c..c 104 5.6 Energy Savings in Road Transport - Possible Courses of Action.... eec c go. e e ee. e ceecec... ,e e 107 5.7 'TRANSCLUB" (France) ...... cccec 111 5.8 Comparative Gas Oil and Gasoline Prices and Taxes, 1982 e . ec,o*cc.eoo eo ...cccccceooeooco.ee 113 5.9 Costs and Benefits of Recommended Fuel Conservation Measures in Transportation Sectoro...... e...... oo 115

MAPS

IBRD 16179: Main Transmission System and Power Stations IBRD 16325: Location of Major Energy-Intensive Industries MAIN FINDINGS AND RECOMMENDATIONS

The Energy Problem

1, The high cost of energy in Portugal and the country's dependence on imported energy sources are major constraints to its economic development. Imported oil accounts for around 80% of final energy demand and r.e.toil imports absorbed about 30% of export earnings from goods and services in 1982, compared with only 3% in 1973. Inclu.Iingcoal and net electricity imports, the import bill for energy was about 33% of exports of goods and services and 67% of merchandise exports. Given its limited domestic energy resource base, Portugal's major energy problem will be how to keep down the cost of imported energy while maintaining acceptable rates of economic growth. This will require a strategy to (a) reduce the energy intensity of GDP through demand management, (b) substitute cheaper energy sources for oil, and (c) promote flexibility in investment to meet future energy demand.

The National Energy Plan

2. The Government's future energy strategy will be partly based on the 1982 version of the draft 1980-2010 National Energy Plan (PEN). The PEN, soon to be discussed in Parliament, is a major achievement providing a conprehensive, sophisticated and flexible policy instrument for energy planning. It considers several objectives in meeting energy needs including the least cost solution, maximization of the use of domestic energy resources and promoting national security by reducing dependence on foreign oil. After careful consideration of all these objectives, the reference strategy was selected, designed to meet future energy requirements at minimum cost to the economy while increasing the security of supply and reducing dependence on imported oil (para 2.1). On the supply side, PEN envisages intensified development of the limited domestic energy resources, mainly hydropower and uranium, while diversifying the sources of imported energy, primarilv through a switch from petroleum products to coal and liquified natural gas (LNG) (para 2.9). This policy is to be coupled with an intensive energy conservation program to re- strain demand.

Domestic Supply Options

3. The domestic energy resource base is relatively limited, con- sisting mainly of hydropower, wood fuel and uraniuin. Proven reserves of coal and ligri:e are small and of poor quality. No commerci 'ly exploit- able petroleum reserves have been discovered.

Imported Energy

4. The PEN projections inidicate that imported petroleum and petroleum products would remain the dominant primary energy sources into the - ii -

latter 1990s, but that their share would decline from their current 80% to 64% in 1990, mainly due to substitution by coal and natural gas, and further reductions to 49X by 2010 are due to the advent of nuclear power production. 5. Despite the intensifieddevelopment of domestic energy sources, import dependence would actually increase from the 1980 level of 80% to 86% in 1990, as increases in the shares of imported coal and LNG exceed the decline in the share of petroleum. The upward trend is not reversed until the beginning of nuclear power production in 1995, based on domestic uranium, when import dependence would fall to 77% and to 63% by 2010.

Future Energy Demand

6. Given the major economic adjustments the Portuguese economy is undergoing now, it is very difficult to make macroeconomic and related energy projections for the medium term and even more difficult for the long term. Therefore, projections have been revised several times. In the face of this uncertainty, the PEN's scenario approach is to be commended, indicating high and low cases to be updated and refined on a continued basis. The PEN "reference strategy" projects energy demand for a 30-year period (1980-2010) making skillful use of available data and well established computer nmdels (MEDEE2, DFI, WASP and VALORAGUA). The mission finds that the PEN low GDP growth scenario with average annual rates of 3% for 1980-85, 3.5% for 1985-1990, and 4.5% for 1990-2000 high in light of current trends and prospects for the medium term. Furthermore, the mission notes that the forecasting models do not explicitly incorporate the impact of rising absolute real energy prices on overall energy demand in Portugal. However, MEDEE2 implicitly allows for the effect of rising prices in its energy demand scenarios and DFI takes into account relative energy prices in determining the least cost energy supply option.

7. The PEN reference strategy assumes an intensive energy conservation program but projectionsshow the share of imported petroleum still accounting for nearly half of the projected primary energy requirements in the year 2000. However, cutrrent efforts to introduce an industrial energy conservation and diversification program, including audits of major energy consuming industries, should give an indicatioliof prospects for a greater energy conservation potential. At the same time, the proposed substitution of three new major primary energy sources (coal, natural gas and uranium) for petroleum within the next decade and beyond could present formidable infrastructureand management requirementswhich have not yet been thoroughly evaluated and incorporated in the PEN.

Recommendations

8. The mission's recommendations regarding the energy demand projections in the 1982 draft PEN are intended to provide a second opinion on some of the basic assumptions made. Concerning GDP growth assumptions, the mission recommends taking account of estimates below - iii -

those used for the medium term low growth case in PEN (3.25%). The mission estimates, for example, that using a 2.25% average annual GDP growth rate and retaining specifically the energy/GDP elasticity assumptions implicit in the PEN forecasts (1.50) for the period 1980-90 would result in an increment to primary energy demand about a third less during the period. This illustrates the type of uncertainty Portugal faces in its macroeconomic and energy planning for the medium term. Furthermore, the mission finds the energy/GDP elasticity high compared with countries at a similar stage of development and considering the importance attached to energy conservation in the PEN.

9. The mission recommends that several further checks be made on the projections using a sectoral approach, including a continuation of present efforts to test growth rates of energy demand by sector for internal consistency. Furthermore, the mission supports extending the 1979 input/output (I-0) table to include an energy sector broken down into the main petroleum products, coal and electricity, fitting demand equations to the I-0 table and projecting through time. The mission realizes this will require a considerable effort and is likely to yield results only in the longer term.

10. The mission also recommends that the revisions of the PEN projections include testing the influence of the absolute level of energy prices on energy demand, considering the large increases in energy prices that have taken place since 1980 with further price increases expected over the medium term. DGE staff are well aware of this omission in the present version of the MEDEE2 model and a new version of the model is planned, incorporating the price variable for selected industries. In the meantime, however, the mission recommends comparing the results of the PEN models with a single equation econometric approach (para 3.11). It would also be worthwhile to consider alternative assumptions for both energy/GDP and price elasticity coefficients to determine a possible range of outcomes. 11. Following the revisionsmade to the energy projections as indi- cated above, the mission recommends testing the impact of the resulting differences on the size, composition and timing of energy projects in the investment program. Such an approach would highlight the costs of uncertainty and focus attention on those decisions which need to be made immediately, otherwise resulting in high costs to the economy, and those which may be postponed at little cost or even benefit (cost savings).

12. Regarding the least cost supply solution, it would be desirable to test its sensitivity to higher discount rates given Portugal's severe capital constraints over the near to medium term, and to lower future real increases in the prices of petroleum products and coal. The mission was informed that the Ministry of Finance and Planning is now recommend- ing sensitivity testing for the discount rate through the range of 9-14%. 13. Finally, the costs and benefits of the conservation scenarios should be evaluated further to determine whether the "very intensive" conservation program of the "increased security of supply" strategy - iv -

should be adopted for the reference case. Moreover, the revised supply projections should also allow considerable time for solving the organizational, management and planning problems likely to be encountered, along with infrastructurerequirements, associated with major new energy sources. Electric Power Projections

14. Electricity demand forecasts are derived from the same forecasting models as the overall energy projections and thus appear on the high side for the same reasons mentioned above. An additional consideration in this sector is that the system load factor is assumed to remain close to its present level of 58%, although there is some reason to believe that it may increase along with the substantial expected real increases in electricity prices and the rising share of industrial consumption. Should the load factor improve, there could be savings in generating capacity requirements which might be significant insofar as about 60% of the total investment program is for electric power generation and distribution.

15. As is the practice in many cther countries, EDP optimizes the power investment program only for generation. The mission recommends that EDP make efforts also to optimize the distribution investment program, and compare the economic return on investment generation with that in distributionto improve service and reduce losses.

16. A point which merits further attention is that the PEN's evaluation of electricity supply prospects includes some basic economic and technical assumptions which seem to favor nuclear power (para 3.24). Although the Government is still open to the choiee of nuclear technology, the only nuclear option evaluated in the PEN is the pressurized water reactor (PWR) which is available in relatively large units compared to coal, the other major generating option considered. However, the PEN also indicates that in cases where smaller units may be more appropriate in relation to projected electricity demand, the heavy water reactor (HWR), could be considered since it uses natural uranium avallable in Portugal and is available in 600 MW units, compared to the smallest PWR unit (950 MW) considered in PEN.

17. The proposed use of Rio Maior lignite for power generation is not economically viable, based on data available to the mission. This is due to the poor quality and high mining cost of the relatively small lignite reserves. Recommendations

18. The usefulness of present forecasting methods could be further improved by several additional procedures, given the considerable amount of planning expertise already within EDP and DGE. These include: (a) improving the data base through EDP's establishment of a market and load research section; (b) reviewing the constant system load factor assumption, testing the impact of load factor improvementson investmentneeds; v

and (c) reviewing reference strategy assumptions on the discount rate, power station availability, alternative fuel prices and plant costs to better determine the costs and benefits of available options.

19. The mission supports the PEN proposal to study the distribution networks as soon as the integration of municipal undertakings is re- solved, to determine investment requirements and other measures to reduce losses and raise the quality of service. Such a study would be appropriate for short to medium term planning only, due to the high degree of uncertainty over the long term. This, however, might more effectivelybe done as part of a wider study of the EPD system to improve technical efficiency and reduce overall system losses.

20. There is considerable merit in making the planned power expansion program as flexible as possible, particularly in relation to the proposed 950 KW nuclear power option, to avoid premature commitment t% significantly large unit sizes involving the risk of excess capacity. To this end, the following options could be considered along with other alternatives: (a) the use of natural uranium based HWR, which could be economically viable on a smaller scale, and (b) the feasibility of a joint nuclear power venture with Spain or France in view of Portugal's and Spain's prospective entry into the EEC. In order to more fully evaluate possible options, it would be desirable to analyze the potential costs and benefits to the economy of a commitment to large power units and the risk of resulting excess capacity.

LNG Option

21. The price at which natural gas could be made available to potential consumers is difficult to determine with current information. Components of this price include the c.i.f. price of LNG, capital costs of infrastructure,and operating costs of the system. The PEN ratios of the LNG price (c.i.f.), the major component of the final gas price, to the prices of alternative fuels (oil and coal) are significantly above their current (July 1983) levels. On the other hand, the capital cost component of the final price for natural gas seems low given the proposed infrastructure investment. Also, operating costs do not appear to account for (a) the costs of marketing the gas; (b) increased manpower requirements; (c) the costs of adjusting supplies to demand fluctuations; and (d) the costs of individual consumer connection and equipment conversion. A market study has been made by a foreign consultant which gives some prospective market scenarios, but these need further evaluation specifying the additional costs cited above. Other gas options, such as a natural gas pipeline through Spain and local gas distribution systems based initially on LPG/air as nuclei of an eventual national gas network should receive closer attention (para 3.40). - vi -

Recommendations

22. Given the uncertainties described above and current information gaps, before proceeding with investment in LNG, it is important that options for natural gas supply be more fully analyzed with emphasis on: (a) the potential market for natural gas in the short and medium termn (i.e., to 1990 and 1995); (b) the existing cost estimates for LNG, taking account of the deficiencies identified by the mission (paras 3.3?-3.39); (c) alternative gas options; (d) gas pricing; (e) preliminary design of the gas transmission and distribution system, including appropriate measures for load adjustment purposes; and (f) the organization, manpower and training requirements for a national gas industry, including a review of existing safety standards. The mission estimates that such a reevaluation would be on the order of 25 man-weeks at a cost of US$90,000.

Energy Prices

23. The current Government has moved boldly towards economic pricing of energy. Across-the-board increases in petroleum product prices as of July 1, 1983, have largely eliminated individual product subsidies and improved relative product prices. Subsidies still relmain on town gas and fuel oil, but the Government intends to abolish at least the latter over the near term.

24. The most important remaining pricing policy issue is the relative price of gas oil to gasoline, which at present is only 57% of the gasoline price. This pricing structure has given the wrong signal to consumers regarding the economic costs of gas oil consumption and Is likely to have contributed to the need for additional gas oil imports, urban traffic congestion and air pollution (para 4.30). Furthermore, higher gas oil requirements combined with the projected reduction in demand for fuel oil due to coal substitution, has led PETROGAL to consider investment in a hydrocrackingfacility.

25, Another area of concern is the Government's pricing formula for petroleum products, as this does not specifically allow for the actual costs to PETROGAL, particularly the cost and foreign exchange risk of borrowing to finance imports of crude oil.

26. As for electricity pricing, EDP's electricity bulk tariff, increased several times in recent years, has been made binding on the municipalities still outside the system, and is shortly to be raised again. But some of these municipalities have failed to pass on past rate increases to their custoners, resulting in cumulative arrears in paynents to EDP amounting to about US$300 million by the end of 1982 (paras 4.14- 4.15). EDP expects that with Government support its tariff will be close to LRMCby 1988.

27. A contract between EDP and the coal company (ECD) requires ECD to sell and EDP to buy coal at a pr,ce linked to ECD's manpower and - vi;. -

tmajor' material costs, as long as the price does not exceed the equivalent value of fuel oil. The present price of domestic coal to EDP appears too low to provide a saLisfactory financial retutrnto ECD.

Recommendations

28. The real price of gasoline should be heLd constant and that of gas oil allowed to rise closer to the gasoline price by 1985. The rationale for closing this gap is to signal te consumers the economic cost of high gas oil consumption: (a) higher Liquid fuel consumption in the transport sector than might be the case if the gas oil were priced at a level closer to that of '>oline;-. (b) the encouragement given to the use of heavy vehicles with consequent road track costs; (c) the environmental costs of exhaust emissions and noise in urban areas, which could hinder certain revenue earning ..ctivities such as tourism; and (d) increased congestion due to the encouragement of larger vehicles and taxis which have a convenience/priceadvantage over public transport. A study is recommended to determine how to achieve the relative price alignment, with particular reference to the modal choice in transport and the associated costs and benefits. It is estimated that this study would require about 25 man-weeks at a cost of US$90,000. r 29. The effects of a policy to alter the relative prices of gasoline and gas oil should be taken into accoLut in formulating refinery policy, including the option of direct imports of petroleum products to meet requirements.

30. The long-standing negotiations fo. the revision of the ex- refinery pricing formula for petroleum products should be concluded and a formula agreed upon which would assure full cost recovery for efficient importing and refining of crude oil by PETROGAL, including net financial costs. The treatment of the foreign exchange risks and interest on arrears in payments to PETROGAL from the Foreign Exchange Risk Guarantee Fund and the Supply Fund should be clarified as part of the agreed pricing formula, and, thereafter, appropriately reflected in the accounts of all concerned parties.

31. The mission supports the Coverment's intention of ensuring the timely implementation of the decrees establishing the uniform national electricity tariff and of the process to determine and regularize the payment of the amounts due to EDP from municipalities which have their own low-tension distribution systems.

32. Finally, regarding Lisbon's town gas system, a small technical/ economic study also should oe undertaken of town gas supply options, including closure of the system and the concomitant expected increase in demand for LPG and electricity. This would require about 10 man-weeks at a cost of US$40,000 (Annex 4.10). - viii -

Energy Conservationin the Transportation Sector

33. Energy consumption in the transport sector accounts for 29% of total final energy consumption and is mainly for road vehicles (83% of the total); the transport sector is second in importance only to industry as a target for fuel savings. However, the conservation policy for achieving the fuel savings projected in PEN is not clearly defined mainly because of (a) the divide.d responsibility between the Ministries of Transport and Energy; (b) the tendency to take decisions on fuel and vehicle taxation independently of an analysis of agreed upon conservation objectives, and (c) the low priority apparently given to the problems of energy consumption in transportation by regional and local officials.

34. Furthermore, improved energy efficiency in the transport sector is constrained by several factors. First of all, the wide differential between the price of gas oil and the price of gasoline is not economically justified. Although a special tax on diesel cars is intended to compensate for this differential, the amount of the tax has not kept pace with changes in the absolute prices of the two fuels. Secondly, technical regulations for vehicles have not been designed to reduce fuel consumption, air pollution and the high number of road accidents. This is especially desirable, given the high average age of vehicles in Portugal. Thirdly, public transport service in Lisbon has deteriorated in the face of population growth, the congestion caused by private cars, and the absence of a well defined public transport policy. (Paras 5.17 to 5.21).

35. Finally, the road haulage market is characterized by overcapacity, leading to underutilization of vehicles, low annual mileage, poor rates of return (and hence, an inability to invest in new, more efficient vehicles), an increasing percentage of "empty" journeys, and excessive fuel consumption (para 5.19). There is considerable scope for improving fuel efficiency and thieiwould reduce fuel costs and the cost per ton kilometer of goods transported, of which fuel cost accounts for some 28%. Recommendations

36. The mission recommends that the Government appoint an inter- ministerial commission to identify the best way to effectively coordinate conservation efforts in transportation, including (a) development of a transportation energy management plan; (b) collection of reliable statistical information on energy consumption trends in the transport sector; and (c) establishment of procedures for evaluating the results of policy measures. 37. Furthermore, it is important that a follow-up study also be made to determine the feasibility of a number of fiscal and technical measures outlined in para 5.32. These include a phased program of vehicle inspection, special measures for energy savings in heavy road transport, including fuel consumption control equipment (Annex 5.6), and - ix -

the establishment of "freight offices" or information systems to optimize goods transport and thus reduce the number of empty journeys (Annex 5.7). It is estimated that these will require 70 man-weeks of studies at a cost of US$280,000. 38. The capital costs of the measures recommendedfor improving the efficiency of energy use in transport would be on the ordet of US$80 million. These investments are estimated to bring about fuel savings of 225,000 toe per year, or around ten percent of current petroleum product consumption in the transport sector. The resulting annual savings would be US$50 million, in addition to other associated benefits such as reduced air pollution and traffic accidents.

Summary of Recommended Studies

Study Estimated Cost ($US) 1. Alignment of Gas Oil and Gasoline Prices - 25 man-weeks (Annex 4.9) 90,000

2. Technical/EconomicAspects of Town Gas Supply Options in the Lisbon Area - 10 man-weeks (Annex 4.10) 40,000 3. Reevaluationof the Natural Gas Option - 25 man-weeks (para 3.9) 90,000

4. Development of an Energy Management Policy for the TransportationSector - 70 man-weeks (Annex 5.5) 280 000

Total 500,000 I. ENERGYIN THE ECONOMY

The Economy

1.1 The 1970s witnessed a sharp decline in the rate of economic growth in Portugal, from 7.3% a year on average between 1965-73, to 3.2% in 1974-80. The deterioration has continued, with GDP growing 1% in 1981, 3% in 1982, an estimated 0.5% in 1983, with a projected decline of 1.5% in 1984. As a result, even if the economy were to grow on average by 3.3% between 1985-90, the average growth rate for the 1980s would not exceed 2.25%.

1.2 With a population of nearly ten million, 1/ Portugal's 1981 GNP per capita was US$2,520. 2/ The services sector accounts for 55% of GDP, industry 29%, agriculture 8.5%, and construction 7.5%. 3/ In addition to exports of manufacturing goods, the country's laraest sources of foreign exchange revenues are workers' remittancesand tourism, together accounting for about one-half of Xotal export earnings from goods and services. Major export commodities include, in order of relative importance, textiles and clothing; wood, cork and paper; agricultural produ('s; mineral products; and machinery.

1.3 Perforinancein the foreign trade sector worsened considerably during the past decade, as evidenced by the shift from a current account surplus of US$348 million in 1973 to a deficit of US$3.2 billion in 1982. This worsening of performance reflects the impact of oil price increases in the 1970s combined with the appreciation of the US dollar (the currency of ;.ternational oil trade) against the escudo. Other economic indicators have also deteriorated sharply. At the end of 1982, the budget deficit had reached 12.6% of GDP, with external public debt at US$13.5 billion or 57% of GDP, and the average rate of inflation at about 22%.

1.4 The dilemma facing the Portuguese Government now is to under- take the structural changes which the country needs while at the same time reduce the balance of payments deficit and keep external debt at a sustainable l...vel. The current Government, which took office in June 1983, has embarked on a stabilization program to recover a more sound financial and economic position and restructure large segments of the economy, especially in industrial and energy sectors. As part of this

1/ Total national population, including the Azores and Madeira. UnLess otherwise stated, the energy data in this report relate to continen- tal Portugal, with a population of 9.5 million (1982).

2/ 1983 World Bank Atlas.

3/ Based on newly published national accounts data. -2 -

program, the escudo has been devalued, interest rates have increased, and most subsidies have been eliminated. Moreover, the Government has concluded a standby arrangement with the IMF. The current account deficit is expected to be reduced to US$2 billion in 1983 (9% of GDP), and is projected to be further reduced to US$1.25 billion in 1984 (6% of projected CDP).

The Energy Problem

1.5 The high cost of energy and dependence on imported energy sources are major constraints to economic development. OiL accounted for nearly 80% of final energy demand, absorbing about 30% of export earnings from goods and services (including workers' remittances) in 1982, compared to 3% in 1973. Including coal and net electricity imports, the import bill for energy was about 33% of export earnings from goods and services and 67% of merchandise exports earnings separately. Given the limited domestic energy resource base, Portugal's major energy problem during the current decade will be how to keep down the cost of imported energy while maintaining acceptable rates of economic growth. This requires a strategy designed to (a) reduce the energy intensity of GDP through careful demand management, (b) substitute cheaper energy sources for oil, and (c) promote flexibility in investment to meet future energy demand.

Past Energy Trends

1.6 The trend of energy consumption since 1965 has been broadly in line with the general trend of the economy -- relatively rapid growth in the first half of the period giving way to a marked slowdown in the second half (Table 1.1). Primary energy consumption trebled from 4 million to 12 million toe over the period, and per capita consumption nearly trebled from 480 kgoe to 1282 kgoe in 1982, which compares with an average (1980) of 1,174 kgoe for oil-importingupper middle income developing countries and 5,247 kgoe for industriaLizedcountries. Final energy consumption grew somewhat more slowly than primary energy demand because of the rising proportion of intermediateconsumption. The energy intensity of GDP increased substantially in the latter half of the period, as did the energy/CDP elasticity; these reflect economic development policies which encouraged large, energy-intensive projects and, possibly, the lower efficiency of energy use which results from underutilization of capacity.

1.7 rhe contribution of different forms of energy to final consumption has been changing (Annex 1.1). For example, che share of petroleum product7 in final consumption rose from 69% in 1971 to 75% in 1982, and that of electricity from 11% to 15%, while coal's contribution fell from over 7%, to around 2%. Wood, about 8% of final energy demand, is an important fuel in the pulp, paper and timber industries, where it is produced as a byproduct, and in the ceramics and baking industries. Fuelwood provides nearly 30% of household energy needs, being particularly important in rural areas. The dominant role of petroleum is reflected also in its growing share of primary energy requirements,which rose from 72X to 76% over the same period, mainly at the expense of coal, while the share of wood fell from l(%Zto 57. and that of hydropower increased from 9% to 13%.

Table 1.1: Energy Trends, 1965-82

1965 1973 1982 1965-731973-82 1965-82 ('000 toe) (%) ('000toe) M%) ('000toe) (%) (Growth % p.a./EIasticityl

Final consumption 3,706 92 6,259 86 8,994 74 6.8 4.1 5,4 Intermediate consumption 314 8 979 14 3,186 26

Total primary energy 4,020 100 7,238 100 12,180 100 7.6 6,0 6.7 of which: net Imports 2,923 73 5,693 79 10,143 83 8.7 6.6 7.6

Primary consumption/ cap., toe 0.48 0.84 1.28 Energy intensitytoe/ mill. esc. 8.01 8.23 10.60 Energy/GDPelasticity 1.04 1.53 1.36

Source: Annex 1.1.

1.8 As shown in Table 1.2, fueL and gas oil account for over three- quarters of the consumption of petroleum products. As .s result of the rapid growth of demand for these two products, sales of gasoline have lagged behind, as shown in its declining share of the market. These trends reflect the impact of the Government pricing policy which has favored the use of gas oil in transport, agriculture and fishing, and the use of Euel oil in industry.

Table 1.2: Consumption of Petroleum Products, 1973-82

1973 1982 1973 - 1982 cuouu toe) (x) ('uuu toe) (z) (Growth rate, X p.a.) LPG 390 9.1 580 7.4 4.5 GasoLine 748 17.4 899 11.4 2.1 Naphtha 296 6.9 312 4.0 0.6 Kerosene 71 1.6 52 0.7 -3.4 Gas Oil 1,009 23.5 2,080 26.4 8.4 Fuel Oil 1,780 41.5 3,940 50.1 9.2 Total 4,294 100.0 7,863 100.0 7.2

Source: Annex 1.2 and mission estimates. - 4 -

1.9 Portugal has two operating refineries 4/ with a combined capacity of 15 million tpy (10 million tonnes at Sines and 5 million tonnes at Oporto), but they are operating only at about 50% of capacity (Annex 1.3). Production is heavily weighted towards fuel oil and gas oil, which account for about two-thirds of refinery output. This is still,insuffi- cient to meet the internal demand for these products, and the deficit has to be met by imports, which account for most of the n.t imports of petroleum products (about one million tons in 1981).

Electricity Trends

1.10 Electricity consumption has been growing more rapidly than overall energy demand, reflecting the rising share of electricity in final energy consumption. As shown in Table 1.3, the growth rate also has been more stable, with final consumption growing at 7.9% p.a. during 1971-1976 and at 7.4% during 1977-1982, despite the sharp drop in the CDP growth rate in the later period. As a result, the electricity intensity of GDP rose sharply from 11,200 kWh per million 1980 escudos in 1971, to 15,600 kWh in 1982, and the electricity/CDP elasticity rose from 1.68 in 1971-76 to 1.85 in 1977-82 (Annex 1.4). Even so, per capita electricity consumption (about 1,900 kWh) remains one of the lowest in Europe, comparing to an average of 4,600 kWh for all of Europe in 1981, 5,100 kWh for France, and 2,900 kWh in Spain. 5/

1.11 As shown in Table 1.3, electricity production has failed to keep pace with consumption, and the resulting deficits have had to be met by imports, which fluctuate widely according to hydrological conditions in Portugal. In 1981, for example, which was a particularly dry year, hydropower production was less than half the 1979 level, and net imports rose to 3,060 GWh, or 3% of total supplies.

1.12 The industrial sector accounts for most of the electricity consumption (58% in 1982), foLLowed by households (22%) and services (17%). As in the case of overall energy consumption, industry's share showed some decline over the period, mainly because of a much slower growth rate in the earLy 1970s compared with the household and services sectors (Annex 1.4).

1.13 The public sector is responsible for about 93% of the electricity supplied in Portugal; industrial auto production contributes only 7%. Access to public electricity is close to 100% in urban areas but some half million of the rural inhabitants,comprising 7,000 communities, are

4/ A third refinery at Lisbon was phased out foiLowing the opening of the Sines refinery in 1978.

5/ UN Yearbook of World Energy Statistics 1981. - 5 -

without electricity. Most of these are quite small,with fewer than 50 inhabitants.

Table 1.3: ElectricitySupply and Consumption, 1971-82

1971 1976 1982 1971-76 1976-82 1971-82 (GWh) (X) (GWh) (%) (GWh) (%) (GrowthRave, % p.a.)

Production Hydropower 6,207 78 4,887 48 6,858 45 Thermal Power 1,726 22 5,258 52 8,409 55

Total 7,933 100 10,145 100 15,267 100 5.1 7.0 6.1

Net Imports 178 1,724 2,969 Total 8,111 11,869 18,236 7.6 7.5 7.5

Consumption Intermediatea/ 1,184 15 1,725 15 2,666 15 Final 6,927 85 10,144 85 15,570 85 7.9 7.4 7.6

a/ Power station consumption and network losses. Source: Annex 1.4.

Structure of Demand and Supply

1s14 Tabl.e 1.4 shows the structure of energy supply by source and final energy demand by sector in 1982. Only 20% of gross energy supplies came from domestic sources in 1982, mainly from hydroelectricity and fuelwood. Imported crude oil and petroleum products accounted for 77% of supplies, with imports of coal, coke and electricity making up the re- mainiiug3%. Domestic demand,.including net additions to stocks of coal and oil, absorbed 94Z of gross supplies, and exports -- mainly of petroleum products (including fuel for foreign ships and aircraft) -- took 6%. 1.15 Industry (including construction) and transportation account for three-fourths of final energy demand; industry's share is 45%, up from 39% in 1975, and transportation'sshare is down -- from 34% to 29% (1982). The share of the household and services sector rose from 16% to 18% over the same period (Annex 1.1). The major energy-consuming industries are cement, steel, textiles, food and drink, chemicals and plas- tics, and ceramics. Road transport by private cars, trucks and buses, accounts for nearly 85% of energy consumption in the transportation sector, and railways account for less than 7%. - 6 -

Table 1.4: Structure of Energy Supply and Demand, 1982 ('000 toe and % shares)

Solid Town Hydro- Electri- Fuels Oil Gas Power city Total

Gross Energy Supply (000 toe) 1,044 9,327 - 1,553 256 12,180 Fuel Source/total (%) (8) (77) - (13) (2) (100) Conversion Loss and Energy Sector Use (000 toe) -18 -2,573 57 -1553 1,067 -3,186 Final Energy Demand Fuel Totals (000 toe) 860 6,754 57 - 1,323 8,994 Sector Composition (%) Industry & Const. (59) (43.) (5) - (57) (45) Transportation - (39) - - (2) (29) Household/Services (41) (10) (95) - (40) (18) Agriculture/Fishing - (5) - - (1) (4) Non-Energy Uses - (5) - - - (4) Tctal (100) (100) (100) (-) (100) (100)

Source: Annex 1.1 and mission estimates.

Energy Conservation in Industry

1.16 Industry (including construction) is the largest energy consuming sector in Portugal, accounting for 45% of final energy demand in 1982. As such, it is the main target of the Government's energy conservation strategy. In 1982, a Government energy management decree required 1,000 enterprises with annual energy consumption levels of 1,000 toe or more to undergo a comprehensive energy audit by independent auditors and prepare a tive-year energy conservation plan. Under the plan, each enterprise will attempt to achieve set energy consumption targets linked to the performance of the most energy-efficient enterprises in the industry concerned. Each of the enterprises i9 required to appoint an energy manager to implement the conservation plan and report to the Government on investments and changes in operating practices undertaken for this purpose. The Bank is assisting in the Government's conservation program for industry under a 1982 loan for an Industrial Energy Conservation and Diversification Project. The project provides for (a) energy conservation studies and investments in the major energy- intensive industries designed to produce immediate savings in energy costs; (b) an energy survey covering ten other major consuming industries, mainly focussing on small and medium-scale enterprises, along with technical assistance in establishing an Energy Management Audit and Training Center; and (c) a leasing facility intended for investments in energy conservation in the private sector to improve the access of small - 7 - and medium-scale enterprises to energy-saving equipment;and (d) pilot and demonstation projects for renewable energy techniques.

Energy Investment

1.17 Energy sector investment has been increasing as a share of nationaL investment, rising from 6-7% in the early 1970s,to 13-14% in recent years (Annex 1.5). Electric power investment has declined in relative importance, mainly becau;e of heavy investment by the national oil company PETROGAL during the L970s, notably for the Sines refinery. However, electricity still accounts for about 80% of thletotal.

Energy Resources

1.18 The main indigenous energy resources are hydropower, relatively low grade coal, wood/other biomass and uranium. No commercially expLoit- able petroleum deposits have been discovered so far. Other resources include industrial and agricultural residues and solar energy.

Hydropower

1.19 The estimated technically and economicalLy feasible hydropower potential is 26,400 GWh p.a. in average hydrological conditions. About 20,000 GWh is located at sites which are suitabLe for large and medium hydropower schemes; the remainder is suitable for small (mini or micro) schemes. About 48% of the large and medium scheme potential has been developed, and plans are to develop a further 12% by 1998. The estimated small hydro potential of 6,400 GWh is a preliminary figure based on 200 kW installationswhich have an average annual production of 0.5 GWh, and on survey work covering 80% of the country. The theoretical potential for mini or micro schemes is beLieved to be about 15,000 GWh p.a., but a study is now underway to establish the precise figure. It should be noted that the estimates of small hydropower potential are sensitive to tileoil price assumed, and the estimates quoted assume a price above the present level.

Coal and Lignite

1.20 The only proven reserves amount to eight million tonnes (3.3 million toe) in situ of anthracite at Pejao, near Porto, with an average calorific value of 4,100 kcal/kg, and 33 million tonnes (4.3 million toe) of recoverable Lignite at Rio Maior, north of Lisbon, with an average calorific value of about 1,300 kcal/kg. The only deposit being mined is at Pejao where production is running at about 200,000 tonnes p.a., nearly all for electricity generation. In addition to the proven reserves, probable reserves in the northern coal basin are estimated at 28 million tonnes (13.2 million toe), and possible reserves at 42 million tonnes (19.7 million toe). There are also significant sub-bituminous coal - 8 - prospects at Villa Nova da Ourem -- also in the north; estimates of the potential range up to 500 million tonnes, but more detailed studies are needed to confirm this. There is an ongoing exploration program in the northern coal basin, and the Federal German Geological Service plans to carry out an evaluation of unexplored coals and lignites in Portugal.

Renewable Energies

1.21 Wood is the principal biomass energy source, contributing in 1982 close to 700,000 toe, about 6% of totaL primary energy. The potential contribution of wood and other forest products is estimated at 5.3 million dry tonnes p.a. (about 1.8 million toe), comprising 1.2 million tonnes of wood and 4.1 million tonnes of tree and plant wastes. A study under the Bank's energy conservation and diversification project will assess the availability of forest and forest industry residues as fuel and will include a preliminary assessment of afforestation for energy purposes. The energy potential from urban wastes is about 300,000 toe p.a., and from agricultural wastes about 15,000 toe. According to current estimates, the total biomass potential would amount to nearly three times the current contribution of biomass to primary energy supply. Regarding solar and wind energy resources, at present only solar flat plate collectors for water heating appear to be worth pursuing. Fiscal incentives and the solar energy component of the aforementioned Bank financed project are designed to this end.

Uranium

1.22 The resource base currently is estimated at 11,500 tonnes of uranium, of which 6,700 tonnes are "reasonably assured" reserves, ex- ploitable at a cost of under US$80/kg and 1,500 tonnes at US$80-iSO/kg. These would suffice for about 2,500 MW of nuclear capacity over a 25-year life. According to a 1979 IAEA estimate, there is also a speculative potential of 20,000-80,000 tonnes of uranium oxide (U308).

Petroleum Prospects

1.23 Two basins are thought to have oil and gas potential: the Lusitanian Basin, covering both onshore and offshore areas from Porto to Sines, and the Algarve Basin, covering the southern offshore Atlantic Shelf and the adjacent onshore areas. The Bank currently is financing an exploration project in the Lusitanian basin, where the exploration his- tory and petroleum geology indicate a high probability of discovering small commercial deposits.

Institutional Framework

1.24 Compared to many countries, Portugal has a relatively large number of agencies involved in the energy sector, as shown in the organization charts attached as Annex 1.6. The Ministry of Industry, Energy and Exports (MIEE) has jurisdiction over most energy-related matters. -9-

Within the Ministry, the Directorate General for Energy (DGE), with about 100 professionals, is responsible, under the Secretary of State for Energy, for formulating energy policies and projecting energy requirements. The Directorate General for Geology and Mines (DGGM) provides geological services, grants and regulates mining concessions, and de- velops mineral policies. The major public sector energy enterprises are PETROGAL, the national oil company; EDP, the electric power authority; ECD, the coal production company; and ENU, the uranium production company. DGE and the National Laboratory for Industrial Engineering and Technology (LNETI) have major responsibilities for both energy conservation and renewable energy developmisent.

1.25 Coordination among the sector agencies has been quite good, as evidenced by the production of the draft 1980-2010 national energy plan (PEN) by an inter-agency commission with the assistance of several con- sultative groups. Nevertheless, there are some weaknesses in the sector which will need to be corrected if energy plans are to be soundly formu- lated and successfully implemented. Weaknesses specific to the topics covered in the report are dealt with in the appropriate chapters, but the main areas of concern may be summarized as follows:

(a) Planning. DGE's middle management planning capability should be strengthened, as it does not have enought staff to prepare the detailed energy demand projections needed to refine the national energy plan.

(b) Conservation. So far, only energy conservation in industry has been dealt with in any detail. This is understandable, because industry is the largest energy-consuming sector and because it comes under the same ministry as DGE. Although 1h'4re have been some delays in the implementaion of energy conservation projects, the limited program set-up for industry still is far in advance of those in other sectors where institutional short- comings are more serious (Chapter V).

Cc) Imported Natural Gas. If the LNG program is implemented, there will be a need for a strong national gas company which would be responsible for handling not only imports of LNG, but marketing and distribution as well, including setting and enforcing safety standards (see Chapter III).

(d) Imported Coal. The form of organization for handling the greatly increased coal imports envisaged in the national energy plan also remains to be more clearly delineated (Chapter III). - 10 -

II. THE NATIONAL ENERCY PLAN - ENERGY, ELECTRIC POWER AND NATURAL GAS PROJECTIONS

The National Energy Plan

2.1 The draft National Energy Plan 6/ (PEN) provides a flexible and sophisticated instrument for energy policy and planning in Portugal. The primary objective is to satisfy energy requirementsarising from economic development and social progress, but this is combined with various com- plementary objectives which are not necessarily mutually consistent. The most important objectives identified in PEN are (a) minimizing the cost of energy supply to consumers; (b) increasing security of energy supply and resilience to unexpected shocks; (c) reducing import dependence; and (d) minimizing damage to the environment. PEN distinguishes between a medium-term planning horizon of six to ten years, determined by the lead time for the construction of major energy installations, and a long-term horizon of 30 years to cover the working life of these installations.

2.2 Given the uncertainty of long-term forecasts, the approach adopted was to develop alternative scenarios taking account of exogenous factors (mainly the growth of GDP) and of energy-specific factors such as fuel and energy equipment prices (see Annex 2.1 for a list of the main variables and the values assumed). This chapter reviews the resulting energy projections, with special reference to the electric power subsector and the proposed LNG import program.

Energy Demand Projections

Methodology

2.3 PEN first projects usefuL energy demand using a computer model (MEDEE2) developed for use in the EEC, which splits useful energy consumption into 18 "demand modules", grouped into the four sectors of households/services, industryiconstruction,transportation, and agriculture and fishing (Annex 2.2). Projections of the useful energy requirements of each module are made using as coefficients the specific useful energy per unit of gross vaLue added, except in the transportation sector, where the useful energy requirements are determined from activity volumes and not from gross value added. The coefficients used were those for 1980. Another model, DFI (Decision Focus Incorporated), determines how the useful energy demand of each activity will be met, taking account of the relative prices of the competing fuels and consumer preferences, and translating the useful energy projections into the least-cost configuration of primary energy requirements.

6/ Plano Energetico Nacional (Versao 1982). - 11 -

Alternative Projections

2.4 Since the number of possible combinations of the variables and hence of alternative energy projections is large, the PEN analysis is confined to 16 selecced cases for sensicivity testing purposes. Eleven of these cases assume a low economic growth scenario (scenario B) which postulates continuing relative stagnation of the world economy snd average GDP growth rates for Portugal of 3% p.a. for the period 1980-85, 3.5% for 1986-90 and 4.5% for 1991-2010. The other five PEN projections assume the high growth scenario A, which postulates a significant recovery of the world economy and average GDP growth in Portugal of 4% p.a. for 1980-35, 5.5% for 1986-90 and 6.5% for 1991-2010. Scenario B is regarded by the Portuguese as the more realistic of the two scenarios used in PEN.

2.5 The resulting projections of final energy consumption in 2010 (Annex 2.3) show that demand is most sensitive to the economic scenario assumed, the projection for scenario A being over nine million toe higher than that for Scenario B (35.3 miLlion toe against 25.8 million toe). The scenario B cases, which include both "intensive" 7/ and "moderate" energy conservation cases, show the sensitivity to this factor, with final consumption of 25.8 million toe in the intensive conservation case against 28 million toe with a moderate conservation policy. The respective shares of the different fuels appear relatively insensitive to the assumptions adopted, except for some substitution of coal for petroleum with the P2 price scenario, which assumes 3% p.a. increase in the coal price compared with 6% in the P1 scenario. Reference Strategy

2.g The strategy chosen in PEN as the basic reference case (ER) for planning purposes assumes the economic scenario B, together with the associated macroeconomic projections (Annex 2.1), a discount rate of 10%, the intensive conservation program and the P2 fuel price scenario, which assumes average annual real increases in fuel prices 8/ of 3.3-4% for oil, 3% for coal, 4% for natural gas and 3.1% for uranium. Primary energy consumption grows at 6% a year in 1980-85, against less than 5% in the later 1970s, but declines to less than 4% a year after that (Table 2.1.). Final energy consumption grows somewhat less rapidly because of the growing p-oportion of intermediate consumption for energy conversion, transmission and distribution (from 16% in 1980 to 24% in 2010), which is partly due to the increasing share of thermal power in electricity production.

7/ Assumed to result in savings of 550,000 toe in 1985 (4%), rising to nearly seven million toe in 2010 (16%), at an estimated annual cost of 50,000 escudos (1980 prices) per toe saved.

8/ After the year 2000, petroleum, coal and gas prices are assumed to increase in line with general inflation, i.e. remain constant in real terms. - 12 -

Table 2.1: Reference Strategy Projections, 1980-2010

1980 1985 1990 2000 2010 (actual)

Useful energy, '000 toe 6,105 7,556 9,482 14,535 21,859 Final energy, '000 toe 8,454 11,064 13,105 18,010 25,610 Intermediateenergy, '000 toe 1,653 2,492 3,178 4,988 7,950 Primary energy, '000 toe 10,107 13,556 16,283 22,998 33,560

Primary energy per cap., toe 1.073 1.403 1.644 2.209 3.066

GDP, billion 1980 esc. 1,098 1,273 1,512 2,348 3,646

Final energy, toe/mill. esc. 7.70 8.69 8.67 7,67 7.02 Primary energy toe/mill. esc. 9.20 10.65 10.77 9.79 9.20

Source: Annex 2.2.

2.7 The increasing intensity of energy use projected for the 1980s is due to more rapid growth of industrial demand compared with other sectors (Annex 2.2), and the parcicularlyhigh growth rates for heavy users of energy, such as cement, steel, chemicals and ceramics (Annexes 2.4 and 2.5). The declining intensity after 1990 reflects the impact of conservation programs. The primary energy/CDP elasticity also increases sharply -- to two in 1980-1985, compared with 1.53 in 1974-1980 (Table 1.1). Thereafter, the trend decLines sharply, with elasticities of 0.7- 0.8 in the 1990s.

2.8 Projected consumption by sector shows a reversal of the trends during the 1970s. Industry's share increases from 38% in 1980 to 50% in 2010, reflecting the more rapid growth (4.7% p.a.) of industrial energy demand compared with other sectors (Annex 2.2). The share of the households and services sector falls from 21% to 11%.

2.9 The shares of the various forms of energy in final energy consumption show substantial changes (Annex 2.2), notably the declining contribution of oil, from 72% in 1980 to 49% in 2010, and the corresponding increases for coal (2% to 20%) and natural gas (1% to 7%). These changes reflect the projected substitution of coal for oil in industry and electricity generation, and the proposed importationof LEG beginning in the Later 1980s.

2.10 Table 2.2 shows the growing dominance of middle distillates (essentiallygas oil) in the demand for petroleum products. This is due - 13 - to the projected heavy growth of road transportation demand (heavy trucks), the stagnation of LPC demand, with the introduction of LNG, the slower growth of demand for Light distilLates (mainly gasoline), and the encroachment of coal and uranium on the traditional markets for fuel oil in heavy industry and electricity generation.

Table 2.2: Final Consumption of Petroleum Products, 1980-2010

1990 1990 2000 2010 '000 toe Z '000 toe % '000 toe £ '000 toe £

LPG 568 9,4 520 6.3 540 5.4 560 4.4 Light distillates 1,047 17,3 1,840 22.1 1,900 19.1 2,020 16.1 Middle distillates 2,158 35.6 3,061 36.8 4,400 44.2 6,620 52.7 Heavy fuel oil 2,283 37.7 2,899 34.8 3,120 31.3 3,370 26.8 Total 6,056 100.0 8,320 100.0 9,960 100.0 12,570 100.0

Source: National Energy Plan (1982 version).

2.11 Because of the growing divergence between the market shares of gas oil (36%) and fuel.oil (38%) and their shares of Portuguese refinery output (25% and 43% respectiveLy in 1982), PETROGAL is considering the installation of a 15/20,000 bpd hydrocracker. This option to meet increasing gas oil demand should be compared with the alternative of directly importing the additionaL gas oiL required.

2.12 The projected primary energy mix shows declining shares for petroleum and hydroelectricity,with offsetting increases for coal, natural gas and, above all, uranium (Table 2.3). The uranium projection assumes a large nuclear power contribution beginning in 1995. Import dependence actually increases from 80% in 1980 to 86% in 1990, as increases in the shares of imported coal and natural gas exceed the decline in the share of imported petroleum. The upward trend is not reversed until the advent of nuclear power in 1995, when import dependence falls to 77% and then to 63% by 2010.

2.13 These primary energy projections assume the continued use of conventional crude oil for petroleum products. PEN also considers the option of synthetic crude oil (Syncrude) from imported coal by 2000. This would reduce crude oil requirements but increase total primary energy requirements by 1.4 million toe in 2000 and 2.8 million toe in 2010 because of the conversion losses from coal to oil (Annex 2.2).

Reference Strategy Investment Requirements

2.14 Implementing the PEN reference strategy would require nine separate development programs covering energy conservation, electric power system expansion, the introduction of nuclear power, the coal - 14 - subsector, the introduction of natural gas, renewable energy resources, the petroleum subsector, evaluation of national energy resources, and a program of energy research, development and demonstration. Energy investment would absorb about 12% of estimated total national investment in 1983-1990, and 8-11% after that (TabLe 2.4), which is below the 13-14% levels of recent years. However, the absolute sums are large (US$800 million p.a. on average in the 1980s, rising to US$1,340 million in the 1990s),and may give rise to fi.nancingproblems, particularly if the economy does not grow as assumed.

Table 2.3: Primary Energy Supply by Energy Source, 1980-2010 Reference Strategy

1980 1990 2000 2010 '000 toe % '000 toe % '000 toe % '000 toe %

Petroleum 7,965 78.8 10,480 64.4 11,260 49.0 13,260 39.5 Coal 213 2.1 2,700 16.6 4,438 19.3 6,205 18.5 Hydroelectricity 851 8.4 980 6,0 1,115 4.9 1,279 3.8 Natural gas - - 800 4,9 1,175 5.1 1,652 5.0 Uranium - - - - 2,993 13.0 8,404 25,1 Wood a/ 1,079 10.7 1,315 8.1 1,990 8.6 2,710 8.0 Solar and wind energy - - 8 - 27 0.1 50 0.1 Total 10,108 100.0 16,283 100.0 22,998 100.0 33,560 100.0

a/ includingindustrlal residues. Source: Annex 2.2.

Table 2.4: ReferenceStrategy InvestmentRequirements, 1983-2010 (billion 1980 escudos)

1983-90 1991-95 1996-2000 2001-10 Amount % Amount % Amount % Amount %

Electricpower 202.5 63.9 174.2 69.8 189.7 46.6 534.6 60,6 F.'troleum 33.9 10.7 4.2 1.7 127.9 31.4 154.9 17.6 Coal 16.4 5.2 3.5 1.4 0.5 0.1 7.2 0.8 Natural gas 14.5 4.6 12.2 4.9 6.5 1.6 7.5 0.8 Energy conservation 37.8 11,9 44.8 18.0 64.2 15.8 135.2 15.3 Other a/ 11.7 3.7 10.6 4.2 18.3 4.5 43.0 4.9 Total 316.8 100.0 249.5 100.0 407.1 100.0 882.4 100.0

National Investment 2,694.2 2,718.7 3,638.3 11,384.4 Energy as % national 11.8 9.2 11,2 7.8

a/ Renewable energy, evaluation of national energy resources and energy research,development and demonstration. Source: Annex 2.6. - 15 -

Foreign Exchange Costs

2.15 Even with the projected switch from petroleum to other fuels, the foreign exchange costs of energy under the reference strategy, covering both equipment and fuel imports, remain around their present level of 38% of export earnings in the 1980s and 1990s, with fuel imports accounting for about 90% of the total (Table 2.5).

Table 2.5: Reference Strategy Foreign Exchange Costs, 1983-2010 (billion 1980 escudos)

1983-90 1991-2000 2001-10 Amount % Amount % Amount X

Investment a/ 105 7.4 366 12.0 371 9.7 Fuel 1,306 92.6 2,693 88.0 3,469 90.3 Total 1,411 100.0 3,059 100.0 3,840 100.0 Exports 3,749 7,826 14,828 Energy as % exports 37.6 37.8 25.9 a/ Including the cost of "security" stocks of fuel. Source: Annex 2.'

Increased Security of Supply Strategy

2.16 The PEN study includes an alternative strategy designed to correct the relatively high degree of import dependence in the reference strategy and its reliance on energy sources such as natural gas and nuclear power which are regarded as vulnerable to supply interruptions. This results in a reduction of nearly six million toe (16%) in primary energy requirements in 2010 (Annex 2.8) from a more intensive energy conservation program. The costs of this strategy compared with the reference strategy are not given.

2.17 As a variant, the PEN study considers a non-nuclear strategy. This would nearly double coal requirements by 2010 to some ten million toe, but would reduce total primary energy consumption about 2% because of the higher thermal efficiency of coal-fired stations.

Electric Power Projections

Reference Strategy

2.18 Specific electricity requirements in terms of useful energy are determined by the MEDEE2 model. The DFI model determines the final consumption of electricity in these specific applications and also in non- - 16 -

specific applications, given the assumptions on the prices of electricity and competing fuels. The DFI model also determines gross electricity requirements,allowing for network losses and power station consumption.

2.19 The PEN reference strategy (Table 2.6) shows final consumption of electricity growing at 4.7% p.a in the 1980s and 3.9X p.a. after that, compared to 7.6% p.a. in the 1970s. Gross electricity supply grows rather more slowly because of declining network losses and power station consumption (Annex 2.9). The pubLic network accounts for about 96% of total supply throughout the period, auto-production by industry contributing only 4%. The electricity intensity of GDP rises to ovet 17,000 kWh per million escudos (at 1980 prices) by 1990, but de_Lines thereafter. Because of conservationmeasures, the electricity/GDPelasticity falls from its 1970s value of 1.77 to 1.38 in the 1980s,and 0.82 in the 1990s. Electricity consumption per capita doubles by the year 2000 to 3580 kWh, about its present level in Italy.

Table 2.6: ElectricityConsumption and Supply. 1980-2010 Reference Strategy

Growth rate % p.a./Elasticity 1980 1990 2000 2010 1981-90 1991-20002001-2010

Final consumption, GWh 14,338 22,674 33,488 49,070 4.7 3.9 3*9 Intormedlateconsump- tion, GWh 2,430 3,248 3,792 4,521 Gross supply, GWh 16,768 25,922 37,280 53,591 4.5 3.7 3.7 Gross supply, kWh/mill. 1980 esc, 15,271 17,144 15,877 14,719 Gross supply/GOP elasticity 1.38 0.82 0.82 Gross supply per capita, kWh 1,780 2,620 3,580 4,900

Source: Annex 2.9.

2.20 The share of the household and services sector in consumption continues to decline, while the share of inidustryand construction rises to nearly 80% in 2010 (Table 2.7), reflecting the very different growth rates projected (2% p.a. on average for households and services,against 5 to 6% for industry).

Power System Development Program

2.21 The state power company, Electricidadede Portugal (EDP), uses the weLl-known Wien Automatic System Planning (WASP) linear programming model in conjunction with another computer model known as VALORAGUA to - 17 -

determine the least-cost development program. WASP simulates the operation of the EDP system over 30 years and chooses the combination of plants and fuels with the lowest present worth of total system costs (capital plus operating) to meet the projected demand. VALORAGUA, developed for planning power systems with a significant hydropower component, fine tunes the WASP results, mainly by refining the in-service dates of the plants selected by WASP.

r'ble2.7: Elec ricityConsumption by Sector,1980-2010 ReferenceStrategy

1980 1990 2000 2010 GWh % GWh % GWh X GWh E

Households & services 5,791 40.4 7,419 32.7 8,860 29.3 10,349 21.1 Industry& Construction 8,198 57.2 14,883 65.6 24,221 69.2 38,256 78.0 Transportalion 244 1,7 279 1.2 302 1.1 349 0.7 Agriculture & fishing 105 0.7 93 0.4 105 0.4 116 0.2

Source: Annex 2.9.

2.22 The resulting EDP projections show a continuing decline in the hydropower share, and substantial changes in the pattern of thermal generation (Table 2.8). Oil-fired steam plant continues to predominate up to 1985 but, by 1990, is superseded by coaL-fired plant, which is over- taken by nuclear power~in the later 1990s.

2.23 The projected consumption of fossil fuel reflects these changes. After rising to nearly two million toe by 1985, fu*1 oil declines almost to zero by 2010; cc'alconsumption risee to nearly two million toe in 1995-2000, then falls to about one million toe in 2010; gas oil is virtually eliminated after 1990 as pumped storage plants displace combustion turbines for peaking service. Outside the public network, the use of industrial residues by autoproducers would rise from 100,000 toe in 1980 to 450,000 toe in 2010 (Annex 2.9).

2.24 Any delay in the nuclear power program will increase coal requirements and probably also oil requirements. In the extreme case of the non-nuclear strategy, coal consumption for electricity generation would rise to 3.5 million toe in 2000 and 5.5 million toe in 2010.

2.25 The least-cost power program does not include any new oil fired plants beyond the recently completed steam units at Setubal (2 x 250 MW) and combustion turbines at Sines (2 x 83 MW). It comprises 1800 MW of coal-f!red plant (6 x 300 MW) in 1985-1993, 5700 MW of nuclear power (6 x 950 MW) in 1995-2009, and 3680 MW of hydropower capacity (25 projects) between 1982 and 2010 (Annex 2.10). Hydropower continues to account for half or more of total installed capacity to the year 2000, - 18 - falling to 46% in 2010, by which time the system will be essentially based on hydra and ntuclearpower (40%).

Table 2.8: Public Electricity Supply by Energy Source, 1980-2010

1980 1985 1990 2000 2010

% of total production

Hydropower 61.7 49.9 45.6 36.4 29.0 Thermal power 38.3 50.1 54.4 63.6 71.0 of which: Oil-fired steam 34.6 4D.3 24.9 8.6 0.2 Coal-fired steam 2.2 9.3 29.5 22.5 7.8 Combustion turbines 1.5 0.5 - 0.2 - Nuclear power - - - 32.3 63.0

'ossil fuel consumption, '000 toe

Fuel oil 1,296 1,851 1,450 675 22 Gas oil 77 26 - 15 - Coal 87 450 1,800 950 980

Total 1,460 2,327 3,250 2,640 1,002

Source: Annex 2.9.

High Growth Scenario

2.26 In the PEN high growth scenario electricity consumption would grow at about 7% p.a. during the 1980s, and about 5.4% thereafter, compared with the reference strategy rates of 4.7% and 3.9%, respectively. As a result, consumptionwould be 21% higher in 1990, 42% in 2000 and 64% in 2010, requiring an additional 600 MWof capacity in 1990, nearly 4000 MW in 2000 and over 7000 MW in 2010. However, this scenario assumes relativelyhigh CDP growth rates.

Electric Power Investment Requirements

2.27 Electric power investment absorbs the bulk of projected energy sector investment throughout the period (Table 2.4), but its share of total national investment declines from 7.5% in the 1980s to under 5% in 2000-2010 (Table 2.9). The big intcreasein the share of generation, from 66% in the 1980s to over 80% after that,combinedwith existing dieficien- cies in the distribution system raises a question about the adequacy of the allocation to transmission and distribution to maintain a satisfactory quality of service and achieve the projected reduction in network losses. - 19 -

Teble 2.9: Projected Electricity Investment, 1983-2010 Reference Case (billion 1980 escudos)

1983-1990 1991-1995 1996-2000 2001-2010 Amount % Amount % Amount % Amount S

Auto-producers 2.9 1.4 2.4 1.4 2.5 1.3 4.5 0.8 Public network 199.6 98.6 171.8 98.6 187.2 98.7 530.1 99.2 Total 202.5 100.0 174.2 100.0 189.7 100.0 534.6 100.0

National investment 2,694.2 2,718.7 3,638.3 11,384.4 Electricity % National 7.5 6.4 5.2 4.7 Generation a/ 131.5 65.9 141.8 82.5 152.2 81.3 435.1 82.1 Transmission a/ 22.4 11.2 7.5 4.4 7.5 4.0 22.5 4.2 Distribution a/ 45.7 22.9 22.5 13.1 27.5 14.7 72.5 13.7

a! Public network.

Source: National Energy Plan (1982 version).

Medium--Term Electricity Projections

2.28 The PEN electricity projections provide the long-term perspec- tive for evaluating various options under different economic growth, price and conservation scenarios. For its own investment and financial planning, EDP makes medium-term projections, normally covering a period of seven years, which are updated annually. Until recently, these were based on trends in electricity consumption per person in more advanced countries. This approach gave good results from 1976 to about 1980, but it lacked any explicit connection with economi: activity and prices, and left unexplained the wide year-to-year variations in the growth of electricity demand. EDP therefore developed another model which uses as exogenous variables the growth rate of GDP and the rate of change of tile price of electricity relative to the change in the price index for o;.her fuels (Annex 2.11). The model has its limitations in that it is based on a relatively small number of observations; nevertheless, the model has given good results when applied to past data, though for 1983 there is an apparent incongruence in that the model predicted stagnant dernand for electricity on the basis o£ Government predictions of GDP growth,whereas actual data showed an increase of about 7%. This apparent incongruity should be investigated when actual GDP figures for 1983 are available.

The LNG Option

2.29 The PEN reference strategy envisages imported liquified natural gas (LNG) as part of the policy of diversification to reduce the present - 20 - high degree ^f eependence on imported oil. It would be used in industrial processes requiring a clean fuel, in households and commercial premises and also as a chemical feedstock. PEN envisages the first imports in 1988, allowing for a four-year lead time from 1984 for the necessary infrastructure. The alternative of natural gas by pipeline from Spain was rejected as more costly.

Market Prospects

2.30 Natural gas consumption is projected by the DFI model to grow from 0.8 million toe in 1990 to 1.65 million toe in 2010 (Table 2.10), accounting for about 5% of primary energy supplies over the period. From 1995 onwards,natural gas would be supplemented by biogas and relatively small though growing quantities of gas manufactured from coaL. In the household/servicessector,the main uses would be for space heating, water heating and cooking; in industry, the main market would be processes requiring a clean fuel, although a rising use is also envisaged for steam-raising (Annex 2.12).

2.31 The PEN projection is very different from a projection by consultants in 1981 for Petroquimica e Gas de Portugal (PGP) for the period 1985-2004. If the PGP figures are lagged three years to align them with the PEN projection, the PEN 1990 total is 30% higher, but in 1995 tle PCP total is 33%, and in 2000 46', above the PEN figures (TabLe 2.11). The relatively low PEN industrial projections are partly due to the exclusion of potential markets, particularly in industries using heat processes which can utilize any type of fuel, and industries with dual-firing equipment, which could utilize natural gas on an "interruptible supply" basis.

2.32 These differences are not surprising since quite different methodologies were used. The PCP projection is based on a market survey, which envisages a three-stage deveLopment of the service area, starting with Lisbon and Setubal, then rmovingnorthwards to the Porto area and, finally, to Cuimaraes and Braga (Annex 2.13). The household demand projections assume final penetration of 30-40% over five to ten years for existing houses and 60% for houses built after the arrival of natural gas in an area. The number of households served rises from 185,000 in 1988 to 373,000 in 1995, to more than 500,000 in 2000 and 600,000 in 2008. Consumption in the services sector was assumed to be 35% of total households/servicesconsumption, as in the Lisbon town gas service area. The industry projections assumed 20% initial penetration of the industrial fuel market, and then 2% annual growth to a final penetration level of 30%.

Reference Strategy Cost Assumptions

2.33 The reference strategy consumption projections were determined by the DFI model on the basis of the costs of natural gas relative to the costs of other fuels. These costs comprise the c.i.f. price of the imported ;NG, plus the costs of the LNG terminaL, storage facilities, transmission and distributiou networks. The c.i.f. prices assumed are - 21 -

those of the P2 price scenario. The estimated investment costs are 24.2 billion escudos at 1980 prices (US$492 million 9/), covering the LNG reception terminal facilities, 730 km of primary networks and 3,580 km of secondary networks (Annex 2.14). The estimated average annual operation and maintenance costs are 1.94 billion escudos (1980 prices). The c.i.f. price of LNG accounts for more than 80% of the final cost (Table 2.12).

Table 2.10: Natural Gas Consumption, 1990-2010 ~Weference Strategy Projection ('000 toe)

1990 1995 2000 2010

Final Gas Consumption Households/Services 230 305 400 660 Industry ;60 303 a/ 425 a/ 703 N,ni-energy uses 410 410 410 410 800 1,018 1,235 1,770

Gas Suppl LNG 800 1,000 1,175 1,652 Coal gas - 6 18 45 Biogas - 20 70 130 800 1,026 1,263 1,827

LNG as % total primary energy 4.9 5.1 5.1 4.9 a/ Includes consumption of natural gas in combustion turbines for electricity generation (28,000 toe in 1995, 5,000 toe in 2000). Source: Annex 2.12.

Table 2.11: Natural Gas Consumption, 1990-2000 Comparison of PEN Reference Strategy and PGP Projections ('000 toe)

1990 1995 2000 PEN PGP PEN PGP PEN PGP Households/Services 230 102 305 186 400 271 Industry a/ 570 514 713 1,169 835 1,532 Total 800 616 1,018 1,355 1,235 1,803 a/ Including use of natural gas as feedstock. Source: National Energy Plan (1932 version).

9/ At 1980 average exchange rate of US$1 = 49.19 escudos. - 22 -

Table 2.12: Natural Gas Costs, 1980-2000 - Reference Strategy (1980 escudos/kgoe)

1980 1982 1990 1995 2000

LNG c.i.f. price 8.38 11.23 15.36 18.69 22.75 Final cost of gas - - 18.59 23.11 26.82 c.i.f. price as % final cost 82.60 80.90 84.80

Source: PEN and Annex 2.15.

Comparative Fuel Prices

2.34 According to PEN (Table 2.13), LNG will closely match the price of fuel oil and will remain significantly cheaper than crude oil (6%) and, especially, LPG (35%). Coal, however, remains much cheaper than LNG (49% of the LNG price in 1990, falling to 44% in 2000), reflecting the PEN assumption of a 3% p.a. increase for imported coal against 4% p.a. for LNG.

2.35 A more significant comparison is between the prices of the various fuels in terms of useful energy, i.e., aLlowing for their relative efficiencies of utilization in different applications. On this basis, according to PEN, in the households/servicessector natural gas is cheapest for space heating, and for cooking in urban areas (although wood and biogas have the advantage in rural areas), but wood and coal are cheaper for water heating. Similarly, in industry, natural gas is cheapest where a clean fueL is required, but it is more expensive than wood, coal and fuel oil for steam production (Table 2.14).

Increased Security of Supply Strategy

2.36 The PEN "increased security of supply" strategy (para 2.15) projects natural gas requirements after 1990 wzhich are about 7% lower th.anin the reference strategy. This reflects partly lower total energy reoiuirements, but partLy also the view that natural gas may be particularly vulnerable to interruptions of supply because of the small number of potential suppliers.

Pipeline Alternative

2.37 A PGP study, conducted in 1979 when the Spanish gas discoveries in the Bay of Cadiz seemed highly promising, concluded that a pipeline from Huelva on the Spanish border to the Sines-Setubal area would require about twice the amount of capital needed for an LNG terminal in the same area. The import of Russian natural gas via the Spanish network, assuming this is extended to Madrid, was ruled out since a pipeline frum Madrid to the Sines-Setubal area was estimated to cost at least four - 23 -

times as much as an LNG terminal, with no offsetting advantage in the price of Russian gas aver LNG. 10/

Table 2.13: Comparative c.i.f. Fuel Prices, 1980-2010 Reference Strategy (1980 escudos/kgoe)

1980 1982 1990 1995 2000

LNG 8.38 11.23 15.36 18.69 22.75 Crude oil 12.07 12.61 16.38 19.93 24.25 Fuel oil 9.90 11.33 15.50 18.86 22.95 LPG 16.81 17.25 23.61 28.72 34.95 Coal 4.31 5.93 7.52 8.71 10.10

Source: National Energy Plan (1982 version).

Table 2.14: Comparative Useful Energy Costs of NaturaL Gas and Other Fuels in 1990 - Reference Strategy Estimates (1980 escudos/kgoe)

Households/Services Industrv Space Water "tClean" Heating Heating Cooking Processes Steam

Natural gas 29 36 63 27 26 Coal 38 35 - - 20 LPC 45 55 95 39 37 Fuel oil 47 43 - - 25 Wood 59 30 49 - 19 Electricity 88 85 139 57 63 Biogas - - 39

Source: National Energy Plan (1982 version).

10/ The respective figures per million Btu were US$4.60 for Russian gas at the West German border, plus an estimated US$1 for its transmission to Portugal, i.e., US$5.60 c.i.f. Portugal; and for Algerian LNG US$5.10 f.o.b. Algeria plus an estimated US$0.50 to carry it to Lisbon. - 24 -

III. ENERGY, ELECTRIC POWERAND NATURAL GAS PROJECTIONS - ISSUES AND RECOMMENDATIONS

3.1 The PEN projections make skillful use of available data with the help of well established computer models. The models are still in an experimental stage, and there are of course certain deficiencies, many of which the Portuguese have begun to address, particularly regarding input data. Nevertheless, the initiaL results are useful for analyzing the implications of different future growth paths and development strategies. The mission's review of the projections focuses on several important issues which it believes merit attention by Portuguese energy planners. These are summarized in this chapter, together with the Mission's recommendations for dealing with them.

Energy Projections

Main Issues

3.2 Although the models used for the projections allow for the influence of relative fuel prices as determinants of market shares, they do not make explicit allowance for the influence of the absolute level of energy prices on energy demand. The total demand for energy is essentially income-determined, without reference to fuel price, which could double, for example, without changing total demand. However, some implicit allowances are made for the effect of rising prices in the energy demand scenarios of MEDEE2 and relative fuel prices are taken into account by the DFl model in selection of the least cost energy supply option.

3.3 Furthermore, GDP growth appears high in light of current trends and prospects and average annual growth since 1980 has been below 3%. Also, projected energy consumption in industry, which now accounts for 45% of total demand, appears to be inflated by over-optimistic assumptions about the growth of the cement, steel, chemicals and ceramics industries, which are responsible for over 50% of industrial energy demand (Annex 2.4).

3.4 The PEN assumptions for future fossil fuel prices now seem high in light of more recent forecasts. The 4% p.a. growth in real terms assumed for crude oil, compares with the 1.6% suggested in the Bank's World Development Report 1983 for the period 1982-1995. By the same token, the 1.5% p.a. growth assumed for coal in the PEN P3 price scenario (Annex 2.1) appears more appropriate than the 3% p.a. of the reference strategy.

3.5 The 12% discount rate appears too low .or an upper limit, given the capital constraints in the economy.

3.6 The fact that petroleum still accounts for almost half of primary energy requirements in the year 2000 calls into question the - 25 -

adequacy of the conservation program assumed for the reference strategy, particuLarly as the "very intensive" conservation program of the "increased security of supply" strategy gives estimated additional annual fuel savings worth some US$250 million in 1990, at the projected real fuel prices, rising to over US$1 billion in 2010 (all in 1980 escudos).

3.7 The PEN projections assume the introduction of three major new primary energy sources (imported coal, LNG and nuclear power) within the next 12 years. This may be difficult, given the formidable organization and management problems involved, and the associated infrastructure requirements, particularly for coal and natural gas. For example, the proposed coal-handling facilities at Sines are at least two years behind schedule.

Recommendations

3.8 DGE staff are well aware of the need for an ongoing review of the energy projections, i.e., testing the impact of changes in significant variables, including GDP growth, energy prices, and the appropriate minimum economic rate of return on investment (rate of discount). The following recommendations are offered as a second opinion on assumptions made, to assist in this review.

3.9 The mission recommends, first of aLl, that planning for the medium term take account of GDP growth rates below those estimated in the PEN low growth case, 3.25% for 1980-90. According to mission estimates, using a 2.25% average annual growth rate and retaining the PEN energy/GDP elasticity assumption of 1.5 would result in an incremental growth in primary energy demand more than a third less than in PEN. This gives an idea of the type of uncertainty Portugal faces in its macroeconomic and energy planning for the medium term. Furthermore, the mission finds the PEN energy/GDP elasticity high relative to that of other countries at a similar stage of economic development and considering the PEN's emphasis on energy conservation.

3.10 The mission recommends an additional check on the demand projections adopting a sectoraL approach, including a continuation of present efforts to test the growth rates of energy demand by sector for internal consistency. Furthermore, the mission supports extending the 1979 input-output (1-0) table to include an energy sector broken down into the main petroleum products, coal and electricity, fitting demand equations to this table and projecting through time. The mission recognizes that this will require considerable effort and is likely to yield results only in the longer term.

3.11 At the same time, the mission recommends that the revisions of the projections include explicit testing of the influence of the absolute level of energy prices on energy demand. Pending the modification of the sophisticated models used for PEN which couLd take a considerable amount of time, a simple check could be made by comparing the results of the PEN - 26 - models with a single equation econometric approach which explicitly treats the price level of energy as a variable. 11/ 3.12 Once revised projections have been made along the lines out- Lined above, indicating a Likely range of energy demand, the mission recommends testing the impact of the resulting differences on the size, composition and timing of energy projects in the energy investment program. Such an approach wouLd highlight the costs of uncertainty and focus attention on those decisions which need to be made immediately, otherwise resulting in high costs to the economy and those which may be postponedat little cost or even benefit (cost savings).

3.13 The fuel price scenario for the reference case projection needs to be reviewed to incorporate growth rate assumptions reflecting current prospects(e.g., about 2% for oil and 1.5X for coal).

3.14 An upper value for the discount rate greater than 12X should be used for sensitivity testing. The mission therefore strongly supports the recommendationnow being made by the Ministry of Finance and Planning to test for sensitivity at rates up to 14%.

3.15 The costs and benefits of the conservation scenarios in PEN shouLd be evaluated to determine whether the "very intensive" conservation program assumed for the "increased security of supply" strategy should be adopted for the reference strategy.

3.16 The revised suppLy projections should make allowances for the major organizational,management and planning problems which are likely to be encountered and the infrastructure requirements associated with introducingmajor new energy sources.

Electric Power Projections

3.17 The issues relating to the general energy projectionsapply, of course, to the electric power projections,as these derive from the same MEDEE2/DFI models. There are also some issues related specifically to the electricity sector, outLined briefly below.

11/ SingLe equation models of this kind gave been tested very successfully for a number of countries by Pearce and Westoby (D.W. Pearce and R. Westoby, 'Energy and the European Economy,' in A. El-Agraa, Britain within the European Community, Macmillan, 1983; 'Energy Consumption in Eastern Europe,' Energy Economics, January 1984; and 'Single Equation Models for the Projection of Energy Demand in the United Kingdom 1954-1980,'University of Aberdeen, Scotland, Discus- sion Paper 83-07.) - 27 -

3.18 The electricity demand forecasting models used make no explicit allowance for the effect of changes in the absolute level of electricity prices on demand, despite the significant increases proposed in real electricity prices. However, MEDEE2 implicity takes account of this variable in the formulation of the long term energy demand scenarios adopted.

3.19 The global forecasting models used by EDP are supply-oriented rather than demand-oriented,and the most recent of them is based on only a limited number of observations. EDP has found the price variable not to have been statistically significant over the period studied. The PEN models use a disaggregated approach to forecast demand by sector and end- use but they do not appear to be based on reliable data on electric appliance and equipment ownership.

3.20 Both the PEN and EDP electricity forecasts assume the PEN reference strategy CDP growth rates. Assuming growth rates in line with current trends and prospects coupled with the PEN electricity/GDP elasticity of 1.38, the gross electricity requirement in 1990 would be 23,290 GWh, or about 10% less than the PEN projection of 25,940 GWh.

3.21 The forecasts for the public supply network imply that the system load factor wilL remain around its present level of 58%. There may be some reason to believe that it will increase along with the substantial expected real increases in electricity prices and the rising share of industrial consumption. Tf so, there could be savings in generating capacity requirements.

3.22 The PEN reference strategy does not consider the option of joint power-station ventures with France or Spain, apparently because of the failure of past attempts (e.g., for a joint nuclear power station).

3.23 The option of using Rio Maior lignite for electricity generation looks questionable in view of the relatively'small quantity involved (sufficient for only a 125-MW station over its working life or a 250-MW station for 12 years), uncertainty about the quality of the lignite, and its high cost compared with imported coal.

3.24 Some of the economic and technical assumptions used in the PEN reference case for evaluating the generating plant options (Annex 2.10) are open to question. In particular, the relatively low discount rate (10%), the availability factor of 72% for nuclear power, the use of the same escalation rates for the capital costs of all the alternatives, and the assumption of the same real rate of increase in coal and uranium prices appear unduly favorabLe to the nuclear power option. It should be taken into account that the average availability of existing large pressurized water reactors, PWRs, (730 MW and over) has been only 59%, according to recent International Energy Agency data, and that nuclear power capital costs are liable to escalate more rapidly than those of conventional power stations, particuLarly in the pioneer stages. - 28 -

Recommendations

3.25 Given the present uncertainty about future electricity demand, the mission makes the following recommendations,which it believes wouLd be helpful in refining electricity demand projections. First, a market and load research section should be established to collect information on patterns of electricity end use, including ownership of electrical appli- ances and equipment. Secondly, gLobaL projections prepared by EDP should be supplemented with separate forecasts made by each of its four distribution offices, taking account of each region's specialized knowledge of factors influencing electricity demand and covering the same period as EDP's medium term development program, to be updated annually. Thirdly, the impact of changes in the load factor should be tested for its effect on projected peak demand, instaLled capacity and the investment program.

3.26 The mission recommends that the electric power expansion program be as flexible as possible to avoid any premature commitment to larger unit sizes, with the risk of overcapacity if demand fails to materialize as predicted. The present EDP program meets this requirement as it includes both hydro and thermal power units which are not above 300 MW each, and peak demand is estimated to increase from 3,000 MW in 1980 to nearly 5,000 MW in 1990. The phasing of successive thermal units can, within limits and subject to any financial constraints, be adjusted according to annual updates of the demand forecast. Such flexibility should be particularly weighed in relation to the proposed 950-MW PWR nuclear power option.

3.27 Bearing in the mind the flexible approach to investment planning mentioned above, the mission recommends consideration of the follow- inRg additional factors with regard to the least cost supply option: (a) a 60% availability factor for the PWR option, (b) a 1.5% per annum real increase in coal prices (retaining 3.1% for nuclear fuel), (c) a higher rate of increase in nuclear compared with coal power plant capital costs, and (d) with respect to net present value calculations, discount rates of more than 12%, e.g., up to 14% as recommended by the Ministry of Finance and Planning.

3.28 Regarding the nuclear option in particular, the mission believes that in addition to the PWR options considered in the PEN, the following two alternatives merit further consideration: (a) a natural uranium fueled alternative such as the heavy water reactor (HWR) since it may be available in smaller units (600 MW) with less risk of over-capacity if electricity demand is less than expected,and (b) the possibility of a joint nuclear venture with France or Spain, particularly in view of Portugal's and Spain's prospective entry into the EEC.

3.29 The option of building a thermal power station fueled by Rio Maior lignite should be critically evaluated in light of prospective prices for imported coal.

3.30 As proposed in PEN, a study should be undertaken of the distribution networks to determine the organizational and investment require- - 29 - BEZICOPY AVAILABLE ments of a distribution strategy to reduce losses and improve the quality of service. It should be part of a wider study of the EDP system to improve technical efficiency and reduce system losses. This study would be applicable only to the short and medium term given the considerable long run uncertainties associated with demand.

The Natural Gas Option

3.31 The key issue concerns the price at which natural gas can be made available in Portugal, since this will largely determine the potential market. The final price comprises the c.i.f. price of LNG, the costs of the terminal facilities and the costs of transmitting, distri- buting and marketing the gas. The PEN treatment of these items gives rise to the following issues.

3.32 In PEN, the LNG c.i.f. price represents 83-85% of the final gas price, leaving only 15-17% to cover all other costs. On the other hand, the PEN costs for investment, operation and maintenance, imply that these items would account for a quarter to a third of final unit costs (Annex 2.15).

3.33 The absence in the PEN reference strategy of an appropriate strategic reserve of gas distorts the comparison vith the imported coal option, which includes such a provision.

3.34 The omission from the capital costs of any alLowance for retro- fitting by consumers may be valid in the case of existing town gas consumers, who would be supplied with gas of the same calorific value as at present, but not for existing household and industrial consumers of LPG who would incur piping costs in changing over to natural gas.

3.35 The PEN figure of 1.94 bilLion escudos for annual operation and maintenance of the LNG terminal facilities does not appear to allow for the variable costs associated with the nattral gas marketing operation, which will be substantial. In particular, the estimated manpower requirements in PEN of 560 in 1990, rising to 1,130 in 2005, based on the Gas de France ratio of one employee per 500 customers serviced, looks much too Low. Figures for another European gas undertaking with a land area similar to Portugal and serving about 670,000 customers, which is reasonably close to the projected 600,000 in Portugal by 2005, show a ratio of one employee per 140 customers, or three-and-a-half times as high.

3.36 The total cost estimates should take into account the costs of adjusting supplies to the wide seasonal fluctuations typical of the demand for gas which may represent 20% of the final gas cost.

3.37 Some provision for losses of gas in the LNG terminal and gas networks (about 3% of final costs) should also be made. - 30 -

The Market for Natural Gas 3.38 The other main issue is the uncertainty regarding the market for natural gas. There are marked differences between the PEN reference strategy forecast and the PGP/SOFREGAZprojections. The PEN forecast is based on optimistic economic growth rates and low final cost of natural gas. In evaluating the potential market, the full costs involved in con- verting existing consumers of LPG and naphtha to naturaL gas shouLd be carefully assessed including various possibilitiesfor marketing strategy and pricing policy. An astute and careful appreciation of the market potential for LNG is crucial, given the massive initiaL capital outlays required and the need to capture quickly an adequate share of the industrial market in the face of competition from coal and LPG. The mission also noted that the magnitude of the organization,manpower and training problems in introducing natural gas may be understated. The establishment.and enforcement of stringent safety standards should also be a prime consideration in the organizational set-up.

Alternative Gas Options

3.39 Finally, alternative gas options warrant reevaluation in view of the mission's finding that (a) the estimated costs of a natural gas pipeline from Spain (over four times the cost of LNG terminal facilities) appear much too high; and (b) the use of LPG/air mixture has not been considered. This latter method has the advantage that it can be installed in relatively small units to serve individual towns/areas, thus obviating the need for expensive high pressure transmission systems.

Recommendations

3.40 Given the many uncertainties and inadequacies of the existing information, a comprehensive reevaluation of the natural gas option would be justified with particular reference to prospective demand at competitive prices (including relevant conversion cost), alternative options of gas supply and their costs and inistitutional/manpowerrequire- ments. Specific components of this reevaluation include:

(a) operating cost estimates for an LNG-bar-edgas supply system, taking account of the deficiencies identified by the mission. The review should include an analysis of LNG sources, with particular reference to the possibility of purchasing surplus LNG from existing plants, for example, in Algeria;

(b) a detailed market study, particularly of the industrial sector, to determine the potential market for natural gas in the short and medium term (for example, to 1990 and 1995), including the impact- on the petroleum products market and the pattern of refinery output;

(c) evaluation of alternative gas options including, in particular, LPG/air and piped natural gas from Spain. The LPG/air mixtures - 31 -

should be compatible with natural gas to facilitate subsequent conversion to the latter;

(d) based on the cost estimates for LNG and the alternatives, a preliminary study of the structure and level of gas prices to various categories of consumers;

(e) following the detailed market study, a preliminarydesign study of the gas transmissionand distributionsystem with due regard to storage requirements so as to optimize gas demand in relation to supply 12/;

(f) a study to determine whether local gas undertakings should be established based on LPG/air, as forerunners of a future national gas authority.

(g) a study of the organization, manpower and training requirements for a national gas industry. This should include a review of the adequacy of existing safety standards. 13/ 3.41 Further study is needed to reevaluate the gas option in its various aspects to determine the conditions of technical and economic feasibility and to define any subsequent studies as appropriate. The mission estimates that this study would require a gas industry specialist and an energy economist for a total of about 25 man weeks, at an estimated cost of US$90,C00.

12/ Since the Assessment Misbion (July 1983), two studies have been carried out -- one on the optimal pipeline design and another on storage options for security of supply.

13' Also since July 1983, some studies have been made on appropriate codes and safety regulationsfor gas system operations. - 32 -

IV. ENERGY PRICES

Overview

4.1 Given its dependence on imports for over 80% of its primary energy requirements, Portugal is a 'price taker' in that its ability to modify internal prices rests almost entirely with its fiscal ability to adjust ret;ailprices through indirect taxes and subsidies. The stated aim of the Portuguese Government is to remove energy subsidies in the sense of direct financial subsidies wherever possible. Because of the domestic system of pricing petroleum products on the basis of their f.o.b. costs in the Persian Gulf, the removal of financial subsidies is, by and large, equivalent to pricing energy products at, or above, their border prices. To this extent, Portuguese Government policy also entails the removal of 'economic' subsidies -- the difference between internal prices and the opportunity cost of energy products as measured by their border prices.

4.2 Tn July 1983, the prices of most petroleum products were raised for the third time since July 1982, thereby eliminating most of the financial subsidies (Table 4.2). ELectricity prices remain below the long-run marginal cost of supply but with the fuel price adjustment mechanism, final electricity tariffs are increased automatically, in addition to regular discrete tariff adjustments. EDP expects, witn Government support, to approach marginaL cost prices for electricity by 1988. This chapte-; reviews the evoLution of prices for all energy products, identifies remaining financial and economic subsidies and focuses on areas where further action appears warranted, particularly the pricing of town gas in Lisbon, electricity tariff distortions through non-compliance of municipaLities with national tariff rules, preferential treatment of fishing and agriculture through gas oil pricing, and the relative price distortion between gas oil and gasoline. The town gas pricing issue is related to one aspect of the proposed introduction of LNG into Portugal. The gas oil/gasoline pricing issue also relates to refinery policy in Portugal.

Petroleum Products

4.3 The Government sets both retail and ex-refinery prices for petroleum products and ex-refinery prices are based on an import parity system to encourage efficient refinery operations. For retail prices there is a differentiated structure, as in many middle-income developing countries: petroleum products for private use, such as gasoline, have been taxed heavily, while products like fuel oil and gas oil used in key economic sectors, such as industry and electric power, and in public transportation, have been less heavily taxed or in some cases subsidized. Another objective of Government petroleum pricing policy has been to generate substantial tax revenues for the Fundo de Abastecimento - 33 -

(Supply Fund), which is used to subsidize key commodities, including some petroleum products.

4.4 Since 1971, real petroleum product prices have increased at an annual average rate of some 5-6% for gasoline, 11% for kerosene, 9% for gas oil, and 11-12% for fuel oil. Prices rose relatively slowly in the early part of the period, particularly for kerosene, fuel oil and gas oil but acceLerated sharply after 1977 (Table 4.1).

Table 4.1: Petroleum Product Prices a/ 1971-83 (1981 escudos)

January January July Growth Rate, % p.a. 1971 1977 1983 1971-77 1978-83 1971-83

Super gasoline 32.80 37.20 56.87 2.1 6.8 4.6 Regular gasolin 28.30 31.90 54.84 2.0 8.8 5.6 Kerosene 9.30 8.50 31.48 -1.5 22.5 10.6 Gas oil 11.60 12.80 31.14 1.7 14.8 8.6 Fuel oil 3.30 4.30 11.90/13.20b/ 4.5 17.0/19.0 11.3/12.2 a/ Per liter, except for fuel oil, which is per kilogram. b/ For electricity/non-electricityuse.

Source: AnneY 4.1.

4.5 The Government's pricing formula for petroleum products (Annex 4.2), which has operated unchanged for a number of years, treats ex-refinery products as if they had been imported from the Middle East. The starting point is the price f.o.b. Persian Gulf, to which are added freight, insurance and an evaporation allowance, to obtain the price c.i.f. Portugal. Specified margins are added to the c.i.f. price for the oil companies' profit (about 15% of net assets in operation), distribution and retailing costs. Taxes comprise customs duty, a national tax and a "taxa de compensacao", in the form of a tax (or subsidy) paid into (or out of) the Supply Fund.

4.6 Traditionally, the most heavily taxed product has been gasoline, followed by gas oil (except for agricuLture and the fishing industry) and kerosene. Until July 1, 1983, the subsidized products comprised LPG, refining gas, naphtha (for fertilizers and town gas), gas oil for agriculture and fishing, and fuel oil. Since then, the price changes introduced by the current Government eliminated the financial subsidies for all except fuel oil, naphtha and refinery gas as feedstock for town gas and a negligible residual subsidy on bottled propane (Table 4.2). - 34 -

Table 4.2: Petroleum Product Prices, Taxes and Subsidies

June 30, 1983 July 1, 1983 Net tax (subsidy) Net tax (subsidy) Product Price Amount % Cost Price a/ Price Amount % Cost Price a/

Bulk butane, esc/kg 39.0 (2.3) (5.6) 45.0 3.7 9.0 Bulk propane, esc/kg 39.0 (0.4) (1.0) 45.0 5.6 14.2 Piped propane, esc/kg 41.5 (7.9) (16,0) 51.0 1.6 3.2 Bottled butane, esc/kg 39.0 (12.1) (23.7) 50.5 (0.6) (1.1) Bottled propane, esc/kg 40.0 (9.8) (19.7) 51.0 1.2 2.4 Super gasoline, esc/liter 74.0 44.7 152.6 84.0 54.7 186.7 Regular gasoline, esc/liter 70.0 43.7 166.2 81.0 54.7 208.0 Naphtha (fertiliser), esc/kg 20.0 (9.2) (31.5) 29.2 0.0 - Naphtha (town gas), esc/kg 3.6 (25.7) (87,7) 3.6 (25.7) (87.7) Kerosene (lighting), esc/liter 40.0 9.6 31.6 46.0 15.6 51.3 Kerosene (heating), esc/liter 41.0 8.5 26,2 47.0 14.5 44.6 Gasoil, b/ esc/liter 40.0 12.5 45.5 46.0 18.5 67,3 Fuel oil (electricity), esc/kg 17.5 (3.1) (15.0) 17.5 (3.1) (15.0) Fuel oil c/ (non-electricity) esc/kg 17.5 (3.1) (15.0) 19.5 (1.1) (5.3) a/ "Cost price" = Price plus net subsidy (or minus net tax). b/ Except for agriculture and fishing. c/ Fuel oil with 3.5% sulphur.

Source: Ministry of Energy and missior estimates.

4.7 The remaining subsidies and preferential arrangements call for the following comments:

(a) Fuel oil As a result of the latest reduction, the subsidy from the Supply Fund in 1983 is expected to be about US$87 million, compared to US$157 million in 1982. The Government intends to remove the remaining subsidy beginning 1984, which is desirable considering that the subsidy has (i) reduced net Government income from the Supply Fund and hence investible public sector savings; (ii) kept down electricity prices artificially, encouraging electricity consumption, with consequent demands on limited capital funds; (iii) subsidized some industrial production, notably cement; (iv) increased imports of fuel oil at heavy foreign exchange costs; and (v) discouraged energy conservation.

(b) Gas oil In the case of the fishing industry, the basic philosophy is that the industry should not pay the tax on gas oil, at present 18.5 escudos (Table 4.2). This is a protective measure for an industry in economic difficuLties as elsewhere in Europe. On this basis, the price would be 27.5 (instead of - 35 -

46.0) escudos/liter, but the actual price ranges from 27.04 to 27.41 escudos/liter. A smnalL net subsidy remains, and the estimated cost in foregone tax revenues ir about US$20 million for 1983. Agriculture receives a rebate on the fixed price. The rebate was five escudos/ liter before July 1, 1983 and is now 9.5 escudos/liter, giving an effective price of 36.5 escudos against 35 escudos/liter previously. The estimated cost to the Supply Fund in forgone revenue is about US$37 million p.a. at present levels of consumption.

(c) Naphtha The current net subsidy on naphtha for town gas is nearly 90% of the fixed price (Table 4.2). The estimated cost in foregone tax revenues is nearly US$8 million for 1983.

4.8 The latest price changes have continued to narrow the gap between the prices of gas oil and gasoline. During most of the 1970s, the trend was the other way, with the price of gas oil falling from 41% of the regular gasoline price in 1971 to 27% in 1976. In 1980, it was still below the 1971 ratio at 37%, but it has since risen to 57%. This is still a wide differential, providing a strong incentive to substitute gas oil for gasoline in transportation, which consumes nearly 60% of the gas oil. In order to partially offset this price differential, the Gov- ernment imposed a surtax on diesel vehicles; however, this tax has not kept pace with the widening relative price gap between the fuels.

4.9 Thus, between 1973 and 1982, gas oil consumption approximately doubled, from one million tpy to 1.85 million tpy, while chat of gasoline, having risen from 700,000 tpy in 1973 to 800,000 typ in 1975, subsequently declined and regained its 1975 level only in 1982. This demand pattern has exceeded domestic refinery capacity to suppLy gas oil, resuLting in additional gas oil imports amounting to 12% of total 1982 gas oil consumption, a situation which has also led PETROCAL to consider investment in a costLy hydrocracking facility to maximize refinery output of gas oil, taking into account the Government's policies for fuel oil substitution and gas oil pricing.

4.10 The July 1983 petroleum product price changes also have eliminated economic subsidies, except on naphtha for town gas and the small remaining subsidy on fuel oil.

4.11 The overall structure of prices for selected petroleum products is shown in Table 4.4. Gasoline remains the most heaviLy taxed product, followed by gas oil (except for agriculture and fishing) and kerosene.

Electricity

4.12 After declining in real terms during the earLy 1970s, electricity prices have risen since 1976, although the 1971 levels were not achieved again until 1980 in the domestic seccor and 1981 in the industrial sector (Table 4.5).&, The average tariffs presented in Table 4.5 - 36 -

disguise the fact that some municipalities outside EDP charge much lower tariffs. The Porto tariff, for example, was only about 60% of the EDP tariff in 1974 and in 1982 only 25%. The overall con,.tant price of electricity and the lower rates charged by some municipalities have contributed to the relatively rapid growth of electricity demand.

Table 4.3: Ratio of Domestic to Border Prices of Petroleum Products

Domestic/ C.i.f. Domestic Price c.i.f. Price Ratio Price June '83 July '83 June '83 July '83

Super gasoline, esc/liter 26.8 74.0 84.0 2.76 3.13 Regular gasoline, esc/liter 23.8 70.0 81.0 2.94 3.40 Kerosene, esc/liter 28.8 40.5 46.5 1.41 1.61 Gas oil, esc/liter 25.4 40.0 46.0 1.58 1.81 Fuel oil to electricity, esc/kg 19.8 17.5 17.5 0.88 0.88 Fuel oil to other uses, esc/kg 19.8 17.5 19.5 0.88 0.98 Naphtha to fertilizers, esc/kg 29.3 20.0 29.2 0.68 1.00 Naphtha to town gas, esc/kg 29.3 3.6 3.6 0.12 0.12 LPG, esc/kg 50.5 39.5 50.7 0.78 1.00

Source: Ministry of Energy and mission estimates.

Table 4.4: Petroleum Product Price Structure Selected Products, July 1983 (US$/metric ton) a/

Ex-Refinery Distribution Net Taxes/ Retail Product Price Margins (Subsidies) b/ Price

Super gasoline 372 23 736 1,131 Regular gasoline 345 24 722 1,091 Kerosene (lighting) 362 28 201 591 Kerosene (heating) 383 19 180 582 Gas oil c/ 314 18 224 55i6 Fuel oil (electricity) 203 2 (28) 177 Fuel oil (non-electricity) 203 2 (8) 197

a/ At US$1 = 99.068 escudos. b/ Includes customs duty, special national tax and "taxa de compensacao" (or subsidy) to (from) the Supply Fund. c/ Except for agriculture and the fishing industry. Source: Annex 4.2. - 37 -

Table 4.5: Electricity Prices, 1971-83 (1981 a/ escudos per kWh)

1st Qtr. 1971 1975 1980 1983

Domestic 3.505 2.556 4.136 4.920 Industrial 2.505 1.815 2.363 3.803

a/ Using GDP deflator. Source: Annex 4.3.

4.13 EDP's tariff takes into account marginal costs. Consumers are classified in four groups: low voltage (up to 1 kV); medium voltage (1-30 kV); high voltage (60 kV); and very high voltage (above 60 kV). Low-voltage (LV) consumers are further subdivided into two groups according to subscribed demand: above and below 13.6 kVA. Except for LV consumers below 13.6 kVA, all groups have a two-part tariff (demand charge and energy charge) with additional tariff structures (interruptible demand, time-of-day, etc.) also available at the customer's option. A fuel adjustment charge was introduced in 1977. Since 1978, EDP's tariff rates have increased at Least once a year by an average of about 35%, more than keeping up with inflation. Although each increase has moved prices closer to the long-run marginal cost of supply (LRMC), current rates still fall short of this level, with deviations in the order of 25- 29% for very high-voltage, 20-23% for high-voltage, 16-22% for medium- voltage, and 24-45% for Low-voltageconsumers (Annex 4.3).

4.14 EDP expects, with Government support, to approach full LRMC tariff rates by 1988. Table 4.6 shows the projected changes in prices designed to achieve this. Progress towards LRMC-based electricity tariffs is satisfactory,apart from a question mark concerning the cross- subsidization of low-voltage commercial and residential consumers (Annex 4.4). The real problems, which could seriously jeopardize EDP's achievement of 30% self-financing by 1986 as agreed with the Bank, do not concern the overall tariffs. The first problem arises from the failure of some municipalities supplied by EDP, but outside the EDP system, to adjust their own rates in line with the rates charged by EDP. This problem goes back to the time when some municipalities, notably Porto, were supplied with cheap electricity. Following the international oil price increases in the mid-1970s, these municipalities were faced with much higher rates, which many of them, especially Porto, chose not to pass on in their entirety to their customers and, from 1979, ignored completely. They were able to do this because the retaiL tariff rates approved by the Government set only upper limits, within which the municipalitieswere free to set their own tariffs and some municipalities failed to pay for supplies received from EDP. The result has been an increasing degree of de facto subsidization of electricity consumers in these non-compliant municipalities. The cumulative arrears of payments - 38 - due to EDP at the end of 1982 amounted to some 31 billion escudos (about US$300 million).

Table 4.6: Projected Electricity Rate Increases, 1982-86

1982 1983 1984 1985 1986

GDP deflator 100.0 120.0 141.6 164.3 187.3 Rate increase,%: (a) Discretionary 22.0 20.0 18.0 8.8 (b) Fuel price adjustment 12.1 12.5 6.5 5.9 Rate index 100.0 134.1 177.6 221.1 253.7 Unit revenue index a!: (a) Nominal 100.0 149.4 191.6 238.9 274.5 (b) Real 100.0 124.5 135.3 145.4 146.6 Real unit revenue increase,% 24.5 8.7 7.5 0.8 a/ Rise above rate index in 1983 is due to a payment by consumers to EDP from the Thermal Support Fund. Source: EDP.

4.15 A Government decree issued in 1982 required the non-compliant municipalitiesto raise existing prices for low voltage consumers by 25% on the basis of prices ruling on August 31, 1982, and again by 50Z of the August 31, 1982 price in April 1983. In July 1983, municipal tariffs were to rise by 20% of the difference between the national and municipal tariff prevailing in June 1983, provided the resulting increases were in the range 0.4 to 0.9 escudos/kWh. For customers supplied at other volt- ages, existing prices were to increase in 1982 by 50% of the difference between the prevailing national and municipal tariffs. By July 1983,all municipal tariffs were to be equivalent to the national tariffs. How- ever, a number of municipalities, accounting for about 9% of national electricity consumption, failed to implement this decree. Porto's share alone was nearly six percent. As of mid-1983, their average rates were mostly around half of the average EDP rates, but in the case of Porto, they were only about one-quarter (Annex 4.5). The resulting de facto subsidy to consumers in these municipalitiesis estimated to be at least 4.3 billion escudos for 1983 14/ (US$40 million). Porto, which accounts for nearly three-quartersof the total subsidy, was expected to increase its tariffs by 25% in July 1983. This would reduce the totaL annual subsidy to about US$32 million, and it was expected that it would be followed by further tariff action by Porto and the other municipalities to fulfill all the requirementsof the decree.

14/ Based on 1978 consumption data, the most recent availabLe. - 39 -

4.16 A second financial problem relating to electricity pricing concerns the operation of the Thermal Support Fund (TSF). This is supposed to compensate for shortfalls or excesses in actual electricity revenues compared with those projected, arising from the fact that EDP, in formulating each year's tariff rates, assumes hydropower output corresponding to average hydrological conditions. If actuaL output is above average, EDP will obtain more net revenue than projected, because the extra hydropower output will replace more costly thermal generation; if hydropower output is below average, EDP will suffer a loss of net revenue because more costly thermal output or additional imports of relatively expensive electricity from Spain will be needed. In years of above-average hydropower output, therefore, the surplus revenues are credited to the TSF, to be drawn on to compensate EDP for loss of revenue in years of below- average hydropower generation.

4.17 The TSF is designed to balance over a 30-year cycle. However, a succession of exceptionally dry years and low hydropower output has led to mounting deficits, which totalled 43 billion escudos (about US$400 million) at the end of 1982. EDP has had to cover these deficits by short-term borrowing at high interest rates. In 1982, EDP proposed that the arrangements be changed to permit EDP generation of sufficient revenues to cover interest and repayment of loans incurred on behalf of the TSF. If tariff increases to achieve this were not approved, EDP proposed that the difference would be made good to EDP by the Govern- ment. In addition, if the TSF had an operating deficit in any year exceeding 15% of EDP's electricity revenues in the previous year, EDP should be authorized to immediately apply a provisional 10% increase in tariff rates until the deficit was fully recovered.

4.18 No definitive action had been taken on this proposal at the time of the mission, but the new Government intended to issue a decree to segregate the TSF accounts from those of EDP and empower the Ministry of Energy to approve a tariff surcharge to cover the TSF deficit within five years, whenever the accumulated deficit amounted to 15% or more of EDP's electricity revenues in the previous year. In addition, the Government would be responsible fo:- ensuring that loans were available to the TSF whenever necessary. These arrangements should resolve tne financial problems which the past operation of the TSF has catsed for EDP.

Coal

4.19 Almost all domestic coal production is sold directly by the state company, Empresa Carbonifera do Douro (ECD), to EDP for electricity generation. The contract requires ECD to seLl, and EDP to buy, 170,000- 230,000 tonnes of coal from the Pejao mine near Porto, at a price related to ECD's manpower and 'major' materiaL costs. The coal price may not, however, rise above the equivalent value of fuel oil, the dominant fossil fuel input for electricity generation in Portugal. The relevant fuel oil price is the official administered price, the subsidy element of which is shortly to be phased out. The coal price paid by EDP to ECD is regulated - 40 -

by the Government and has in the past restricted ECD's ability to make profits for reinvestment in projected coal schemes in Portugal. 15/

4.20 As shown in Table 4.7, the relationship between the domestic price for coal and world prices for coal and fuel oil have been substantially altered by international and internal price changes as well as exchange rate movements. The recent trend of domestic coal prices shows that domestic coal has been priced significantly lower than fuel oil on a heat equivalent basis, about 30% less in 1983. Compared to imported coal on a similar basis, the domestic coal price was slightly above the c.i.f. value of imported coal during 1979-81, with the latter likely to have been more expensive, including the additional handling and inland transportation charges that would have been required for its use. However, in 1982 and 1983, the c.i.f. price of imported coal fell significantly below the domestic coal price by 19% and 22%, respectively. However, at the same time, the price of domestic coal appears too low to provide a satisfactory return to ECO. Whether, therefore, this coal should continue to be produced is essentially a question of the social costs and benefits involved, a detailed study of which is outside the scope of the present report.

4.21 In addition to coal in Pejao, there are lignite deposits at Rio Maior, with an average calorific value (c.v.) given as 1,283 kcal/kg. A previous Bank mission put the 1981 cost of producing this lignite at US$21/tonne. Based on a c.v. of 6,670 kcal/kg for imported thermal coal, the cost of producing this lignite would be nearly US$110 per tonne. This compares with the current price of about US$56/tonne for imported thermal coal (Table 4.7), making the use of Rio Maior lignite for electricity generation, the only major possible use, clearly uneconomic.

Town Gas

4.22 In 1982, about 60% of households in Lisbon, (or 180,000 resi- dences) were supplied by town gas, mainLy for hot water and cooking. The gas is manufactured from refinery gas and naphtha by the state company Petroquimica e Gas de Portugal (PGP) and distributed by EDP (Annex 4.7).

15/ It should be noted that there are currently no other markets for the coal, as its high ash content (about 40%) and local transportation inhibit competitiveness in other local markets. The 150-MW Tapada do Outeiro power plant, the sole user of the coal, is about 20 years old, and uses a 50/50 coal/fuel oil mixture. It is expensive to operate and is primarily used to provide power in dry years when hydro electric capacity is low. There is not much scope for increasing the domestic coal share in the fuel mix which, given the coal's poor quaLity, would lead to technical difficulties and increased operating and capitaL costs. - 41 -

Table 4.7: Prices of Domestic Coal, Imported Coal and Fuel Oil, 1979-83

1979 1980 1981 1982 1983

Price, escudos/tonne Domestic coal a/ 1,317 1,707 2,483 3,808 5,314a/

Imported coal 2,200 2,650 3,997 5,024 6,776 Fuel oil 4,000 5,500 9,000 13,500 17,500

Price, US$/tonne fuel b, oil equivalent c/ Domestic coal 63.1 79.9 94.5 113.6 102.8 Imported coal c/ 64.7 76.2 93.5 92.1 80.6 Fuel oil 81.8 110.0 146.3 171.9 144.6

a/ Price paid by EDP to ECD, excluding taxes. b/ At annual average exchange rates, except for 1983, which is the average for July 1983 (121 escudos = US$1). c/ Assuming c.v. of 9,600 kcal/kg for fuel oil, 6,670 kcal/kg for imported coal and 4,100 kcal/kg for domestic coal. Source: EDP and ECD.

4.23 The upper limit on the price of town gas is set by LPG prices because of the substitutability of the two fuels. The 1982 price structure was as follows:

Escudos/m3 Percent

Price to PCP 4.71 49.0 EDP's net margin 4.48 46.6 Supply Fund tax 0.43 4.4 Price to consumer 9.62 100.0 EDP's net margin is used to meet all the distribution costs.

4.24 Town gas is heavily subsidized through the Low prices paid by PCP for the refinery gas and naphtha used in its manufacture. The refinery gas price of 5,000 escudos/tonne is only about 13% of its estimated economic cost of 37,630 escudos/tonne, and the naphtha price of 3,600 escudos/tonne is only about 12% of its normal price of 29,263 escudos/tonne. Assuming the 1980 tonnages of 32,000 tonnes of naphtha and 31,000 tonnes of refinery gas, the total subsidy in 1983 would be - 42 -

1,833 million escudos 16/ (US$18 million). At estimated sales of 137 mi 1.on s3 , to remove the subsidy the current gas price of 16.5 escudos/m would have to increase by 13.4 escudos (81%) to 29.9 escudos, or 29.5 escudos if the Supply Fund tax were eliminated. No such price rise could be effective without a corresponding increase in LPG prices, which are at approximace parity with town gas. However, because 80% of LPG is sold outside Lisbon, this would largely penalize consumers who have no effective choice of fuels.

4.25 One proposal is to substitute LNG for naphtha as feedstock, but this assumes the proposed LNG project goes ahead. Tentative costings, on fairly optimistic assumptions about the cost of LNG, suggest that this option would still result in a town gas price that, in the absence of any subsidy, would be substantially above the price of LPG, so that the dilemma of either continuing the large town gas subsidy or a steep rise in the price of LPG would remain unresolved.

Pricing Issues

4.26 The Government's pricing formula for petroleum products gives rise to several problems. The first is that some of PETROCAL's costs are not included, notably the cost of borrowing to pay for crude oil imports, as well as the foreign exchange risk on these borrowings. PETROGAL is also required to use Bank of Portugal 180-day credit notes, which are too "long" for PETROGAL's needs, while the interest rate may be higher than what PETROGAL could obtain elsewhere. These 'imposed' costs are substantial. The accounts of PETROCAL do not reveal losses because 'one-off' adjustments are made at the end of the financial year, but for the year ending October 1982 the loss reported to the mission was 11 billion escudos (about US$140 million), which is likely to rise to some 20 billion escudos (about US$220 million) in 1983. These losses include continued nonpayment of monies owed to PETROGAL so that the exact role of the financing cost is difficult to assess.

4.27 Under the Bank Petroleum Exploration Project (Loan 2024-PO) the Government agreed to ensure that ex-refinery prices would be adjusted as necessary to cover the full costs of efficient purchasing and refining of crude oil, including net financial costs. As of July 1983, the pricing formula had not yet taken all these considerations into account. PETROGAL now has proposed a revised formula for pricing up to the point where the "taxa de compensacao," for which it has no responsibility, is applied.

4.28 The problem of PETROGAL's financing costs raises the wider question of the appropriate economic foundation for the pricing formula for petroleum products. What it effectively does is to ensure that

16/ [31,000 x (37,630-5,000)+ 32,000 (29,263-3,600)] escudos. - 43 -

product prices in Portugal reflect border prices unLess the "taxa de compensacao" is used to subsidize the product. In July 1983, most of the remaining subsidies were removed, so that most domestic petroleum product prices equal or exceed, border prices. However, the formula makes little allowance for actual refinery costs other than through the various commercial margins (Annex 4.8). With 50% utilization of refinery capacity, it would be surprising if the reported losses by PETROCAL were not also reflecting high unit costs of operation.

4.29 The continuing price preferences for gas oil in agriculture and the fishing industry are costly (about US$60 million p.a.) in terms of revenue foregone to the Supply Fund. Their impact on the costs, prices and international competitiveness of these industries is not known, but their removal clearly would be politically sensitive.

4.30 Although it has been narrowing, the gap between the prices of gas oil and gasoline remains wide in favor of gas oi.. This gives the wrong signal to consumers regarding the economic cost.sof gas oil consumption, arising from (a) the need to import gas oil as a finished product (12% of 1982 total consumption); (b) the encouragement to use heavy vehicles with consequent road track costs; (c) the environmental costs in terms of diesel exhaust emissions and noise in urban areas; and (d) increased urban congestion through the encouragement given to using private vehicles and taxis over public transport.

4.31 The present configuration of refinery output in Portugal, which is heavily weighted towards fuel oil (43%) and gas oil (25%), is likely to be inconsistent with the future pattern of demand, as fuel oil prices rise internally and coal substitution takes place. The decision of whether or not to install a hydrocracker to meet anticipated increases in gas oil demand has been postponed pending further study by PETROCAL.

4.32 The main outstanding issue on electricity prices is that of the municipalities which manage their own distribution systems. Effective Government action to deal with this is now established by legislation, but it will be important to ensure that the momentum is maintained in order to stop the accumulation of arrears to EDP, bring electricity rates in these municipalities in line with those of EDP as quickly as possible, and regularize the payment of amounts past due.

4.33 The contir.uing subsidy to town gas is costly in relation to the relatively small number of consumers supplied. It is not clear whether alternatives to the present arrangements have been properly considered.

Recommendations

4.34 The mission's recornmendations on these pricing issues are as follows:

(a) The long standing negotiations for revising the ex-refinery pricing formula should be concluded, and a formula agreed upon which would assure full cost recovery for efficient importing - 44 -

and refining of crude oil by PETROGAL. This should include net financial costs, the treatment of the foreign exchtangerisks and interest on arrears in payments to PETROGAL from the Foreign Exchange Risk Fund and the Supply Fund. Thereafter, this should be reflected appropriately in the accounts of all concerned parties.

(b) To narrow t'ae gap between gas oil and gasoline prices, the price of gasoline should be held constant in real terms while the price of gas oil should be allowed to rise closer to that of gasoline with the objective of eventual parity, particularly if Portugal joins the EEC. At the same time, a study should be undertaken on the implicationsof a closer aLignment of gas oil and gasoline prices, with particular reference to the impact on modal choice of transport and the associated costs and benefits. Suggested terms of reference are attached (Annex 4.8). tc) The system and procedures of the gas oil preferences to agriculture and the fishing industry should be examined with a view to reducing the net fiscal costs involved.

(d) Refinery policy in Portugal should be reviewed in light of a detailed forecast of petroleum product demand; special reference should be given to different scenarios on relative prices of petroleum products resulting from the recommended removal of subsidies on gas oil and action on the relative prices of gas oil and gasoline. The option of importing refined products as an alternative to the proposed hydrocracker should be properly evaluated.

(e) The Government should ensure timely implementation of the program as legislated regarding the introduction of a uniform national electricity tariff and regularization of the arrears owed by the municipalities to EDP.

(f) In view of the costs of the subsidy on town gas, a small technical study should be undertaken to evaluate alternatives to the present arrangements. Suggested terms of reference are attached (Annex 4.9). - 45 -

V. ENERGYCONSERVATION IN THE TRANSPORTATIONSECTOR

Overview

5.1 The transportation sector is second only to industry as an energy user, accounting for 29% of final energy consumption in 1982 and 39% of petroleum consumption, compared to 45% and 41%, respectively, in industry (Annex 1.1). Given its almost complete dependence on petroleum (99%), the sector is expected to become the main consumer of petroleum products. Transportation is, therefore, a key sector for any energy conservation program, particularly since short-term measures can produce immediate effects in reducing erqrgy consumption. The main focus must be on road transportation as this accounts for 83% of final energy consumption for transportation(Table 5.1).

Table 5.1: Energy Consum2tion inTransportation. 1980

'000 toe z

Aircraft 203 9 Marine 110 5 Rail 77 3 Tramways 5 - Road 1,878 83 2,273 100

Source: Ministry of Energy.

Road Transportation Trends

5.2 The present road vehicle fleet comprises 1.371 million vehicles, 1.04 million private cars, and 331,000 light and heavy commercial vehicles. New car registrations increased rapidly in the early 1970s to about 90,000 p.a. in 1972-1974, but are now 70,000-75,000 a year. Annual registrations of light commercial vehicles rose from 7,500 in 1970 to 42,000 vehicles in 1981, and are currently 39,000 a year. Heavy truck registrations rose from 3,000 in 1970 to 9,000 in 1981, but have since tended to decline (Annex 5.1). 5.3 The average mileage by private cars appears to be declining; the estimated figure for 1983 is 10,000 km compared to 12,000 km for earlier years. 17/ For commercial vehicles the trend has been upwards, reflecting more "empty" vehicle journeys as a result of the general re- cession and the excess of transportationsupply over demand.

17/ Transport Sector Memorandum, World Bank, August 1983. - 46 -

Private Cars

5.4 According to the latest information available (1979), the private car accounts for 62% of passenger traffic, the railways and public buses for 16% each and light goods vehicles for the remaining 6% (Annex. 5.2). The average age of the private cars is high, over 76% being more than six years old. The renewal period for the car pooulation is about 20 years, compared with ten years in France. The proportion of diesel cars has increased rapidly in the last ten years and is now 7% of the total, reflecting the increased rate of diesel car sales (5% of car sales in 1970, 10% in 1981). An estimated 50% of the road mileage covered by cars occurs in urban and suburban aretas,which translates into about 60% of total fuel consumption by cars, allowing for the higher consumption per kilometer in town driving. Despite the high average age of the cars, there is no technical inspection of vehicles to ensure they are in satisfactory condition. Public Road Transport

5.5 The state enterprise Rodoviaria Nacional 18/ (RN), with its 3,000 vehicles, handles most passenger traffic by public road transport. The present average age of its fleet is 8.5 years, but a renewal program is expected to replace 38% of the vehicles by 1986.

5.6 After a period of decline, public road transport in Lisbon has increased the number of passengers carried by 43% since 1975. It now handles about two-thirds of the total passenger traffic in the Lisbon area, carrying 1.925 million passengers/day, mostly by bus (66%), followed by the underground railway (22%) and electric trams (12%). This increase in traffic was secured by a series of measures which improved employee productivity by 16% and increased the average speed from 13.2 to 15 km/hour. The measures included restructuring and additional routes, modernization of the fleet, a halt to the abolition of tramways, provision of better information services, the issue of tickets valid for use on all city transport services and reorganizationof the Lisbon transport company CARRIS. However, since 1979, the Lisbon public transport system has deteriorated because of a failure to keep pace with the growth of demand and increasing road congestion from private cars. Road Freight Traffic

5.7 The annual volume of freight transported is estimated at 11.4 billion tonne-kilometers,of which 92% is by road and 8% by rail. The great bulk of the road traffic is handled by companies' own vehicles. Only 10% of commercial vehicles are owned by specialized transport companies. Most of these are very small, two-thirds of them operating

18/ National Road Services. - 47 - only a single vehicle. The road freight market is badly organized and subject to complicated regulations. There is overcapacity, an!d 45% of journeys are made by empty vehicles, with the resulting waste in fuel.

Fuel Consumption for Road Transportation

5.8 After following similar trends from 1960 to 1973, the consumption of gasoline and gas oil has since diverged considerably (Annex 5.3). Gasoline consumption rose from about 700,000 tonnes in 1973 to 800,000 tonnes in 1975, but then declined, only regaining the 1975 level in 1982. Taken in conjunction with the increase in the number of private cars since 1975, and the increasing proportion of diesel cars, this trend confirms the decline in average mileage per vehicle. The consumption of gas oil, on the other hand, has risen sharply -- from about one million zonnes in 1973 to just over 1.85 million tonnes in 1982. Transportation accounts for 62% of this total, nearly all of it (93%) for road vehicles (Table 5.?).

Table 5.2: Gas Oil Consumption in the Transportation Sector, 1980

Percent

Coastal shipping 2 Railways 5 Road vehicles 93 of which: Heavy trucks 35 Public transport 9 Light trucks a! 36 Private cars b/ 13

a/ Up to 3.5 tonnes. b/ Including taxis. Source: Ministry of Energy.

Railway Transportation

5.9 Passenger rraffic accounts for most of the business of the national railway company (CP). The numbers carried rose from about 170 million in 1974 to 210 million in 1982, after peaking at 215 million in 1981. CP projects an increase to over 250 million by 1988. The suburban lines of Lisbon, Porto and Coimbra carry more than 80% of the passengers. The inter-city lines suffer from an inadequate volume of traffic, resulting in poor economic performance and inefficient use of energy. Only the Lisbon-Porto line, with an electrified double track, carries a significant volume of traffic (60 million passengers p.a.). - 48 -

5.10 The railway's share of freight traffic is even less than its share of passenger traffic. In 1982, it carried about 3.5 million tonnes, which was below its 1982 level, but CP's current projection shows it nearly doubling by 1988.

Transportation in the National Energy Plan

5.11 According to the PEN reference strategy projection, energy consumption in the transportation sector is expected to increase 42/ during the 1980s (Table 5.3). This projection seems high considering that consumption in the sector grew by only 1.5% in 1981 and actually declined in 1982. One reason is the unrealistically high economic growth rates assumed in the PEN reference strategy (para 3.2), but another is the relatively small improvement which PEN assumes in the efficiency of energy utilization in the transportation sector, (i.e. in the proportion of final energy converted into useful energy) -- only 3.3% by 1985 and of 20% by 2010 (Table 5.3). These are very low, given the reduction in consumption attainable through vehicle renewals alone.

Table 5.3: Energy Consumption in the Transportation Sector, 1980-2010 ('000 toe)

1980 (actual) 1985 1990 2000 2010

PEN Reference projection 2,453 2,920 3,480 4,780 6,850 Efficiency improvement % (compared with 1980) 3.3 20.0 Consumption at 1980 efficiency 3,016 8,220 Projected PEN saving 96 1,370 Saving, % 3.2 16.7

Source: National Energy Plan (1982 version).

5.12 PEN assumes that energy savings in the transportation sector, as in the industrial sector, are a function of investment in conservation and that the marginal cost per annual toe saved rises as the total savings to be secured increases. PEN estimates the marginal cost of achieving the projected 1985 annual savings of 96,000 toe at 13,000 escudos per annual toe and the total cost at 600 million escudos (at 1980 prices). However, the analogy with the industrial sector is not very helpful for evaluating the scope for energy savings in transportation, and the purported relationship between marginal investment costs and energy savings has no direct relevance to how fuel consumption can actually be reduced in the transportation sector. - 49 -

5.13 Finally, the PEN analysis of the factors determining energy consumption in the sector in the long term (i.e., by 2010) does not take into sufficient account the structural factors affecting the long-term demand for energy such as town and country planning policies, the policy of decentralization, changes in life-styles and deveLopments in telecommunications and information technologies.

5.14 In the mission's view, future energy requirements in the transportation sector are likely to be significantly below those in the PEN projection, assuming a satisfactory energy policy, particularly with respect to energy conservation, and the probability of lower rates of economic growth than assumed in the PEN reference strategy. The following is suggested as a plausible range of values, the lower end assuming an intensive energy conservation policy, while the upper end assumes a more moderate conservation effort, with the main savings resulting from the replacement of old by new vehicles:

million toe

1990 2.7 - 3.0 2000 3.6 - 4.0 2010 4.4 - 5.0

Major Issues

5.15 Although the PEN report recognizes the importance of fuel savings in the transportation sector, there is no clearly defined conservation policy for achieving them. A successful conservation policy will depend in part on effective political direction and coordination, which could be improved, given that:

(a) Central responsibility is divided between the Ministries of Transport and Energy, and coordination and working liaisons are weak;

(b) Within the Ministry of Transport, liaison between the depart- ments concerned respectivelywith the different transport modes and with traffic movements could be improved;

(d) Regional and local officials need to become more involved in the problems of energy consumption in transportation, and develop means for effective action;

(e) The municipalities responsible for urban traffic and parking problems lack the expertise for integrating the energy dimension into their decision processes; and

(f) Finally, the road haulers are not aware of the scope for reducing fuel consumption. - 50 -

5.16 There is no technical regulation of vehicles. Considering the high average age of vehicles, a system of vehicle inspections would reduce fuel consumption, air pollution and the high level of road accidents (three times as high as in France and one-and a-half times as high as in Spain).

5.17 After some improvement in the mid-1970s, the quality of the public transport networks in Lisbon has begun to deteriorate since 1979. The transport services have not kept pace with population growth. The congestion caused by private cars is a major obstacle to any improvement in the efficiency of public transport, as evidenced by a virtual tripling of the number of kilometers lost by public vehicles for this reason over the last five years (from 250,000 km in 1977 to 692,000 km in 1982).

5.18 An effective system of planning is required to deal with these public transport problems but this does not exist because of the policy of regional decentralization, the absence of a defined transport policy, particularly for route management, and the constant changes in the poLicy of financing public transport.

5.19 The road haulage market is badly organized and inefficient. There is overcapacity, leading to underutilization, relatively low annual mileage, poor rates of return and hence an inability to invest in new, more efficient vehicles, an increasing percentage of "empty" journeys, and excessive fuel consumption. At the same time, the lack of intramodal and intermodal coordination of the transportation of goods has unfavor- able consequences for the railways.

5.20 The general crisis in the road haulage part of the sector has had the further undesirable effect of pushing into the background any concern about reducing fuel consumption. Although fuel accounts for 28% of the total cost per kilometer, there is no explicit action program to reduce fuel costs.

5.21 The large price advantage of gas oil over gasoline (para 4.8) has no economic justification. A special tax on diesel cars is supposed to compensate for this differential, but the amount of the tax has not kept pace with changes in the prices of the two fuels (Annex 5.4). Be- tween 1976 and 1979, the price gap widened from 11.50 to 26 escudos per liter, but the compensatory tax on diesel cars remained unchanged at 18,000 escudos. 19/ This is likely to have contributed to the ropid increase in the share of diesel cars in total new registrations, ft-m 4.6% in 1975 to a peak of nearly 15% in 1978.

19/ This highlights the need discussed in para. 5.15 (c) for the Ministry of Finance to set fuel taxes with regard to their broader energy policy implications. - 51 -

5.22 The mission's recommendations are designed to further the following main objectives of energy conservation in the transportation sector:

(a) To regulate fuel consumption in the sector by (i) reducing the unit consumption per passenger/km and per tonne/km, (ii) opti- mizing traffic volumes and the length of journeys through an appropriate land use policy and improved systems of production; and (iii) progressively influencing consumer demand towards the most economic modes, taking account of social and economic costs.

(b) To reduce the excessive dependence of the sector on hydro- carbons by (i) developing the use of electricity by promoting modes which use this form of energy, and (ii) encouraging research to find partial or complete substitutes for petroleum fuels.

(c) To ensure the safe and reliable operation of the transport system in all circumstances. This aspect is not examined here but is covered in the terms of reference Eor the proposed follow-up study (Annex 5.5).

Recommendations

(a) An inter-ministerial commission should be appointed with the responsibility for establishing coordinating machinery with respect to energy conservation in the transportation sector. rts main functions will be to define: (i) the form of a per- manent body responsible for an energy management plan in the transportation sector; (ii) the scope of action and powers of this body; and (iii) arrangements for collecting reliable statistical information on energy consumption and trends in the sector by mode, type of usage etc. and establishing methods for evaluating the results of policy measures.

(b) A phased program should be introduced for regular vehicle inspections, initially on a voluntary basis. In addition, vehicle suppliers should be required to publicize the fuel consumption of new vehicles (e.g. in accordance with EEC standards), and a study should be undertaken of the merits of fixing license fees for vehicles according to their fuel consumption.

(c) Trucks and buses should be fitted with modern control equipment for measuring consumption of fuel (Annex 5.6), possibly in connection with the regulation of drivers' working hours (e.g. if Portugal joins the EEC), which would require such equipment.

(d) The procedures for fixing speed limits should be simplified and effective control measures established. This should help to reduce the number of traffic accidents. - 52 -

(e) Urban car traffic and parking should be more strictly controlled, road space reallocated in favor of public transport, and the use of electrical transport modes promoted.

(f) Goods transportation should be improved through: (i) a more rational organization of goods deliveries in towns by grouping light-weight truck operators; (ii) the establishment of "freight offices" or information systems to optimize vehicle movements and reduce the number of empty return journeys. This could be accomplished along the lines of the system recently introduced in France (Annex 5.7); (iii) a review of the present conditions of railway freight traffic; and (iv) a study of the merits of developing combined forms of transport (by containers and trailers) for long journeys.

(g) The present differential between the prices of gas oil and gasoline has no economic justification, as the energy advantages of diesel cars are a sufficient incentive to gas oil demand. The prices of gas oil and gasoline should be progressively aligned while making corresponding reductions in the compensatory tax on diesel vehicles. The aim should be to reach parity by 1990, which would bring Portugal into line with Austria, Switzerland, the Federal Republic of Germany and the U.K. (Annex 5.8). In particular, if Portugal joins the EEC, then under the "value-added tax" regime, operators of diesel commercial vehicles would have a refund of the tax, equal at present to 18.6% of the final price of gas oil, so that they would still be paying only about 80% of the gasoline price.

(h) The Government should carry out publicity campaigns to educate the public about the energy and financial costs of transportation, emphasizing the economic advantages of pu'lic transport in urban areas and the high cost of short journeys by private car.

(i) Training courses in good driving practices should be introduced for new drivers, who should also be given some elementary mechanical instruction to encourage an interest in driving skills and regular vehicle maintenance.

(j) Regarding inter-city traffic, equitable competition should be encouraged among different modes. In particular, the operation of the seccndary railway lines should be reviewed to def:ne an economic system of operation. A new, smaller energy-saving type of train ("rail bus") should be introduced in due course on these lines.

(k) A follow-up study should be undertaken to establish the feasibility of the proposed measures and assist in their implementation (Annex 5.5). The proposed technical assistance would require 70 man-weeks at an estimated total cost of US$280,OO0. - 53 -

Costs and Benefits

5.23 The estimated capital costs of the recommended measures to reduce energy consumption in the transportationsector total about US$80 million (Annex 5.9). The costs of control equipment in trucks and buses account for US$75 million, with an estimated payback period of two to four years. The estimated benefits in terms of fuel savings amount to 225,000 toe p.a. (Annex 5.9), representinga savings of about ten percent on the present level of consumption of petroleum products in the transportation sector. At 1983 prices, this would mean an annual saving of about US$50 million, all in Eoreign exchange. This does not count other benefits of the proposed measures suichas reductions in traffic accidents and air pollution. The proposed follow-up study (Annex 5.5) will define a feasible action program more precisely and develor specific benefit/ cost calculations. ANNEX 1.1 Page 1

Energy Consumption and Supply. 1965-80 ('000)

1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

I. Final energy consumption 3706 5136 5449 5842 6259 6380 6575 6818 7309 7593 8046 8454 8823 8994 of which: (1) By Sector Households & services a/ 889 1054 1784 1603 1628 Industry & construction 2155 2555 3241 3763 4007 Transportation 1641 2222 2453 2451 2647 Agriculture & fishing 334 321 456 540 382 Non-energy uses 430 423 520 276 330 (2) By Form of Energy Petroleum products 3786 4217 4609 4731 4871 5065 5386 5516 5847 6056 6480 6754 Coal 397 314 295 229 259 253 287 286 280 126 184 166 Electricity 583 638 701 768 797 858 965 1047 1150 1233 1250 1323 Gas 63 68 75 72 75 73 72 76 74 59 57 57 Wood 620 605 580 580 575 570 600 667 696 980 852 694 II. Intermediate Consumption a/ 314 834 825 884 979 1092 1382 1424 1221 1308 1525 1654 2477 3186 III. Primary Energy Supply Internal production 1132 1296 1379 1419 1389 1420 1316 1164 1623 1757 1829 2027 2144 2347 Net imports 2923 4770 4911 5226 5693 6135 6404 7350 7179 7064 8747 8081 8662 9716 Changes in stocks c/ 35 96 16 (81) (156) 83 (237) 272 272 (80) 1005 - 142 117

Total primary energy supply 4020 5970 62?4 6726 7238 7472 7957 8242 8530 8901 9571 10108 11300 12180 of which: Petroleum 4511 5003 5454 5755 6316 6618 6633 6805 7399 7965 8637 9327 Coal 473 417 487 385 397 391 401 432 434 213 326 350 Hydroelectricity 549 619 631 682 571 569 814 916 950 851 1483 1809 Wood 622 687 666 650 673 664 682 748 788 1079 852 694 Industrial Residues 119 Commercial primary energy supply.d/ 5533 6039 6572 6822 7284 7578 7848 8153 8783 9029 10448 11486 a/ Services comprise public administration, commercial establishments (including banks, insurance companies, etc.), schools, hospitals, hotels and restaurants. bJ Intermediateconsumption = energy consumed by the energy sector in the conversion, transport and distributionof energy. c/ Stock changes in parentheses denote reductions from additions to stocks. dJ Commercial primary energy supply = total primary energy supply, less wood and industrial residues.

Source: National Energy Plan, 1982 Version; DGE. ANNEX 1.1 Page 2

Energy Consumptionand Supply, 1965-80

Ratios and Percentages 1965 1970 1971 1973 1975 1980 1981 1982

Primary Energy Supply, % Shares Net imports 72 79 78 80 85 80 77 80 Intermediateconsumption 8 14 13 14 17 16 22 26 Energy Source: Petroleum 71.9 75.4 79.4 78.8 76.5 76.6 Coal 7.5 6.7 5.0 2.1 2.9 2.9 Hydroelectricity 8.8 8.7 7.2 8.4 13.1 14.8 Wood 9 91 9.2 7.2 9.7 7.5 5.7 Industrialresidues 1.9 1.2 1.0 Final Energy Consumption,% Shares (1) By Sector Households & services 16.3 16.0 21.1 i8.6 18.1 Industry & construction 39.6 38.9 38.3 43.5 44.6 Transportation 30.1 33.8 29.0 28.4 29.4 Agriculture& fishing 6.1 4.9 5.4 6.3 4.2 Non-energyuses 7.9 6.4 6.2 3.2 3.7 (2) By Form of Energy Petroleum products 69.5 73.6 74.1 71.6 73.4 75.1 Coal 7.3 4.7 3.9 1.5 2.1 1.9 Electricity 10.7 11.2 12.1 14.6 14.2 14.7 Gas 1.2 1.2 1.1 0.7 0.6 0.6 Wood 11.3 9.3 8.8 11.6 9.7 7.7

Ratios

Primary ene:gy cons./cap.,toe 0.48 0.7b 0.74 0.84 0.87 1.08 1.19 1.28 Final energy cons./cap., toe 0:.': MA3 0.64 0.73 0.72 0.89 0.91 0.95 Primary energy intensity, toelmill. esc. a/ (a) Total ftnal energy 8.01 8.84 8.66 8.22 9.38 9.20 10.10 10.60 (b) CommercialPrimary Energy b/ 7.64 7.47 8.49 8.22 9.35 9.98 Final energy intensity, toe/mill. esc. a/ (a) Total final energy 7.39 7.61 7.52 7.11 7.67 7.70 7.72 7.81 (b) Commercialfinal energy b/ 6.67 6.45 7.00 6.81 6.96 7.21 a/ At 1980 prices. b/ Excludeswood and industrialresidues. .. Not available.

Source: National Energy Plan (1982 Version), Bank Economic Reports DGE and Mission estimates. - 56 -

ANNEX 1.1 Page 3

Portugal Energy Balance: Actual 1982 ('000 toe)

Solid Fuels a/ Oil Gas b/ Hydro Electricity Total GROSS SUPPLY Production 794 - - 1,553 - 2,347 Imports 267 9,871 - - 290 10,428 Exports - -251 - - -34 -285 Bunkers - -427 - - - -427 Stock Change 17 +134 - - - 117

Total 1,044 9,327 - 1.553 256 12,180

CONVERSIONS -184 -2,573 57 -1,553 1,067 -3,186 Elect. Production -142 -1,828 - -1,553 3,523 c/ 0 Gas Production - -60 58 - -3 -5 Oil Refining - -672 - - -20 -692 Losses/Energy Sector Use -42 -13 -1 - 2,433 -288

FINAL DEMAND 860 6,754 57 - 1,323 8,994 Industry 506 2,743 3 - 755 4,007 - Iron/Steel 127 41 - - 44 212 - Non-Ferrous Metals 33 8 - - 79 120 - Chemicals 37 807 - - 109 953 - Non Metallic Minerals 188 853 - - 106 1,147 - Others 121 1,034 3 - 417 1,575 Transport - 2,625 - - 22 2,647 - Road - 2,064 - - - 2,064 - Other - 561 - - 22 583 Commerce/Services 3 206 12 - 231 452 Households 351 478 42 - 305 1,176 Agric./Fishing - 372 - 10 382 Non-Energy Use 330 - - - 330

Notes:

A/ Supply breakdown estimated as follows: Fuelwood, 694,000 toe and coal 100,000 toe. Detailed breakdown of demand not available. b/ Town gas from naphtha and refinery gas. c/ Corresponds to total generation of 15,370 GWh including 7,810 GWh from petroleum products, 6,950 GWh from hydropower and 610 GWh from coal.

Source: Portugal, Doc. IEA SLT (83) 30, 1st revision; mission estimates. Ah'NEX1.2

Consumption of Petroleum Products, 1960-1982 (tonnes)

Heavy Year Propane Butane Gasoline Naphtha Kerosene Diesel Fuel Oil

1960 5,449 30,221 203,599 11,942 156,223 304,905 439,428 1961 8,381 43,765 211,177 17,769 144,421 334,494 462,089 1962 11,177 54,985 223,829 53,504 140,279 345,105 499,290 1963 15,206 67,235 231,322 8B,529 135,058 364,887 561,362 1964 18,680 84,302 255,581 124,596 127,014 419,484 575,949 1965 23,440 98,349 281,386 143,577 120,561 448,457 619,271 1966 28,039 118,416 312,035 145,667 111,507 494,399 617,696 1967 34,825 132,473 346,762 149,120 99,906 542,325 716,034 1968 44,882 152,660 377,112 156,209 95,770 574,580 814,677 1969 55,990 174,610 428,436 217,960 89,376 855,301 797,758 1970 68,061 186,837 478,273 219,484 82,992 715,378 1,039,555 1971 86,956 t 217,282 553,358 286,695 72,424 814,433 1,420,145 t 1972 103,388 234,163 612,853 283,001 70,951 899,913 1,592,192 1973 118,273 242,541 712,109 282,192 69,320 988,852 1,779,836 1974 120,378 252,599 881,916 289,318 64,261 1,004,871 2,033,442 1975 112,243 279,672 803,827 279,726 68,789 1,085,878 2,290,149 1976 119,855 314,462 780,741 259,768 71,494 1,209,014 2,666,265 1977 119,816 332,518 760,109 293,418 76,273 1,228,338 2,454,719 1978 122,552 333,645 753,824 260,448 82,091 1,360,850 2,543,896 (126,292) (326.,362) (780,000) 282,068) (82,500) (1,500,000) (2,820,000) 1979 128,287 343,776 748,598 275,605 80,501 1,503,368 3,045,643 (139,210) (356,128) (1,030,000) (283,037) (127,600) (1,890,000) (3,830,000) 1980 156,044 342,511 751,325 253,396 67,273 1,698,186 3,453,995 (160,448) (355,563) (970,000) (249,593) (98,900) (1,950,000) (3,750,000) 1981 190,685 339,744 1,110,000 254,737 71,900 2,090,000 4,100,000 1982 190,444 346,375 856,510 n.a. 50,800 2,040,000 3,940,000

Source: Ministryof Energy and mission estimates. - 58 -

ANNEX1. 3

Petroleum Refinery Output, 1978-82 (million tonnes)

1978 1979 1980 1981 1982

Output by Refinery

Porto 3.9 1.9 2.2 3.1 2.6 Lisbon 1.6 0.7 0).1 . .. Sines 0.1 5.3 4.9 4.4 4.8 Total 5.6 7.9 7;7 73 7.4

Refinery Output by Share of Products

Gasoline 13.7 13.0 13.4 14.6 11.7 Gas Oil 22.9 24.0 25.5 27.1 25.1 Fuel Oil 45.4 47.0 44.2 40.2 43.1 LPG 2.3 2.1 3.3 3.5 3.2 Naphtha 5.3 3.9 2.8 2.0 4.0 Jet Fuel 6.2 5.9 6.1 7.2 5.5 Other 4.2 4.1 4.7 5.4 7.4 Total 100 100 100 100

negligible Source: PETROGAL. ANNEX i.4 Page 1

Electricity Supply and Consumption. 1971-82 (GWh)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Growth Rate, x P.A. 1971-76 1976-82 1971-?Z

Supply Hydropower Production 6207 7151 7354 7888 6437 4887 10010 10865 11251 8072 5193 6358 of which: EDP 6957 7473 6079 4768 9872 10723 11106 7947 4991 Other Public a/ 364 378 328 91 104 109 107 89 166 Autoproducers 33 37 30 28 34 33 38 36 36 a/ 36 a/ Thermal Power Production 1726 1753 2467 2857 4291 5258 3809 3788 4901 7191 8755 8409 of which: EDP 1863 2271 3601 4525 3061 3023 3971 6117 7654 Other Public ------Autoproducers a/ 604 586 690 733 748 765 930 1074 1101 Gross Production 7933 8904 9821 10745 10728 10145 13819 14653 16152 15263 13948 15267 5.1 7.0 6.1 of which: EDP 8820 9744 9680 9293 12933 13746 15077 14064 12645 Other Public 364 378 328 91 104 109 107 89 166 Autoproducers 637 623 720 761 782 798 968 1110 1137 Station Use 161 179 231 267 318 348 359 416 476 537 571 584 of which: EDP 231 267 318 341 359 416 476 526 556 Other Public - - - 7 - - - 11 15 Station Use, % 2.0 2.0 2.4 2.5 3.0 3.4 2.6 Z.8 2.9 3.4 4.1 4.1 Storage Pumping 53 93 42 85 38 143 61 77 54 3Z 108 87 Net Production 7719 8632 9548 10393 10372 9654 13399 14160 15622 14644 13269 14596 4.6 5.4 5.0 of which: EDP 8547 9392 9324 8809 12513 13253 14547 13456 11981 Other Public 364 378 328 84 104 109 107 78 151 Autoproducers 637 623 720 761 782 798 968 1110 1137 Net Imports b/ 178 38 (10) 44 200 1724 (545) (Z18) (203) L8Z7 3060 Z969 Available Supply 7897 8670 9538 10437 10572 11378 12854 13942 15419 16471 16329 17565 7.6 7.5 7.5 Transmission & Discrib. Losses 970 1077 1222 1326 1144 1234 1462 1592 1782 1870 1860 1995 Transmission & Distrib. X 12.3 12.4 12.8 12.7 10.8 10.8 11.4 11.4 11.6 11.4 11.4 11.4 Final Consumption 6927 7593 8316 9111 9428 10144 11392 12350 13637 14601 14469 15570 7.9 7.4 7.6 of which: Households 1448 1623 1763 2062 2254 2582 2714 2931 3160 3392 3235 3494 12.3 5.2 8.3 Services 926 1042 1163 1433 1502 1559 1703 1913 2135 2388 2476 2650 11.0 9.2 10.0 Industry 4318 4669 5122 5335 5378 5697 6664 7187 8010 8469 8409 9050 5.7 8.0 7.0 Transportation 198 214 218 221 226 233 232 234 242 245 243 262 3.3 2.4 2.6 Agriculture 37 45 50 60 68 73 79 85 90 107 106 114 14.6 7.7 10.8 a/ Estimated. bl Figures in parentheses are net eXports.

Source: DGE, except for estimated figures. - 60 -

ANNEX 1,4 Page 2

Electricity Supply and Consumption 1971-82

Ratios and Percentages 1971 1973 1976 1980 1982

PRODUCTION Hydropower % 78.2 74.9 48.2 52.9 44.9 Thermal % 21.8 25.1 51.8 47.1 55.1 Public % 93.5 92.5 92.7 Private % 6.5 7.5 7.3

Total Supply Domestic Production, % 97.8 100 85.5 89.3 83.7 Net Imports, % 2.2 - 14.5 10.7 16.3

Consumption Intermediate % a/ 14.6 15.2 14.5 14.6 14.6 Final % 85.4 84.8 85.5 85.4 85.4

Final Consumption, % Share Households 20.9 21.2 25.4 23.2 22.4 Services 13.4 14.0 15.4 16.4 17.0 Industry 62.3 61.6 56.2 58.0 58.1 Transportation 2.9 2.6 2.3 1.7 1.7 Agriculture 0.5 0.6 0.7 0.7 0.8

Population Served % 80.5 84.5 93.2 Gross Consumption/Cap., kWh 761 1018 1204 17713

Electricity Intensity, kWh/mill. esc. b/ Gross Consumption 11195 11149 12988 15563 15679 Final Consumption 9561 9450 11101 13297 13899 a/ Intermediate consumption comprises power station use, storage pumping and network losses (transmission and distribution). b/ MLllion escudos of GDP at 1980 prices.

Source: EDP; mission estimates. ANNEX1.5

EnergySector Investment, 1971-80 (millioncurrent escudos)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Energy Sector Investment

Electricitya/ 2,291 2,606 3,130 4,220 5,820 7,410 9,360 13,281 17,566 26,849 OtherFuels 327 406 387 243 1,151 42051b/ 8,519b/ 9,030b/ 5,298b/ 6,315b/

Total 2,618 3,012 3,517 4,463 6,971 11,461 17,879 22,311 22,864 33,164

National Gross Fixed Investment 37,259 47,526 57,256 66,761 73,992 88,931 125,500 156,500 189,900 252,500

Energyas % National 7.0 6.3 6.1 6.7 9.4 12.9 14.2 14.2 12.0 13.1 a/ Includes town gas. b/ PETROGALonly. Source: NationalEnergy Plan (1982version). - 62 - Ak4NEX1.6 pnBe t

PORTUGAL Energy Sector Orgonization

(mv)

| Sv d ~El L Motd

Aw~~~~~~~~~oa~ ~ ~ ~ E'ma .

DEWNWETsi

~~~~o,g~~~) ~E1*MEe ~~~~ &

DSOM _ ~ ~o( ,o.o ,~g&W~GEP Co#ti',&~a Er&& 9F

doATC Enwh noOot,t Tdo,~~COON ,DP BO,& |tO.. ECD,d O oNoo~dCo ENJd I{ITGA FGF&oo DEr I,g, I EQM* m CNW.C Dxlm aE CIf.l*&WM I I EnI I

Reo ACESCPNon

DE>STMENTBSTCOY VALAL - 63 - ANNF,X 1.6 Page 2

PORTUG'.L ENERGY SECTOR ORGANIZATION BY FUNCTION AND AGENCY

Function Agency Comments

GENERAL POLICY/LEGISLATION DGE Gtves advice on energy policies and drafts legislation.

ENERGY IMPORT ARRANGEMENTS

Petroleum PETROGAI Imports crude petroleum and prodticts. Oversees refining and distribution operations.

Coal EDP* An arrangement currently under consideration plans PFTROGAL* for FOP to import coal for power requirements and PETROGAIL for all other uses.

Flectricity EDP Special agreements exist with France and Spain.

Gas POP PGP produces "town gans from naphtha and refine:y EDP gas. EDP distributes the gas to the Lisbon area. No institution has been set up to superv'se the import. handiing and distribution for the proposed LNG program but various alternatives are being discussed.

ENERGY PRfCING DGE DGE makes recommendations but Ministry of Finance MOF (MOF) has ulttmate authority for pricing policy. including taxation.

ENERGY CONSERVATION

Industry DGE Supervises energy management program for industry and administers programs for energy conservation subsidies.

LNETI* Training of energy auditors and managers of energy EMAC* enterprises.

IAMPEI Technical assistance and advisory services to small enterprises for energy conservation.

Transport/Other None Potential for energy conservation in transport and other sectors is discussed in the PEN but there are no formal agencies charged with the development and implementation of special programs.

DOMESTIC ENERGY DEVELOPMENT

Coal ECD Ferrominas is currently a holding company for coal DGGM and iron ore development. It plans to take over the FERROMINAS production functions of ELW. uGGM supervises coal exploration.

Electricity EDP Generates and distributes electricity to customers served by the national grid. Also sells electricity to certain municipalities with their own distribution system.

Uranium/Nuclear Energy DGGM ENU produces uranium for stockpiling and/or for ux- ENU port. Both DGGM and ENU cooperate In uranium explo- LNET1 ration. LNETE is conducting research on various aspects of nuclear power devalopment ircluding technologtes, safety standards and training programs.

Nydropower DGRAH DCRAH is concerned with Portugal's overall water re- EDP source development and EDP is in cbarge of hydropower instaltations. They cooperate through a oint general council.

Petroleum GPEP Oversees oil and gas exploration programs, grants concessions and makes recommendations for government exploration policy.

*Proposed function. RMT IPY AAAII ARIF - 64 -

ANNEX 2.1 Page 1

PEN Assumptions for Energy Projections

I. Economic Variables

(a) Growth of population: 0.5% p.a.

(b) Growth of GDP, % p.a,

1980-85 1985-90 1990-2000 2000-2010 1980-2010

Scenario A 4.0 5.5 6.5 6.5 5.9 Scenario B 3.0 3.5 4.5 4.5 4.1

Note: Scenario A assumes a significant recovery in the world economy as a result of international cooperation to remove trade barriers, reduce North-South inequalities, control inflation and improve the balance of payments in industrializedand developing countries.

ScenariG 3 assumes continuing relative stagnation of the world economy va3 a result of negative developments in relation to the factors assumed for Scenario A.

3.I. Energy Sector Variables

(a) Energy conservation: two alternatives were considered, moderate conservation (CM) and intensive conservation (CI). PEN does not specify the energy savings associated with CM, but gives the following figures for C1: Savings from Intensive Energy Conservation Policy

1985 2010 Primary Energy Final Energy Primary Energy Final Energy ('000 toe) (%) ('000 toe) (X) ('000 toe) (X) ('000 toe) ()'

Scenario A 822 5.4 703 5.7 14,796 22.0 13,407 27.5 Scenario B 552 3.9 442 3.8 6,946 16.0 6,440 20.1 - 65 -

ANNEX 2.1 Page 2

(b) Fuel prices - average real increase Z p.a.:

Scenarios Pi P2 F3

Petroleum 3.3-4.0 a/ 3.3-4.0 a/ 1.3-2.0 a/ Natural gas 6.3 b/-4.0 4.0 c/ 2.0 c/ Coal 6.0 d/ 3.0 1.5 Uranium 2.4 3.1 3.1

a/ The lower end of the range assumes four percent p.a. increase of the FOB price combined with a reduction in freight rates by SOPONATA (the national shipping company) to make them equal to the 1980 international rates. b/ The higher end of the range is the rate which would equalize the FOB price per calorie of petroleu'uand natural gas in 1990. cf The rates which would maintain the relationship between the CIF prices per calorie of fuel oil and natural gas. dl This is below the rate which would equalize the cost of steam from coal and fuel oil in 2000 (7.1% p.a.). (c) Equipment prices:

(i) Constant prices (E1)

(ii) Three percent p.a. real increase (E2) ANNEX 2.1 Page 3

Macroeconomic Projections Reference Strategy - Low Growth Scenario (billion1980 escudos)

1980 Averagegrowth 1985 Average Growth 1990 Average Growth 2000 AverageGrowth 2010 (actual, rate, X p.a. rate, % p.a. rate, % p.a. rate, x p.a.

Consumption )080 3.1 1257 3.6 1503 4.5 2338 3.2 3216

Gross investment 307 3.0 356 5.0 455 6.0 815 6.0 1459

1xports 33b 5.0 429 5.5 560 6.0 1003 7.0 1973 1 0\

Imports 518 4.5 646 5.5 844 6.0 1512 5.0 2462 1

GUP at market prices 1205 3,0 1396 3.7 1674 4.7 2644 4.7 4186

GOP at Eactor cost 1098 3.0 1273 3.5 1512 4.5 2348 4.5 3646

Investment,% of GDP 25 25 27 31 35

Source: NationalEnergy Plan (J982 version). Annex 2.2 Page 1

Energy Demand and Supply, 1980-2010 Reference Strategy - Low Growth Scenario ('000)

Growth Rates, 2 p.a. 1980 1985 1990 1995 2000 2010 1980-85 1985-90 1990-95 1995-2000 2000-2010 (Actual)

1. Useful Energy Consumption Householdsand Services Space Heating 256 294 333 379 414 501 2.8 2.5 2.6 1.8 1.9 Water Heating 111 170 270 400 580 734 8.9 9.7 8.2 7.7 2.4 Specific Elec. 320 373 431 509 594 713 1.0 2.9 3.4 3.2 1.S. Cooking 182 191 196 204 211 224 1.0 0.5 0.8 0.7 0.6 Subtotal 869 1,028 1,230 1,492 1,799 2,172 3,4 3.7 3.9 3.8 1.9 Industryand Construction Furnaces (any fuel) 721 934 1,244 1,692 2,241 3,969 5.3 5.9 6.3 5.8 '.8 Furnaces (clean fuel 97 126 176 249 345 610 5.4 6.9 7.2 6.7 5.9 Steam 718 886 1,119 1,365 1,638 2,358 4.3 4.8 4.1 3.7 3.7 Specific Elect. 662 941 1,283 1,636 2,062 3,201 7.3 6.4 5.0 4.7 4.5 Motor Fuels 1L,3 182 233 316 413 732 4.9 5.1 6.3 5.5 5.9 Subtotal 2,341 3,069 4,055 5,258 6,699 10,870 5.6 5.7 5.3 5.0 5.0 Transportation Private Cars 1,144 1,252 1,374 1,505 1,632 1.952 1.8 1.8 1.8 1.6 1.8 Trucks/Buses 919 1,349 1,919 2,595 3,352 5,592 8.0 7.3 6.2 5.2 5.2 Trains/Shipping 159 168 178 192 204 235 1.1 1.2 1.5 1.2 1.4 Aviation 203 210 217 225 232 249 0.7 0,7 0.8 0.6 0.7 Electric Trains 21 23 25 27 29 35 1.8 1.7 1.6 1.5 1.9 Subtotal 2,446 3,002 3,713 4,544 5,449 8,063 4.2 4.3 4.1 3.7 4.0 Agricultureand Fishing Heating 6 6 6 7 7 10 - - 3.1 - 3.6 Motor Fuels 328 332 352 385 425 545 0.2 1.2 1.8 2.0 2.5 Specific Elec. 8 8 8 9 11 14 - - 2.4 4.1 2.4 Fuel for fishing boats 107 111 118 125 145 185 0.7 1.2 1.2 3.0 2.5

Subtotal 449 457 484 526 588 754 0.3 1.2 1.7 2.3 2.5 Total

Motor Fuels 3,003 3,604 4,391 5,343 6,403 9,490 3.7 4.0 4.0 3.7 4.0 Specific Elect. 1,011 1,345 1,747 2,181 2,696 3,963 5.9 5,.4 4.5 4.3 3.9 Other 2,091 2,607 3,344 4,296 5,436 8,406 4.5 5.1 5.1 4.8 4.5

Total Useful Energy 6,105 7,556 9,482 11,820 14,535 21,859 4.4 4.6 4.5 4.2 4.2

RPrT NI.PVAVAiII ARIF Annex 2.2 Page 2

Energy Demand and Supply 1980-2010 Reference Strategy - Low Growth Scenario ('000 toe)

Gr-h RatesZ7,p±. 1980 1985 1990 1995 2000 2010 1980-85 1985-9 990-95 1995-2000 2000-2010 1980-2010 (Actual)

II. Final Enerew Consumotion 8,454 11,064 13,105 15,389 18,010 25,610 5.5 3.4 3.3 3.2 3.6 3.8 of which, (1) By Sector: Households and Services 1,784 1,844 1,985 2,169 2,370 2,810 0.6 1.5 1.8 1.8 1.7 1.5 Industry and Const. 3,241 4,100 5,240 6,610 8,200 12,950 4.8 5.0 4.8 4.4 4.7 4.7 Transportation 2,453 2,920 3,480 4,100 4,780 6,850 3.5 3.6 3.4 3.1 3.7 3.5 Agriculture& Fishing 456 460 480 500 550 700 0.2 G.8 0.8 1.9 2.4 1.4 Non-Energy Uses 520 1,740 1,920 2,010 2,110 2,300 27.3 2.0 0.9 1.0 0.9 5.1 (2) by Form of Energv PetroleumProducts 6,056 7,905 8,320 9,960 12,570 5.5 4.0 1.8 2.3 2.4 Coal 126 480 900 2,470 5,180 12.1 13.4 10.6 7.7 10.3 Electricity 1,233 1,550 1,950 2,880 4,220 4.7 4.7 4.0 3.9 4.2 Gas 59 65 800 1,230 1,770 1.9 65.2 4.4 3.7 12.0 Solar Energy - 4 7 20 40 - 11.8 11.1 7.2 Biogas - 10 40 160 300 31.9 14.9 6.5 Wood 980 1,050 1,088 1,290 1,530 1.4 0.7 1.7 1.7 1.5 a/ bI a/ bI III. Losses 1,653 2,492 3,178 4,988 640 7,950 T 7X

IV. Primary Energy PC4qSuD. 10,107 13,556 16,283 22,998 24,410 33,560 36,380 6.0 3.7 3.5/4.1 3.9/4.1 4.1/4.4 Of which: Petroleum 7,965 10,575 10,480 11,260 8,260 13,260 7,260 5.8 (0.2) 0.7t(2.4) 2.4/(1.3) 1.7/(0.3) Coal 213 930 2,700 4,438 8,850 ' 205 15,025 15.8 11.3 5.1/12.6 3.4/5.4 11.9/15.2 Natural Gas - - 800 1,175 1,175 ,.52 1,652 3.9 3.5 Uranium - - - 2,993 2,993 8,404 8,404 10.9 Hydroelectricity S51 852 980 1,115 1,115 1,279 1,279 - 2.8 1.3 1.4 1.4 Wood 980 1,065 1,170 1,680 1,680 2,260 2,260 0.8 1.0 3.7 3.0 2.8 Industrial Residues 99 130 145 310 310 450 450 5.6 2.2 7.9 3.8 5.2 Solar Energy - 4 7 20 20 40 40 11.8 11.1 7.2 Wind Energy - - 1 7 7 10 10 21.5 3.6

Ratios Population, *000 9,423 9,661 9,906 10,156 10,413 10,946 GDP Billions of 1980 Escudos 1,098 1,273 1,512 2,348 3,646 3.0 3.5 4.5 4.5 4.5 4.1 Energy Consumption/Capita,TOE - Primary Energy 1.073 1,403 1.644 2,209/2.344 3.066/3.324 - Final Energy 0.897 1.145 1.323 1.515 1.730 2.340 Primary EnergyiGDP Ratio, TOE]MillionEscudos 9.20 10.65 10.77 9.79/10.40 9.20/9.98 Final Energy/GDPRatio, Toe/Million Escudos 7.70 8.69 8.67 7.67 7.02 Losses, x Primary Energy 16.4 18.4 19.5 21.7/26.2 23.7/29.6 Primary Energy GDP Elasticity 2.0 1.06 0.78j0.91 0.87/0.91 Final EnergyGDP Elasticity 1.83 0.97 0.73 0.71 0.80 a/ without SYNCRUDE" b/ with -SYNCRUDE'.

Source: National Energy Plan (1982 Version) and Mission Estimates. RFRTVVPY AVAII ARI r - 69 -

ANNEX2.2 Page 3

Structure of Energy Demand and Supply Reference Strategy Low Growth Scenario

1980 1985 1990 1995 2000 2010 (Actual) (Percentage Shares)

Final Energy by Sector Households & Services 21.1 16.7 15.i 14.1 13.2 11.0 Industry & Construction 38.3 37.0 40.0 43.0 45.5 50.6 Transportation 29.0 26.4 26.6 26.6 26.5 26.7 Agriculture & Fishing 5.4 4.2 3.7 3.2 3.1 2.7 Non-energy Uses 6.2 15.7 14.6 13.1 11.7 9.0 Final Enegy by Form of Energy Petroleum Products 71.6 71.5 63.5 55.3 49.1 Coal 1.5 4.3 6.9 13.7 20.2 Electricity 14.6 14.0 14.9 16.0 16.5 Gas 0.7 0.6 6.1 6.8 6.9 Solar Energy - - - 0.1 0.1 Biogas - 0.1 0.3 0.9 1.2 Wood 11.6 9.5 8.3 7.2 6.0

Primary Energy by Energy Source a/ b/ a/ b/ Petroleum 78.8 78.0 64.4 49.0 33.d 39.5 20.0 Coal 2.1 6.9 16.6 19.3 36.2 18.5 41.3 Natural Gas - - 4.9 5.1 4.8 5.0 4.6 Uranium - - - 13.0 12.3 25.1 23.1 Hydroelectricity 8.4 6.3 6.0 4.9 4.6 3.8 3.5 Wood 9.7 7.9 7.2 7.3 6.9 6.7 6.2 Industrial Residues 1.0 0.9 0.9 1.3 1.3 1.3 1.2

Solar Energy ) _ - _ 0.1 0.1 0.1 0.1 Wind Energy ) a/ without "SYNCRUDE." b/ with "SYNCRUDE." - 70 - ANNEX 2.3

Structure of Final Energy Consumption in 2010 (x of Total Consumption

1. Scenario B Cases

1 2 3 4 5 a/ 6 b/ 7 g/ 8 9 10 11 S%MPl 12X M PI 8Z M P2 12% M P2 12X M P2 12% M P2 12 MP 2 8% M P3 8% M PI 82 I P2 121P

7 F uel1 LPG 3.1 3.1 2.7 2.6 2.7 2.2 2.4 2.7 2.8 2. 2.5 Gasoline 8.0 8.5 8.0 8.5 8.5 8.5 8.5 8.1 7.9 7.9 8.2 Gas oil 29.2 28.8 28.2 27.7 27.7 27.7 27.8 28.4 27.5 26.3 26.0 Fuel oil 16.5 16.6 13.4 13.3 13.3 13.4 13.1 13.9 17.0 14.0 14.3 Total Petroleum Products 56.8 57.0 52.3 52.1 52.2 51.8 51.8 53.1 55.2 50.7 51.0

Coal 16.3 16.0 21.1 21.1 21.2 21.2 21.9 19.9 15.4 20.5 20.7 Gas 3.7 4.3 4.0 4.5 4.7 5.1 4.6 4.8 4.1 4.2 4.2 Electicity 15.5 15.0 15.2 14.9 14.9 14.8 14.6 15.0 16.9 16.6 16.3 Wood 6.1 6.3 6.0 6.2 6.1 6.1 6.2 6.0 6.8 6.4 6.4 Solar Energy 0.08 o.n5 0.06 0.04 0.04 0.05 0.04 0.04 0.13 0.10 0.08 Biogas 1.5 1.2 1.3 1.2 0.8 1.0 0.9 1.2 1.4 1.4 1.3

Final Consumption. '000 toe 28048 28050 28050 28086 28053 27963 28042 28019 25596 25594 25758 a/ Allowing for consumer preferences. b/ Including city gas in the base year, with consumer preference and different fuel reaction times. ci Including city gas, and with different fuel reaction times.

Kemo Notes: Column headings refer to three elements in the following order: the discount rate (%); moderate (X) or intensive (I) energy conservation; and price scenarios (PI, P2 , P3).

2. Scenario A Casea

12 13 14 1 5 d/ 1 6 el 12% I-PI 12% IIP 12%ZIPj 122 I1P' 12% I P,

LPG 2.6 2.2 2.3 2.2 2.2 Gasoline 8.6 8.6 8.6 8.4 8.6 Gas oil 29.4 28.7 28.8 28.8 28.6 Fuel oil 15.4 12.2 15.3 14.5 12.0

Total Petroleum Products 56.0 51.6 52.5 53.0 51.4

Coal 14.1 18.8 17.6 18.7 18.7 Gas 3.9 3.9 4.4 3.9 4.3 Electricity 19.8 19.7 19.7 17.3 19.8 Wood 5.1 5.0 4.9 5.2 4.9 Solar Energy 0.08 0.06 0.05 0.04 0.07 Biogas 1.0 0.9 0.8 0.9 0.8

Final Consumption, '000 toe 35210 35282 35249 29690 35253

e/ With real increase in equipment prices. f/ Allowing for consumer preferences.

Source: National Energy Plan (1982 Version).

BESTCOPY AVAILABLE - 71 -

ANNEX 2.4

Energy Consumption by Industry, 1980

Industry Energy Consumption ('000) (% Total)

Cement 851 18.5 Steel 641 13.9 Textiles 559 12.2 Food 513 11.2 Chemicals 508 11.0 Ceramics 404 8.8 Metal Products 236 5.1 Paper Pulp 208 4.5 Paper 191 4.2 Glass 1A9 3.2 Wood 1 20 2.6 Other 220 4.8

Total 4,600 100.0

Source: National Energy Plan (1982 version) - 72 -

ANNEX 2.5

Growth of Gross Value Added by Industry, 1980-2010 Low Growth Scenario (% p.a.)

Industry 1980-1985 1985-1990 1990-2000 2000-2010 1980-2010

Food 2.4 2.5 3.0 2.2 2.5 Drink 4.9 3.9 3.5 3.1 4.5 Tobacco 1.1 1.3 1.5 1.5 1.3 Textiles and Clothing 2.5 3.5 2.0 2.0 2.5 Footwear 5.2 4.3 2.9 2.5 3.7 Wood, Cork and Furniture 3.7 3.9 3.3 2.8 3.4 Paper Pulp 1.7 2.9 2.8 1.0 2.1 Paper 5.5 7.0 5.2 4.0 5.4 Printing and Publishing 2.4 3.5 5.4 4.5 3.9 Rubber 2.0 3.8 2.6 2.5 2.7 Chemicals 10.2 7.6 5.6 6.0 7.4 Non-MetallicMinerals 5.6 5.9 5.6 5.0 5.5 - Ceramics 6.3 6.7 6.6 6.1 6.4 - Glass 4.5 4.1 3.5 2.6 3.7 - Cement 6.0 7.0 7.0 6.5 6.6 Basic Iron and Steel Industries 3.6 8.9 3.0 1.3 3.5 - Steel 3.9 10.9 2.4 0.5 3.5 Basic Non-FerrousMetals 7.5 9.5 6.0 4.0 6.2 Metal Products 5.3 5.2 5.9 5.2 5.4 Mechanical and Electrical Equipment 5.6 5.6 6.1 6.4 5.9 TransportationProducts 2.8 8.2 5.7 4.3 5.2 - Automobiles 3.1 12.7 5.3 3.5 5.5 MiscellaneousIndustries 4.4 5.3 4.3 4.1 4.4 All ManufacturingIndustries 4.4 5.3 4.3 4*1 A4 Extractive Industries 15.5 19.9 5.6 4.5 9.1

Source: National Energy Plan (1982 version) ANNEX 2.6

Energy Sector Investment, 1983-2010 Reference Strategy (billion 1980 escudos)

Electric Natural Energy National Energy % Period Power Petroleum Coal Gas Conservation Other a/ Total Investment Nat onal

1983-1985 79.4 18.0 12.7 2.7 10.5 4.5 127-8) 2694.8 11.8 1986-1990 123.1 15.9 3.7 11.8 27.3 7.2 189.07 2 1 1991-1995 174.2 4.2 3.5 12.2 44.8 10.6 249.5 2718.7 9.2 1996-2000 189.7 127.9 0.5 6.5 64.2 18.3 407.1 3638.3 11.2 2001-2010 534.6 154.9 7.2 7.5 135.2 43.0 882.4 11384.4 7.8 - a/ Rene-wableenergy, evaluation of national energy resources and energy research, development and demonstration.

Source: National Energy Plan (1982 Version). - 74 -

ANNEX 2.7

Estimated Foreign Exchange Costs of Reference Case Energy Projections 1983-2010 (billion 1980 escudos)

1983-90 1991-2000 2001-2010 Amount % Amount % Amount %

Investment a/ Electric Power 66.0 63.0 175.0 65.8 262.0 70.7 Petroleum 23.8 22.7 78.9 29.6 97.2 26.2 Coal 7.3 7.0 3.8 1.4 6.9 1.9 Natural Gas 7.6 7.3 8.5 3.2 4.6 1.2 Subtotal 104.7 100 366.2 100 37L}J 100

Fuel Imports Petroleum 1208.7 92.5 2137.6 79.4 1867.1 53.8 Coal 68.7 5.3 339.3 12.6 1168.9 33.7 Natural Gas 28.8 2.2 196.0 7.3 324.0 9.4 Nuclear . 19.5 0.7 108.9 3.1 Subtotal 1306.2 100 2692.4 100 3468.9 100

Total 1410.9 2958.6 3839.6 Exports 3739.0 7826.0 14828.0 Energy as % Exports 37.6 37.8 25.9 a/ Including inveatment in security" stocks of fuels.

Source: National Energy Plan (1982 version). - 75 ~ ANNEX 2.8

Energy Demand and Supply. 1980-2010 Increased Security of Supply Strategy - Low Growth Scenario

1980 1990 2000 2010 Growth Rates, X p.a. (Actual) 1980-90 1990-2000 2000-2010 1980-2010

FinalEnerg:v Consumption 8,454 12,700 17,000 22,450 4.2 3.0 2.8 3.3 of which: (1) By Sector Households& Servicees 1,784 1,900 2,200 2,400 0.6 1.5 0.9 1.0 Industry& Construction 3,241 5,110 7,800 11,600 4.7 4.3 4.1 4,3 Transportation 2,453 3,300 4,380 5,550 3.0 2.9 2.4 2.8 Agriculture& Fishing 456 470 5,510 600 0.3 0.8 1.6 0.9 Non-energy Uses 520 1,920 2,110 2,300 14.0 1.0 0.9 5.1 (2) By Form of Energy Petroleum Products 6,056 7,870 9,367 10,750 2.7 1.8 1,4 1.9 Coal 126 900 2,200 4,300 21.7 9.4 6.9 12.5 Electricity 1,233 1,900 2,678 3,700 4.4 3.5 3.3 3.7 (Gas 59 800 1,150 1,650 30.1 3.7 3.7 3.7 Solar Energy - 10 40 100 - 14.9 9.6 Siogas - 48 160 300 - 12.8 6.5 Wood 980 1,100 1,250 1,430 1.2 1.3 1.3 1.3 IndustrialResidues - 72 155 220 - 7.9 3.6

Losses 1,653 2,812 3,911 5,578

Primary Energy Consumption 10,107 15,512 20,911 28,028 4.4 .0 3.0 3.5 of which: Petroleum 7,965 9,656 10,686 11,885 1.9 1.0 1.1 1.3 Coal 213 2,700 4,154 5,250 29.0 4.4 2.4 11.3 Natural " - 800 1,095 1,531 - 3.2 3.4 Uranium - - 1,662 5,074 - - 11.8 Iydroelectr...ity 851 1,000 1,200 1,400 1.6 1.8 1.6 1.7 Wood 980 1,200 1,750 2,300 2.0 3.8 2.8 2.9 Industrial Residues 99 145 310 450 3.9 7.9 3.8 5.2 Solar Energy - 10 41 102 - 15.1 9.6 Wind Energy 1 13 30 - 29.2 8.8

Ratios Energy Consumption/Capita,toe - Primary Energy 1.073 1.566 2.008 2.561 - Final Energy 0.897 1.282 1.633 2.051 Primary Energy: GDP, TOE/iillion escudos 9.20 10.26 8.91 7.69 Final Energy: GDP, TOE/million escudos 7.70 8.40 7,24 6.16 Primary Energy: GDP Elasticity 1.38 0.67 0.67 Final Energ;, GDP Elasticity 1.31 0.67 0.62 Losses, % of Primary Energy 16.4 18.1 18.7 19.9

Source: National Energy Plan (1982 Version) and Mission Estimates.

BESTCOPY AVAIUBt ANNEX2.9 Page 1

ElectricityConsumption and Supply,1980-2010 ReferenceStrategy - Low Growth Scenario (GWh)

Growth RatesX p.a. 1980 1985 1990 1995 2000 2010 1980-851985-80 1990-95 1995-2000 2000-2010 1980-2010

Final Consumption Householdsand Services 5,791 6,233 7,419 8,081 8,860 10,349 1.5 3.5 1.7 1.8 1.6 2.0 Industry 8,198 11,406 14,883 19,081 24,221 38,256 6.8 5.5 5.1 4.9 4.7 5.3 Transportation 244 291 279 291 302 349 3.6 - 0.8 0.7 1.5 1.2 Agriculture and Fishing 105 93 93 105 105 116 - - 2.5 - 2.0 0.3 Total 14,338 18,023 22,674 27,558 33,488 49,070 4.7 4.7 3.9 4.0 3.9 4.1 Of Which: Public Network 13,616 17,350 21,740 26,300 31,790 46,700 5.0 4.6 3.9 3.9 4.1 4.2 Autoproducers 722 673 934 1,258 1,698 2,370 NetworkLosses a/ 1,677 !,660 2,159 2,359 2,532 3,189 Network Losses, Z a/ 11.0 8.7 9.0 8.2 7.4 6.4

Net Supply 16,015 19,683 24,833 29,917 36,020 52,259 4.2 4.8 3.8 3.8 3.3 ';.0 Of Which: Public Network 15,293 19,010 23,899 28,659 34,322 49,889 4.4 4.8 3.7 3.7 3.8 4.0 Autoproducers 722 673 934 1,258 1,698 2,370 StationConsumption a/ 753 827 1,089 1,179 1,260 1,332 StationConsumption, Z a/ 4.7 4.2 4.8 4.0 3.5 2.6

Gross Supply 16,768 20,510 25,922 31,096 37,280 53,591 4.1 4.8 3.7 3.7 3.7 3.9 Of Which: Public Network 16,046 19,837 24,988 29,838 35,582 51,221 4.3 4.7 3.6 3.6 3.7 3.9 Autoproducers 722 673 934 1,258 1,698 2,370

Productionby Energy Source a/ a Hydropower 9,895 9,907 11,395 12,326 12,965 14,872 ThermalPower 6,151 9,930 13,593 17,512 22,617 36,349 Of Which: Oil Fired Steam 5,547 8,000 6,233 3,430 3,047 105 Coal-FireaSteam 360 1,837 7,360 8,105 8,012 4,000 CombustionTurbines 244 93 - 395 58 - Nuclear - - - 5,582 11,500 32,244

Fuel Consumption.'000 Toe Public Network FPeel Oil 1,296 1,851 1,450 797 675 22 Gas Oil 77 26 - i05 15 - Coal 87 450 1,800 1,989 1,950 980 Autoproducers Fuel Oil 100 85 85 80 7 78 Gas Oil. 3 3 8 8 10 10 Industrial Residues 99 130 145 243 310 450 Public and Private Fuel Oil 1,396 1,936 1,535 877 750 100 Gas Oil 80 29 8 113 25 10 Coal 87 450 1,800 1,989 1,950 980 Indue':rial Residues 99 130 145 243 310 450 Total 1,662 2,545 3,488 3,222 3,035 1,540 a/ PubLic Network

Source: National Energy Plan (:i82Version). BESTCOPY AVAILBlE - 77 - Annex 2.9 Page 2

Electricity Consumptionand Suppli 1980-2010 Reference StLategy_- Low Growth Scenario

198& 1985 1990 2000 2010

Final Consumption Households and Seivices 40.4 34.6 32.7 29.3 21.1 Industry 57.2 63.3 65.6 69.2 78.0 Transportation 1.7 1.6 1.2 1.1 0.7 Agriculture and Fishing 0.7 0.5 0.4 0.4 0.2

Gross Supply Public network 95.t; 96.7 96.4 96.0 95.6 Auto Producers 4.14 3.3 3.6 4.0 4.4 Proe,uction a/ Hydropower 61.7 49.9 45.6 36.4 29.0 Thermal power 38.3 50.1 54.4 63.6 71.0 Of Which: Oil-Fired Steam 34.6 40.3 24.9 8.6 0.2 Coal-Fired Steam 2.2 9.3 29.5 22.5 7.8 Combustion Tuirbines 1.5 0.5 - 0.2 Nuclear - - - 32.3 63.0 a/ Public Network

Electricity: GDP Elasticity

1980-85 1985-90 "'90-95 1995-'2000 2000-2010 1980-2010

Final Elec. Cons.: GDP 1.57 1.34 0.87 0.89 0.87 1.02 Gross Supply/GDP 1.37 1.37 0.82 0.82 0.82 0.95

ElectricityIntensigy kwh/million 1980 escudos of GDP

1980 1985 1990 2000 2010

7inal consumption 13,058 14,158 14,996 14,262 13,459 Gross supply 15,271 16,112 17,144 18,877 14,719

Source: National Energy Plan (1982 Version) and mission calculations. ANNEX 2.10 Page 1

Electricity Consumption and Supply. 1980-2010 PeblicNetwork (Electricidadede Portugal) NationalEnergy Plan Projections- ReferenceStrategy

1980 1985 1990 1995 2000 2005 2010 Growth Rates, I p.a. 1980-85 1985-90 1990-95 1995-2000 2000-2010

Final Consumption, GWh 13,616 17,350 21,740 26,300 31,790 38,500 46,700 5.0 4.6 3.9 3.9 3.9 Gross Production,a/ GWh 16,046 20,625 25,940 30,780 36,495 43,590 51,940 5.1 4.7 3.5 3.5 3.6 Net Supply,b/ GWh 15,400 19,800 24,900 29,700 35,400 42,500 50,900 5.1 4.7 3.6 3.6 3.7 NetworkLosses, GWh 1,784 2,450 3,160 3,400 3,610 4,000 4,200 Network Losses,% 11.6 12.4 12.7 11.4 10.2 9.4 8.3 Peak Demand, MW 3,000 3,860 4,800 5,900 7,000 8,400 10,150 4.8 4.7 4.2 3.5 3.8 SystemLoad Factor,% 58.6 59.' 59.2 57.5 57.7 57.8 57.2

InstalledCapacity. KW Thermal Oil-FiredSteam c/ 1,315 1,815 !,815 1,315 1,065 565 - Coal-fired_/ Steam 150 450 i,350 1,950 1,950 1,950 1,950 Combustion Turbines e/ 164 330 330 166 166 - - Nuclear - - - 951 1,900 3,800 5,700 Total Thermal 1,629 2,595 3,495 4,381 5,081 6,315 7,650 9.8 6.1 4.6 3.0 4.2 Hydropower 2,276 2,872 3,923 4.583 5,012 5,647 6,492 5.5 6.4 3.2 1.9 2.6 Total InstalledCapacity 3,905 5,467 7,418 8,964 10,093 11,962 14,142 6.7 6.3 3.9 2.4 3.4 CapacityMargin, MW 905 1,667 2,618 3,064 3,093 3,562 3,992 CapacityMargin, Z of Peak Demand 30.2 43.9 54.5 51.9 44.2 42.4 39.3

Guaranteed Capacity, MW Thermal Oil-FiredSteam 883 1,233 1,233 908 583 233 - Coal-FiredSteam 97 307 937 1,357 1,357 1,357 1,357 Combustion Turbines 132 264 264 132 132 - - Nuclear - - - 665 1,330 2,660 3,990 Total Thermal 1,112 1,804 2,434 3,062 3,402 4,250 5,347 Hydropower 1,82! 2,298 3,138 3,666 4,010 4,518 5,194 Total GuaranteedCapacity 2,933 4,102 5,572 6,728 7,412 8,768 10,541 6.7 6.3 3.9 1.9 3.6 Margin over peak,MV -67 302 772 828 412 368 391 Margin,I of peak -2.2 7.9 16.1 14.0 5.9 4.4 3.9

Energy Capability, GWh Thermalpower 8,874 14,068 19.587 25,956 28.934 37,230 46,840 Hydropower,average 9,642 10,851 12,309 13,183 13,678 14,652 15,397 Hydropower,firm 5,854 6,447 7,254 7,837 8,126 8,563 8,843 Total, average 18,516 25,019 31,896 39,139 42,612 51,882 62,237 6.2 5.0 4.2 1.7 3.9 Total, firm 14,728 20,515 26,841 33,793 37,060 45,793 55,683 6.9 5.5 4.7 1.9 4.2 at Derivedfrom net supply projections,assuming power stations'consumptior of 4% of gross productionin 1985 and 1990. 3.5% in 1995. S% in 2000, 2.5% in 2005 and 2% in 2010 (as in DFI model). EDPE/ Projections,which are the same as the gross productionprojections in the DFI model. c/ Projections assume retirement of Carregado I-IV (500 MW) in 1995, Carregado V-VI (250 MW) in 2000, Setubal I and It (500 MW) in 2005. d/ Includes the existing Tapada Do Outeiro station, which buins coal and fuel oil. e/ Assuming retirement of Tunes I and 11 (32MW) in 1992, Alto de Mira (132 MW) in 1995 and Tunes III and IV in 2002.

Source: NationalEnergy Plan (1982version). GrCT1.DY AUJAIIARI F - 79 -

Annex 2.10 Page 2

Technical and Economic Assumptions

Generation Plant

1. The generating plant candidates considered in PEN for determining the long-term development program were 100 MW combustion turbines (CT), coal-fired steam p'.ants of 300 and 600 MWcapacity (C300 and C600), fuel oil fired steam plants of the same capacity (F300 and F600) and nuclear power plants of 950 and 1300-MW capacity (N950 and N1300), assumed to be of the pressurized water reactor type (PWR). The technical characteristicsand capital costs are as follows:

CT C300 b/ C600 b/ F300 b/ F600 b/ N950 N1300

Availability, %of capacity 80 70 70 70 70 72 68 Station consuraption, % 1 8 8 7.5 7.5 5 5 Specific fuel ornumption kg/kwh sert cUlt 0.272 0.422 0.411 0.232 0.226 Stock of fuel a/, '000 tors 58 251.5 490 139.5 271 conomic life. years 18 25 25 25 25 25 25 Capital cost perkW c/ (1) In 1980 escudos: (i) 14,238 61,167 49,728 51,992 42,269 73,238 59,985 (ii) 15,947 80,128 65,144 68,1CB 55,373 105,293 88,040

(2) In 1980 US$: d/ (i) 284 1,222 993 1,038 844 1,463 e/ 1,198 e/ (ii) 318 1,600 1,301 1,360 1,106 2,103 e/ 1,759 e/ a/ Sufficient for 90 days cortinmous operation at full plart availability. b/ Including provision for S02 rerval. c/ (i) Excluding interest during corEtrution, (ii) Including interest durirg construction. d/ At average 1980 e=hag rate of US$1= 50.062 escudos. e/ Including provision for disanrtlirig at erd of awlear station's Iffe. Source: National Energy Plan (1982 version). - 80 -

ANNEX 2,10 Page 3

Fuel Prices

2. The base prices used were the actual 1980 prices (except for uranium, which was the 1981 price) as follows:

1980 Esc./toe 1980 US$/toe a/

Crude Oil 12070 241 Gas Oil 15170 303 Fuel Oil 9900 198 Coal 4310 86 b/ Uranium 1420 28 a! At exchange rate of US$1 = 50.062 escudos. b/ Includes cost of handling in Sines coal facility.

3. These prices were then adjusted to a 1982 basis as follows:

1980 ESC/toe

1981 1982 % Change Price % Change Price Crude Oil +20.0 14490 -13.0 12610 Gas Oil +15.2 17470 - 8.6 15970 Fuel Oil +23.9 12270 - 7.7 11330 Coal +33.6 5760 + 3.0 a/ 5930 Uranium - 1420 + 3.1 b/ 1460

a/ In P2 price scenarios (see below). In P1 and P3 scenarios 6% and 1.5% respectivelywere assumed. b/ In P2 and P3 price scenarios. In P1 scenario the increase assumed was 2.4%.

4. Real fuel prices on a c.i.f basis (in 1980 escudos) were then projected as follows: (price scenario P2 is the reference case): - 81 -

ANNEX 2.10 Page 4

(a) Growth Rates, % p.a.

1983-90 1991-2000 20001-2010

P1 P2 P3 P1 P2 P3 P1 P2 P3

Crude oil 3.3 3.3 1.3 4.0 4.0 2.0 0 0 0 Gas oil 4.0 4.0 2.0 4.0 4.0 2.0 0 0 0 Fuel oil 4.0 4.0 2.0 4.0 4.0 2.0 0 0 0 Coal 6.0 3.0 1.5 6.0 3.0 1.5 0 0 1.5 Uranium 2.4 3.1 3.. 2.4 3.1 3.1 2.4 3.1 3.1

(b) Fuel Prices, 1980 escudos/toe

1985 1990 1995 2000 2010

Crude oil, P1 & P2 13910 16380 19930 24250 24250 P3 13120 14020 15480 17090 17090 Gas oil, P1 & P2 17960 21850 26590 32350 32350 P3 16950 i8710 20660 22810 22810 Fuel oil, Pl & P2 12740 15500 18860 22950 22950 P3 12020 13270 14650 16180 16180 Coal P1 7280 9740 13030 17440 17440 P2 6480 7520 8710 10100 10100 P3 6120 6590 7100 7650 8880 Uranium P1 1560 1760 1980 2230 2820 P2 & P3 1600 1870 2180 2540 3440

5. In the case of nuclear fuels, the actual 1981 values assumed were as follows, based on information supplied by the International Atomic Energy Agency (IAEA):

Natural uranium US$24/lb U30 8 Conversion to hexafluoride US$5.5/kgU Enrichment US$176/SWU a/ Fuel fabrication US$192.5/kg U Fuel transport US$38.5/kg U Reprocessing of spent fuel US$605/kg U Plutonium credit US$13.2/kg U

a/ SWU - separative work unit. - 82 -

ANNEX 2.10 Page 5

6. The calorific values assumed for fossil fuels were 10100 kcal/kg for gas oil, 9600 kcal/kg for fuel oil and 5,800 kcal/kg for coal.

Operation and Maintenance Costs

7. The fixed and variable 0 and M costs assumed were as follows:

1980 Escudos CT C300 C600 F300 F600 N950 N1300

Fixed 0 and M, kw/year 1282 780 1068 652 1800 1320 Variable 0 & M per kwh 4.78 1.87 1.74 3.08 2.93 0.41 0.40

Generating Costs

8. The resulting generating costs per kwh sent out (i.e., excluding each power station's own consumption) are as follows:

1980 escudos/kWh CT C300 C600 F300 F600 N950 N1300

Fuel Cost 4.78 1.65 1.61 2.88 2.80 0.40 0.40 Variable 0 and M - 0.22 0.13 0.20 0.12 0.01 0.01 Fixed 0 and M 0.51 0.32 0.20 0.27 0.17 0.36 0.28 Capital Charge 1.87 1.57 1.27 1.32 1.08 1.94 1.71

Total 7.16 3.76 3.21 4.67 4.17 2.71 2.40 - 83 -

ANNEX 2.11

EDP Medium-Term Electricity ForecastingModel

1. The traditional method used in Portugal for forecasting electricity consumption has been the so-called analogy method, which takes the past evolution of electricity consumption per capita in more advanced countries as the basis for determining the future trend of consumption in Portugal. This approach yielded good empirical results in the period 1976-80, observed real growth in this period showing only small deviations from the forecast trend.

2. However, the analogy model takes no explicit account of economic activity and prices, and provided no explanation of the wide fluctuations in year-to-year growth rates of electricity demand. In an attempt to overcome this defect, EDP Planning Department has developed a simple regression equation relating the growth rate of electric energy consumption (ELEC) to the growth rate of GDP, the real price of electricity (PE) and the rate of change of the price of electric energy relatively to the change in the price index of other fuels (PR). The price variables are lagged one year.

3. Applied to annual data for 1975-81, i.e.. only seven observations, the equation gave results which were very close to the observed growth rates for those years. Taking account of GDP growth (3% and 3.5% assumed) and price values for 1981, and with the electricity growth rate adjusted to average temperature conditions, and PE and PR corrected to allow for municipal tariffs which have not been adjusted for changes in EDP tariffs, the resulting equations are as follows:

For 3% GD? growth in 1982:

LECt = 1.67 GDPt - 0.015 PEt-I - 0.0335 PRt_. (1) For 3.5% GDP growth in 1982:

ELECt - 1.62 GDPt + 0.002 PEt.. - 0.0356 PRt-1 (2)

4. The results suggest an income elasticity of demand of 1.6-1.7, negligible or zero own price elasticity of demand (although the sign in equation (2) indicates that it is statistically not significant) and relatively high cross-elasticityof demand (0.3-0.4). However, results based on such a limited number of observations must be open to doubt. The predictive value of the equation has also been called in question by the behavior of electricity demand in the first few months of 1983. Given the stagnation of the economy, with zero growth projected for the year, and the bigh real electricity price increases in 1982, the model would indicate ::erogrowth of electricity consumption in 1983. However, demand so far has been runnirg about 9% above the 1982 level, or 7% on a temperature adjusted basis. ANNEX 2.12

Final Consumption of Gas, 1980-2010

1980 1990 1995 2000 2010 '000 toe % al '000 toe Z a/ '000 toe X a/ '000 toe % a/ 'OvO toe Z a/

Households/Services Space heating 4 0.5 77 13.0 285 38.6 Water heating 18 10.3 111 20.4 240 26.3 Cooking 34 6.4 117 23.4 135 29.6

Total 56 3.1 230 11.6 305 14.1 400 16.9 660 23.6

Industry 'Clean"fuel processes 3 2.0 188 53.1 473 63.8 Steam-raising - - 115 b/ 4.8 227 7.2

Total 3 0.1 160 3.1 303 3.7 425 b/ 5.1 700 5.0

Non-energyUses - - 410 21.4 410 20.4 410 19.4 410 17.6

Total final consumption 59 0.7 800 6.1 1018 6.1 1235 6.9 1770 6.9 of which: Natural gas - 800 1000 1175 1652 Town gas (from naphtha 59 - - - Coal gasification - 4 12 29 Biogas - 14 48 89 a/ % of total final energy consumptionfor the end-wzeconcerned. b/ 1995 and 2000 figuresinclude natural gas suppliedto combustionturbines for electricity generatio-(28,000 toe in 1995, 5000 toe in 2000).

Source: NationalEnergy Plan (1982 version). -85 - ANNEX 2.13

Household Gas Consumption, 1985-2005- PGP/SOFREGAZMarket Survev

1985 1990 1995 2000 2005

(a) Number of Consumers, '000) 1st Phase Greater Lisbon & Setubal 185,4 300,0 391.6 429.2 462.7

2nd Phase Lisbon - Porto Axis - Greater Porto - 12.9 80.1 108.9 121.9

3rd Phase Guimaraes & Braga - 1.6 10.4 12.7 15.1

Total 185.4 314.5 482.1 550.8 599.7

(b) Specific Consumption per Household, therms 1st Phase Greater Lisbon & Setubal 3000 3300 3650 4000 4000 2nd Phase South Axis - 3000 3300 3650 4000 North Axis & Porto - 3500 3850 4250 4700

3rd Phase Guimaraes & Porto - 3500 3850 4250 4700

Source: National Energy Plan (1982 version). - 86 -

ANNEX 2.14

Natural Gas Investment Costs (million 1980 escudos)

1. LNG Terminal Buildings & civil engineering 402.7 Initial storage reservoirs - 2 x 35,000 m3 1610.9 2 x 120,000 m3 a/ - Additional storage reservoirs - 5 x 120,000 m3 a/ Regasification 237.5 Additional vaporisers a/ 278.8 Auxiliary plant 691.9 Dredging & earthworks a/ 444.0 Wharf & Jetties a/ 423.4

Subtotal 4089.2

2. Primary network (high & medium pressure transmission) Equipment 2188.0 Erection 4290.0 Other 1116.0

Subtotal 7524.0

3. Secondary network (low & medium pressure distribution) Equipment 8174.0 Erection 4401.0

Subtotal 12575.0

TOTAL 24188.2 a! These items not considered in DFI model.

Source: National Energy Plan (1982 version). ANNEX 2,15 - 81 -

Final Costs of LNG

1. The PEN report provides the following information concerning the cobts of LNG assumed for the reference strategy: (a) The c.i.f. prices of LNG at five-year intervals from 1985 to 2010, from which the prices for the intervening years are easily obtainable, since PEN assumes a 4% p.a. real increase up to 2000, and constant real prices thereafter. (b) The annual capital expenditures under the proposed investment program for the associated LNG terminal installations, transmissionand distributionnetworks.

(c) The average annual operating and maintenance costs, both fixed and variable, of the LNG terminal and the transport and distribution networks.

(d) The final cost per kgoe of the natural gas for each year of the 20-year period 1988-2000.

The detailed figures are shown in Attachment 1.

2. At the 12% discount rate (the 'rate assumed for the PEN reference strategy evaluation of the LNG option) the present worth of the proposed capital investment program is 18.625 billion escudos. The present worth of the LNG tonnages consumed is 4.542 million toe, so that the average capital cost per kgoe is 4.10 escudos. The average O&M cost works out at 3.19 escudos per kgoe. As shown in Table 1, the resulting final costs of natural gas are significantly higher (12-22%) than those given in PEN.

Table 1: Natural Gas Final Costs, 1990-2000 (1980 escudos/kgoe)

1990 1995 2000 PEN Mission PEN Mission PEN Mission

LNG c.i.f. price 15.36 15.36 18.69 18.69 22.75 22,75 Capital costs (a) ) 4.10 ) 4.10 ) 4.10 ) 3.23 ) 4.42 ) 4.07 O&Mcosts ) 3.19 ) 3.19 ) 3.19 Total (a) 18.59 22.65 23.11 25.98 26.82 30,04

Source: National Energy Plan (1982 version) and mission estimates. - 88 - ANNEX2.15 Attachment 1

LNG Costs - PEN Reference Strategy ( 1980 escudos)

Average LNG G'apital Investment O&M c.i.f. Final cost of gas Gas million -escudos Costs Price esc./kgoe Consurption Year mnill.esc. esc./kgoe '000 toe

1984 554.9 - - - 1985 1343.1 - - - 1986 :'346.9 - - - 1987 2045.2 - - 1988 640.7 1940 14.21 17,50 700 1989 6i7.1 1940 14.78 18.03 750 1990 853.9 1940 15.36 18.59 800 1991 2912.7 1940 15.97 19.22 836 1992 4037.5 1940 16.61 20.09 875 1993 1155.2 1940 17.28 21.79 915 '994 1158.9 1940 17.97 22.44 956 1995 1160.1 1940 18.69 13.11 1000 1996 1205.9 1940 19.44 23.80 1033 1997 482.7 1940 20.21 24.53 1067 1998 464.3 1940 21.02 25.34 1102 1999 656.5 1940 21.86 26.05 1138 2000 607.9 1940 22.75 26.82 1175 2001 435.5 1940 22.75 26.72 1216 2002 327.6 1940 22.75 26.55 1258 2003 324.2 1940 22.75 26.47 1302 2004 280.7 1940 22.75 26.32 1347 2005 277.1 1940 22.75 26.18 1394 2006 279.1 1940 22.75 26.04 1442 2007 25.91 1492

Source: National Energy Plan (1982 version). ANNEX 4.1

Petroleum Product Prices. 1960-83

Premium Gasoline Regular Gasoline Kerosene Gas Oil/Diesel Fuel Oil Nominal Real a/ Nominal Real a/ Nominal Real a/ Nominal Real at Nominal Real a( Esc/liter Esc/l Esc/l Esc/l EscJ1 Eec/i Esc/lE Esc/l Esc/kg Esclkg

Jan. 1960 5.00 37.70 4.30 32.50 1.85 14.00 2.50 18.90 0.90 6.80 1961 5.00 37.00 4.30 31.80 1.85 13.70 2.50 18.50 0.90 6.70 1962 6.00 43.40 5.30 38.40 1.85 13.40 2.50 18.10 0.90 6.50 1963 G.00 43.70 5.30 38.60 1.85 13.50 2.50 18.20 0.90 6.60 1964 6.00 42.60 5.30 37.70 1.85 13.20 2.50 17.80 0.90 6.40 1965 6.00 40.90 5.30 36.10 1.85 12.60 2.50 17.00 0.90 6.10 1966 6.00 39.50 5.30 34.90 1.85 12.20 2.50 16.50 0.90 5.90 1967 6.00 37.40 5.30 33.00 1.85 11.50 2.50 15.60 0.90 5.60 - 1968 6.50 39.00 5.60 33.60 1.85 11.10 2.60 15.60 0.90 5.40 1969 6.50 37.30 5.60 32.10 1.85 10.60 2.60 14.90 0.90 5.20 1970 6.50 34.90 5.60 30.10 1.85 9.90 2.60 14.00 0.80 4.30 t 1971 6.50 32.80 5.60 28.30 1.85 9.30 2.30 11.60 0.65 3.30 O 1972 6.70 31.20 5.70 26.60 1.85 8.60 2.40 11.20 0.65 3.00 @ 1973 6.70 28.20 5.70 24.00 1.85 7.80 2.40 10.10 0.65 2.70 1974 7.50 28.10 6.30 23.60 1.85 6.90 2.60 9.70 0.65 2.40 1975 12.50 37.20 11.00 32.70 3.00 8.90 4.00 11.90 1.30 3.90 197T 17.50 44.70 15.00 38.30 3.00 7.70 4.00 10.20 2.00 5.10 1977 17.50 37.20 15.00 31.90 4.00 8.50 6.00 12.80 2.00 4.30 1978 26.00 44.40 23.00 39.30 6.00 10.20 7.50 12.80 3.30 5.60 - 1979 31.00 44.50 28.00 40.20 9.00 12.90 10.00 14.40 4,00 5.70 1980 39.00 45.50 35.00 40.80 13.00 15.20 13.00 15.20 5.50 6.40 1981 50.00 50.00 46.00 46.00 22.50 22.50 22.50 22.50 9.00 9.00 1982 58.00 48.30 54.00 45.00 28.00 23.00 28.00 23.00 13.50 11.30 1983 b/ 74.00 50.10 70.00 47.40 35.00 23.70 35.00 23.70 17.50 11.90 July 1983 84.00 56.87 81.00 54.84 46.50 31.48 46.00 31.14 19.5/ 13.2/ 17.5 ^J 11-90 c/ a/ 1981 prices. bJ Provisional rate of inflation. cJ For non-electricity/electricityuses.

Sources: Ministry of Energy. ANNEX 4.2 - 90 Page 1

Pricing Formula for Petroleum Products

1. Petroleum product prices are determined by a 'formula'which treats ex-refinery products s if they had been imported as finished products from the Middle East. The formula has not been changed for some considerabletime and may be presented as:

P PI + F + I - E + B + C .... (1) where P administeredprice

PI = internationalproduct price, Persian Gulf, f.o.b.

I insurance costs

E = evaporation adjustment

B = a set of taxes and margins (see below)

C a tax or subsidy, the 'taxa de compensacao',from the national Supply Fund (SF).

in addition:

F F .... (2)

i.e., freight charges are invariant with products and are themselves administered prices which do not necessarily reflect actual freight costs. When summed across products F may thus exceed or be below actual freight costs, in which case lump sum transfers are made from the SF at certain time intervals.

Also I 0.5 PI + F 100 00.... (3)

and E 1 PI + F I 100 0.... (4) 2. The 'B' taxes and margins are comprised of four elements.

B1 = direct customs duty levied by the Portuguese Government; agents' fee, plus a national tax which has replaced the National Salvation Tax.

B2 = distribution costs for PETROGAL and other comapanies, averaged across companies as an equal charge. Certain costs are not included (see text), and geographical differentials in distribution costs are reimbursed from the SF.

B3 - rate of return equal to about 15% on all companies' net assets in distribution. ANNEX 4.2 - 91 - Page 2

B4 retailer margins based on a sample in the previous year.

The size of the various 'B' components is as follows:

Composition of Taxes/Margins on c.i.f. Price (escudos/liter)a/

Super Regular Kerosene Kerosene Gasoline Gasoline 1 b/ 2 c/ Gas Oil Fuel Oil

B1 4.6640 4.4692 0.9176 0.9344 0.3157 0.2444

B2 0.6090 0.5848 0.5243 0.5444 0.4277 0.2159

B3 0.8410 0.8080 0.7131 0.7402 0.5646 0.3887

B4 1.1300 1.1300 1.7000 0.9900 1.0300 0 Total 7.244 6.992 3.855 3.209 2.338 0.849 a/ Escudos/kg for fuel oil. b/ For lighting purposes. _/ For heating purposes.

Source: PETROGAI. 9 2 - ANNEX 4.2 Page 3

Petrolewn Product Price Formation: Selected Products July 1983

Super Regular Kerosene Kerosene Fuel Oil a/ Fuel Oil d/ Gasoline Gesoline 1 a/ 2 b/ Gas Oil 3.57. 3.5%

PI (US$/tame POB) 327.08 306.89 319.73 340.27 275.27 168.85 168.85

PI (esc/tauie FMB)e/ 32,403 29,809 31,675 33,710 27,271 16,728 16,728

+ F 2,750 2,750 2,750 2,75) 2,750 2,750 2,750

+ 1 176 163 172 182 150 97 97

-E 353 327 346 366 302 196 196

PI (esc/tome CIF) 35,682 33,049 34,943 37,008 30,473 19,771 19,771

= PI (esc/litre) 26.76 23.80 27.43 30.16 25.44 - -

PI (escfkiio) f/ - - - - - 19.77 19.77

+ 'B' taxes/margins 7.24 6.99 3.86 3.21 2.34 0.85 0.85

= Base Price 34.00 30.79 31.29 33.37 27.78 20.62 20.62

+ 'C' (ta:ca de cawieacao) 50.00 50.21 14.71 13.63 18.22 -3.12 -1.12

Retail Price (P) 84.00 81.00 46.00 47.00 46.00 17.50 19.50 a/ For lighting purposes. b/ For heating purposes. c/ To EDP (electricity generation). d/ To other consumers. e/ At 99.068 esc/US$. f/ Market prices for fuel oil are quoted per kilogram.

Source: PFIROGALand mission estinmates. - 93 -

ANNEX 4.3

Electricity Prices, 1971-83 (esc/kWh)

Current Prices Constant Prices (1981 esc.) Year Domestic Industrial Domestic Industrial

1971 0.694 0.496 3.505 2.505 1972 0.705 0.504 3.279 2.344 1973 0.684 0.489 2.886 2.063 1974 0.707 0.505 2.648 1.891 1975 0.859 0.610 2.556 1.815 1976 1.096 0.689 2.803 1.762 1977 1.483 0.863 3.155 1.836 1978 2.042 1.177 3.485 2.008 1979 2.386 1.419 3.423 2.036 1980 3.545 2.025 4.136 2.363 1981 4.220 3.048 4.220 3.048 1982 5.947 4.438 4.956 3.698 1983 a/ 7.085 5.476 4.920 3.803 a/ First quarter only.

Source: Current price data from Ministry of Energy. Mission estimates for constant price series using GDP deflator. AMNEX 4.4

1983 Electricity Prices and their Relation to Marginal Costs of Supply (esc/kWh)

V8V HiV MV No Load Full Av. Pull Av. Full Av. Av. LV at Peak Load Load Load Load Load Load Size Small Size Domestic Hours Charge Curve Charge Curve Charge Curve Industrial Industrial Commercial Sector

Marginal Cost: Capital 0.759 0.707 1.139 0.724 1.168 0.645 1.060 2.080 2.273 6.819 8.524 Fuel 5.004 5.098 5.207 5.380 5.511 5.848 6.037 6.185 8.847 7.483 7.483 Total 6.763 5.805 6.346 6.104 6.679 6.493 7.077 8.265 11.120 14.320 16.007

Price: Capital 0.134 0.124 0.201 0.304 0.489 0.356 0.574 1.148 0.648 1.944 2.430 Fuel 3.963 4.240 4.447 4.557 4.683 5.100 5.235 5.340 7.800 6.450 6.450 Total 4.097 4.364 4.648 4.861 5.172 5.456 5.809 6.488 8.448 8.394 8.880

Price as X of LRNC 71.1 75.2 73.2 79.6 77.4 84.0 82.1 78.5 76.0 58.6 55.5

Deviation Z 28.9 24.8 26.8 20.4 22.6 16.0 17.9 21.5 24.0 41.4 44.5

V'V = Very high voltage (above 60 kV) HV = High voltage ( (60 kV) 11 = Hedium voltage (1-30 kY) LV = Low voltage (up to I kV)

Source; EDP.

RESTCOPY AVAILABLE ANNEX 4.5

Electricity Rates i. Non-Compliant Municipalities; Mid-1983

Average EDP Tariff Rate Estimated b/ % of National Effective (esc/kWh) Consumption (MWh) Consumption Subsidy RV LV WV LV million esc.

Average EDP Tariff Rate 4.822 6.655

Municipality Rates a/

Espinho 2.155 3.163 136 13,455 0.1 47.35

Ge,adomar - 5.155 - 60,005 0.5 90.00

Mala 4.822 3.865 9,832 51,828 0.5 144.60 "

Oporto 1.104 1.700 137,208 523,280 5.7 3,102.99

Povoa do Varzim 3.911 5.330 1,340 19,324 0.2 26.83 l1alongo 2.410 - 32,165 0.3 136.54

Viana do Castelo 2.793 3.865 1,293 30,959 0.3 88.99

Vila Lova de Gala 2.155 3.163 7,178 178,789 1.6 643.47

a/ Excludes Arouca, Murtosa and Mealhada which, since 1982, are integrated with EDP through not necessarily charging EDP rates yet. Also excludes Matosinhos which is integrated with EDP and charges EDP rates. b/ 1978 consumption figures because of data difficulties. - 96 - ANNEX 4.6

Imported Coal and Coke Prices, 1971-82 (Average prices, escudos/tonne)

Coke Coal Current Prices Constant Prices Current Prices Constant Prices (1981 -scudos) (1981 escudos)

1971 1,500 7,576 700 3,535

1972 1,354 6,298 600 3,163

1973 1,590 6,709 641 2,705

1974 2,250 8,427 1,356 5,079

1975 3,050 9,077 1,870 5,565

1976 3,165 8,095 1,968 5,033

1977 3,632 7,724 2,338 4,974

1978 4,698 8,017 2,609 4,454

1979 4,872 6,990 3,346 4,801

1980 6,397 7,464 4,748 5,540

1981 8,813 8,813 5,800 5,800

1982 9,800 8,167 7,466 6,222

Source: Current price data from Ministry of Energy. Constant price estimates by mission using GDP deflator. - 97 -

ANNEX4,7

Town Gas Sales, 1977-82

1977 1978 1979 1980 1981 1982

Sales (million m3)

Households 101.2 103.6 101.2 101.1 101.7 99.0 Commercial 24.0 25.5 25.4 26.2 26.4 25.2 Other 11.1 11.9 12.8 14.0 12.2 12.2 Total 136.3 141.0 139.4 141.3 140.3 136.4

Outlet B (thousand)

Lisbon 161.7 163.8 165.8 167.3 170.5 172.8 Oeiras 2.1 2.5 3.0 3.5 4.0 4.3 Amadora - - - 0.6 1.7 3.0 Loures 0.1 0.1 0.2 0.3 0.6 0.7 Total 163.9 -166.3 169.0 171.6 176.7 180.9

Source: EDP - 98 - ANNEX4.8

Terms of Reference for a Study of the Relative Prices of Gas Oil and Gasoline in Portugal 1. The study is designed to seek an appropriate set of recommendations for changing the relative price of gas oil (diesel) so that it approaches more closely the price of gasoline. The study should result in a clear statement of what the appropriate target relativity should be. Portugal has a high growth rate of demand for gas oil and imports some 20% of national consumption as a refined product. The price is currently some 57% of the price of gasoline. 2. In order to establish the appropriate target, the study should give considerationto the following factors:

(a) a detailed examination of the end-uses of gas oil in Portugal;

(b) an estimate of the price elasticity of demand for gas oil;

(c) a comparisonwith other European countries' prices for gas oil and gasoline; (d) the foreign exchange implications of increased gas oil prices with due allowance for fuel switches; (e) the impact on government revenues of increased gas oil prices; (f) the impact on modal choice in the transport sector with separate attention being paid to (i) passenger transport and (ii) road freight transport; (g) via the impact on modal choice, some assessment of the environmental benefits that may be obtained (i) in terms of any changes in levels of congestion in Lisbon and (ii) reduced noise, vibration, and non-stationary air pollution. It is not expected that monetary measures of environmental benefit will be obtained and physical indicators should be attempted;

(h) attention should be given in a broad manner tc any impact on the configurationof refinery output in Portugal.

3. The study should take 25 manr-weeksand an essential part of the manpower requirement is for a transport economist. The other inputs may come from a further transport economist familiar with environmental impact analysis or from a non-economist familiar with this type of analysis. It is not thought that a transport engineer is required. A period of some 12 man-weeks should be spent in Portugal. The focus of the study should be Lisbon, but the study should liaise with the separate team investigating the impacts of gas oil subsidy removal in the fisheries and agricultural sectors(Annex 4.9). The recommendationsfrom the two studies should be consistent. - 99 - ANNEX4.9

Terms of Reference for a Technical/EconomtcStudy of Town Gag Supply Options in Lisbon

1. The existing gas supply in Lisbon uses a 'cocktail' of refinery gas and naphtha. It is estimated that the system operates with an implicit subsidy of some US$18 million p.a. An upward movement in prices is constrained by the price of LPG: town gas is priced at parity with LPG. Any move in town gas prices would thus result in a switch to LPG. Equally, there is no rationale for raising LPG prices beyond levels likely to be dictated by world oil market conditions. The study should therefore delineate all feasible options for changing the feedstock for the town gas system and should estimate the comparative rates of return of these options. The study should include in the options complete closure of the system. 2. While the study should consider itself free to include any set of options, attention should be paid to the fo'tlowing:

(a) closure of the system and the consequent likely increase in demand for LPG and electricity; (b) the proposal to 'nix' imported LNG with refinery gas, which should be evaluated in terms of the savings of naphtha (its value-added in alternative uses) and likely LNG costs. The latter should be assessed, initially at least, on the basis of data on LNG costs in the Plano Energetico Nacional;

3. The study should occupy 10 man-weeks and should be carried out by a gas engineer with expertise in investment appraisal techniques. A period of three weeks in Lisbon should suffice for on-site work and attention should focus on the expertise of EDP (responsiblefor the sale of town gas) and PGP. - 100 - ANNEX 5.1

PORTUGAL

New VehicLe Registrations, 1.979-83 .. Private C&rs

Light Connercial Vehicles

Heavy Trucks

-T.~ ~ ~ ~ ~ ~ ~~~

Source: ACAP If~TIaPY AVAILABLE - 101 -

ANNEX5.2

Passenger and Goods Traffic by Mode, 1979

Passenger-km % of Ton-km % of (billion) Total (billion) Total

Road Cars 22.2 62 - - Light goods vehicles (vans) 2,0 6 1.3 11 Buses 5.9 16 - - Trucks - - 9.2 81 Subtotal 30.1 84 10.5 92 Rail 5.6 16 0.9 8

Domestic aviation 0.1 0 0.0 0

Inland waterways and coastal shipping 0.1 0 0.0 0

Total 35.9 100 11.4 100

Sources: Road: Draft Transport Sector Memorandum, World Bank, April 1983. Rail: Aviation and Shipping - Instituto Nacional de Lstatistica, Estatiscicas dos Transportes et Communicacoes, 1979. TONNES 1,800,000

1,700,000 PORTUGALENERGY ASSESSMENT. 1,600,000- Gas Oil and Gasoline Consumption, 1960-1982

1,500,000.

1,400,000.

1,300,000/

1,200,000

1,100,000/

1,000,000 o

900,000

800,000

700,000 Gas Oil

600,000 -

500,000./ 500,00- Gasoline

400,0oCq

300,000

200,000

100,000

, .r -, , , , , S , . ,U, _ _

1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1.976 1977 1978 1979 1980 1981 - 03 -

ANNEX 5.4 PORTUGAL ENERGY ASSESSMENT Trend of Gas Oil a:d Gasoline Prices and Relation to CommLunaatory 'Tax on Diesel Vehicles

Annual increase required for savings in gas oil costs to

1 ~~~~~~~~~~~~GASOLINEr

o]~~~~~~~~~~~~~~~~~LI I I V

r- X r ~~~~~~~~~~~GASOIL

3-TA 't9 65 iz 1B 1 1.3 - 104

ANNEX 5.5 Page 1

Terms of Reference for Study to Establish the Feasibility of an Energy ManagementPolicy in the TransportationSector

A. General Objectives

On the basis of the findings of the Bank/UNDP energy sector assessment mission to Portugal in July 1983, the study should provide for: 1. assistance to the Portuguese commission recommended by the mission to establish an energy management policy in the transportationsector;

2. establishing the feasibility conditions for the measures proposed to reduce energy consumption (accounting records, costs, practical means of proceeding, energy gains, etc.); and 3. direct participation in the implementation of the initial act4.on program proposed. B. Means

The consultant should:

1. Establish a statistical service to obtain accurate data on:

- the development of energy consumption in the sector by transport mode;

- the actual vehicle fleet in use and the characteristicsof the vehicles in it. 2. Evaluate the practical requirements for establishing technical control centers for vehicles, with particular reference to

- the type of equipment needed;

- the required investment;

- manpower requirementsand training needs;

- means of verifying proper implementation of the control measures; - juridical status of the control centers and relations with existing agents (garages, vehicle concessionaires, equipment suppliers).

- projected operating costs of the technical centers. - 105 -

ANNEX 5.5 Page 2

3. Study the compatibility of the present regulatory and fiscal arrangements with the policy for rational energy utilization with particular reference to:

- relative fuel prices (gas oil, super gasoline)

- the detenmination ol the vehicle license fee and the merits of relating tileamount of the fee to the vehicle's specific fuel consumpLion, with the object of favoring the most economic models.

4. Analyze the national transport plan and review the recent studies by Kampsax International and Canadian Pacific Consulting Service, taking account of the energy dimension (which was insufficiently considered), with particular reference to the investment programs.

5. With regard to the present organization of road hauliers

- examine means of reducing the number of empty journeys, such as the establishment of regional freight offices, and the development of a system (including the use of telex) for the daily circulation of the flows of information between customers and carriers, along the lines of the French "TRANSCLUB";

- study methods and procedures for reducing the fuel consumption of trucks, such as (a) carrying out energy diagnoses of large transport undertakings (e.g. R.N., Transfac) and formulating an energy conservation plan; and (b) instituting a plan for training drivers in fuel-saving driving techniques and education of management to improve the management of the fuel account by transport workers.

6. With regard to the plan for rail transport of goods, study the validity of the plan for restructuring stations open to traffic and the associated measures, with special reference to:

- commercial policy;

- the efficiency of terminal installations on branch lines;

- the policy for management of the fleet of railway wagons;

- the possible development of combined road-rail transport (containers or trailers);

- coordination with road transport for forwarding of goods at terminals. - 106 ANNEX 5.5 Page 3

7. In connection with the railway passenger lines of local interest, examine the possibility of replacing the present mode of operation by an economic system of operation based on (a) a new type of rail-car of modest size (60-80 seats with low fuel consumption (35-40 liters/100 kin);

(b) a reduction in the costs of personnel and fixed installations,and ia variable expenses (maintenance,fuel consumption,etc.); and

(c) a comparison between the present system, the proposed economic system and the alternative road transport solution. 8. Formulate an urban traffic plan for Lisbon taking explicit account of the "energy" variable. A similar plan can be made subsequentlyfor Porto.

9. Study means for creating greater awareness amongst elected local officials, engineers, and industrial managers of the problem of energy management in ,he transportation sector. These means should include arrangements, based either on existing bodies or on a new Institute of Transport, for familiarizing students and engineers with transport energy economics.

10. Review the mutual consistency of the forecasts in the National Energy Plan for the transportation sector and establish alternative assumptions concerning the effectiveness of the proposed energy management policy. In this connection, the consultant should also study a plan for the allocation of fuels in the event of a long or short supply crisis.

C. Expertise and Man-Weeks Required Execution of the study would require a multi-disciplinary team including one transportation economist (team leader), one general economist, one transport operations/managementadvisor, one mechanical engineer, one civil engineer, one urban planner, one sociologistand one training specialist for an estimated total of 70 man-weeks. - 107 - ANNEX 5.6 Page 1-

Energy Savings in Heavy Road Transport - Possible Courses of Action

I. Actions Relating to the Vehicle Fleet

(a) The first measure for reducing consumption is replacement of vehicles, given the continuous technical improvements by manufacturers (more aerodynamic designs, reduced vehicle weight, improved engine design). For example, the reduction in the consumption of a 1982 versus a 1970 26-ton truck is about 20%.

(b) The choice of the most suitable replacement vehicle and equipment (gear box, engine, body design, tires) is an importantfactor in energy savings.

- aerodynamic deflectors (savings of 2 to 6% according to vehicle weight and type of journey);

- speed limiters, particularly effective on long journeys (savingsof 3 to 6% according to the type of journeys);

- devices to assist driving, such as ind±.cators of consumption and engine performance,which allow the driver to adopt an optimal driving regime (savingsup to 6%);

- the tachygraph for recording fuel consumption is a management tool (identification of the fuel cost of a journey) which can bring savings of 2 to 5%, if it is fully utilized. This type of tachygraph requires the use of a consumption computer between the fuel tank and the petrol pump. It is particularlyuseful when a significant part of fuel intakes is made outside the enterprise.

(d) Improvementsin vehicle maintenance (savings of 1 to 4%):

- installation of diagnostic equipment in vehicle maintenance workshops, allowing immediate correction of any irregularity;

- the maintenance contracts offered by certain manufacturers which allow good supervision of vehicles;

- analysis of engine oil, which provides information about the mechanical condition of the vehicle. - 108 - ANNEX 5.6 Page 2

II. Actions at the Enterprise Level

(a) Personnel

- Fuel-consciousdriving can reduce the required power by 15 to 25%. On the other hand, under-inflation of tires results in an extra power requirement of 5 to 15%. Consequently, training of drivers in fuel-saving driving techniques is one of the surest ways of securing better management of the energy account, especially if it is accompanied by a policy of incentives within the enterprise (bonuses, publicity for consumption rates). It can be carried out in various ways, either by using a specialized outside organization, or within the firm itself. The latter approach ensures more durable results through regular refresher courses.

- The variety of potential sources for energy saving in a large road transport enterprise may make it necessary to appoint an individual responsible for the choice and coordination of measures and evaluation of the results. Depending on the size of the enterprise, an outside consultant or the appointment of an internal energy manager, combining technical, information, training and management functions, may therefore be useful, if not indispensable.

(b) Management

Taken in conjunction with the preceding measures, close supervision of the energy account and its share in the operating costs of the enterprise can result in energy savings of 2 to 4%. Modern technical methods for enterprises include:

- systems for recording fuel distribution, which are useful if internal fuel inputs are significant;

- equipment for the automatic analysis of tachygraph discs which allows full exploitation of the information provided by the devices for recording consumption;

- programs of management information concerning the cost price per km, allowing a check on the operation of each vehicle and its optimization.

The institution of these various actions (see table in the Attachment showing the estimated returns) presupposes the establishment of a detailed diagnosis of the enterprise assess the scope for energy savings and the areas of possible intervention (as a function of the type of equipment used, type of transport assumed, etc.) Other possible savings can be Investigated at the level of the service supplied by the - 109 - ANNEX 6 Page 3 enterprise, especially through optimization of turn-around time and journeys and adoption of combined road-rail transportation (use of containers). - 110 -

ANNEX 5.6 Attachment

Profitabilityof Proposed Measures (expressed in payback period for the investment)

Assumptions for the calculation

Fuel Consumption Categories of vehicle km/year a/ liters/100 km b/ A. 22.1-38 tons 55,000 52 B. 11.5-22 tons 41,500 36

Financial assumptions- equipment prices as in France at June 1, 1983 - price of gas oil in PGrtugal 46 escudos/liter (July 1, 1983)

Proposed Action Payback Period, Years A B

3-dimensional deflector 1-2 2-4 Speed limiter 1-2 1-2 Driver assistance device (with computer) 1-2 2-3 Tachygraph (with 4 "stylets") 2 3-4 Diagnostic equipment varies according to vehicle fleet size Vehicle maintenance contract varies according to vehicle fleet size Engine oil analysis Assured Assured Training in fuel conscious driving Variable Variable Recording fuel distribution 1 yr/10 veh. 1 yr./10 vehicles Automatic analysis of semi-automatic 1-2 years/ 2-4 years/ discs 10 vehicles 10 vehicles Management program on cost price per km Assured Assured

a/ Transport Sector Memorandum, World Bank, August 1983. b/ 1983 ANTRAM report. - 3l1l-

ANNEX 5.7 Page 1

"TRANSCLUB"(France)

Objective

By establishing close links between road haulers and their customers, with the object of limiting the energy costs of the former and assisting the latter to obtain information, each of the parties should get to know each other better thanks to the TRANSCLUB infrastructure, making it possible to contribute effectively to the campaign for energy savings. (Extract from "Journal Officiel" of July 25, 1982). Definition

TRANSCLUBis a system of information on traffic flows ("SIFT"), anonymous, impartial but indispensable between the carrier and the customer. From this fact, TRANSCLUB cannot be assimilated by any professional group associated with transport at the national or international level.

Operation

SIFT/TRANSCLUB relies on telecommunications(utilizing national and international telex networks) and "micro-information"services. The software program is designed to mrtch every offer and demand for carriage of goods by road, and also the various parameters, within a geographical radius of 80 km. It canilikewise calculate every distance in km between a loading point and a delivery point, and inform participants who have opted for a tariff based on distance of the amount of the charge. Limiting Empty Vehicle Journeys

Each year journeys totalling 1.3 billion km are made by empty 38-ton trucks in France. Very often the lack of information is the main cause of these journeys by empty vehicles. In the sector for perishable foodstuffswhich are transported under controlled temperature conditions, public transport, supposed to be available on demand, generates many journeys by empty vehicles. The TRANSCLUB system's first year of operation (1984) is expected to result in a saving of 4,000 toe, or 20% of the fuel consumption of the 400 enterprises involved. The cost of setting up the system are US$75,000 and the annual operating cost, mainly telex charges, are about US$600,000. Other Advantages of TRANSCLUB

Apart from the reduction in wastage of energy, the system has a number of positive indirect effects: - 112 -

ANNEX 5.7 Page 2

(a) better utilization of existing transport capacity, and hence increased turnover for the carrier; (b) a reduction in the amount of the charges to the customer's account, with the possibility of a consequent reduction in prices to the consumer and for export;

Cc) a reduction in driving time, and in congestion and traffic jams, resulting in a reduction in the social costs attributable to heavy truck traffic; and

(d) elimination of the costly day-to-day work in which carriers and customers are involved at present in trying to seek out each other. PORTUGAL ERGY I'SSESSNiT Corarative Gas Oil and Gasoline Prices and Taxes, 1982 cat. I (Portugal) TAXATIO t D! PRICE =AIN PRICE cat. II (France) ATION PRICE 7 ; 3 cat. III (F-R TAXATION v;. PRIcE r

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ANNEX 5.9 Page 1

Costs and Benefits of Recommended Measures to Reduce Fuel Consumptionin TransportationSector

A. COSTS

1. For technical control of vehicles (RecommendationNo. 2):

15 vehicle inspection centers at a cost of about US$125,000 per center

Total cost - 15 million French francs (US$1.9 million) 2. Fuel control equipment for trucks and buses (Recommendation No. iii):

Speed limiter US$ 400 Tachygraph US$ 500 Consumptioncomputer US$ 350 US$1250

Total cost (for 60.000 units) - about USY75 million (estimatedpay-back period 2-4 years)

Note: It is estimated that the Government could finance 20-30 percent of the total amount under its energy conservation policy, i.e. US$15-22.5 million. 3. Establishmentof "freight offices" (RecommendationNo. vi): Cost per "office" US$200,000 Total cost (five offices) - US$1 million

4. For parking meters to control urban traffic (Recommendation No. v).

1000 meters (one or two spaces) at US$100/unit 100 meters (10-15 spaces) at US$1800/unit

Total cost - US$280,000

SUMMARY OF COSTS US$ million Technical control of vehicles 1.9 Control equipment for trucks & buses 75.0 "FreightOffices" 1.0 Parking meters 0.3 Total 78.2

Source: Mission estimates. - 115 -

ANNEX 5.9 Page 2

B. BENEFITS

From measures related to vehicles

- Providing incentive to purchase new vehicles with low fuel consumption through establishing vehicle license fees based on specific fuel consumption (EEC standards).

- Establishment of compulsory technical control of existing vehicles (inspection of general condition of vehicle, especially lights, carburettor, fuel injection). Average fuel saving per vehicle five percent.

Secondary benefits - improved safety, abatement of noxious emissions and employment creation.

Total potential fuel saving: five percent - 45.000 toe

From measures relating to vehicle users

- Encouragement of fuel-economizing driving techniques by publicity campaigns on the energy costs of poor driving, excessive speed (emphasizingthe fuel-saving aspects) and short car journeys in urban areas.

- Practical training course in fuel-economizing driving techniques for people taking their driving licence. Training for driving-school inst¢xctors and equipment of driving-school cars with consumption iteters.

Potential fuel saving five percent - 45,000 toe

From measures related to the organizationof urban transport

- Improving the efficiency of urban public transport.

- Reducing traffic congestion.

- Regulating the conditions of access by private cars to urban centers.

- Establishing a policy of parking fees in towns to discourage the use of private cars for travel from home to place of work.

Secondary benefits - reduction of harmful environmentaleffects of traffic and improvement in the quality of life.

Potential fuel saving - 10 perce'it reduction in fuel consumptionof car traffic in towns - bO.000 toe - 116 - ANNEX 5.9 Page 3

From measures related to !oad transportation of goods - Advice to companies on the following main points: measurement and recording of fuel consumption;

equipment for economizing in fuel;

improved vehicle maintenance;

training of drivers in rational driving techniques.

- Measures to improve vehicle efficiency

reduction in "empty" return journeys through (a) creation of regional freight offices and the establishment of an information system along the lines of the French "TRANSCLUB", and (b) regrouping individual road hauliers into small cooperp+-ves;

encouragement of independent road haulage companies.

Potential saving of 15 percent in fuel consumption of road transport (goods and passengers) - 75,000 toe Summary

Total potential annual fuel saving - 225,000 toe Estimated value (at 1983 prices) - about US$50 million p.a.

Source: Mission estimates. r 100° 90 f0 70- -420 To Pontevedra .J.\

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