Tunisia - Interfuel substitution study : a joint report

- F3$,1oiiqf IEE.E..EEEEE.EE,,EEX -i..EEEE-...E.,E IUEEEEEEEEEEEEEEEEE hee~ Seto PaRg ~~~~~~~~~~~~~~~.. 'a ... . , , , , . ..~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. 3,, #~~~~~~~~~~~~~~~~~' \ \~~~~~~~~~~~~' '\ ( 3'  ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAM PURPOSE The World Bank/LJDP/Bllateral Aid Energy Sector Management Assistance Program (ESNAP) was launched in 1983 to complement the Energy Assessment Program which had been established three years earlier. The Assessment Program was designed to Identify "he most serious energy problems facing some 70 developing countries and to propose remedial action. ESMAP was conceived, In part, as a preinvestment facility to help Implement recommendations made during the course of assessment. Today ESMAP is carrying out preinvestment and prefeasibility activitles in about 60 countries and is providing a wide range of Institutional and policy advice. The program plays a significant role in the overall International effort to provide technical assistance to the energy sector of developing countries, It attempts to strengthen the Impact of bilateral and multilateral resources and private sector Investment, The findings and recommendations emerging from ESMAP country activities provide governments, donors, and potential Investors with the information needed to identify economically and environmentally sound energy projects and to accelerate their preparation and implementation. ESMAP's polIcy and research work analyzing cross-country trends and Issues in specific energy subsectors make an important contribution In highlighting critical problems and suggesting sc:utions, ESMAP's operational activities are managed by three units within the Energy Strategy Management and Assessment Division of the Industry and Energy Department at the World Bank. - The Energy Efficiency and Strategy Unit engages In energy assessments addressing institutional, financial, and policy Issues, design of sector strategies, the strengthening of energy sector enterprises and sector management, the defining of investment programs, efficiency Improvements in energy supply, and energy use, training and research. - The Household and Renewable Energy Unit addresses technical, economic, financial, institutional and policy issues In the areas of energy use by urban and rural households and small Industries, and Includes traditional and modern fuel supplies, prefeasibility studies, pilot activities, technology assessments, seminars and workshops, and policy and research work. - The Natural Gas Cavelopment Unit addresses gas Issues and promotes the development and use of natural gas in developing countries through preinvestment work, formulating natural gas development and related environmental strategies, and research. FUNDING The ESMAP Program Is a major international effort supported by the World Bank, the United Nations Development Programme, and Bilateral Aid from a number of countrles Including Australia, Belgium, Canada, Denmark, Finland, France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland, the United Kingdom, and the United States. FURTHER INFORMATION For further information or copies of the completed ESMAP reports listed at the end of this document, contact: Energy Strategy Management OR Division for Global and Interregional and Assessment Division Programmes Industry and Energy Department United Nations Development Programme The World Bank One United Nations Plaza 1818 H Street N,W. New York, NY 10017 .. .. . - . . - ^As .- .1. .~....  TUNISIA INTERFUEL SUBSTITUTION STUDY MAY 1990 JOINT REPORT Energy Efficiency and Strategy Unit Industry and Energy Department and EMENA Country Department II World Bank Washington, D.C. 20433 Secretariat d'Etat a l'Energie et aux Mines Agence de Maitrise de 1'Energie and Societ6 Tunisienne de 1'Electricit6 et du Gaz Tunis, Tunisia  FOREWORD This report is the result of a study conducted in October 1988 by the Joint UNDP/World Bank Energy Sector Management Assistance Program (RSMAP) and the Tunisian government. The study was conducted by a working group selected by the Tunisian government, under the supervision of and with the assistance of Mr. Abderazzak Ferroukhi (Senior Energy Planner, EMENA, Country Department II, World Bank), Noureddine Berrah (Task Manager, ESMAP), Jean-Marie Chevalier (Consultant, ESMAP), and Thomas E. Houston (Consultant, ESMAP). The working group representing the Tunisian government consisted of: Messrs. Ahmed Ounali (AME), N. Meddeb (AME), N. Osman (AME), M. Majdoub (AME), Labben (ETAP), A. Khalifa (DGI), H. Turki (STEC), M. Aissa (STEG), C. Chakroun (STEG), and Mies. F. Bargaoui (STEG) et N. Hamrouni (DGE). Ms. Rym Bembli (AME) typed and prepared the interim report, and Mrs. Jacqueline Klopner (ESMAP) was responsible for putting the report into its final form. The members of the working group and the representatives of the World Bank and of the Joint World Bank/UNDP ESMAP program wish to thank all those who participated in the meeting dedicated to discussion of the interim report for their comments and suggestions which -ontributed greatly to improving the report, and for the time they gave subsequently to revision and discussion of the final version. The list of participants appears on the next page.  larticipants at July 19, 1989 Meeting to Discuss Study Findings The purpose of this meeting, which was chaired by the Secretary of State for Energy and Mines of the Ministry of National Economy, was to discuss the findings of the study of the possibilities for interfuel substitution in the electricity and industry sectors made in the context of a World Bank/UNDP/ESMAP program. The following persons took part in the meeting: Messrs. M. Lahiani General Manager for Energy MEN H. Benzarti MEN A. Khalifa MEN Z. Nouri MEN T. Alaya MEN T. Ennaifer General Manager for Projects MP H. Mahjoub Planning Directorate MP M. Ben Abdallah President and General Manager AME A. Abid AME M. Majdoub AME N. Osman AME N. Meddeb AME T. Hadj Ali President and General Manager STEG M. Aissa STEG K. Rekik President and General Manager SOTUGAT- SERGAZ A. Kesraoui President and General Manager ETAP M. Boussen President and General Manager STIR M. Mouelhi President and General Manager SNDP N. Kammoun President and General Manager ANPE The consultant group was represented by: Messrs. A. Ferrouhki Sr. Energy Planner World Bank N. Berrah Economist ESMAP/World Bank J. M. Chevalier Consultant ESMAP  ACROMS AME Agence de Maitrise de l'Energie (Energy Management Agency) ANPE Agence Nationale de Protection de l'Environnement (National Agency for Environmental Protection) CAT Ciments Artificiels Tunisiens CIF Cost plus insurance plus freight CIOK Ciments Industriela d'Oum Kelil (Oum El Khelil Cement Plant) CJO Cimenterie de Jebel Ouest (Jebel West Cement Plant) CPB Cimenteries Portland de Bizerta DGE Direction Generale de l'Energie (Directorate General for Energy) DGI Direction G6n6rale de l'Industrie (Directorate General for Industry) ETAP Entreprise Tunisienne d'Activites Petrolieres (Tunisian Enterprise for Petroleum Activities) FOB Free on board GDP gross domestic product IAA Industries agricoles et alimentaires (agriculture and food industries) IAEA International Atomic Energy Agency IGCC Integrated Gasification/Combined-Cycle Power Plants IMCCV Industrie des materiaux de construction, ceramique et verrerie (building materials, ceramics and glass industry) IME Industries mecaniques et 4lectriques (mechanical and electrical industries) ITHC Industrie textile, habillement et cuir (textile, clothing and leather industry) MAED Model for Analysis of Energy Demand MEN Minist4re de l'Economie Nationale (Ministry for the National Economy) MP Ministere du Plan (Ministry of Planning) ONPT Office National des Ports Tunisiens (Tunisian National Ports Office) OPEC Organization of Petroleum Exporting Countries SICC Societe des Industries Cimentieres du Centre (Central Tunisia Cement Industries Company) SNDP Societe Nationale de Distribution Petrolie're (National Petroleum Distribution Company) STEG Societe Tunisienne de l'Electricite et du Gaz (Tunisian Electricity and Gas Corporation) STIR Societe Tunisienne des Industries de Raffinage (National Refineries Company) WASP Wien Automatic System Power Planning (model for analysis of energy demand)  ABBRIVIATIONS bbl barrel ktoe thousand tons of oil equivalent LPC liquefied petroleum gas Mt million tons Mtoe million tons of oil equivalent t ton toe tons of oil equivalent ENMGY mESAES CWH gigawwat hour kcal kilocalories kV kilowatt kVh kilowatt hour mBtu million British thermal units MV megawatt T'h terawatt hour CURRENCY EQUIVALENTS Currency Unit - Tunisian Dinar (TD) Official Exchange Rate a/ 1 US$ = 0.8265 TD a/ Rate nrevailing in October 1988, at the time of the mission's visit. Fiscal Year January 1 to December 31  TABLE 0F CONTENTS EXECUTIVE SUMMARY ................................. . i I. INTRODUCTION ................. II. THE ENERGY SITUATION IN TUNISIAN........... 3 Organization of the Energy Sectorc... 3 Retrospective Analysis of Energy Balance .........,.... 3 III. STUDY METHODOLOGY AND PRICE SCENARIOS .................... 16 Objectives and Methodology 16 International Energy Marketsr.k et.s...... .......... 17 Price Scenariose .. 20 IV. ANALYSIS OF DEMAND.................. 26 Overall Demand for Energy .......... o.............. *; . 26 Results of the Survey on Energy Demand in Industry..... 29 Substitution Potential................... e* .......... 32 V. SUPPLY AND SUBSTITUTION OPTIONSI...N.S...... 34 Study of Substitution Possibilities in the Electricity S e c t o r 34 Substitution Possibilities in the Cement Plants.***.#*s 46 Substitution Possibilities in Other Industriesri.es0... 49 Choice of a Substitution Strategy.o.c..o.e..ce..o. ..e. 51 VI. IMPLEMENTATION OF A SUBSTITUTION ST kTATEGYG.Y........... 53 Environmental Problems*.......... ....c53 Future Availability of Coal and Logistic Constraints... 55 Future Availability of Natural Gas and Security of Supply..y S.0.. *eoeoeoeooe@*.@oc~.~* .............. see. 57 Prices--Taxation... .., .. oo ....... ev .. 59 Pricing of Gas: Incentives for Conversion............. 60 Institutional Problems........ .0.... . . e... 61 Recommendations for Implementation of the Strategy....e 63 ANNEXES 1 Organization of the Energy Sector in Tunisia**...,**..* 65 2 Production of Primary Energy and Crude, 1970-1987......... 67 3 The World Market for Coal................................. 69 4 Energy Demand in the Industrial Sector (Findings of the AME Survey) ............. ...................... see. 75 5 Optimization of Equipment for Electricity Generation-- Base Case Data and Results....................... e. 77 6 Optimization of Equipment for Electricity Generation-- Technical and Economic Data ......................... 80 7 Costs of Conversion of the Cement Plants a n ts.......... 108  8 Costs of Transport of Coal by the Tunisian National Railroad Company (SNCFT) .................... . . ......... 110 9 Engineering Works Required to Prepare La Goulette and Bizerta to Receive CoaL................ ............ .... 112 10 Experience with Use of Coal in Morocco and Portugal....... 113 TABLES 2.1 Summary National Energy Balance, 198?.................... 5 2.2 Final Energy Consumption in Industry, 1981-1987.......... 9 2.3 Electricity Balance, 1962-87. ........................... 10 2.4 STEG Generating Facilities in 1991.......................* 11 2.5 Availability and Price of Heavy Fuel Oil and Natural Ga s 198387 ......... . . * ... ................ . .... ....... 13 3.1 Fuel Prices--"Continuing Competition" Scenario........... 23 3.2 Fuel Prices--"Tight Market" Scenario....e................ 24 4.1 Possible Development of Demand for Primary Energy in ............................................. . 29 4.2 Energy Consumption of 60 Industrial Establishments, 4.3 Results of the AME Survey................................ 31 4.4 Substitution Potential, 1988 and 2001o................... 33 5.1 Size and Type of Sets Adopted in Optimization Study...... 36 5.2 Technical and Economic Characteristics of the New 37 5.3 Main Cnaracteristics of Optimum Solution "High Demand/Continuing Competition" .......................*.. 39 5.4 Main Characteristics of Optimum Solution "High Demand/Tight Market........................... ........ .. 40 5.5 Main Charactiristics of Optimum Solution "Low Demand/Continuing Competition" .s., 42 5.6 Main Characteristics of Optimum Solution "Low Demand/Tight Market................. .......... ......... . 43 5.7 Main Characteristics of Cement Plants in Service in 1987.. 46 5.8 Basic Hypotheses for Study of Substitution in the Cement Plns.............................48 5.9 Results of Analysis of Substitution Possibilities in the Cement Plants....................... ....... ..... 49 5.10 Examples of Conversion Costs in the Regions Served by Gas 50 FIGURES 1 Organization Chart of Tunisia's Energy Sector............. 4 2 Changing Fuel-Consumption Pattern in Electric Power Generation. ... . . . . . . . . . . . . . . . . . . . .e. . ........ 12 3 Toward an Energy Deficit ........................ ....... 15 MAPS IBRD 22227 Tunisia's Natural Gas Distribution Network IBRD 22228 Tunisia's Electricity Distribution Network  EXCUTIVE gUMMABY 1. This report is the result of a study conducted under the Joint World Bank/UNDP Energy Sector Management Assistance Program (ESMAP), designed to contribute to the formulation of an energy strategy for Tunisia. The study complements preparatory work on the diversification of energy supply and the rationalization of energy consumption in Tunisia. 2. The study was carried out by a working group coordinated by the Tunisian Energy Management Agency (Agence de Maitrise de l'Energie - AME). The working group included representatives of the relevant energy sector organizations: the Directorate General for Energy (DGE) of the State Secretariat for Energy and Mines; the Tunisian Electricity and Gas Corporation (Societ6 Tunisienne d'Electricitb et du Gaz - STEG), and the Tunisian Enterprise for Petroleum Activities (Entreprise Tunisienne d'Activites Petrolieres - ETAP). The Directorate General for Industry (DCI) of che Ministry of Economy was associated with all work involving the industrial sector. The National Agency for Environmental Protection (Agence Nationale de Protection de 1'Environnement - ANPE) was informed and consulted about issues related to the environment. 3. ESMAP provided technical assistance and methodological support to the group during the most important phases of the study; provided the data-processing facilities needed for running the energy projection and power investment optimization models; and enabled three members of the group to visit Morocco and Portugal to study experiences with interfuel substitution, particularly the use of coal. 4. The study had two main objectives: to estimate the potential for interfuel substitution in the electricity generation and industrial sectors by identifying the existing or to-be-built installations that might use gas or coal instead of petroleum products, and to evaluate the various energy supply options, taking into consideration economic, technical, infrastructural and institutional constraints. 5. This summary follows the organization adopted by the working group for its report: (a) An outline of the problem and of the energy situation in Tunisia (Chapters I and II); (b) Study methodology and price scenarios (Chapter III); (c) Analysis of demand (Chapter IV); (d) Supply and substitution options (Chapter V); and (e) Recommendations for implementation of a substitution strategy (Chapter VI).  - ii - The Energy Situation in Tunisia 6. The energy situation in Tunisia is characterized by limited domestic resources, stagnation in the production of hydrocarbons and sustained growth in energy consumption, despite efforts in recent years to conserve energy and rationalize its use. 7. Recoverable hydrocarbon reserves are limited; however, Tunisia has significant geological potential and the possibility of new discoveries should not be overlooked, especially for natural gas: (a) as of January 1, 1989, almost 70% of the oil reserves, or 100 Mt, were recovered and the recoverable oil reserves remaining were about 42 Mt, representing 8 to 9 years' production at the current level (of 5 Mt/year); (b) reserves of associated gas, under production since 1986, are almost totally exhausted. Gas discoveries in recent years, notably in the Gulf of Gabes, are promising, but their potential is still uncertain. Recoverable reserves from the main field, Miskar, are about 30 billion m3, and th.ose from Franig, whose development is under study, are about 4 billion m3. Technically, production from Miskar is no longer a problem, but the economic viability of the Miskar field is still under study; (c) in addition to these national resources, there are royalties on the gas carried through the trans-Mediterranean gas pipeline, which supplies Algerian gas to Italy. At present, maximum additional resources are about 600 million m? per annum. 8. From 1970 to 1980 production of primary energy grew moderately at an annual rate ei 3.7%. Since 1980 there has been no further growth and even a slight decline, due mainly to the saturation and decline of the oil fields in production. 9. Table 1 shows that the growth in the consumption of both primary and final energy has slowed since the beginning of the decade.  - iii - Table 1; GROWTH IN ENERGY CONSUMPTIO*N, 1970-1987 1970 1980 1987 Consumption of primary energy ('000 toe) 979 3,085 3,935 Annual rate of growth (%) 12 3.5 Final energy consumption Q000 toe) (843)a/ 2,658 3,659 Annual rate of growth (%) 12 4.8 Source: AME. a/ Estimate. Despite a definite slowdown in the growth rate, due in part to efforts to rationalize energy consumption, supported by a policy aimed at aligning domestic energy prices with international prices, the growth in energy consumption is still significant (5% p.a. at the final level and 3.5% p.a. at the primary level). The difference between the two rates of growth indicates that efforts have been made to conserve energy at the energy transformation stage. 10. Growth in electricity consumption has slowed since the beginning of the 1980s, with an annual rate of about 7.5% compared to the rate of slightly over 11% that was maintained for almost two decades. 1I. Between 1980 and 1987 the pattern of final energy consumption showed a slight drop in the consumption of oil products in favor of electricity and natural gas (Table 2). Table 2: PATTERN OF FINAL ENERGY CONSikPTIUN, 1980 and 1987 1980 1987 Share of oil products in energy 'afnsuwption (%) 73 64 Share of electricity In final energy consumption (1) 23 29 Share of gas in 'intS energy consumption (%) 3 7 Source: AME,  - iv - 12. At the primary energy level, the market penetration of gas varies according to the demand for gas in the electricity sector, which absorbed 83% of the gas consumed in the domestic market between 1983 and 1988. Ninety percent of STEG's demand for fuel originates from steam- generating facilities that are equipped to burn either fuel oil or gas. This allows flexibility of supply, depending on the prices of these two fuels on the international market. Since the beginning of the 1980s the share of natural gas in the annual demand for primary energy has varied between 15% and 30%. 13. Between 1980 and 1987 energy imports (oil and natural gas) grew from 1.2 to 1.8 Mtoe, while oil exports dropped from 4.3 to 3.4 Mtoe. The net energy balance dropped from 3.1 to 1.5 Mtoe, an annual decline of about 10%. Current data indicate that this trend will become more marked and Tunisia will likely become a net energy importer during the first half if the next decade, even with minimal growth in demand and sustained energy management and conservation efforts. Study Methodology and Energy Price Movement Scenarios 14. The study methodology is organized around six key components: (a) construction of two contrasting scenarios for the movement of oil, fuel oil, natural gas and coal prices over the study period (1991-2020); (b) a forecast of overall demand using an analytical model to determine long-term energy demand; (c) an assessment of the potential for interfuel substitution, to the year 2000, in the electricity generation and industrial sectors, based on: (i) an estimation of the power generation capacity, either already installed or to be installed, for which interruel substitution is possible; and (ii) a survey of the possibilities for substitution in the industrial sector; (d) evaluation of the various investment and supply options to identify solutions that would minimize the net present discounted operating and capital costs, using the WASP (Wien Automatic System Power Planning) model for the electricity sector and a conventional cost/benefit analysis for the industrial sector; (e) sensitivity and risk analyses to confirm the soundness of the investment strategies proposed for power sector development,  taking into consideration the uncertainties regarding demand growth, energy prices, environmental constraints, equipment availability and cost; and (f) recommendations for the selection and implementation of a substitution strategy. 15. Since any interfuel substitution strategy will depend on the future movement of energy prices, the working group, with technical assistance from two international experts: (a) examined closely the principal characteristics of international energy markets and the trends that can be deduced therefrom; and (b) constructed two contrasting price movement scenarios for oil, fuel oil, natural gas and coal, based on the principle that the economic costs of fuel are equal to their CIF import costs plus the costs of distribution to the final consumer. These scenarios -- "continuing competition" and "tight market" -- are not so much price predictions as projections of a range of possible price movements; (i) the "continuing competition" scenario is characterized by a moderate increase in oil prices, to around US$ 22/bbl in 2000 and to US$ 30/bbl in 2010. Between 2010 and 2020, two assumptions are considered: continuation of the trend observed between 1990 and 2010 and stabilization of prices at the level reached in 2010; (ii) the "tight market" scenario is characterized by a much more rapid, even extreme, increase in oil prices to around US$ 30/bbl in 2000 and to US$ 40/bbl in 2010. Between 2010 and 2020, the same assumptions were considered as in the first scenario: continuation of the trend observed between 1990 and 2010 and stabilization of prices at the level reached in 2010. Some of the price movements considered exaggerate the possible changes to show the effects of a large increase in gas prices on the competitiveness of gas in relation to coal. Almost all recent studies forecast price movements between now and 2000 that are closer to the "continuing competition" scenario, although they do not exclude the possibility of brief periods of tension in the market.  - vi - 16. Table 3 summarizes the results of the two scenarios retained. Table 3; ALTERNATIVE FUEL PRICE *VEMENT SCENARIOS, 1990-2020 (in 1988 US dollars/toe) #'Continuing competition" "Tight market" 1990 2000 2020 1990 2000 2020 Oil 118 162 221 140 221 294 Fuel oil 89 122 166 105 166 221 Gas 88 121 165 104 166 220 Coal 83 88 104 86 104 119 Source: Study team. In the base cases, for both scenarios, parity of fuel and gas prices at the level of the final consumer was retained in accordance with the "netback" principle. During the sensitivity analysis, introduction of an environmental premium consisting of increasing the price of gas by 1OZ at the level of the final consumer as of 1995 was tested. This premium tends to reflect a not improbable situation in which environmental constraints in Western Europe would put natural gas at a premium over fuel oil, due to its specific advantages. 17. Since Tunisia's gas potential is sizeable, though not large enough to allow exports of gas, if local fields were developed, the economic cost of the gas would equal the long-term marginal cost, and thus would be lower than the opportunity cost of the alternative fuel, which in this case is fuel oil. Demand Analysis 18. Th, long-term forecast of final energy consumption by fuel type was made using the MAED model (Model for Analysis of Energy Demand). After numerous simulations, only one growth alternative was retained. The hypothesis adopted by the working group is based on: (a) success of the policy of structural adjustment currently being implemented by Government, aimed at sustained GNP annual growth of 5.5% up to the year 2000 and of 6.5% thereafter; and (b) continuation of the policy of rationalization and control of energy consumption, supported by a policy of aligning prices with the economic costs of supply.  - vii - 19. Given the importance of the electricity sector in interfuel substitution, the results of the global methodology were compared with STEG's medium- and long-term analytical projections of electricity consumption. Two alternatives were adopted for the evolution of electricity consumption: (a) 4.4% annual growth from 1989 to 1996 and 4% thereafter (low- growth hypothesis), and (b) 6.8% annual growth from 1989 to 1996 and 5.3% thereafter (high- growth hypothesis). The group found that for both cases the market penetration of electricity was compatible with the development of final energy consumption. 20. The results obtained are summarized in Table 4. Table 4: SCENARIOS FOR EVOLUTION OF ENERGY DEMAND THROUGH 2021 (Mtoe) 1986 2001 2021 Final energy demand, excluding electricity 2.5 4.6 9.8 Electricity demand a/ . Low hypothesis 0.9 1.8 3.8 . High hypothesis 0.9 2.4 6.7 Final demand . Low hypothesis 3.4 6.4 13.6 . High hypothesis 3.4 7.0 16.5 Primary energy . Low hypothesis 3.9 7.1 15.4 . High hypothesis 3.9 7.8 18.6 Elasticity . Low hypothesis 1 0.77 0.60 . High hypothesis 1 0.88 0.68 Source: Study team. a/ Converted to equivalent energy production.  - viii - 21. Table 5 illustrates the estimated interfuel substitution potential for 1988 and 2001. Estimates were based on sector-by-sector analysis of final energy demand, an estimate of likely demand for electric power in the case of rapid growth, and the findings of a survey of large industrial energy consumers conducted by the Energy Management Agency (AME). Table 5; INTERFUEL SUBSTITUTION POTENTIAL, 1988 AND 2001 ('000 toe) 1988 2001 Electricity sector 900 2100 Cement plants 160 160 industry excluding cement plants 140 290 Total 1200 2550 Source: Study team. This substitution potential consists of the demand that can be satisfied by any of the three fuels under consideration: natural gas, coal, or petroleum products. The main possibilities for substitution are in the electricity sector (75% in 1988 and 82% in 2001), followed by the cement industry (13% in 1988 and 6% in 2001). Supply and Substitution Options 22. Supply and substitution options were studied for the electricity sector, the cement irdustry and for other industries. The main emphasis was on the first two groups because of their high interfuel substitution potential. Analysis of substitution options in the electricity sector 23. Optimization was carried out for eight base cases by means of permutations of the two sets of demand projections (high, low), the two energy price scenarios (continuing competition, tight market), and the two hypotheses on requirements for coal use (with and without desulfuri- zation). The analysis was completed by: (a) studying the sensitivity of the solutions obtained to variations in those parameters deemed significant; and (b) evaluating the economic risks or losses that would be incurred should technical and/or economic conditions differ from the assumptions used in the solution adopted; and  - ix - (c) determining which price premium of gas over coal would ensure the competitiveness of coal as of 1996, i.e., eliminate the combined-cycle units from the optimum solutions. 24. The technical and economic characteristics of the units proposed for the electricity generation sector during the period under consideration are summarizec in Table 6. Table 6: TECHNICAL AND ECONOMIC CHARACTERISTICS OF THE GENERATING UNITS CONSIDERED Investment Specific Costs Consumption Availability TM 1988/kW) (kcal/kWh) (M) 300 MW coal-fired steam turbine (CH30) 832 a/ 2390 76 300 MW fuel oil-fired steam turbine (FU3O) 621 2344 76 300 MW combined-cycle unit (CC30) 535 2143 89 100 NW gas turbine (TGIO) 350 3000 88 Source: Study team estimates. a/ This value is for use of coal without desulfurization. With desulfurization, the cost per kilowatt used would be TD 1109/kW. It should be noted that: (a) the working group discussed at length the technical parameters adopted for optimization, which were based on documentary research and international comparisons, particularly with parameters for several developing countries: (i) the 44% efficiency for the combined-cycle unit can be considered low since even in developing countries there are units in service with efficiencies of 45 to 48%, while the efficiencies announced for the new generation of combined-cycle units range from 50 to 55%; (ii) the availability of the combined-cycle unit is 20% higher than that of the coal-fired unit although some available  statistics show it as being as much as 25-30% higher. The maximum availability observed for the coal-fired units varies from 70 to 75%, whereas combined-cycle units installed in the mid-1970s have attained availabilities of 90% during 10 years of operation. The most recent generation of machines, installed nearly five years ago, have achieved 95% availability, even under difficult operating conditions; (b) the capital costs adopted for the analysis are the same or even slightly lower for coal, and 15% higher for combined-cycle units, than average costs observed in the United States and Europe. 25. A discount rate of 8% was applied in the optimizations. This is the rate generally used in planning studies in Tunisia. In each case considered, sensitivity analyses were made using rates of 10% and 12%, the rates the World Bank deems most appropriate for Tunisia. 26. It must be emphasized that the goal of the analysis is not to make decisions about power system development for the next 30 years but to study the long-term economic consequences for the electricity generation sector of several different energy supply options. Its principal objective is to define the long-term strategic choices that should guide immediate investment decisions. 27. Table 7 lists the equipment that would need to be installed for each of the optimum solutions obtained in the base cases (without desulfurization) (For further details, see Tables 5.3 to 5.6).  - xi - Table 7S EQUIPMENT NEEDS FOR OPTIMUM SOLUTIONS IN HIGH DEMAND AND LOW DEMAND SCENARIOS (without Desulfurization) High demand Low demand continuing tight continuing tight competition market competition market 1. Units to be installed 150-MW fuel-fired stem turbines till 2000 2 91 2 a/ 2 a/ 2 a/ after 2000 0 0 0 0 300-MW coal-fired steam turbines * til 2000 0 1 0 0 * after 2000 1 14 6 9 300-MW combined cycle units till 2000 3 2 2 2 after 2000 9 0 2 0 100-1 gas turbines till 2000 1 a/ 1a/ 1 a/ I a/ * after 2000 3 3 0 0 2. Discounted total expenditures (million TD) 3392 3851 2422 2880 3. Aggregate Investments (non-discounted) (million TM) 2805 4440 2410 2838 Source: Study results, a/ Investment decisions made by STEG from 1992 to 1995 imposed to the model during the optimization but reconsidered In the sensitivity analysis (see para 27c). Table 7 shows that: (a) even if coal were used without desulfurization and at an investment cost equivalent to that for industrialized countries, before the year 2000 it would be competitive only in the extreme case of high demand and a tight market. Even in this case, only one 300-MW coal-fired steam unit is to be installed before 2000 (in 1998).  - xii - (b) a minimum of two to three combined-cycle units will need to be installed at the beginning of the period according to the technical and econcmic conditions envisaged which, in certain cases, are unfavorable to gas; (c) the number of combined-cycle units to be installed before the year 2000 should be increased by at least a 300-MW combined-cycle unit if STEG is able to reconsider the two 150- MW steam turbines already decided upon; an optimization without constraints over the complete period under study showed that the least-cost solution, in the case of high demand/- continuing competition, would be to install four 300-MW combined-cycle units before the year 2000 and delay introduction of the first coal-fired steam unit to the year 2002. If this solution were adopted, the total discounted expenditures would be reduced by about 3.5%. (d) stricter environmental protection standards (desulfurization imposed) reduce the competitiveness of coal. The number of coal-fired steam units decreases in all solutions and, in the case of a tight market, the first units are not put into service before 2003 or 2004; in the case of continuing competition on the energy market, they are not put into service until after 2010. 28. Sensitivity analyses carried out on the various parameters confirm the competitiveness of the combined-cycle units before the year 2000s even in the case where the price of gas rises much more rapidly in real terms than the price of coal during the next three decades; 3.75% p.a. compared to 1.09% p.a. The conclusions of the analyses are that: (a) a higher discount rate (10 to 12%) increases the competitiveness of the combined-cycle units without causing any fundamental changes in the solutions obtained in the eight cases studied; in general the number of coal-fired steam turbines is reduced by one or two units and their installation is set back one to three years. (b) a 15 to 20% higher cost per installed kW for coal-fired steam turbines does not affect any of the optimum solutions; (c) inclusion of a 10% "environmental premium" in the price of gas from 1995 has practically no effect on the optimum solutions in all the cases considered; and (d) a lower availability of the combined-cycle units, 84% and 76% (as for the coal-fired steam turbines), instead of 89%, would not affect the competitiveness of the combined-cycle units before 2000.  - xiii - 29. A strategy based on installation of combined-cycle units before 2000 is risk-averse for two reasons: (a) uncertainties regarding the movement of energy prices do not affect the competitiveness of combined-cycle units before 2000, even in the most extreme cases; (b) the extreme flexibility of the combined-cycle units (due to their modular design, they can be installed in three 100-MW tranches), will increase the system's load-following capability and adaptation to differentiated growth in electricity demand; and (c) short and recurrent interruptions in the supply of natural gas due to failures in the distribution network, or an interruption of 4 years (1996 to 1999) while Miskar and/or Franig is developed (contractual problems), and use of gas oil for the combined-cycle units during these periods does not modify the optimum solutions, and particularly has no effect on installation of the combined-cycle units before the yeax 2000. 30. In addition to the sensitivity and risk analyses, analysis was made to determine what price premium of gas over coal from 1996 to 2020 would eliminate the combined-cycle units from all the optimum solutions. This premium can be considered as the actual difference between the two indexed prices or the difference between the two average prices during the period. The results obtained show that this premium is sentive to the economic and technical assumptions and ranges from TD 70 to 110/toe; e.g., US$ 85 to 130/toe or US$ 2 to 3/mBtu. It should be noted that from 1975 to 1986 the premium of gas over coal was about US$ 68/toe or US$ 1.6/mBtu. Analysis of Substitution Options in the Industrial Sector 31. An analysis of substitution options in the industrial sector was made by: (a) assessing the economic and financial consequences of conversion of existing cement plants to gas and to coal; and (b) examining studies made by STEC in the context of promoting the use of natural gas by other industrial users. 32. Since cement production capacity exceeds demand in Tunisia, no expansion of capacity is envisioned, and one of the six existing cement plants is expected to be shut down shortly. The results obtained confirm the decisions STEG has already taken regarding conversion to natural gas. Of the five cement plants under consideration, two -- Gabes and Oum Kelil -- have already been converted to gas while three -- Bizerte, Jebel Oust and Enfidha -- run on fuel oil. Case-by-case economic and financial analyses have shown that:  - xiv - (a) for the Enfidha and Jebel Oust plants, conversion to gas is economically and financiaily more advantageous than conversion to coal. The Jebel Oust plant will be converted to gas before the end of 1989. In the least favorable case, the internal rate of return on conversion to gas is 44%, and the payback time two years; and (b) for the Bizerte plant, conversion to gas cannot be justified at present because of very high infrastructure costs. Conversion to coal is a slightly better proposition, with an internal rate of return of about 25% and a positive discounted cash flow under favorable conditions (existence of a STEC electric power station and of a coal port at Bizerte, 8% discount rate). However, conversion to coal is still too risky since the discounted cash flows of the operation would be negative under unfavorable conditions (no STEC power station or coal port, 12% discount rate). 33. As regards the other industries, the AME survey showed that nearly all manufacturers were considering converting to natural gas because of its qualities, ease of use, and availability. Financial calculations made by STEG for the regions supplied with gas reveel that the payback time required for investments made to connect the plants to the natural gas distribution network is generally from two to 16 months. These calculations suggest that substitution of natural gas for fuel oil is economically attractive since there is little price distortion in the energy sector, and the cost of converting industrial equipment from fuel oil to gas is low, generally much less than the cost of connection to the network. Choice and Formulation of a Substitution Strategy 34. The main conclusions of the technical and economic analysis are: (a) present consumption of substitutable energy is about 1.2 million toe, almost 30% of primary energy consumption. Considering the high demand scenario for electricity, it should reach 2.5 million toe in the year 2000, and would still be about 30% of primary energy consumption. Eighty percent of this substitution potential is in the electricity generation sector; (b) for the industrial sector, particularly for two of the three cement plants still operating on fuel oil, it is preferable from both the economic and the financial viewpoint to replace fuel oil with gas;  - xv - (c) in the electricity generation sector, under all anticipated technical and economic conditions, combined-cycle units and coal-fired steam turbines are preferable to fAel-oil-fired steam turbines. The long-term relative competitiveness of the combined-cycle units and coal-fired steam turbines depends on the future movement of coal and gas prices, and on the environmental protection standards adopted by the Tunisian Government. But these uncertainties in no way affect medium- term investment decisions since in all demand and price situations anticipated, two to three 300-MW combined-cycle units will have to be installed before the year 2000 (and even three to four units before 1996 if the investment decisions already taken by STEG can be reconsidered). 35. For the medium term, a substitution strategy is recommended that would hold energy supply costs to a minimum while preserving the flexibility needed to cope with uncertainties regarding demand and energy price movements. This substitution strategy is based on three components: (a) promotion of natural gas for industrial use and, in particular, conversion of the cement plants (except Bizerte) to natural gas while retaining the possibility of using fuel oil; (b) installation of 300-MW combined-cycle units to satisfy growth in demand for electricity up to the year 2000; (c) a prefeasibility study for construction of a coal power station on a new site. The study would include: (i) comparison of installation of conventional coal-fired steam units with use of the new technology linking a coal-gasification module with a combined-cycle unit; 1/ (ii) a precise assessment of the environmental impact of coal use; and (iii) determination of the infrastructure necessary for the supply of coal, particularly the port facilities. 36. This strategy does not foreclose other fuel use options in the future, since it would allow the energy system to adapt, without extra cost, to future demand and energy price configurations, becauset 1/ This technolo6y (IGCC: Integrated GasificLtion/Combined-Cycle Power Plants) links a coal-gasification module to a combined-cycle unit; a 120-MW unit has been in operation in Coolwater, California sincel984. Many experts believe it will reach the commercialization stage toward the mid-1990s.  - xvi - (a) the modular design of the combined-cycle units permits better adaptation of supply to demand and brings additional economic benefits that were not taken into account during the optimization exercise; (b) the country will be better prepared for the introduction of coal after the year 2000 (if the development of the energy market makes it prove to be compecitive vis a vis natural gas) and technological improvements will be incorporated that permit more efficient and cleanoe use of coal without extra economic costs. 37. In addition, this strategy will: (a) reduce the amount of capital needed for the development of electricity generation by at least 15% compared to the amount needed if fuel-oil-fired steam turbines were used and by nearly 35Z compared to the amount needed if coal-fired turbines were used; (b) safeguard the country's independence in the energy sphere and the flexibility of the system, up to the year 2000, since: (i)if Franig and/or Miskar are developed, total gas consumption from 1995 to 2005 or 2010 can be met by domestic production and the royalties from the trans-Mediterranean gas pipeline, even in cases of high demand; (ii)in the most pessimistic case, assuming that Franig and Miskar are not developed and royalties do not increase, imports to satisfy demand to the year 2000 would not exceed 1.5 to 2 billion m3 if the dual-fired steam units and possibly the cement plants also are converted to fuel oil; and finally (c) keep the negative impact on the environment to a minimum because the use of gas is not only economically justified, but it will also reduce S02, C02 and NOx emissions. 38. To encourage the substitution of natural gas for petroleum products in the medium term, and of natural gas and/or coal for petroleum products in the longer term, it will be necessary to: (a) implement the policies recommended by the Tunisian Government, which promote: (i) greater transparency and clear management rules and procedures to improve the efficiency of the enterprises and eliminate extra costs; and (ii) elimination of remaining price distortions, by aligning the prices of the various forms of energy with economic costs;  - xvii - (b) launch an information campaign targeting industrial clients in the areas supplied by the natural gas system, emphasizing the economic and financial benefits and the reduced air pollution that can be gained from switching from fuel oil to gas: (c) avoid distortion of prices for the various forms of energy through fiscal measures. If the Government finds incentive measures in support of an adequate price policy appropriate, it would be more advisable to grant tax rebates and/or facilitate financing, to encourage manufacturers to invest in conversion, than to apply preferential tariffs that are not economically justified; (d) ensure greater market penetration for natural gas, by: (i) promoting the best possible use of the existing infrastructure by the offer of interruptible supply contracts to large industrial consumers to encourage them to retain the possibility of using heavy fuel oil after conversion; (ii) studying the ntcessary infrastructure, including storage facilities, to ensure security of supply at a level acceptable to consumers; (iii) negotiating supply contracts which would ensure the competitiveness of natural gas with other forms of energy, specifically coal; (iv) studying the institutional problems posed by rapid development of gas, even though Tunisian authorities do not plan to restructure the energy sector in the near future. In the short term, STEG should strengthen its gas department through increased funding, accounting transparency, increased management autonomy, a commercial policy for natural gas that is independent of, and even competitive with the commercial policy for electricity, etc.; and finally (v) considering the combined-cycle option in the reassessment of the Miskar field and/or Franig and encouraging exploration in order to increase the natural gas potential; (e) carry out a prefeasibility study of a coal-fired power generation station at a new site, in the event that the development of the energy market justifies the introduction of coal after the year 2000; and  - xviii - (f) study and issue national environmental protection regulations, particularly standards for atmospheric emissions: particulates, 02, S02 and NOx. Adoption of such standards should be considered a prerequisite for inclusion of coal-fired plants in the electricity generation system.  I. INF1ODUCTION 1.1 In 1988, Tunisia's consumption of primary energy was estimated at 4 million toe, almost exclusively from hydrocarbons, including 2.9 Mtoe of petroleum products and 1.03 Mtoe of natural gas. Although the country has been a net energy exporter since 1967, Tunisia's domestic production of hydrocarbons is today virtually static, while primary energy demand is rising by 4% annually. 2/ 1.2 Without new discoveries, Tunisia will become a net energy importer in the course of the next decade, even if sustained efforts are made to conserve energy and rationalize consumption. In the circumstances, the key questions are: How can Tunisia mobilize its domestic resources, existing or potential, and to what extent might it benefit from importing alternative sources of energy (coal or natural gas) that are considered more economically advantageous than petroleum products? 1.3 Primary energy consumption will rise to 7 Mtoe by the end of the century. However, 64% of demand is estimated to be nonsubstitutable; the remaining 2.5 Mtoe (36% of demand) represents substitutable demand, which can be covered with petroleum products, natural gas or coal. 1.4 Systematic examination and economic evaluation of the energy substitution potential in the industrial and electricity sectors led to proposal of a strategy of substituting natural gas for petroleum products over the medium term (up to the year 2000) and substituting natural gas and/or coal for petroleum products, depending on energy price movements, over the longer term. 1.5 The study that led to the above conclusions was conducted by a working group set up by the Government of Tunisia and consisting of representatives of Agence de Maitrise de l'Energie (AME), Societe Tunisienne de l'Electricite et du Gaz (STEG), Entreprise Tunisienne des Activit6s Petrolieres (ETAP), the Directorate General of Energy, and the Directorate General of Industry. The group's mandate was to examine substitution possibilities in the industrial and electric power sectors and to identify the key requirements for instituting or accelerating the necessary structural modifications. 1.6 The approach chosen by the working group, with assistance from ESMAP, was the follouing: 2/ In this report energy consumption is always intended as commercial consumption.  - 2 - (a) evaluation of substitution potential in the industrial and electric power sectors -- that is, identification of plant, existing or to be installed, that would be capable of utilizing natural gas or coal instead of petroleum products; (b) formulation of two contrasting scenarios based on the possible evolution of international energy prices, so as to provide the means for estimating the risks inherent in decisions on substitution or nonsubstitution; (c) economic evaluation of each of the possible options to identify the least-cost interfuel substitution strategy, and sensitivity and risk analysis to ensure its robustness; (d) review of other strategic factors important to implementation of the strategy, such as independence, security of supply, flexibility, and protection of the environment. 1.7 This general approach was built around the following five points, which also serve as the main chapter headings for this report: (a) the energy situation in Tunisia (Chapter II); (b) methodology of the study and presentation of th} price scenarios (Chapter III); (c) analysis of demand and substitution potential (Chapter IV); (d) supply and substitution options (Chapter V); (e) implementation of a substitution strategy (Chapter VI).  -3- II. TH9R ENEGY SITUATION IN TUNISIA Organization of the Energy Sector 2.1 One feature of the energy picture in Tunisia is the marked preponderance of the public sector. 2.2 The State Secretariat for Energy and Mines consists of the Office of the Secretary and a central administrative complex. It supervises the statutory bodies and the enterprises belonging to the energy sector, in particular: (a) Entreprise Tunisienne des Activit&s petrolieres (ETAP); (b) Societe Tunisienne de l'Electricite et du Gaz (STEG); (c) Agence de Maitrise de l'Energie (AME); (d) Soci6t6 Tunisienne des Industries de Raffinage (STIR); (e) Soci6t6 Nationale de Distribution Petroliere (SNDP). 2.3 In addition to the public-sector entities, there are a number of private corporations, mostly engaged in hydrocarbon exploration, production, transportation and distribution. 2.4 The general structure of the energy sector in Tunisia is shown in the accompanying organization chart (Figure 1), while more detailed particulars are given in Annex 1. Retrospective Analysis of Energy Balance 2.5 The energy situation in Tunisia is marked by limited domestic resources, stagnation in the production of hydrocarbons, and sustained growth in consumption. 1987 Energy Balance (Table 2.1) 2.6 Domestic primary energy production fell by 4% between 1986 and 1987, from 5,857 to 5,614 ktoe, owing mainly to a 5% drop in crude oil output and stagnation in gas production. Electricity generation rose by 8% between 1986 and 1987, from 4,202 to 4,549 GWh.  Figure 1: ORGANIZATION CHART OF TUNISIA'S ENERGY SECTOR Gov't. Government Sector Industrial and commercial activity Agency Department Exploration Import Export D S and of oil of oil Refining Transport Distribution I E Production - STIR - STIR R C. - ETAP (exchange) (exchange) E DIRECTORATE E O - ETAP - SOTRAPIL - SNDP T OF C O I Foreign Import - STIR A A HYDROCARBON T F L Companies of oil Export - CIN Foreign P 0 products of oil Companies R S - ETAP products A T - ETAP T A _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ E r _ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~E Production Importation Transport Distribution D G I E F G - SITEP - ETAP International - STEG R N 0 A - TTPC E E R S C R National T E A E - STEG O L L N S R E E ._ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ___ __ _ _ _ _ _ T A C 0 R E E T T G F G L G E R A Y E I SM E C Production Transport Distribution O C A N A T - STEG F I A N E N R - Independent - STEG - STEG T N A R 0 C Producers (Monopoly) (Monopoly) Y D G G C E Y M I E M T N E N Y E N I R T N ENERGY A