Public Disclosure Authorized DISTRIBUTED POWER GENERATION FOR LEBANON Market Assessment and Policy Pathways MAY 2020 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized DISTRIBUTED POWER GENERATION FOR LEBANON Market Assessment and Policy Pathways MAY 2020 Ali Ahmad 1 © 2020 May | International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of the World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Images: © World Bank All images remain the sole property of their source and may not be used for any purpose without written permission from the source. 2 “When the winds of change blow, some people build walls; others build windmills” – Chinese proverb 3 CONTENTS ACKNOWLEDGMENTS 6 PREFACE 7 EXECUTIVE SUMMARY 8 Realities of Lebanon’s Diesel-based Distributed Electricity Sector 8 The Potential and Economics of Distributed Solar PV 8 Recommendations for an Efficient Transition Towards Renewables-Based Distributed Energy Market 9 PART I:CONTEXT OF LEBANON’S ELECTRICITY SECTOR AND DISTRIBUTED POWER GENERATION 11 1. Realities of Lebanon’s Electricity Sector 12 2. Context of Diesel Generators’ Operations 14 2.1 Evolution of government policies towards private generators 14 2.2 New rules, new challenges 15 3. Distributed Renewable Energy Development 17 3.1 Status and trends 17 3.2 Uses of distributed solar PV 17 3.3 Evolution of RE policies in Lebanon 18 PART II:THE DIESEL GENERATOR MARKET IN LEBANON 20 4. Value Chain and Market Size 21 4.1 Size of the commercial diesel generator market 21 4.2 Size of the generator sale and diesel fuel economy 23 5. The Business Model of Private Diesel Generators 27 5.1 Cost components 27 5.2 Revenue streams 29 5.3 Profits and profit margins 30 6. Ownership Models and Structures 31 7. Political Economy Considerations 33 7.1 Overview of political economy challenges 33 7.2 Actors, influences and interests 34 PART III:THE POTENTIAL AND ECONOMICS OF DISTRIBUTED SOLAR PV 36 8. Economics of Distributed Solar PV for Lebanon 37 8.1 Value propositions of distributed solar PV 37 8.2 Cost structure of distributed solar PV projects 39 8.3 Electricity production costs 40 8.4 Financial feasibility 41 8.5 Costs outlook and the role of storage 42 8.6 Case Study: Beirut’s Distributed Rooftop PV Potential 44 8.7 Can owners of diesel generators shift to a solar PV-based business model? 47 9. Ownership Models 49 9.1 Ownership models 49 9.2 Third-party ownership model 51 4 10. Technical Challenges and Solutions 53 10.1 Challenges 53 10.2 Solutions 54 11. Energy Security Considerations 55 11.1 Attacks on Lebanon’s power sector 55 11.2 Energy security and distributed renewable energy 56 12. Environmental Impact 58 12.1 Diesel generator emissions 58 12.2 Environmental impact of scaling-up distributed RE systems 59 ANNEXES 61 APPENDIX A: CURRENT POLICY INSTRUMENTS 62 A.1 NEEREA Mechanism 62 A.2 Net-Metering 62 A.3 Other Green Financing Mechanisms 63 APPENDIX B: EVOLUTION OF GOVERNMENT’S POLICIES TOWARDS DISTRIBUTED POWER GENERATION 64 B.1 Evolution of regulations and control over the operations of commercial diesel generator owners 64 B.2 Evolution of RE laws, regulations and government policies 65 B.3 Role of various ministries and public entities in dealing with distributed RE in Lebanon 65 APPENDIX C: ESTIMATE OF THE NUMBER OF DIESEL GENERATORS IN LEBANON 67 APPENDIX D: METHODS 70 D.1 Levelized cost of electricity 70 D.2 Feasibility of rooftop solar PV systems 71 APPENDIX E: DIESEL GENERATOR COSTS 73 E.1 Lifetime maintenance cost data of a typical diesel generator 73 E.2 Distribution infrastructure costs of a typical generator network 73 E.3: Variable O&M costs of the generator business 74 5 ACKNOWLEDGMENTS This paper was prepared by Ali Ahmad, consultant of the World Bank and an energy policy scholar at the American University of Beirut’s Issam Fares Institute for Public Policy and International Affairs. The author would like to thank the World Bank Middle East and North Africa Energy team for commissioning and guiding this paper. The contributors to this paper include from the World Bank: Sameh Mobarek (Senior Energy and PPP Specialist), Tu Chi Nguyen (Energy Economist), and Rita Ghorayeb (Consultant); and from the International Finance Corporation (IFC): Jaikishin Asnani (Senior Investment Officer). The paper also benefited from the peer review of Marcel Rached (Country Officer, IFC) and Ashok Sarkar (Senior Energy Specialist, World Bank). The author is grateful to Paul Noumba Um (Regional Director, MENA Infrastructure, World Bank) and Erik Fernstrom (Practice Manager, MENA Energy, World Bank) who have given overall guidance on the paper. The financial and technical support by the Energy Sector Management Assistance Program (ESMAP) is gratefully acknowledged. ESMAP—a global knowledge and technical assistance program administered by the World Bank—assists low- and middle-income countries to increase their know-how and institutional capacity to achieve environmentally sustainable energy solutions for poverty reduction and economic growth. ESMAP is funded by Australia, Austria, Canada, ClimateWorks Foundation, Denmark, the European Commission, Finland, France, Germany, Iceland, Italy, Japan, Lithuania, Luxemburg, the Netherlands, Norway, the Rockefeller Foundation, Sweden, Switzerland, the United Kingdom, and the World Bank. 6 PREFACE The electricity sector in Lebanon suffers from a chronic shortage of power supply which has been met by private diesel generators that have increased dramatically over the past two decades. The Government is embarking on a broad- based sector reform, elaborated in the Ministry of Energy and Water’s “Policy Paper for the Electricity Sector” 2010 and updated in the “Updated Policy Paper for the Electricity Sector” of 2019. This reform aims to, among others, provide more stable power supply and reduce the high cost of the sector and the steep implicit subsidies required to keep the sector operating. If implemented, it is expected that demand for private diesel generation will subside. However, there remains a strong interest in maintaining and even increasing private sector participation through alternative retail solutions such as renewable energy and energy efficiency products and services. This report describes the current state of play in the private diesel generation business and assesses how to invest in and create new markets for private sector participation within the green energy sector. The objective is not to provide precise numbers but rather to offer insights and inform reform plans aiming to help the power sector transition from the prevalence of private diesel generation toward renewable-based distributed electricity market (on-grid or off-grid) combined with more reliable grid-based electricity. Its initial sections focus on the private diesel generation business with respect to market size, value chain, cost of power generation, charged tariffs, profit margins, expected revenues, ownership and organizational structures, political economy aspects, and adverse health and environmental impacts. Given sizable market and employment shares of these businesses, their transformation will be challenging; however, they can play an important role in the transition toward clean energy, as aligned with the Government’s objective of 30 percent renewables in electricity generation by 2030.