Report No. 39695-GZ. Public Disclosure Authorized West Bank and Gaza Energy Sector Review May, 2007 Sustainable Development Department (MNSSD) Middle East and North Africa Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized CURRENCY EQUIVALENTS Currency Unit = New Israeli Shekel (NIS) NIS1 = US$0.24 US$1 = NIS4.2 FISCAL YEAR January 1 – December 31 Vice President: Daniela Gressani Country Director: A. David Craig Sector Director: Inger Andersen Sector Manager: Jonathan D. Walters Task Team Leaders: John Besant-Jones and Somin Mukherji Abbreviations and Acronyms AMR Automatic Meters Reading bcm billion cubic meters BG British Gas Group BOO Build-Own-Operate btu British Thermal Unit CCGT combined cycle gas turbine CIF Cost, Insurance and Freight cm cubic meter CNG compressed natural gas CPI consumer price index EAPC Eilat-Ashkelon Pipeline Company EC European Community ELNG Egyptian LNG EMG East Mediterranean Gas ESIMP Electric Sector Investment & Management Project FPL Fuel Products Line FY fiscal year GEDCO Gaza Electricity Distribution Company Ltd GDP gross domestic product GOI Government of Israel GM Gaza Marine GPGC Gaza Power Generation Company GPP Gaza Power Plant GWh gigawatt-hour (1 million kWh) HEPCO Hebron Electric Power Company HFO heavy fuel oil HHV higher heating value HV high voltage ICL Israel Chemicals Ltd. IEC Israel Electric Corporation Ltd INGL Israel Natural Gas Lines Company IMF International Monetary Fund INGL Israel Natural Gas Lines Company IPO Initial Public Offering IPP Independent Power Producer JDECO Jerusalem District Electricity Company kg kilogram kJ kilojoule km kilometer i kV kilovolt LIBOR London Interbank Offered Rate LNG liquid natural gas LPG liquid petroleum gas LV low voltage MENA Middle East and North Africa mmbtu million btu mmcf/d million cubic feet per day MOF Ministry of Finance MW megawatt (1000 kilowatts) MV medium voltage MVA megavolt-amp NEDCO Northern Electric Distribution Company NGA Natural Gas Authority (Israel) NIS New Israeli Shekel O&M Operation and Maintenance ORL Oil Refineries Ltd. PA Palestinian Authority PCBS Palestinian Central Bureau of Statistics PEA Palestinian Energy and Natural Resources Authority PEC Palestinian Electricity Company PERC Palestinian Electricity Regulatory Council PEI Petroleum and Energy Infrastructures Ltd. PIF Palestine Investment Fund PPA power purchase agreement PPC Palestinian Petroleum Commission PPI producer price index PUA Public Utilities Authority SCADA Supervisory Control and Data Acquisition SELCO Southern Electric Company Tcf trillion cubic feet TJ terajoule (1 billion joules) ToU time of use VAT value added tax YT Yam Thetis WACC weighted average cost of capital ii Contents 1. Executive Summary................................................................................................................. 1 1.1 Review Perspective........................................................................................................ 1 1.2 Overview of the West Bank and Gaza Energy Sector ................................................... 2 1.3 Recommended Priorities................................................................................................ 5 2. Current Energy Supply and Demand....................................................................................... 9 2.1 Economic and Social Factors......................................................................................... 9 2.2 Energy Balance ............................................................................................................ 10 2.3 Petroleum Products Supply and Consumption............................................................. 12 2.3.2 West Bank................................................................................................................ 13 2.3.1 Gaza......................................................................................................................... 13 2.4 Electricity Supply......................................................................................................... 14 2.4.1. West Bank................................................................................................................ 14 2.4.2. Gaza......................................................................................................................... 15 3. Technical and Financial Performance of the Power Utilities ................................................ 18 3.1 Technical Performance of the Power Utilities ............................................................. 19 3.1.1 West Bank................................................................................................................ 19 3.1.2 Gaza......................................................................................................................... 21 3.2 Financial Performance of the Power Utilities .............................................................. 21 3.2.1 JDECO..................................................................................................................... 24 3.2.2 SELCO..................................................................................................................... 24 3.2.3 HEPCO .................................................................................................................... 25 3.2.4 GEDCO ................................................................................................................... 26 4. The Impact of the Energy Sector on the PA’s Recurrent Budget.......................................... 27 4.1 Fiscal Impact of Petroleum Fuels................................................................................. 28 4.2 Fiscal Impact of the Electricity Sector......................................................................... 31 5. Natural Gas Supply and Demand .......................................................................................... 34 5.1 Israeli Gas Market........................................................................................................ 34 5.2 Regional Gas Supplies: Egypt...................................................................................... 36 5.3 Gas Supply and Demand in West Bank and Gaza ....................................................... 37 5.3.1 Potential for Gas Use in West Bank and Gaza ........................................................ 37 5.3.2 Potential Gas Supplies to West Bank and Gaza ................................................................... 38 5.3.3 Development Options for Gaza Marine................................................................... 38 5.3.4 Benefits to West Bank and Gaza from Gaza Marine Development Options........... 40 5.3.5 Strategic Issues Relating to Gas Development in West Bank and Gaza ................. 42 5.3.6 Institutional Issues Relating to Natural Gas in West Bank and Gaza...................... 43 6. Strategic Issues for Supplying Future Electricity Demand.................................................... 45 6.1 Scenarios for Electricity Demand ................................................................................ 45 6.1.1 Estimation of Base Year Electricity Demand .......................................................... 45 6.1.2 Scenarios for Electricity Demand............................................................................ 46 6.2 Strategic Issues for Supplying Power to West Bank and Gaza.................................... 49 iii 6.2.1 Energy Security ....................................................................................................... 49 6.2.2 Issues for Developing Power Supply to West Bank and Gaza ................................ 51 6.3 Bulk Power Supply Priorities....................................................................................... 51 6.4. The PA’s Power Sector Policy..................................................................................... 53 Annex 1. Energy Statistics for West Bank and Gaza.......................................................... 56 Annex 2. Operating and Commercial Performance of the Gaza Power Plant .................... 60 Annex 3. Oil Products Supply-Demand in West Bank and Gaza....................................... 68 Annex 4. Developments in the Israeli Natural Gas Market ................................................ 73 Annex 5. The Demand for Electricity in West Bank and Gaza .......................................... 83 Annex 6. Power Network Investment Needs in West Bank and Gaza ............................... 97 Annex 7. Developments in the Israeli Electricity Market................................................. 103 List of Tables Table 1. Summary Energy Balance of Palestine 2001, 2002, 2003 .............................................. 10 Table 2. Sectoral Composition of Final Energy Consumption...................................................... 11 Table 3. Electricity Sales in West Bank and Gaza by Supplier 2005............................................ 18 Table 4. Comparative Financial and Operating Performance Measures for Selected MENA Electricity Distribution Companies in 2005.................................................................................. 23 Table 5. Fiscal Impact of the Energy Sector in 2005 .................................................................... 28 Table 6. Petroleum Fuels Consumption 2006 ............................................................................... 29 Table 7. Structure