Papua New Guinea : Sustainable Energy Sector Development Program

Energy / Electricity transmission and distribution - Energy sector development and institutional reform

The Sustainable Energy Sector Development Program will support the Government of Papua New Guinea (PNG) in enhancing the adequacy and financial sustainability of low-carbon electricity supply for the country. It combines a programmatic approach of policy-based lending with a project investment component under two subprograms, one in 2024 ($100 million) and another in 2026 ($200 million). The policy component will support PNG's government in creating an enabling policy framework to restore the sustainability of the sector, turning around the national utility PNG Power Limited (PPL)'s performance, and increasing private sector participation to deliver clean, affordable, and reliable power. The reforms will be focused on: (i) transitioning to a low-carbon electricity supply, (ii) restoring the sector's financial sustainability, (iii) strengthening the PPL's operational capabilities, and (iv) enabling more efficient private sector participation in the sector. The project component will focus on urgent network repairs and revenue generating measures.

The program supports the operational priorities (OPs) of ADB's Strategy 2030 by (i) addressing remaining poverty and reducing inequalities (OP1); (ii) accelerating progress in gender equality (OP2); (iii) tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability (OP3); and (v) strengthening governance and institutional capacity (OP6).a It will contribute to the sustainable development goal 7: ensuring access to affordable, reliable, sustainable, and modern energy for all. The program is in line with the objectives of ADB's 2021 Energy Policy and Pacific Approach 20212025 and the country partnership strategy for PNG, 20212025 and is included in ADB's Indicative Country Pipeline and Monitoring Report for PNG, 20232025.e The program is also aligned with the goals of the Paris Agreement.

Country background. The Asian Development Bank (ADB) classifies PNG as a fragile and conflict-affected situation. Its primary sector dominates its economy, with minerals and energy accounting for most export earnings (88%) and a substantial share of gross domestic product (26%). The wider economy has recovered from the effects of coronavirus disease (Covid-19) with an estimated GDP growth of 2% in 2023, driven by growth in the natural resource sector. The country had a fiscal deficit of 5.4% and its public debt is expected to increase to 52.2% of GDP in 2023. The government faces challenges in managing its public debt, among them debts of state-owned enterprises (SOEs). Challenging geography combined with weak transport, energy, and telecommunications infrastructure, extreme ethnic diversity, gender inequality, threats to national sovereignty, and political instability has hindered the broad utilization of the country's natural wealth for the benefit of the country. With some of the highest infant and maternal mortality rates and gender-based violence in the region, gender inequality is deep and widespread.i The country's population is estimated to be 11.8 million in 2022, with 85% residing in rural areas, where the vast majority relies on subsistence agriculture for their livelihoods. PNG is one of the least electrified countries in the world, with the electricity access rate less than 20%. On the main grids, service supply is poor and blackouts are frequent, with an average of over 100 interruptions and more than 25 hours per month, due to inadequate generation capacity and aging networks.

Diesel reliance, high generation cost, and strong demand growth. The total installed generation capacity in PNG is 900 megawatts (MW), with more than 40% of capacity provided by diesel generators and 45% of capacity by hydropower plants. PNG Power Limited (PPL) is a SOE that manages generation, transmission, and distribution of over 400 MW, including three main grids (Gazelle, Port Moresby, and Ramu) that supply the main urban centers and 16 geographically isolated independent power grids that service provincial centers.j PNG's overall grid-based power demand is projected to increase significantly due to population growth and increasing economic activity. Most conservative estimates project power demand in PNG's three main grids to grow by at least 50% by 2030.

Lack of national sector planning address low electrification and the lagging transition to renewable energy resources. In PNG, there is no government led sector planning for power sector development and PPL conducts internal generation and grid planning, despite the sector underwent liberalization with private sector participation. As a result, outside of this plan, independent power producer (IPP) investment decisions are frequently made on an ad-hoc basis and not well coordinated with grid development. Although the government of PNG set a target in 2010 to achieve 70% electrification rate by 2030, there has been very limited progress in increasing national electrification rate. Further, limited progress in the transition from diesel generators to cheap and clean renewable energy resources has been made. To advance towards national electrification goals and reap the benefits of PNG's renewable energy potential, it is crucial to elevate the current power sector planning by PPL to a national level of planning.

PNG's climate targets and the utilization of its abundant renewable energy resources. PNG's Nationally Determined Contribution (NDC) includes the target of reaching 78% renewable energy capacity in the power sector by 2030. Currently, roughly 50% of power generation capacity in PPL's main grids are run on renewable power. While PNG possesses abundant renewable energy resources in hydropower, solar, wind, biomass, and geothermal energy, these have neither been fully explored nor utilized. While hydropower has formed the backbone of PNG's power supply, its role has diminished over the years. Despite the excellent solar irradiation potential in some locations with capacity factors above 25% and good alignment with power demand peaks during the day, solar PV has not been deployed at a utility scale in PNG. Rooftop PV panels have mostly been limited to small off-grid applications. The NDC implementation targets the utilization of the PNG's hydro and solar resources in the short term and the exploration of other renewable resources in the medium term. To reach these targets, power sector planning and operations need to be aligned with PNG's climate targets.

Deteriorating financial sustainability of PNG's energy sector. PNG's energy sector faces large investment needs in the coming decades. The investment needs for achieving 70% electrification are estimated in the range of $745 million. Another major investment need is the upkeep of the aging infrastructure throughout the country. The sector is plagued by high power generation costs, driven by high fuel cost, high technical and non-technical losses and increasing reliance on diesel generators, and the high cost of some of the contracted IPPs. Further, electricity tariff, which is about $0.21 per kilowatt-hour (on average), has not been increased since 2013. Despite regulatory advice for increases, no adjustment has been approved and implemented since. The National Energy Authority (NEA) established in 2021 as the institution responsible for overseeing tariff assessments, still lacks the appropriate technical capacities. As a result, the financial performance of the PPL, together with its high debt exposure, has been exacerbated.

Inefficient private sector participation. The contracting of private sector IPPs has successfully delivered over 170 MW of new generation capacity in the past 10 years and has helped to significantly expand generation capacity in PNG's main networks. However, without clear generation and grid planning, plants were procured ad-hoc to fill short-term gaps or were not efficiently located in the grid infrastructure. Since there were no regulations on IPP bidding process and standard power purchasing agreements (PPAs), all investments were procured via unsolicited and non-competitive processes. This, combined with the absence of payment guarantees to the financially stressed PPL, has caused excessive PPA prices. To achieve more efficient contracting of IPPs and competitive PPA prices, IPP procurement planning, competitive bidding process, PPA templates, and a type of payment guarantee mechanism are needed.

Government policy and program. To address the dual challenges of energy access and economic growth, the Government of PNG issued the PNG Development Strategic Plan, 20102030, articulating the government's strategic priorities to attain a 70% electrification rate and carbon neutrality by 2030.o Moreover, the government aims to provide 78% power generation from renewable energy resources by 2030.p To achieve the strategic targets set out in the PNG Development Strategic Plan, the government approved the Electricity Industry Act in November 2011.q The government also aims to improve the operational performance of SOEs, including PPL, which ADB is currently supporting. The National Executive Council approved an SOE reform blueprint in November 2019, laying out reforms to be undertaken during 20192022 to strengthen overarching corporate governance and policies. In January 2022, Parliament passed the PublicPrivate Partnership (PPP) Amendment Act to facilitate a robust and transparent PPP project development process that will apply to SOEs like PPL.

Enabling critical infrastructure and ensuring energy security (Papua New Guinea Medium Term Development Plan IV 2023-2027)

PNG's government has initiated measures to turn around the national utility PPL's performance commercially and operationally; and to create an enabling policy framework to restore the financial sustainability of the sector and build up capabilities to ensure clean, affordable, and reliable power supply in existing networks and to expand access to electricity.

In its Enhanced Nationally Determined Contribution, PNG has set the target of reaching 78% renewable energy (of all power generation capacity) by 2030b. Furthermore, PNG has set out the target of increasing the electrification rate to 70% by 2030b.

Adequacy and financial sustainability of low-carbon electricity supply enhanced

Policy and regulatory framework for adequacy and efficiency of low-carbon energy supply established

Policy and regulatory framework for improving financial sustainability and operational capacity of the PPL established

PPL's grid infrastructure rehabilitated and modernized