Energy Pricing , NEPCO Losses & their impact on

Renewable Energy Deployment in Jordan

EEEMF2015

19/ 5/2015 By: Dr Ahmad Hiyasat

The paper gave a brief about the energy sector in Jordan and showed that Jordan imports more than 97% of its energy needs.

Challenges facing the energy sector are :

- Lack of local energy sources

- Almost complete dependence on imported energy sources ( Oil & Gas ) based on International prices , and high cost of imported energy ( almost 20% of the GDP in 2012) .

- High Cost of oil products and consequently generated electricity as shown in the paper since International oil prices are applied in Jordan .

- High growth of energy and electricity demand .

- Sharp decrease of quantities of imported natural gas from Egypt during the period 2009-2013 , the quantity of imported natural gas from Egypt in 2013 was 0.86712 BCM . The quantity of gas delivered in 2013 represented only 21.2% of that delivered in 2009 .

- Need to diversify energy resources and increase use of available local energy sources ( Oil Shale , Natural gas , Renewable Energy Sources ,etc)

- Low energy intensity compared to other developed countries .

- Need to enhance environmental protection .

To get out of this situation the GoJ adopted a plan to diversify energy recourses and to increase dependence on Local ones :

- LNG - Oil Shale - RE - Energy Conservation

- Nuclear Energy

Electricity SectorThe paper gave a brief about the history of the electricity sector and their development and brief about

their components.

The paper showed that NEPCO is operating , expanding and maintaining the high voltage power system in Jordan to the best possible standards , and that generation and distribution Companies are

performing well .

All companies except NEPCO make profit .

Ministry of Energy&

Mineral ResourcesPolicy Maker

Electricity RegulatoryCommissionObserver & Regulator & licenser

Interconnection

CEGCO

SEPGCO

AES JORDAN (IPP1) + QEPC (IPP2)

Generation& Power

Producers

JEPCO

IDECO

EDCO

Distribution

Transmission owner & System Operator NEPCONEPCO

Profit (Loss) of NEPCO during 2009-2013

Year Profit (Loss) in million US$

2009 45.322010 (226.155) 2011 (1424.524) 2012 (1635.27) 2013 (1533.759)

Mil.US$ - Losses in 2014 = 1665.25

6485 - Total Losses during 2010 -2014=

Conclusions about the tariff

-The tariff in Jordan is too complicated and includes many categories and many blocks within most of the

categories

-There is a high degree of cross subsidy within each category and among various categories

-Although the tariff is highly subsided it is clear that the current applied prices of electricity in Jordan are very high compared to almost all Arab countries and

many in Europe

- Due to the increase in the tariff in August 2013 and the planned increase for the period 2014-2017 it is expected that the total amount of subsidy will decrease up to 2017, and that many categories and blocks will shift from being subsidized to be supportive to the tariff.

- Losses of NEPCO are due to the gap in the cost of kWh purchased and sold by NEPCO since NEPCO is responsible for securing fuel for the generation companies based on International Oil prices.

Year Purchased KWh , U$Cent/kWh

Sold KWh , U$Cent/ kWh

Gap , U$Cent/ kWh

2009 6.441 6.638 -0.1972010 8.249 6.638 +1.6112011 16.949 7.429 9.522012 19.21 8.99 10.222013 18.362 10.1 8.262

REFORMS :The GoJ issued a Strategic Plan aiming at reaching a breakeven in 2017, i.e. completely lifting the subsidy , but this does not mean that by that date cumulative losses will be compensated .

The plan is based on taking actions to reduce the gap between the cost of kWh purchased and sold through:

- Reducing the generation cost through diversifying fuel sources ( Oil shale , LNG , RES ,,, - Increasing the selling price of kWh through increasing the tariff up to 2017 .Based on these measures the financial situation of NEPCO in the coming years is expected to be as shown in the following Table

Financial Situation of NEPCO up to 2017

Year Profit (Loss) ,Million U$

2014 (1420.9)

2015 (583.33)

2016 (310.734)

2017 104.52( profit)

Estimation of the sustainability of the Electricity Sector : From the information and Tables in the paper and the calculated indicators the following estimation of the sustainability of the Electricity Sector can be mentioned :

a. The organizational structure of the sector based on the Single Buyer Model is satisfactory, there is a clear separation between generation, transmission and distribution functions .

b. The electricity structure and the legal framework adopted is encouraging private investment since almost all generation expansion is done by private developers.

c. Generation companies are efficient and able to operate to very acceptable standards.

d. Generation expansion plans are continuously prepared and updated, proper expansion is planned and performed on time to meet the increasing demand e. The Power System and the Transmission System are planned , operated and maintained to the best possible standards from the technical point of view , however cumulative losses of NEPCO which approaches 5 billion US$ is of a big concern

f. Distribution companies are performing well and able to plan , operate , and expand to cover the increasing demand and number of consumers

g. All companies in the electricity sector have good profits except NEPCO which has cumulative losses of around(7) billion US$ , however despite these huge losses the technical performance of the power system is to the best standards , generation and transmission expansion plans are prepared and performed on time , no planned outages are experienced in Jordan

h. The GoJ has adopted a strategic plan of reforms based on increasing the tariff yearly and to decrease the cost of generated kWh by diversifying energy sources in order to completely lift electricity subsidies by the year 2017

i.The subsidy is concentrated only in the gap between the cost of kWh purchased and sold by NEPCO , and the subsidy is considered as losses incurred by NEPCO .

- Other players in the electricity sector ( generation and distribution companies ) are completely healthy and sustainable and not affected by these losses ( subsidies )

Conclusion :

Based on the above mentioned we can conclude that The electricity Sector in Jordan is sustainable despite NEPCO huge losses .

RENEWABLE ENERGY Briefly there are several tracks open now in Jordan to develop RES Projects, namely:

- Open Competition Projects (OCP):

- Direct Proposal Submission (DPS):

- Net metering (NM)

- EPC contracting

The legal and technical framework for proper deployment of RES is set and a number of projects are being implemented .

Feasibility of RES compared to other traditional generation

Type of Generation Cost of purchased kWh by NEPCO , U$Cent/kWh

Combined Cycle on gas 6.1Steam generation on gas 7.133Simple cycle on gas 7.994Wind 12

Oil Shale ( expected ) 12PV 16.95

cost of kWh purchased by NEPCO

Net metering (PV) 16.95Steam generation on heavy fuel oil (HFO)

18.645

Combined Cycle on diesel 21.073Simple cycle on diesel 28.955

Conclusions

- The most feasible generation source is that based on Egyptian gas . - RES come second after Egyptian gas , which makes Jordan a unique country since RES are absolutely feasible and do not need any kind of subsidy other than that given to other traditional generation . -Due to the fact that it is expected that the new indicative prices which will be issued by the ERC for 2014 will be less than those applied for 2013 , RES (wind & PV) shall be much more feasible .

Is there any hidden subsidy to RES??

Type of Generation

From Sales Tax

From Custom Duties

From Income Tax

From Cost of connection to NEPCO network

Land for almost free

Licensing Fees

IPP Traditional Yes Yes Yes Yes Yes YesRES , open competition

Yes Yes Yes Yes Yes

Partially

Yes

Partially

RES , DPS Yes Yes Yes Partially yes No Yes , Partially

It is clear from the table that RES in general do not enjoy any exemptions other than those granted for traditional IPP projects , on the contrary RES based on the DPS Initiative are supposed to secure the land on their own and they were even requested to pay some part of the connection cost to NEOCO network , as for the land RES based on Open competition get the land at a reduced price , and all RES pay reduced licensing fees while traditional IPP are exempted completely from these fees .

In conclusion there is absolutely no hidden subsidy for RES , on the contrary the Table shows that traditional IPP generation enjoys some hidden subsidies compared to RES .

Concerns :

High penetration of RES without storage facilities might cause some operational problems to the power system due to their variable output depending on weather conditions which cannot be controlled by the operator or forecasted with a very high degree of confidence .

This level of penetration should be carefully studied to insure that RES would not impose serious negative impact on the power system .

Deployment of RES without storage facilities requires raising the value of the hot spinning reserve in the power system to insure its safe operation taking into consideration their variable and , sometimes unpredicted output .The extra cost from raising the hot spinning reserve should be taken into consideration when deciding the feasibility of RES .

- Deployment of RES requires the expansion of the transmission and distribution networks to avoid possible congestions and overloads , which might impose difficulties on the concerned companies in making the necessary investment .

Impact of recent decline of oil prices on NEPCO Losses :International Oil prices have declined during the last months , although there is no guarantee that the current prices will last for a long time an estimation of their impact on NEPCO Losses is briefly done here .

When oil prices were in the range of 100 US$ the loss per one kWh sold by NEPCO was around 10 US cents , as for the current situation the followings three scenarios can be mentioned :

Scenario 1:Average oil prices = 47.9 US$ :

The cost of purchased kWh by NEPCO based on oil prices of (47.9) U$ as was in February 1-st ,2015 is 15.536 US cents , selling price was 12.048 US cents /kWh , loss per kWh = 3,488 US Cents .

To try to estimate total losses of 2015 we assume that LNG will be supplied starting from July 2015 the situation based on Oil prices (47.9) Us$ shall be :

- Average purchasing price of kWh = 14.048 US Cents ,- Average selling price per kWh = 12.048 US Cents ,- Loss per kWh sold = 2 US Cents ,- Total Losses based on 18 577 GWh consumption = 371.54 Mill.US$

Scenario 2 : Oil Prices =60 US$ :

If similar calculations will be done based on the same assumptions as in Scenario-1and oil prices of 60 US$ total losses will be 748 Mill.US$ .

Scenario-3 :

Oil prices 100 US$:

If similar calculations will be done based on the same assumptions as in Scenario-1and oil prices of 100 US$ total losses will be 1836 Mill.US$ .

Since five months have passed in 2015 with relatively low oil prices the author estimates the total losses of 2015 to be in the range of 700-800 Mill.US$ .