P -- I p )' I II( )

PoCrtugall: Issues and O)ptionsin the Energy Sector

Report of the Joint UJNDP/World Bank Energy Sector Assessment Program1 l1s (1O WIneint hd', a dstrier( d l)ultlon It, (ontents rnay not he d1iscloserdwilhout aiithorizathi,n imoti th(e Governmont, the UNDIP or th, VVorldi Bank.

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FOR OFFICIAL USE ONLY

Report No. 4824-PO

PORTUGAL

ISSUES AND OPTIONS IN THE ENERGY SECTOR

April 1984

This is one of a series of reports of the Joint UNDP/World BankEnergy Sector Assessment Program. Finance for this work has beenprovided, in part, by the UNDP Energy Account, and the work has beencarried out by the World Bank. This report has a restricted distri-bution. Its contents may not be disclosed without authorization fromthe Government, the UNDP or the World Bank.

AESTRACT

Portugal's high energy import bill is a serious constraint tothe development of its industrializing economy. The Government has madean impressive attempt to deal with the problem in its draft 1980-2010national energy plan, which provides a sophisticated, flexible policyinstrument. As agreed with the Government, the present report focuses onfour specific issues in energy planning which have considerable bearingon the size and composition of the energy investment program: (a) thekey assumptions underlying energy demand projections; (b) the level andstructure of domestic energy prices, in view of their influence on energydemand and supply; (c) the comparative advantage to Portugal of importingliquified natural gas (LNG) as a substitute for petroleum products; and(d) the potential for improving energy efficiency in the transportationsector. The report makes a number of recommendations regarding theenergy demand projections and the least-cost investment solution. Otherrecommendatd.ons include: (a) postponement of a final decision on theproposed LNG import scheme until the gas option has been more thoroughlyevaluated; (b) closer alignment of relative retail prices for gasolineand gas oil; and (c) various administrative, technical, and fiscalmeasures to improve energy efficiency in the transportation sector.

PREFACE

1. This report is not intended tc present a comprehensive assess-ment of the energy sector in Portugal. A large amount of work alreadyhas been done by the Portuguese with the assistance of the U.S. Depart-ment of Energy, 1/ culminating in the draft national energy plan of 1982,the subject of the present assessment, and by the Bank in connection withits own lending operations. Moreover, it should be emphasized that thelevel of technical expertise in Portugal is very high compared to most ofthe countries in which the Bank operates. For these reasons, it wasdecided, during discussions with the Government on the scope and purposeof the present assessment, that an across-the-board approach was neithernecessary nor appropriate.

2. The mission and the Government agreed that the energy assess-ment could make a specific twofold contribution: (a) a second opinion onthe major assumptions made in the 1982 draft energy plan which arecrucial in determining the size and composition of the energy investmentprogram, and (b) a review of important topics which the Governmentbelieves were not adequately covered in the plan, by reason of timeconstraints or lack of data. The timing of the assessment was consideredparticularly propitious as the plan document was under revision and itwas expected that the assessment would contribute to the ongoing revisionby pointing out the major issues and options warranting further study.

3. This report primarily addresses the following issues in thedraft national energy plan and energy planning, as agreed with theGovernment:

(a) the key assumptions used in the energy demand projections, withparticular reference to the electricity projections, given thedominance of electric power in the energy investment program(two-thirds of proposed 1983-1995 expenditure);

(b) the level and structure of existing energy prices, in view oftheir influence on energy demand and supply;

(c) the comparative advantage to Portugal of substituting importednatural gas for petroleum products, with particular referenceto the liquified natural gas (LNG) program in the draft energyplan and feasible gas alternatives; and

(d) the potential for energy savings in the transportation sector,where there is no effective national conservation policy atpresent, despite the fact that the sector is second inimportance only to industry in both petroleum and final energyconsumption.

1/ USDOE/Portugal Cooperative Energy Assessment, 1980.

4. In addressing these selected issues, the assessment touchesupon two important related issues in the draft energy plan. These are(a) the nuclear power program, only as it relates to the mission'sevaluation of the electricity demand projections and investment program,and (b) the proposed hydrocracking facility, which is under study byPortuguese experts, in connection with the projected market for petroleumproducts. Issues in renewable energy development are not dealt with indetail because of work already done in Portugal which indicates woodbiomass and solar flat plate collectors for water heating to be the mostviable options; further studies in these areas already have been includedin the ongoing Bank project for energy conservation and diversificationin industry.

CURRENCY EQUIVALENTS

July 1983* 1 US Dollar = 121.0 Escudos1 Escudo = 0.008 US DoLlars

1982 1 US Dollar = 78.5 Escudos1 Escudo = 0.013 US Dollars

1981 1 US Dollar = 61.5 Escudos1 Escudo = 0.016 US Dollars

1980 1 US Dollar = 50.062 EscudosI Escudo = 0.020 US Dollars

ACRONYMS

ANTR,AM National Association of Road Transport for MerchandiseCARRIS Urban Transport Company of LisbonCP Portuguese RailwayDCP Departmento Central de PlaneamentoDFI Decision Focus Inc. (Final Energy Demand Model)DGE Direccao Geral de EnergiaDGGM Direccao Geral de Geologia e MinesDOOT Directorate General of Road TransportDGRAA Directorate General of Water Resource DevelopmentDGV Directorate General of TrafficECD Empresa Carbonifera do DouroEDP Electricidade de PortugalEEC European Economic CommunityEMATC Energy Management Audit and Training CenterER Estrafegia de ReferenciaGEP Gabinete de Estudos e Planeamento do Ministerio da

Industria Energia e ExportacaoGPEP Cabinet for Petroleum ExplorationIAEA International Atomic Energy AgencyIEA International Energy AgencyIAMPEI Institute for Assistance to Small Industrial

EnterprisesJAE Autonomous Road AuthorityLNETI National Laboratory for Industrial Engineering and

TechnologyLOCAPOR Leasing Agency for Energy Conservation EquipmentMEDEE2 Energy Demand Model Forecasts of Useful EnergyMIEE Ministerio da Industria, Energia e ExportacaoPEN Plano Energetico Nacional (National Energy Plan)PETROGAL Petroleos de Portugal

* Average value dutring the month in which the Energy Assessment Missiontook place.

ACRONYMS (con't)

PGP Petroquim:ca e Gas de PortugalRN Rodoviaria Nacional (National Road Services)VAI,ORACUA Planning Model for Hydro Based Power SystemsWASP Wien Automatic System Planning (Electric Power Supply

Model)

ABBREVIATIONS

bbl Barrelbd Barrel Per DayBtu British Thermal Unitc.i.f. Cost, Insurance and FreightC.V. Calorific Valueesc. Escudof.3.b. Free on Boardft Cubic FeetCDP Gross Domestic ProductGW GigawattCWh Gigawatthourkcal Kilocaloriekg Kilogramkgoe Kilogram of Oil Equivalentkm KilometerkV KilovoltkVA KilovoltamperekW KilowattkWh KilowatthourLNG Liquified Natural GasLPG Liquified Petroleum Gas (propane, butane)LRMC Long Run Marginal Cost of Supplyml Cubic Metert Metric Ton (tonne)MW MegawattPWR Pressurized Water ReactorSNG Synthetic Natural Gas (from coal)toe Tonne of Oil Equivalenttpy Tonnes Per YearU308 Uranium Oxide

WEIGHTS AND MEASURES a/

I bbl 42 US gallons or 158.98 litresI bpd 50 toe/yearI BTU = 0.252 kcal1 GWh 86 toe (heat value) or 234.8 toe (thermal

replacement value)I kcalj 3,968 BTU1 km 0.62 mixes1rn3 35.3 ftI tonne 1,000 kg

This report is based on the findings of an energy assessmentmission that visited Portugal in June/July, 1983. The mission comprisedJochen Schmedtje (Mission Leader), Matthew Mitchell (Research Assistant),and the following consultants: Bernard Russell (Energy Demand Projec-tions and the Power Subsector), David Pearce (Energy Pricer), Jean-Philippe Pillet (Energy Conservation in the Transportation Sector), andPeter King (LNG O)ption).

a/ Values used in the National Energy Plan.

Table of Contents

PREFACE

MA4IN FINDINGS AND RECOMMENDATIONS*....*....................... i-xvi

I. ENERGY IN THE ECONOMY,, *.,.... , , ... , 0ee**** ,, .... 1

The Energy Problem.2 ........................ .. ., .., , 2Past Energy Trends,. , .. .... .... ........ ... ... .. ... ...... ., 2Electricity Trends, .................... , 4Structure of Demand and Supply.......................... 5Energy Conservation in Industry......................... 6Energy Investment.,, 7Energy Resources ............... , .. . 7

Coal and Lignite .................. , * 7Renewable Energies. ........ .......... , , , , ..... 8

Petroleum Prospectse ..... .. ... ..... ......... .. 8Institutional Framework ........................ 8

II. THE NATIONAL ENERGY PLAN - ENERGY, ELECTRICPOWER AND NATURAL AS P ROJECTI ONS ......................... 10The National Energy Plan ..................... .... * , , .. 10A. Energy Demand Projections........................... 10

Methodology., ........o oooooseo*.e"oe*o 10Alternative ProJectionse..................... ...O, 11Reference Strategy 11Reference Strategy InvestmentRequirements.,^,,.e .................... , ,,,,, ,., .13

Foreign Exchange .................... .. 15Increased Security of Supply Strategy............. 15

B. Electric Power Projections ................e ......... 15Reference Strategy .................... , ...... 15Power System Development Program&n................ 16High Growth Scenario.. .... ... . . ..... .... 18Electric Power Investment Requirements......*....* 18Medium Term Electricity Projections.jections...... 19

C. The LNG Option ............. , 19Market Prospects. ...... .................. *..... 20Reference Strategy Cost Assumptions.o............. 20Comparative Fuel Prices....... ....................* 22Increased Security of Supply Strategyo....,,...... 22Pipeline Alternative.................................. .., 22

III. ENERGY, ELECTRIC POWER AND NATURAL GASPROJECTIONS - ISSUES and RECOMNENDATIONS.................. 24

Energy Projections.. .. .. .... .. . ..... ... .. .. 24Electric Power Projections....... ......... . .. ..... 26The Natural Gas Option ... e.................. .. , , .o 29

Page

OveNrviewY PIE .......................... 32Petroleum Products........ ........ . ........... ., ...... 32Electricity. *.. . .*** **m*e.0.... ,*** . . ,.. . .*.. , , .,. 35Coal ... ,,,,.,,.......... 39Town Gas. . ..... , . .. , ., . ... .... . *. 40Pricing Issues,,........,.,,.,.,, .. ,,, ... 42Recommendations...,. ................. ,. .,,, , .... .*, 43

V. ENERGY CONSERVATION IN THE TRANSPORTATION SECTOR. .,...., 45Overview,., ........... ,, 45Road Transportation Trends.,., , , . 45

Private Cr,......,,, ..... 46Public Road Transport. .. ... ... , , .,e . ..... ..... 46Road Freight Traffic.................... ............ 46Fuel Consumption for Road Transportation............... 47

Railway Transportations99 .9..9 .......... ............ 47Transportation in the National Energy Plan.............. 48Major Isus....... . .,,. ... ........49Recomi.,endations o.o*..*..*oeoooo.. .. *......... .. 51Costs and Benefits .......... , ..... 53

TAM9ES

1.1 Energy Trends, 31.2 Consumption of Petroleum Products, 1973-82................ 31.3 Electricity Supply and Consumption, 1971-82............... 51.4 Structure of Energy Supply and Demand, 1982 ............. 62.1 Reference Strategy Projections, 1980-2010........... ,... 122.2 Final Consumption of Petroleum Products,

1980-2010 ................. 132.3 Primary Energy Supply by Energy Source, 1980-2010......... 142.4 Reference Strategy Investment Requirements,

1983-2010 ........ ,.,.,.,....... 142.5 Reference Strategy Foreign Exchange Costs,

1983-2)10 ......... , , , , ... .. 152.6 Electricity Consumption * :d Supply, 1P30-2010 ...... ,...... 162.7 Electricity Consumption by Sector, 1980-2010 . ........ 172.8 Public Electricity Supply by Energy Source,

1980-2010 ..................... 182.9 Projected Electricity Investment, 1983-2010 .................. 192.10 Natural Gas Consumption, 1990-2010........................ 212.11 Natural Gas Consumption, 1990-2000 - Comparison of

PEN Reference Strategy and PGP Projectionse.............. 212.12 Natural Gas Costs, 1980-2000 - Reference

Strrttgygy *99999999999999999999999999999*999999.9999999 222.13 Comparative c.i.f. Fuel Prices, 1980-2010

Reference Strategy. r at.eg............ .... 23

Paoe

2.14 Comparative Useful Energy Costs of NaturalGas and Other Fuels in 1990 - ReferenceStrategy Estimates................................ .... 23

4.1 Petroleum Product Prices, 1971-83.,...................... 334.2 Petroleum Product Prices, Taxes and Subsidies............. 344.3 Ratio of Domestic to Border Prices of Petroleum

Products. . . . . . . . . , , . . .. .a .* . * .. a .* a * .. . a .. a * a .* a . * . . 364.4 Petroleum Product Price Structure: Selected

Products, July 1983.... .364.5 Electricity Prices, 1971-83.......*...o.,.............. 374.6 Projticted Electricity Rate Increases, 1982-86............. 384.7 Coal Prices, 1979-83...................................... 415,1 Energy Consumption in the Transportation

Sector, 1980........... ,. .... .,.,. 455.2 Gas Oil Consumption in the Transportation

Sector, 90...... 475.3 Energy Consumption in the Transportation

Sector, 1980-2010 ...... , . 48

NNEXES

1.1 Energy Consumption and Supply, 1965-82................... 541.2 Consumption of Petroleum Products, 1960-82......o......... 571.3 Petroleum Refinery Output, 1978-82.......................0 581.4 Electricity Supply and Consumption, 1971-82 ............... 591.5 iEnergy Sector Investment, 1971-80......................... 611.6 Portugal: Energy Sector Organization.....,...............,, 622.1 PEN Assumptions for Energy Projections .................... 642.2 Energy Demand and Supply, 1980-2010 - Reference

S t r a t e gy. a a a a * . *. .a. aa ** a* *. a. .a aa a a a * a 672.3 Structure of Final Energy Consumption in 2010 -

Alternative Cases .................. ., . 702.4 Energy Consumption by Industry, 1980................... 712.5 Growth of Gross Value Added by Industry,

1980-2010 - Reference Strategyr a t e gy..s................. 722.6 Energy Sector Investment, 1983-2010,

Reference Strategy.... ....... ... a. 732.7 Estimated Foreign Exchange Costs, - Reference

Case, Energy Projections.......*....S..*....*.S ...... 742.8 Energy Demand and Supply, 1980-2010 - Increased

Security of Supply Strategy......o.....e........s..e.. 752.9 Electricity Consumption and Supply, 1980-2010

- Reference Strategy................ .... a............................ 762.10 Electricity Consumption and Supply 1980-2010 -

- Public Network................ , ,, ... , 782.11 Medium-Term Electricity Forecasting Mode d...........el.... 832.12 Final Consumption of Gas, 1980-2010.................... 842.13 Household Gas Consumption, 1985-2005 -

PGP/SOFREGAS Market Su r v e. 85

Page

2.14 Natural Gas Investment Costs .............................. 862.15 Final Costs of LNG 874.1 Petroleum Product Prices, 1960-83.6 0 - 83................... 894.2 Pricing Formula for Petrolaum FAoducts ................... 904.3 Electricity Prices, 1971-83 ........................ 934.4 Relation of Electricity Prices to Marginal Costs

of Supply, 1983............................................ 944.5 Electricity Prices in Non Compliant

Municipalities.... e.....*...c..*....*ecc .* .*.* 954.6 Imported Coal and Coke Prices, 1971-82cc.cc.cccecc.ceecc6, 964.7 Town Gas Sales, 1977-82.9 7 7 - 82........................ ccc 974.8 Terms of Reference for Gas Oil/Gasoline

Pricing btudy ............6 ..... > l..... eec.. ... ee.e.caa .e..a.. 984.9 Technical/Economic Study of Town Gas Supply

Options in Lisbon. ........ e..c.*c*........c.c*c..c. 995.1 New Vehicle Registrations, 19 7 7 83 c..... 1005.2 Passenger and Goods Traffic by Mode, 19 7 9 ... c0cccc.ee..Gc.. 1015.3 Gas Oil and Gasoline Consumption, 19 6 0-8 2 .cceecgceceeeccce 1025.4 Trend of Gas Oil and Gasoline Prices

and Compensatory Tax on Diesel Vehiclesc.0c.ec.cc.ee.c.. 1035.5 Terms of Reference for Study to Establish the

Feasibility of an Energy Management Policyin the Transportation Sector.. .. eee.......c....c..c 104

5.6 Energy Savings in Road Transport - PossibleCourses of Action.... eec c go. e e ee. e ceecec... ,e e 107

5.7 'TRANSCLUB" (France) ..... .cccec 1115.8 Comparative Gas Oil and Gasoline Prices and Taxes,

1982 e . ec,o* cc.eoo eo ...cccccceooeooco.ee 1135.9 Costs and Benefits of Recommended Fuel Conservation

Measures in Transportation Sectoro.........e..........oo 115

MAPS

IBRD 16179: Main Transmission System and Power StationsIBRD 16325: Location of Major Energy-Intensive Industries

MAIN FINDINGS AND RECOMMENDATIONS

The Energy Problem

1, The high cost of energy in Portugal and the country'sdependence on imported energy sources are major constraints to itseconomic development. Imported oil accounts for around 80% of finalenergy demand and r.e.t oil imports absorbed about 30% of export earningsfrom goods and services in 1982, compared with only 3% in 1973.Inclu.Iing coal and net electricity imports, the import bill for energywas about 33% of exports of goods and services and 67% of merchandiseexports. Given its limited domestic energy resource base, Portugal'smajor energy problem will be how to keep down the cost of imported energywhile maintaining acceptable rates of economic growth. This will requirea strategy to (a) reduce the energy intensity of GDP through demandmanagement, (b) substitute cheaper energy sources for oil, and (c)promote flexibility in investment to meet future energy demand.

The National Energy Plan

2. The Government's future energy strategy will be partly based onthe 1982 version of the draft 1980-2010 National Energy Plan (PEN). ThePEN, soon to be discussed in Parliament, is a major achievement providinga conprehensive, sophisticated and flexible policy instrument for energyplanning. It considers several objectives in meeting energy needs in-cluding the least cost solution, maximization of the use of domesticenergy resources and promoting national security by reducing dependenceon foreign oil. After careful consideration of all these objectives, thereference strategy was selected, designed to meet future energy require-ments at minimum cost to the economy while increasing the security ofsupply and reducing dependence on imported oil (para 2.1). On the supplyside, PEN envisages intensified development of the limited domesticenergy resources, mainly hydropower and uranium, while diversifying thesources of imported energy, primarilv through a switch from petroleumproducts to coal and liquified natural gas (LNG) (para 2.9). This policyis to be coupled with an intensive energy conservation program to re-strain demand.

Domestic Supply Options

3. The domestic energy resource base is relatively limited, con-sisting mainly of hydropower, wood fuel and uraniuin. Proven reserves ofcoal and ligri:e are small and of poor quality. No commerci 'ly exploit-able petroleum reserves have been discovered.

Imported Energy

4. The PEN projections inidicate that imported petroleum and petro-leum products would remain the dominant primary energy sources into the

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latter 1990s, but that their share would decline from their current 80%to 64% in 1990, mainly due to substitution by coal and natural gas, andfurther reductions to 49X by 2010 are due to the advent of nuclear powerproduction.

5. Despite the intensified development of domestic energy sources,import dependence would actually increase from the 1980 level of 80% to86% in 1990, as increases in the shares of imported coal and LNG exceedthe decline in the share of petroleum. The upward trend is not reverseduntil the beginning of nuclear power production in 1995, based on domes-tic uranium, when import dependence would fall to 77% and to 63% by 2010.

Future Energy Demand

6. Given the major economic adjustments the Portuguese economy isundergoing now, it is very difficult to make macroeconomic and relatedenergy projections for the medium term and even more difficult for thelong term. Therefore, projections have been revised several times. Inthe face of this uncertainty, the PEN's scenario approach is to becommended, indicating high and low cases to be updated and refined on acontinued basis. The PEN "reference strategy" projects energy demand fora 30-year period (1980-2010) making skillful use of available data andwell established computer nmdels (MEDEE2, DFI, WASP and VALORAGUA). Themission finds that the PEN low GDP growth scenario with average annualrates of 3% for 1980-85, 3.5% for 1985-1990, and 4.5% for 1990-2000 highin light of current trends and prospects for the medium term.Furthermore, the mission notes that the forecasting models do notexplicitly incorporate the impact of rising absolute real energy priceson overall energy demand in Portugal. However, MEDEE2 implicitly allowsfor the effect of rising prices in its energy demand scenarios and DFItakes into account relative energy prices in determining the least costenergy supply option.

7. The PEN reference strategy assumes an intensive energy conser-vation program but projections show the share of imported petroleum stillaccounting for nearly half of the projected primary energy requirementsin the year 2000. However, cutrrent efforts to introduce an industrialenergy conservation and diversification program, including audits ofmajor energy consuming industries, should give an indicatioli of prospectsfor a greater energy conservation potential. At the same time, theproposed substitution of three new major primary energy sources (coal,natural gas and uranium) for petroleum within the next decade and beyondcould present formidable infrastructure and management requirements whichhave not yet been thoroughly evaluated and incorporated in the PEN.

Recommendations

8. The mission's recommendations regarding the energy demandprojections in the 1982 draft PEN are intended to provide a secondopinion on some of the basic assumptions made. Concerning GDP growthassumptions, the mission recommends taking account of estimates below

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those used for the medium term low growth case in PEN (3.25%). Themission estimates, for example, that using a 2.25% average annual GDPgrowth rate and retaining specifically the energy/GDP elasticity assump-tions implicit in the PEN forecasts (1.50) for the period 1980-90 wouldresult in an increment to primary energy demand about a third less duringthe period. This illustrates the type of uncertainty Portugal faces inits macroeconomic and energy planning for the medium term. Furthermore,the mission finds the energy/GDP elasticity high compared with countriesat a similar stage of development and considering the importance attachedto energy conservation in the PEN.

9. The mission recommends that several further checks be made onthe projections using a sectoral approach, including a continuation ofpresent efforts to test growth rates of energy demand by sector forinternal consistency. Furthermore, the mission supports extending the1979 input/output (I-0) table to include an energy sector broken downinto the main petroleum products, coal and electricity, fitting demandequations to the I-0 table and projecting through time. The missionrealizes this will require a considerable effort and is likely to yieldresults only in the longer term.

10. The mission also recommends that the revisions of the PEN pro-jections include testing the influence of the absolute level of energyprices on energy demand, considering the large increases in energy pricesthat have taken place since 1980 with further price increases expectedover the medium term. DGE staff are well aware of this omission in thepresent version of the MEDEE2 model and a new version of the model isplanned, incorporating the price variable for selected industries. Inthe meantime, however, the mission recommends comparing the results ofthe PEN models with a single equation econometric approach (para 3.11).It would also be worthwhile to consider alternative assumptions for bothenergy/GDP and price elasticity coefficients to determine a possiblerange of outcomes.

11. Following the revisions made to the energy projections as indi-cated above, the mission recommends testing the impact of the resultingdifferences on the size, composition and timing of energy projects in theinvestment program. Such an approach would highlight the costs of uncer-tainty and focus attention on those decisions which need to be made imme-diately, otherwise resulting in high costs to the economy, and thosewhich may be postponed at little cost or even benefit (cost savings).

12. Regarding the least cost supply solution, it would be desirableto test its sensitivity to higher discount rates given Portugal's severecapital constraints over the near to medium term, and to lower futurereal increases in the prices of petroleum products and coal. The missionwas informed that the Ministry of Finance and Planning is now recommend-ing sensitivity testing for the discount rate through the range of 9-14%.

13. Finally, the costs and benefits of the conservation scenariosshould be evaluated further to determine whether the "very intensive"conservation program of the "increased security of supply" strategy

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should be adopted for the reference case. Moreover, the revised supplyprojections should also allow considerable time for solving the organi-zational, management and planning problems likely to be encountered,along with infrastructure requirements, associated with major new energysources.

Electric Power Projections

14. Electricity demand forecasts are derived from the sameforecasting models as the overall energy projections and thus appear onthe high side for the same reasons mentioned above. An additionalconsideration in this sector is that the system load factor is assumed toremain close to its present level of 58%, although there is some reasonto believe that it may increase along with the substantial expected realincreases in electricity prices and the rising share of industrial con-sumption. Should the load factor improve, there could be savings ingenerating capacity requirements which might be significant insofar asabout 60% of the total investment program is for electric powergeneration and distribution.

15. As is the practice in many cther countries, EDP optimizes thepower investment program only for generation. The mission recommendsthat EDP make efforts also to optimize the distribution investmentprogram, and compare the economic return on investment generation withthat in distribution to improve service and reduce losses.

16. A point which merits further attention is that the PEN's evalu-ation of electricity supply prospects includes some basic economic andtechnical assumptions which seem to favor nuclear power (para 3.24).Although the Government is still open to the choiee of nuclear techno-logy, the only nuclear option evaluated in the PEN is the pressurizedwater reactor (PWR) which is available in relatively large units comparedto coal, the other major generating option considered. However, the PENalso indicates that in cases where smaller units may be more appropriatein relation to projected electricity demand, the heavy water reactor(HWR), could be considered since it uses natural uranium avallable inPortugal and is available in 600 MW units, compared to the smallest PWRunit (950 MW) considered in PEN.

17. The proposed use of Rio Maior lignite for power generation isnot economically viable, based on data available to the mission. This isdue to the poor quality and high mining cost of the relatively smalllignite reserves.

Recommendations

18. The usefulness of present forecasting methods could be furtherimproved by several additional procedures, given the considerable amountof planning expertise already within EDP and DGE. These include: (a) im-proving the data base through EDP's establishment of a market and loadresearch section; (b) reviewing the constant system load factor assump-tion, testing the impact of load factor improvements on investment needs;

v

and (c) reviewing reference strategy assumptions on the discount rate,power station availability, alternative fuel prices and plant costs tobetter determine the costs and benefits of available options.

19. The mission supports the PEN proposal to study the distributionnetworks as soon as the integration of municipal undertakings is re-solved, to determine investment requirements and other measures to reducelosses and raise the quality of service. Such a study would be appropri-ate for short to medium term planning only, due to the high degree ofuncertainty over the long term. This, however, might more effectively bedone as part of a wider study of the EPD system to improve technicalefficiency and reduce overall system losses.

20. There is considerable merit in making the planned power expan-sion program as flexible as possible, particularly in relation to theproposed 950 KW nuclear power option, to avoid premature commitment t%significantly large unit sizes involving the risk of excess capacity. Tothis end, the following options could be considered along with otheralternatives: (a) the use of natural uranium based HWR, which could beeconomically viable on a smaller scale, and (b) the feasibility of ajoint nuclear power venture with Spain or France in view of Portugal'sand Spain's prospective entry into the EEC. In order to more fullyevaluate possible options, it would be desirable to analyze the potentialcosts and benefits to the economy of a commitment to large power unitsand the risk of resulting excess capacity.

LNG Option

21. The price at which natural gas could be made available topotential consumers is difficult to determine with current information.Components of this price include the c.i.f. price of LNG, capital costsof infrastructure, and operating costs of the system. The PEN ratios ofthe LNG price (c.i.f.), the major component of the final gas price, tothe prices of alternative fuels (oil and coal) are significantly abovetheir current (July 1983) levels. On the other hand, the capital costcomponent of the final price for natural gas seems low given the proposedinfrastructure investment. Also, operating costs do not appear to ac-count for (a) the costs of marketing the gas; (b) increased manpower re-quirements; (c) the costs of adjusting supplies to demand fluctuations;and (d) the costs of individual consumer connection and equipment conver-sion. A market study has been made by a foreign consultant which givessome prospective market scenarios, but these need further evaluationspecifying the additional costs cited above. Other gas options, such asa natural gas pipeline through Spain and local gas distribution systemsbased initially on LPG/air as nuclei of an eventual national gas networkshould receive closer attention (para 3.40).

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Recommendations

22. Given the uncertainties described above and current informationgaps, before proceeding with investment in LNG, it is important thatoptions for natural gas supply be more fully analyzed with emphasis on:(a) the potential market for natural gas in the short and medium termn(i.e., to 1990 and 1995); (b) the existing cost estimates for LNG, takingaccount of the deficiencies identified by the mission (paras 3.3?-3.39);(c) alternative gas options; (d) gas pricing; (e) preliminary design ofthe gas transmission and distribution system, including appropriatemeasures for load adjustment purposes; and (f) the organization, manpowerand training requirements for a national gas industry, including a reviewof existing safety standards. The mission estimates that such areevaluation would be on the order of 25 man-weeks at a cost ofUS$90,000.

Energy Prices

23. The current Government has moved boldly towards economicpricing of energy. Across-the-board increases in petroleum productprices as of July 1, 1983, have largely eliminated individual productsubsidies and improved relative product prices. Subsidies still relmainon town gas and fuel oil, but the Government intends to abolish at leastthe latter over the near term.

24. The most important remaining pricing policy issue is the rela-tive price of gas oil to gasoline, which at present is only 57% of thegasoline price. This pricing structure has given the wrong signal toconsumers regarding the economic costs of gas oil consumption and Islikely to have contributed to the need for additional gas oil imports,urban traffic congestion and air pollution (para 4.30). Furthermore,higher gas oil requirements combined with the projected reduction indemand for fuel oil due to coal substitution, has led PETROGAL toconsider investment in a hydrocracking facility.

25, Another area of concern is the Government's pricing formula forpetroleum products, as this does not specifically allow for the actualcosts to PETROGAL, particularly the cost and foreign exchange risk ofborrowing to finance imports of crude oil.

26. As for electricity pricing, EDP's electricity bulk tariff, in-creased several times in recent years, has been made binding on the muni-cipalities still outside the system, and is shortly to be raised again.But some of these municipalities have failed to pass on past rate in-creases to their custoners, resulting in cumulative arrears in paynentsto EDP amounting to about US$300 million by the end of 1982 (paras 4.14-4.15). EDP expects that with Government support its tariff will be closeto LRMC by 1988.

27. A contract between EDP and the coal company (ECD) requires ECDto sell and EDP to buy coal at a pr,ce linked to ECD's manpower and

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tmajor' material costs, as long as the price does not exceed the equiva-lent value of fuel oil. The present price of domestic coal to EDPappears too low to provide a saLisfactory financial retutrn to ECD.

Recommendations

28. The real price of gasoline should be heLd constant and that ofgas oil allowed to rise closer to the gasoline price by 1985. Therationale for closing this gap is to signal te consumers the economiccost of high gas oil consumption: (a) higher Liquid fuel consumption inthe transport sector than might be the case if the gas oil were priced ata level closer to that of -.'>oline; (b) the encouragement given to theuse of heavy vehicles with consequent road track costs; (c) the environ-mental costs of exhaust emissions and noise in urban areas, which couldhinder certain revenue earning ..ctivities such as tourism; and (d)increased congestion due to the encouragement of larger vehicles andtaxis which have a convenience/price advantage over public transport. Astudy is recommended to determine how to achieve the relative pricealignment, with particular reference to the modal choice in transport andthe associated costs and benefits. It is estimated that this study wouldrequire about 25 man-weeks at a cost of US$90,000.

r

29. The effects of a policy to alter the relative prices ofgasoline and gas oil should be taken into accoLut in formulating refinerypolicy, including the option of direct imports of petroleum products tomeet requirements.

30. The long-standing negotiations fo. the revision of the ex-refinery pricing formula for petroleum products should be concluded and aformula agreed upon which would assure full cost recovery for efficientimporting and refining of crude oil by PETROGAL, including net financialcosts. The treatment of the foreign exchange risks and interest onarrears in payments to PETROGAL from the Foreign Exchange Risk GuaranteeFund and the Supply Fund should be clarified as part of the agreed pric-ing formula, and, thereafter, appropriately reflected in the accounts ofall concerned parties.

31. The mission supports the Coverment's intention of ensuring thetimely implementation of the decrees establishing the uniform nationalelectricity tariff and of the process to determine and regularize thepayment of the amounts due to EDP from municipalities which have theirown low-tension distribution systems.

32. Finally, regarding Lisbon's town gas system, a small technical/economic study also should oe undertaken of town gas supply options,including closure of the system and the concomitant expected increase indemand for LPG and electricity. This would require about 10 man-weeks ata cost of US$40,000 (Annex 4.10).

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Energy Conservation in the Transportation Sector

33. Energy consumption in the transport sector accounts for 29% oftotal final energy consumption and is mainly for road vehicles (83% ofthe total); the transport sector is second in importance only to industryas a target for fuel savings. However, the conservation policy forachieving the fuel savings projected in PEN is not clearly defined mainlybecause of (a) the divide.d responsibility between the Ministries ofTransport and Energy; (b) the tendency to take decisions on fuel andvehicle taxation independently of an analysis of agreed upon conserva-tion objectives, and (c) the low priority apparently given to theproblems of energy consumption in transportation by regional and localofficials.

34. Furthermore, improved energy efficiency in the transport sectoris constrained by several factors. First of all, the wide differentialbetween the price of gas oil and the price of gasoline is noteconomically justified. Although a special tax on diesel cars isintended to compensate for this differential, the amount of the tax hasnot kept pace with changes in the absolute prices of the two fuels.Secondly, technical regulations for vehicles have not been designed toreduce fuel consumption, air pollution and the high number of roadaccidents. This is especially desirable, given the high average age ofvehicles in Portugal. Thirdly, public transport service in Lisbon hasdeteriorated in the face of population growth, the congestion caused byprivate cars, and the absence of a well defined public transportpolicy. (Paras 5.17 to 5.21).

35. Finally, the road haulage market is characterized by over-capacity, leading to underutilization of vehicles, low annual mileage,poor rates of return (and hence, an inability to invest in new, moreefficient vehicles), an increasing percentage of "empty" journeys, andexcessive fuel consumption (para 5.19). There is considerable scope forimproving fuel efficiency and thiei would reduce fuel costs and the costper ton kilometer of goods transported, of which fuel cost accounts forsome 28%.

Recommendations

36. The mission recommends that the Government appoint an inter-ministerial commission to identify the best way to effectively coordinateconservation efforts in transportation, including (a) development of atransportation energy management plan; (b) collection of reliablestatistical information on energy consumption trends in the transportsector; and (c) establishment of procedures for evaluating the results ofpolicy measures.

37. Furthermore, it is important that a follow-up study also bemade to determine the feasibility of a number of fiscal and technicalmeasures outlined in para 5.32. These include a phased program ofvehicle inspection, special measures for energy savings in heavy roadtransport, including fuel consumption control equipment (Annex 5.6), and

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the establishment of "freight offices" or information systems to optimizegoods transport and thus reduce the number of empty journeys (Annex5.7). It is estimated that these will require 70 man-weeks of studies ata cost of US$280,000.

38. The capital costs of the measures recommended for improving theefficiency of energy use in transport would be on the ordet of US$80million. These investments are estimated to bring about fuel savings of225,000 toe per year, or around ten percent of current petroleum productconsumption in the transport sector. The resulting annual savings wouldbe US$50 million, in addition to other associated benefits such asreduced air pollution and traffic accidents.

Summary of Recommended Studies

Study Estimated Cost ($US)

1. Alignment of Gas Oil and GasolinePrices - 25 man-weeks (Annex 4.9) 90,000

2. Technical/Economic Aspects of Town GasSupply Options in the Lisbon Area -10 man-weeks (Annex 4.10) 40,000

3. Reevaluation of the Natural Gas Option -25 man-weeks (para 3.9) 90,000

4. Development of an Energy Management Policyfor the Transportation Sector - 70 man-weeks(Annex 5.5) 280 000

Total 500,000

I. ENERGY IN THE ECONOMY

The Economy

1.1 The 1970s witnessed a sharp decline in the rate of economicgrowth in Portugal, from 7.3% a year on average between 1965-73, to 3.2%in 1974-80. The deterioration has continued, with GDP growing 1% in1981, 3% in 1982, an estimated 0.5% in 1983, with a projected decline of1.5% in 1984. As a result, even if the economy were to grow on averageby 3.3% between 1985-90, the average growth rate for the 1980s would notexceed 2.25%.

1.2 With a population of nearly ten million, 1/ Portugal's 1981 GNPper capita was US$2,520. 2/ The services sector accounts for 55% of GDP,industry 29%, agriculture 8.5%, and construction 7.5%. 3/ In addition toexports of manufacturing goods, the country's laraest sources of foreignexchange revenues are workers' remittances and tourism, together account-ing for about one-half of Xotal export earnings from goods and services.Major export commodities include, in order of relative importance, tex-tiles and clothing; wood, cork and paper; agricultural produ( 's; mineralproducts; and machinery.

1.3 Perforinance in the foreign trade sector worsened considerablyduring the past decade, as evidenced by the shift from a current accountsurplus of US$348 million in 1973 to a deficit of US$3.2 billion in 1982.This worsening of performance reflects the impact of oil price increasesin the 1970s combined with the appreciation of the US dollar (thecurrency of ;.ternational oil trade) against the escudo. Other economicindicators have also deteriorated sharply. At the end of 1982, thebudget deficit had reached 12.6% of GDP, with external public debt atUS$13.5 billion or 57% of GDP, and the average rate of inflation at about22%.

1.4 The dilemma facing the Portuguese Government now is to under-take the structural changes which the country needs while at the sametime reduce the balance of payments deficit and keep external debt at asustainable l...vel. The current Government, which took office in June1983, has embarked on a stabilization program to recover a more soundfinancial and economic position and restructure large segments of theeconomy, especially in industrial and energy sectors. As part of this

1/ Total national population, including the Azores and Madeira. UnLessotherwise stated, the energy data in this report relate to continen-tal Portugal, with a population of 9.5 million (1982).

2/ 1983 World Bank Atlas.

3/ Based on newly published national accounts data.

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program, the escudo has been devalued, interest rates have increased, andmost subsidies have been eliminated. Moreover, the Government hasconcluded a standby arrangement with the IMF. The current accountdeficit is expected to be reduced to US$2 billion in 1983 (9% of GDP),and is projected to be further reduced to US$1.25 billion in 1984 (6% ofprojected CDP).

The Energy Problem

1.5 The high cost of energy and dependence on imported energysources are major constraints to economic development. OiL accounted fornearly 80% of final energy demand, absorbing about 30% of export earningsfrom goods and services (including workers' remittances) in 1982, com-pared to 3% in 1973. Including coal and net electricity imports, theimport bill for energy was about 33% of export earnings from goods andservices and 67% of merchandise exports earnings separately. Given thelimited domestic energy resource base, Portugal's major energy problemduring the current decade will be how to keep down the cost of importedenergy while maintaining acceptable rates of economic growth. Thisrequires a strategy designed to (a) reduce the energy intensity of GDPthrough careful demand management, (b) substitute cheaper energy sourcesfor oil, and (c) promote flexibility in investment to meet future energydemand.

Past Energy Trends

1.6 The trend of energy consumption since 1965 has been broadly inline with the general trend of the economy -- relatively rapid growth inthe first half of the period giving way to a marked slowdown in thesecond half (Table 1.1). Primary energy consumption trebled from 4 mil-lion to 12 million toe over the period, and per capita consumption nearlytrebled from 480 kgoe to 1282 kgoe in 1982, which compares with an aver-age (1980) of 1,174 kgoe for oil-importing upper middle income developingcountries and 5,247 kgoe for industriaLized countries. Final energy con-sumption grew somewhat more slowly than primary energy demand because ofthe rising proportion of intermediate consumption. The energy intensityof GDP increased substantially in the latter half of the period, as didthe energy/CDP elasticity; these reflect economic development policieswhich encouraged large, energy-intensive projects and, possibly, thelower efficiency of energy use which results from underutilization ofcapacity.

1.7 rhe contribution of different forms of energy to final consump-tion has been changing (Annex 1.1). For example, che share of petroleumproduct7 in final consumption rose from 69% in 1971 to 75% in 1982, andthat of electricity from 11% to 15%, while coal's contribution fell fromover 7%, to around 2%. Wood, about 8% of final energy demand, is animportant fuel in the pulp, paper and timber industries, where it isproduced as a byproduct, and in the ceramics and baking industries.

Fuelwood provides nearly 30% of household energy needs, being partic-ularly important in rural areas. The dominant role of petroleum isreflected also in its growing share of primary energy requirements, whichrose from 72X to 76% over the same period, mainly at the expense of coal,while the share of wood fell from l(%Z to 57. and that of hydropowerincreased from 9% to 13%.

Table 1.1: Energy Trends, 1965-82

1965 1973 1982 1965-73 1973-82 1965-82('000 toe) (%) ('000 toe) M%) ('000 toe) (%) (Growth % p.a./EIasticityl

Final consumption 3,706 92 6,259 86 8,994 74 6.8 4.1 5,4Intermediateconsumption 314 8 979 14 3,186 26

Total primary energy 4,020 100 7,238 100 12,180 100 7.6 6,0 6.7of which: net Imports 2,923 73 5,693 79 10,143 83 8.7 6.6 7.6

Primary consumption/cap., toe 0.48 0.84 1.28

Energy intensity toe/mill. esc. 8.01 8.23 10.60

Energy/GDP elasticity 1.04 1.53 1.36

Source: Annex 1.1.

1.8 As shown in Table 1.2, fueL and gas oil account for over three-quarters of the consumption of petroleum products. As .s result of therapid growth of demand for these two products, sales of gasoline havelagged behind, as shown in its declining share of the market. Thesetrends reflect the impact of the Government pricing policy which hasfavored the use of gas oil in transport, agriculture and fishing, and theuse of Euel oil in industry.

Table 1.2: Consumption of Petroleum Products, 1973-82

1973 1982 1973 - 1982cuouu toe) (x) ('uuu toe) (z) (Growth rate, X p.a.)

LPG 390 9.1 580 7.4 4.5GasoLine 748 17.4 899 11.4 2.1Naphtha 296 6.9 312 4.0 0.6Kerosene 71 1.6 52 0.7 -3.4Gas Oil 1,009 23.5 2,080 26.4 8.4Fuel Oil 1,780 41.5 3,940 50.1 9.2

Total 4,294 100.0 7,863 100.0 7.2

Source: Annex 1.2 and mission estimates.

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1.9 Portugal has two operating refineries 4/ with a combined capa-city of 15 million tpy (10 million tonnes at Sines and 5 million tonnesat Oporto), but they are operating only at about 50% of capacity (Annex1.3). Production is heavily weighted towards fuel oil and gas oil, whichaccount for about two-thirds of refinery output. This is still, insuffi-cient to meet the internal demand for these products, and the deficit hasto be met by imports, which account for most of the n.t imports of petro-leum products (about one million tons in 1981).

Electricity Trends

1.10 Electricity consumption has been growing more rapidly thanoverall energy demand, reflecting the rising share of electricity infinal energy consumption. As shown in Table 1.3, the growth rate alsohas been more stable, with final consumption growing at 7.9% p.a. during1971-1976 and at 7.4% during 1977-1982, despite the sharp drop in the CDPgrowth rate in the later period. As a result, the electricity intensityof GDP rose sharply from 11,200 kWh per million 1980 escudos in 1971, to15,600 kWh in 1982, and the electricity/CDP elasticity rose from 1.68 in1971-76 to 1.85 in 1977-82 (Annex 1.4). Even so, per capita electricityconsumption (about 1,900 kWh) remains one of the lowest in Europe, com-paring to an average of 4,600 kWh for all of Europe in 1981, 5,100 kWhfor France, and 2,900 kWh in Spain. 5/

1.11 As shown in Table 1.3, electricity production has failed tokeep pace with consumption, and the resulting deficits have had to be metby imports, which fluctuate widely according to hydrological conditionsin Portugal. In 1981, for example, which was a particularly dry year,hydropower production was less than half the 1979 level, and net importsrose to 3,060 GWh, or 3% of total supplies.

1.12 The industrial sector accounts for most of the electricity con-sumption (58% in 1982), foLLowed by households (22%) and services (17%).As in the case of overall energy consumption, industry's share showedsome decline over the period, mainly because of a much slower growth ratein the earLy 1970s compared with the household and services sectors(Annex 1.4).

1.13 The public sector is responsible for about 93% of the electri-city supplied in Portugal; industrial auto production contributes only7%. Access to public electricity is close to 100% in urban areas but somehalf million of the rural inhabitants, comprising 7,000 communities, are

4/ A third refinery at Lisbon was phased out foi Lowing the opening ofthe Sines refinery in 1978.

5/ UN Yearbook of World Energy Statistics 1981.

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without electricity. Most of these are quite small, with fewer than 50inhabitants.

Table 1.3: Electricity Supply and Consumption, 1971-82

1971 1976 1982 1971-76 1976-82 1971-82(GWh) (X) (GWh) (%) (GWh) (%) (Growth Rave, % p.a.)

ProductionHydropower 6,207 78 4,887 48 6,858 45Thermal Power 1,726 22 5,258 52 8,409 55

Total 7,933 100 10,145 100 15,267 100 5.1 7.0 6.1

Net Imports 178 1,724 2,969Total 8,111 11,869 18,236 7.6 7.5 7.5

ConsumptionIntermediate a/ 1,184 15 1,725 15 2,666 15Final 6,927 85 10,144 85 15,570 85 7.9 7.4 7.6

a/ Power station consumption and network losses.

Source: Annex 1.4.

Structure of Demand and Supply

1s14 Tabl.e 1.4 shows the structure of energy supply by source andfinal energy demand by sector in 1982. Only 20% of gross energy suppliescame from domestic sources in 1982, mainly from hydroelectricity andfuelwood. Imported crude oil and petroleum products accounted for 77% ofsupplies, with imports of coal, coke and electricity making up the re-mainiiug 3%. Domestic demand,. including net additions to stocks of coaland oil, absorbed 94Z of gross supplies, and exports -- mainly of petro-leum products (including fuel for foreign ships and aircraft) -- took 6%.

1.15 Industry (including construction) and transportation accountfor three-fourths of final energy demand; industry's share is 45%, upfrom 39% in 1975, and transportation's share is down -- from 34% to 29%(1982). The share of the household and services sector rose from 16% to18% over the same period (Annex 1.1). The major energy-consuming indus-tries are cement, steel, textiles, food and drink, chemicals and plas-tics, and ceramics. Road transport by private cars, trucks and buses,accounts for nearly 85% of energy consumption in the transportation sec-tor, and railways account for less than 7%.

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Table 1.4: Structure of Energy Supply and Demand, 1982('000 toe and % shares)

Solid Town Hydro- Electri-Fuels Oil Gas Power city Total

Gross Energy Supply(000 toe) 1,044 9,327 - 1,553 256 12,180

Fuel Source/total (%) (8) (77) - (13) (2) (100)Conversion Loss andEnergy Sector Use(000 toe) -18 -2,573 57 -1553 1,067 -3,186

Final Energy DemandFuel Totals (000 toe) 860 6,754 57 - 1,323 8,994

Sector Composition (%)Industry & Const. (59) (43.) (5) - (57) (45)Transportation - (39) - - (2) (29)Household/Services (41) (10) (95) - (40) (18)Agriculture/Fishing - (5) - - (1) (4)Non-Energy Uses - (5) - - - (4)Tctal (100) (100) (100) (-) (100) (100)

Source: Annex 1.1 and mission estimates.

Energy Conservation in Industry

1.16 Industry (including construction) is the largest energy con-suming sector in Portugal, accounting for 45% of final energy demand in1982. As such, it is the main target of the Government's energy con-servation strategy. In 1982, a Government energy management decreerequired 1,000 enterprises with annual energy consumption levels of 1,000toe or more to undergo a comprehensive energy audit by independentauditors and prepare a tive-year energy conservation plan. Under theplan, each enterprise will attempt to achieve set energy consumptiontargets linked to the performance of the most energy-efficient enter-prises in the industry concerned. Each of the enterprises i9 required toappoint an energy manager to implement the conservation plan and reportto the Government on investments and changes in operating practicesundertaken for this purpose. The Bank is assisting in the Government'sconservation program for industry under a 1982 loan for an IndustrialEnergy Conservation and Diversification Project. The project providesfor (a) energy conservation studies and investments in the major energy-intensive industries designed to produce immediate savings in energycosts; (b) an energy survey covering ten other major consuming indus-tries, mainly focussing on small and medium-scale enterprises, along withtechnical assistance in establishing an Energy Management Audit andTraining Center; and (c) a leasing facility intended for investments inenergy conservation in the private sector to improve the access of small

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and medium-scale enterprises to energy-saving equipment;and (d) pilot anddemonstation projects for renewable energy techniques.

Energy Investment

1.17 Energy sector investment has been increasing as a share ofnationaL investment, rising from 6-7% in the early 1970s, to 13-14% inrecent years (Annex 1.5). Electric power investment has declined inrelative importance, mainly becau;e of heavy investment by the nationaloil company PETROGAL during the L970s, notably for the Sines refinery.However, electricity still accounts for about 80% of thle total.

Energy Resources

1.18 The main indigenous energy resources are hydropower, relativelylow grade coal, wood/other biomass and uranium. No commercially expLoit-able petroleum deposits have been discovered so far. Other resourcesinclude industrial and agricultural residues and solar energy.

Hydropower

1.19 The estimated technically and economicalLy feasible hydropowerpotential is 26,400 GWh p.a. in average hydrological conditions. About20,000 GWh is located at sites which are suitabLe for large and mediumhydropower schemes; the remainder is suitable for small (mini or micro)schemes. About 48% of the large and medium scheme potential has beendeveloped, and plans are to develop a further 12% by 1998. The estimatedsmall hydro potential of 6,400 GWh is a preliminary figure based on 200kW installations which have an average annual production of 0.5 GWh, andon survey work covering 80% of the country. The theoretical potentialfor mini or micro schemes is beLieved to be about 15,000 GWh p.a., but astudy is now underway to establish the precise figure. It should benoted that the estimates of small hydropower potential are sensitive totile oil price assumed, and the estimates quoted assume a price above thepresent level.

Coal and Lignite

1.20 The only proven reserves amount to eight million tonnes (3.3million toe) in situ of anthracite at Pejao, near Porto, with an averagecalorific value of 4,100 kcal/kg, and 33 million tonnes (4.3 million toe)of recoverable Lignite at Rio Maior, north of Lisbon, with an averagecalorific value of about 1,300 kcal/kg. The only deposit being mined isat Pejao where production is running at about 200,000 tonnes p.a., nearlyall for electricity generation. In addition to the proven reserves,probable reserves in the northern coal basin are estimated at 28 milliontonnes (13.2 million toe), and possible reserves at 42 million tonnes(19.7 million toe). There are also significant sub-bituminous coal

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prospects at Villa Nova da Ourem -- also in the north; estimates of thepotential range up to 500 million tonnes, but more detailed studies areneeded to confirm this. There is an ongoing exploration program in thenorthern coal basin, and the Federal German Geological Service plans tocarry out an evaluation of unexplored coals and lignites in Portugal.

Renewable Energies

1.21 Wood is the principal biomass energy source, contributing in1982 close to 700,000 toe, about 6% of totaL primary energy. Thepotential contribution of wood and other forest products is estimated at5.3 million dry tonnes p.a. (about 1.8 million toe), comprising 1.2 mil-lion tonnes of wood and 4.1 million tonnes of tree and plant wastes. Astudy under the Bank's energy conservation and diversification projectwill assess the availability of forest and forest industry residues asfuel and will include a preliminary assessment of afforestation forenergy purposes. The energy potential from urban wastes is about 300,000toe p.a., and from agricultural wastes about 15,000 toe. According tocurrent estimates, the total biomass potential would amount to nearlythree times the current contribution of biomass to primary energysupply. Regarding solar and wind energy resources, at present only solarflat plate collectors for water heating appear to be worth pursuing.Fiscal incentives and the solar energy component of the aforementionedBank financed project are designed to this end.

Uranium

1.22 The resource base currently is estimated at 11,500 tonnes ofuranium, of which 6,700 tonnes are "reasonably assured" reserves, ex-ploitable at a cost of under US$80/kg and 1,500 tonnes at US$80-iSO/kg.These would suffice for about 2,500 MW of nuclear capacity over a 25-yearlife. According to a 1979 IAEA estimate, there is also a speculativepotential of 20,000-80,000 tonnes of uranium oxide (U308).

Petroleum Prospects

1.23 Two basins are thought to have oil and gas potential: theLusitanian Basin, covering both onshore and offshore areas from Porto toSines, and the Algarve Basin, covering the southern offshore AtlanticShelf and the adjacent onshore areas. The Bank currently is financing anexploration project in the Lusitanian basin, where the exploration his-tory and petroleum geology indicate a high probability of discoveringsmall commercial deposits.

Institutional Framework

1.24 Compared to many countries, Portugal has a relatively largenumber of agencies involved in the energy sector, as shown in the organi-zation charts attached as Annex 1.6. The Ministry of Industry, Energyand Exports (MIEE) has jurisdiction over most energy-related matters.

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Within the Ministry, the Directorate General for Energy (DGE), with about100 professionals, is responsible, under the Secretary of State forEnergy, for formulating energy policies and projecting energy require-ments. The Directorate General for Geology and Mines (DGGM) providesgeological services, grants and regulates mining concessions, and de-velops mineral policies. The major public sector energy enterprises arePETROGAL, the national oil company; EDP, the electric power authority;ECD, the coal production company; and ENU, the uranium production com-pany. DGE and the National Laboratory for Industrial Engineering andTechnology (LNETI) have major responsibilities for both energy conser-vation and renewable energy developmisent.

1.25 Coordination among the sector agencies has been quite good, asevidenced by the production of the draft 1980-2010 national energy plan(PEN) by an inter-agency commission with the assistance of several con-sultative groups. Nevertheless, there are some weaknesses in the sectorwhich will need to be corrected if energy plans are to be soundly formu-lated and successfully implemented. Weaknesses specific to the topicscovered in the report are dealt with in the appropriate chapters, but themain areas of concern may be summarized as follows:

(a) Planning. DGE's middle management planning capability shouldbe strengthened, as it does not have enought staff to preparethe detailed energy demand projections needed to refine thenational energy plan.

(b) Conservation. So far, only energy conservation in industry hasbeen dealt with in any detail. This is understandable, becauseindustry is the largest energy-consuming sector and because itcomes under the same ministry as DGE. Although 1h'4re have beensome delays in the implementaion of energy conservation pro-jects, the limited program set-up for industry still is far inadvance of those in other sectors where institutional short-comings are more serious (Chapter V).

Cc) Imported Natural Gas. If the LNG program is implemented, therewill be a need for a strong national gas company which would beresponsible for handling not only imports of LNG, but marketingand distribution as well, including setting and enforcingsafety standards (see Chapter III).

(d) Imported Coal. The form of organization for handling thegreatly increased coal imports envisaged in the national energyplan also remains to be more clearly delineated (Chapter III).

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II. THE NATIONAL ENERCY PLAN - ENERGY, ELECTRIC POWERAND NATURAL GAS PROJECTIONS

The National Energy Plan

2.1 The draft National Energy Plan 6/ (PEN) provides a flexible andsophisticated instrument for energy policy and planning in Portugal. Theprimary objective is to satisfy energy requirements arising from economicdevelopment and social progress, but this is combined with various com-plementary objectives which are not necessarily mutually consistent. Themost important objectives identified in PEN are (a) minimizing the costof energy supply to consumers; (b) increasing security of energy supplyand resilience to unexpected shocks; (c) reducing import dependence; and(d) minimizing damage to the environment. PEN distinguishes between amedium-term planning horizon of six to ten years, determined by the leadtime for the construction of major energy installations, and a long-termhorizon of 30 years to cover the working life of these installations.

2.2 Given the uncertainty of long-term forecasts, the approachadopted was to develop alternative scenarios taking account of exogenousfactors (mainly the growth of GDP) and of energy-specific factors such asfuel and energy equipment prices (see Annex 2.1 for a list of the mainvariables and the values assumed). This chapter reviews the resultingenergy projections, with special reference to the electric power sub-sector and the proposed LNG import program.

Energy Demand Projections

Methodology

2.3 PEN first projects usefuL energy demand using a computer model(MEDEE2) developed for use in the EEC, which splits useful energy con-sumption into 18 "demand modules", grouped into the four sectors ofhouseholds/services, industryiconstruction, transportation, and agricul-ture and fishing (Annex 2.2). Projections of the useful energy require-ments of each module are made using as coefficients the specific usefulenergy per unit of gross vaLue added, except in the transportation sec-tor, where the useful energy requirements are determined from activityvolumes and not from gross value added. The coefficients used were thosefor 1980. Another model, DFI (Decision Focus Incorporated), determineshow the useful energy demand of each activity will be met, taking accountof the relative prices of the competing fuels and consumer preferences,and translating the useful energy projections into the least-cost config-uration of primary energy requirements.

6/ Plano Energetico Nacional (Versao 1982).

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Alternative Projections

2.4 Since the number of possible combinations of the variables andhence of alternative energy projections is large, the PEN analysis isconfined to 16 selecced cases for sensicivity testing purposes. Elevenof these cases assume a low economic growth scenario (scenario B) whichpostulates continuing relative stagnation of the world economy sndaverage GDP growth rates for Portugal of 3% p.a. for the period 1980-85,3.5% for 1986-90 and 4.5% for 1991-2010. The other five PEN projectionsassume the high growth scenario A, which postulates a significantrecovery of the world economy and average GDP growth in Portugal of 4%p.a. for 1980-35, 5.5% for 1986-90 and 6.5% for 1991-2010. Scenario B isregarded by the Portuguese as the more realistic of the two scenariosused in PEN.

2.5 The resulting projections of final energy consumption in 2010(Annex 2.3) show that demand is most sensitive to the economic scenarioassumed, the projection for scenario A being over nine million toe higherthan that for Scenario B (35.3 miLlion toe against 25.8 million toe).The scenario B cases, which include both "intensive" 7/ and "moderate"energy conservation cases, show the sensitivity to this factor, withfinal consumption of 25.8 million toe in the intensive conservation caseagainst 28 million toe with a moderate conservation policy. The respec-tive shares of the different fuels appear relatively insensitive to theassumptions adopted, except for some substitution of coal for petroleumwith the P2 price scenario, which assumes 3% p.a. increase in the coalprice compared with 6% in the P1 scenario.

Reference Strategy

2.g The strategy chosen in PEN as the basic reference case (ER) forplanning purposes assumes the economic scenario B, together with theassociated macroeconomic projections (Annex 2.1), a discount rate of 10%,the intensive conservation program and the P2 fuel price scenario, whichassumes average annual real increases in fuel prices 8/ of 3.3-4% foroil, 3% for coal, 4% for natural gas and 3.1% for uranium. Primary energyconsumption grows at 6% a year in 1980-85, against less than 5% in thelater 1970s, but declines to less than 4% a year after that (Table 2.1.).Final energy consumption grows somewhat less rapidly because of the grow-ing p-oportion of intermediate consumption for energy conversion, trans-mission and distribution (from 16% in 1980 to 24% in 2010), which ispartly due to the increasing share of thermal power in electricity pro-duction.

7/ Assumed to result in savings of 550,000 toe in 1985 (4%), rising tonearly seven million toe in 2010 (16%), at an estimated annual costof 50,000 escudos (1980 prices) per toe saved.

8/ After the year 2000, petroleum, coal and gas prices are assumed toincrease in line with general inflation, i.e. remain constant inreal terms.

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Table 2.1: Reference Strategy Projections, 1980-2010

1980 1985 1990 2000 2010(actual)

Useful energy, '000 toe 6,105 7,556 9,482 14,535 21,859Final energy, '000 toe 8,454 11,064 13,105 18,010 25,610Intermediate energy,'000 toe 1,653 2,492 3,178 4,988 7,950

Primary energy, '000 toe 10,107 13,556 16,283 22,998 33,560

Primary energy percap., toe 1.073 1.403 1.644 2.209 3.066

GDP, billion 1980 esc. 1,098 1,273 1,512 2,348 3,646

Final energy,toe/mill. esc. 7.70 8.69 8.67 7,67 7.02

Primary energytoe/mill. esc. 9.20 10.65 10.77 9.79 9.20

Source: Annex 2.2.

2.7 The increasing intensity of energy use projected for the 1980sis due to more rapid growth of industrial demand compared with other sec-tors (Annex 2.2), and the parcicularly high growth rates for heavy usersof energy, such as cement, steel, chemicals and ceramics (Annexes 2.4 and2.5). The declining intensity after 1990 reflects the impact of con-servation programs. The primary energy/CDP elasticity also increasessharply -- to two in 1980-1985, compared with 1.53 in 1974-1980 (Table1.1). Thereafter, the trend decLines sharply, with elasticities of 0.7-0.8 in the 1990s.

2.8 Projected consumption by sector shows a reversal of the trendsduring the 1970s. Industry's share increases from 38% in 1980 to 50% in2010, reflecting the more rapid growth (4.7% p.a.) of industrial energydemand compared with other sectors (Annex 2.2). The share of the house-holds and services sector falls from 21% to 11%.

2.9 The shares of the various forms of energy in final energy con-sumption show substantial changes (Annex 2.2), notably the decliningcontribution of oil, from 72% in 1980 to 49% in 2010, and the corre-sponding increases for coal (2% to 20%) and natural gas (1% to 7%). Thesechanges reflect the projected substitution of coal for oil in industryand electricity generation, and the proposed importation of LEG beginningin the Later 1980s.

2.10 Table 2.2 shows the growing dominance of middle distillates(essentially gas oil) in the demand for petroleum products. This is due

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to the projected heavy growth of road transportation demand (heavytrucks), the stagnation of LPC demand, with the introduction of LNG, theslower growth of demand for Light distilLates (mainly gasoline), and theencroachment of coal and uranium on the traditional markets for fuel oilin heavy industry and electricity generation.

Table 2.2: Final Consumption of Petroleum Products, 1980-2010

1990 1990 2000 2010'000 toe Z '000 toe % '000 toe £ '000 toe £

LPG 568 9,4 520 6.3 540 5.4 560 4.4Light distillates 1,047 17,3 1,840 22.1 1,900 19.1 2,020 16.1Middle distillates 2,158 35.6 3,061 36.8 4,400 44.2 6,620 52.7Heavy fuel oil 2,283 37.7 2,899 34.8 3,120 31.3 3,370 26.8

Total 6,056 100.0 8,320 100.0 9,960 100.0 12,570 100.0

Source: National Energy Plan (1982 version).

2.11 Because of the growing divergence between the market shares ofgas oil (36%) and fuel. oil (38%) and their shares of Portuguese refineryoutput (25% and 43% respectiveLy in 1982), PETROGAL is considering theinstallation of a 15/20,000 bpd hydrocracker. This option to meetincreasing gas oil demand should be compared with the alternative ofdirectly importing the additionaL gas oiL required.

2.12 The projected primary energy mix shows declining shares for pe-troleum and hydroelectricity, with offsetting increases for coal, naturalgas and, above all, uranium (Table 2.3). The uranium projection assumesa large nuclear power contribution beginning in 1995. Import dependenceactually increases from 80% in 1980 to 86% in 1990, as increases in theshares of imported coal and natural gas exceed the decline in the shareof imported petroleum. The upward trend is not reversed until the adventof nuclear power in 1995, when import dependence falls to 77% and then to63% by 2010.

2.13 These primary energy projections assume the continued use ofconventional crude oil for petroleum products. PEN also considers theoption of synthetic crude oil (Syncrude) from imported coal by 2000.This would reduce crude oil requirements but increase total primaryenergy requirements by 1.4 million toe in 2000 and 2.8 million toe in2010 because of the conversion losses from coal to oil (Annex 2.2).

Reference Strategy Investment Requirements

2.14 Implementing the PEN reference strategy would require nineseparate development programs covering energy conservation, electricpower system expansion, the introduction of nuclear power, the coal

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subsector, the introduction of natural gas, renewable energy resources,the petroleum subsector, evaluation of national energy resources, and aprogram of energy research, development and demonstration. Energyinvestment would absorb about 12% of estimated total national investmentin 1983-1990, and 8-11% after that (TabLe 2.4), which is below the 13-14%levels of recent years. However, the absolute sums are large (US$800million p.a. on average in the 1980s, rising to US$1,340 million in the1990s), and may give rise to fi.nancing problems, particularly if theeconomy does not grow as assumed.

Table 2.3: Primary Energy Supply by Energy Source, 1980-2010Reference Strategy

1980 1990 2000 2010'000 toe % '000 toe % '000 toe % '000 toe %

Petroleum 7,965 78.8 10,480 64.4 11,260 49.0 13,260 39.5Coal 213 2.1 2,700 16.6 4,438 19.3 6,205 18.5Hydroelectricity 851 8.4 980 6,0 1,115 4.9 1,279 3.8Natural gas - - 800 4,9 1,175 5.1 1,652 5.0Uranium - - - - 2,993 13.0 8,404 25,1

Wood a/ 1,079 10.7 1,315 8.1 1,990 8.6 2,710 8.0Solar and wind energy - - 8 - 27 0.1 50 0.1

Total 10,108 100.0 16,283 100.0 22,998 100.0 33,560 100.0

a/ including industrlal residues.

Source: Annex 2.2.

Table 2.4: Reference Strategy Investment Requirements, 1983-2010(billion 1980 escudos)

1983-90 1991-95 1996-2000 2001-10Amount % Amount % Amount % Amount %

Electric power 202.5 63.9 174.2 69.8 189.7 46.6 534.6 60,6F.'troleum 33.9 10.7 4.2 1.7 127.9 31.4 154.9 17.6Coal 16.4 5.2 3.5 1.4 0.5 0.1 7.2 0.8Natural gas 14.5 4.6 12.2 4.9 6.5 1.6 7.5 0.8Energy conservation 37.8 11,9 44.8 18.0 64.2 15.8 135.2 15.3Other a/ 11.7 3.7 10.6 4.2 18.3 4.5 43.0 4.9

Total 316.8 100.0 249.5 100.0 407.1 100.0 882.4 100.0

National Investment 2,694.2 2,718.7 3,638.3 11,384.4Energy as % national 11.8 9.2 11,2 7.8

a/ Renewable energy, evaluation of national energy resources and energyresearch, development and demonstration.

Source: Annex 2.6.

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Foreign Exchange Costs

2.15 Even with the projected switch from petroleum to other fuels,the foreign exchange costs of energy under the reference strategy, cover-ing both equipment and fuel imports, remain around their present level of38% of export earnings in the 1980s and 1990s, with fuel importsaccounting for about 90% of the total (Table 2.5).

Table 2.5: Reference Strategy Foreign Exchange Costs, 1983-2010(billion 1980 escudos)

1983-90 1991-2000 2001-10Amount % Amount % Amount X

Investment a/ 105 7.4 366 12.0 371 9.7Fuel 1,306 92.6 2,693 88.0 3,469 90.3Total 1,411 100.0 3,059 100.0 3,840 100.0

Exports 3,749 7,826 14,828Energy as %exports 37.6 37.8 25.9

a/ Including the cost of "security" stocks of fuel.

Source: Annex 2.'

Increased Security of Supply Strategy

2.16 The PEN study includes an alternative strategy designed tocorrect the relatively high degree of import dependence in the referencestrategy and its reliance on energy sources such as natural gas andnuclear power which are regarded as vulnerable to supply interruptions.This results in a reduction of nearly six million toe (16%) in primaryenergy requirements in 2010 (Annex 2.8) from a more intensive energyconservation program. The costs of this strategy compared with thereference strategy are not given.

2.17 As a variant, the PEN study considers a non-nuclear strategy.This would nearly double coal requirements by 2010 to some ten milliontoe, but would reduce total primary energy consumption about 2% becauseof the higher thermal efficiency of coal-fired stations.

Electric Power Projections

Reference Strategy

2.18 Specific electricity requirements in terms of useful energy aredetermined by the MEDEE2 model. The DFI model determines the final con-sumption of electricity in these specific applications and also in non-

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specific applications, given the assumptions on the prices of electricityand competing fuels. The DFI model also determines gross electricityrequirements, allowing for network losses and power station consumption.

2.19 The PEN reference strategy (Table 2.6) shows final consumptionof electricity growing at 4.7% p.a in the 1980s and 3.9X p.a. after that,compared to 7.6% p.a. in the 1970s. Gross electricity supply growsrather more slowly because of declining network losses and power stationconsumption (Annex 2.9). The pubLic network accounts for about 96% oftotal supply throughout the period, auto-production by industry contri-buting only 4%. The electricity intensity of GDP rises to ovet 17,000kWh per million escudos (at 1980 prices) by 1990, but de_Lines there-after. Because of conservation measures, the electricity/GDP elasticityfalls from its 1970s value of 1.77 to 1.38 in the 1980s,and 0.82 in the1990s. Electricity consumption per capita doubles by the year 2000 to3580 kWh, about its present level in Italy.

Table 2.6: Electricity Consumption and Supply. 1980-2010Reference Strategy

Growth rate % p.a./Elasticity1980 1990 2000 2010 1981-90 1991-2000 2001-2010

Final consumption, GWh 14,338 22,674 33,488 49,070 4.7 3.9 3*9Intormedlate consump-tion, GWh 2,430 3,248 3,792 4,521

Gross supply, GWh 16,768 25,922 37,280 53,591 4.5 3.7 3.7Gross supply, kWh/mill.

1980 esc, 15,271 17,144 15,877 14,719Gross supply/GOPelasticity 1.38 0.82 0.82

Gross supply per capita,kWh 1,780 2,620 3,580 4,900

Source: Annex 2.9.

2.20 The share of the household and services sector in consumptioncontinues to decline, while the share of inidustry and construction risesto nearly 80% in 2010 (Table 2.7), reflecting the very different growthrates projected (2% p.a. on average for households and services, against5 to 6% for industry).

Power System Development Program

2.21 The state power company, Electricidade de Portugal (EDP), usesthe weLl-known Wien Automatic System Planning (WASP) linear programmingmodel in conjunction with another computer model known as VALORAGUA to

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determine the least-cost development program. WASP simulates the opera-tion of the EDP system over 30 years and chooses the combination ofplants and fuels with the lowest present worth of total system costs(capital plus operating) to meet the projected demand. VALORAGUA, de-veloped for planning power systems with a significant hydropower compo-nent, fine tunes the WASP results, mainly by refining the in-servicedates of the plants selected by WASP.

r'ble 2.7: Elec ricity Consumption by Sector, 1980-2010Reference Strategy

1980 1990 2000 2010GWh % GWh % GWh X GWh E

Households & services 5,791 40.4 7,419 32.7 8,860 29.3 10,349 21.1Industry & Construction 8,198 57.2 14,883 65.6 24,221 69.2 38,256 78.0Transportalion 244 1,7 279 1.2 302 1.1 349 0.7Agriculture & fishing 105 0.7 93 0.4 105 0.4 116 0.2

Source: Annex 2.9.

2.22 The resulting EDP projections show a continuing decline in thehydropower share, and substantial changes in the pattern of thermal gen-eration (Table 2.8). Oil-fired steam plant continues to predominate upto 1985 but, by 1990, is superseded by coaL-fired plant, which is over-taken by nuclear power~ in the later 1990s.

2.23 The projected consumption of fossil fuel reflects thesechanges. After rising to nearly two million toe by 1985, fu*1 oil de-clines almost to zero by 2010; cc'al consumption risee to nearly two mil-lion toe in 1995-2000, then falls to about one million toe in 2010; gasoil is virtually eliminated after 1990 as pumped storage plants displacecombustion turbines for peaking service. Outside the public network, theuse of industrial residues by autoproducers would rise from 100,000 toein 1980 to 450,000 toe in 2010 (Annex 2.9).

2.24 Any delay in the nuclear power program will increase coalrequirements and probably also oil requirements. In the extreme case ofthe non-nuclear strategy, coal consumption for electricity generationwould rise to 3.5 million toe in 2000 and 5.5 million toe in 2010.

2.25 The least-cost power program does not include any new oil firedplants beyond the recently completed steam units at Setubal (2 x 250 MW)and combustion turbines at Sines (2 x 83 MW). It comprises 1800 MW ofcoal-f!red plant (6 x 300 MW) in 1985-1993, 5700 MW of nuclear power(6 x 950 MW) in 1995-2009, and 3680 MW of hydropower capacity (25 proj-ects) between 1982 and 2010 (Annex 2.10). Hydropower continues toaccount for half or more of total installed capacity to the year 2000,

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falling to 46% in 2010, by which time the system will be essentiallybased on hydra and ntuclear power (40%).

Table 2.8: Public Electricity Supply by Energy Source, 1980-2010

1980 1985 1990 2000 2010

% of total production

Hydropower 61.7 49.9 45.6 36.4 29.0Thermal power 38.3 50.1 54.4 63.6 71.0

of which:Oil-fired steam 34.6 4D.3 24.9 8.6 0.2Coal-fired steam 2.2 9.3 29.5 22.5 7.8Combustion turbines 1.5 0.5 - 0.2 -Nuclear power - - - 32.3 63.0

'ossil fuel consumption, '000 toe

Fuel oil 1,296 1,851 1,450 675 22Gas oil 77 26 - 15 -Coal 87 450 1,800 950 980

Total 1,460 2,327 3,250 2,640 1,002

Source: Annex 2.9.

High Growth Scenario

2.26 In the PEN high growth scenario electricity consumption wouldgrow at about 7% p.a. during the 1980s, and about 5.4% thereafter, com-pared with the reference strategy rates of 4.7% and 3.9%, respectively.As a result, consumption would be 21% higher in 1990, 42% in 2000 and 64%in 2010, requiring an additional 600 MW of capacity in 1990, nearly 4000MW in 2000 and over 7000 MW in 2010. However, this scenario assumesrelatively high CDP growth rates.

Electric Power Investment Requirements

2.27 Electric power investment absorbs the bulk of projected energysector investment throughout the period (Table 2.4), but its share oftotal national investment declines from 7.5% in the 1980s to under 5% in2000-2010 (Table 2.9). The big intcrease in the share of generation, from66% in the 1980s to over 80% after that,combined with existing dieficien-cies in the distribution system raises a question about the adequacy ofthe allocation to transmission and distribution to maintain a satisfac-tory quality of service and achieve the projected reduction in networklosses.

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Teble 2.9: Projected Electricity Investment, 1983-2010

Reference Case

(billion 1980 escudos)

1983-1990 1991-1995 1996-2000 2001-2010

Amount % Amount % Amount % Amount S

Auto-producers 2.9 1.4 2.4 1.4 2.5 1.3 4.5 0.8

Public network 199.6 98.6 171.8 98.6 187.2 98.7 530.1 99.2

Total 202.5 100.0 174.2 100.0 189.7 100.0 534.6 100.0

National investment 2,694.2 2,718.7 3,638.3 11,384.4Electricity % National 7.5 6.4 5.2 4.7Generation a/ 131.5 65.9 141.8 82.5 152.2 81.3 435.1 82.1Transmission a/ 22.4 11.2 7.5 4.4 7.5 4.0 22.5 4.2Distribution a/ 45.7 22.9 22.5 13.1 27.5 14.7 72.5 13.7

a! Public network.

Source: National Energy Plan (1982 version).

Medium--Term Electricity Projections

2.28 The PEN electricity projections provide the long-term perspec-tive for evaluating various options under different economic growth,price and conservation scenarios. For its own investment and financialplanning, EDP makes medium-term projections, normally covering a periodof seven years, which are updated annually. Until recently, these werebased on trends in electricity consumption per person in more advancedcountries. This approach gave good results from 1976 to about 1980, butit lacked any explicit connection with economi: activity and prices, andleft unexplained the wide year-to-year variations in the growth of elec-tricity demand. EDP therefore developed another model which uses asexogenous variables the growth rate of GDP and the rate of change of tileprice of electricity relative to the change in the price index for o;.herfuels (Annex 2.11). The model has its limitations in that it is based ona relatively small number of observations; nevertheless, the model hasgiven good results when applied to past data, though for 1983 there is anapparent incongruence in that the model predicted stagnant dernand forelectricity on the basis o£ Government predictions of GDP growth,whereasactual data showed an increase of about 7%. This apparent incongruityshould be investigated when actual GDP figures for 1983 are available.

The LNG Option

2.29 The PEN reference strategy envisages imported liquified naturalgas (LNG) as part of the policy of diversification to reduce the present

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high degree ̂ f eependence on imported oil. It would be used in indus-trial processes requiring a clean fuel, in households and commercialpremises and also as a chemical feedstock. PEN envisages the first im-ports in 1988, allowing for a four-year lead time from 1984 for the ne-cessary infrastructure. The alternative of natural gas by pipeline fromSpain was rejected as more costly.

Market Prospects

2.30 Natural gas consumption is projected by the DFI model to growfrom 0.8 million toe in 1990 to 1.65 million toe in 2010 (Table 2.10),accounting for about 5% of primary energy supplies over the period. From1995 onwards,natural gas would be supplemented by biogas and relativelysmall though growing quantities of gas manufactured from coaL. In thehousehold/services sector,the main uses would be for space heating, waterheating and cooking; in industry, the main market would be processesrequiring a clean fuel, although a rising use is also envisaged forsteam-raising (Annex 2.12).

2.31 The PEN projection is very different from a projection by con-sultants in 1981 for Petroquimica e Gas de Portugal (PGP) for the period1985-2004. If the PGP figures are lagged three years to align them withthe PEN projection, the PEN 1990 total is 30% higher, but in 1995 tle PCPtotal is 33%, and in 2000 46', above the PEN figures (TabLe 2.11). Therelatively low PEN industrial projections are partly due to the exclusionof potential markets, particularly in industries using heat processeswhich can utilize any type of fuel, and industries with dual-firingequipment, which could utilize natural gas on an "interruptible supply"basis.

2.32 These differences are not surprising since quite differentmethodologies were used. The PCP projection is based on a market survey,which envisages a three-stage deveLopment of the service area, startingwith Lisbon and Setubal, then rmoving northwards to the Porto area and,finally, to Cuimaraes and Braga (Annex 2.13). The household demandprojections assume final penetration of 30-40% over five to ten years forexisting houses and 60% for houses built after the arrival of natural gasin an area. The number of households served rises from 185,000 in 1988to 373,000 in 1995, to more than 500,000 in 2000 and 600,000 in 2008.Consumption in the services sector was assumed to be 35% of total house-holds/services consumption, as in the Lisbon town gas service area. Theindustry projections assumed 20% initial penetration of the industrialfuel market, and then 2% annual growth to a final penetration level of30%.

Reference Strategy Cost Assumptions

2.33 The reference strategy consumption projections were determinedby the DFI model on the basis of the costs of natural gas relative to thecosts of other fuels. These costs comprise the c.i.f. price of theimported ;NG, plus the costs of the LNG terminaL, storage facilities,transmission and distributiou networks. The c.i.f. prices assumed are

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those of the P2 price scenario. The estimated investment costs are 24.2billion escudos at 1980 prices (US$492 million 9/), covering the LNGreception terminal facilities, 730 km of primary networks and 3,580 km ofsecondary networks (Annex 2.14). The estimated average annual operationand maintenance costs are 1.94 billion escudos (1980 prices). The c.i.f.price of LNG accounts for more than 80% of the final cost (Table 2.12).

Table 2.10: Natural Gas Consumption, 1990-2010~Weference Strategy Projection

('000 toe)

1990 1995 2000 2010

Final Gas ConsumptionHouseholds/Services 230 305 400 660Industry ;60 303 a/ 425 a/ 703N,ni-energy uses 410 410 410 410

800 1,018 1,235 1,770

Gas SupplLNG 800 1,000 1,175 1,652Coal gas - 6 18 45Biogas - 20 70 130

800 1,026 1,263 1,827

LNG as % total primaryenergy 4.9 5.1 5.1 4.9

a/ Includes consumption of natural gas in combustion turbines forelectricity generation (28,000 toe in 1995, 5,000 toe in 2000).

Source: Annex 2.12.

Table 2.11: Natural Gas Consumption, 1990-2000Comparison of PEN Reference Strategy and PGP Projections

('000 toe)

1990 1995 2000PEN PGP PEN PGP PEN PGP

Households/Services 230 102 305 186 400 271Industry a/ 570 514 713 1,169 835 1,532

Total 800 616 1,018 1,355 1,235 1,803

a/ Including use of natural gas as feedstock.

Source: National Energy Plan (1932 version).

9/ At 1980 average exchange rate of US$1 = 49.19 escudos.

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Table 2.12: Natural Gas Costs, 1980-2000 - Reference Strategy(1980 escudos/kgoe)

1980 1982 1990 1995 2000

LNG c.i.f. price 8.38 11.23 15.36 18.69 22.75Final cost of gas - - 18.59 23.11 26.82c.i.f. price as % final cost 82.60 80.90 84.80

Source: PEN and Annex 2.15.

Comparative Fuel Prices

2.34 According to PEN (Table 2.13), LNG will closely match the priceof fuel oil and will remain significantly cheaper than crude oil (6%)and, especially, LPG (35%). Coal, however, remains much cheaper thanLNG (49% of the LNG price in 1990, falling to 44% in 2000), reflectingthe PEN assumption of a 3% p.a. increase for imported coal against 4%p.a. for LNG.

2.35 A more significant comparison is between the prices of thevarious fuels in terms of useful energy, i.e., aLlowing for theirrelative efficiencies of utilization in different applications. On thisbasis, according to PEN, in the households/services sector natural gas ischeapest for space heating, and for cooking in urban areas (although woodand biogas have the advantage in rural areas), but wood and coal arecheaper for water heating. Similarly, in industry, natural gas ischeapest where a clean fueL is required, but it is more expensive thanwood, coal and fuel oil for steam production (Table 2.14).

Increased Security of Supply Strategy

2.36 The PEN "increased security of supply" strategy (para 2.15)projects natural gas requirements after 1990 wzhich are about 7% lowerth.an in the reference strategy. This reflects partly lower total energyreoiuirements, but partLy also the view that natural gas may beparticularly vulnerable to interruptions of supply because of the smallnumber of potential suppliers.

Pipeline Alternative

2.37 A PGP study, conducted in 1979 when the Spanish gas discoveriesin the Bay of Cadiz seemed highly promising, concluded that a pipelinefrom Huelva on the Spanish border to the Sines-Setubal area would requireabout twice the amount of capital needed for an LNG terminal in the samearea. The import of Russian natural gas via the Spanish network, assum-ing this is extended to Madrid, was ruled out since a pipeline frumMadrid to the Sines-Setubal area was estimated to cost at least four

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times as much as an LNG terminal, with no offsetting advantage in theprice of Russian gas aver LNG. 10/

Table 2.13: Comparative c.i.f. Fuel Prices,1980-2010 Reference Strategy

(1980 escudos/kgoe)

1980 1982 1990 1995 2000

LNG 8.38 11.23 15.36 18.69 22.75Crude oil 12.07 12.61 16.38 19.93 24.25Fuel oil 9.90 11.33 15.50 18.86 22.95LPG 16.81 17.25 23.61 28.72 34.95Coal 4.31 5.93 7.52 8.71 10.10

Source: National Energy Plan (1982 version).

Table 2.14: Comparative Useful Energy Costs of NaturaLGas and Other Fuels in 1990 - Reference Strategy Estimates

(1980 escudos/kgoe)

Households/Services IndustrvSpace Water "tClean"Heating Heating Cooking Processes Steam

Natural gas 29 36 63 27 26Coal 38 35 - - 20LPC 45 55 95 39 37Fuel oil 47 43 - - 25Wood 59 30 49 - 19Electricity 88 85 139 57 63Biogas - - 39

Source: National Energy Plan (1982 version).

10/ The respective figures per million Btu were US$4.60 for Russian gasat the West German border, plus an estimated US$1 for its transmis-sion to Portugal, i.e., US$5.60 c.i.f. Portugal; and for AlgerianLNG US$5.10 f.o.b. Algeria plus an estimated US$0.50 to carry it toLisbon.

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III. ENERGY, ELECTRIC POWER AND NATURAL GAS PROJECTIONS -ISSUES AND RECOMMENDATIONS

3.1 The PEN projections make skillful use of available data withthe help of well established computer models. The models are still in anexperimental stage, and there are of course certain deficiencies, many ofwhich the Portuguese have begun to address, particularly regarding inputdata. Nevertheless, the initiaL results are useful for analyzing the im-plications of different future growth paths and development strategies.The mission's review of the projections focuses on several importantissues which it believes merit attention by Portuguese energy planners.These are summarized in this chapter, together with the Mission's recom-mendations for dealing with them.

Energy Projections

Main Issues

3.2 Although the models used for the projections allow for theinfluence of relative fuel prices as determinants of market shares, theydo not make explicit allowance for the influence of the absolute level ofenergy prices on energy demand. The total demand for energy isessentially income-determined, without reference to fuel price, whichcould double, for example, without changing total demand. However, someimplicit allowances are made for the effect of rising prices in theenergy demand scenarios of MEDEE2 and relative fuel prices are taken intoaccount by the DFl model in selection of the least cost energy supplyoption.

3.3 Furthermore, GDP growth appears high in light of current trendsand prospects and average annual growth since 1980 has been below 3%.Also, projected energy consumption in industry, which now accounts for45% of total demand, appears to be inflated by over-optimistic assump-tions about the growth of the cement, steel, chemicals and ceramicsindustries, which are responsible for over 50% of industrial energydemand (Annex 2.4).

3.4 The PEN assumptions for future fossil fuel prices now seem highin light of more recent forecasts. The 4% p.a. growth in real termsassumed for crude oil, compares with the 1.6% suggested in the Bank'sWorld Development Report 1983 for the period 1982-1995. By the sametoken, the 1.5% p.a. growth assumed for coal in the PEN P3 price scenario(Annex 2.1) appears more appropriate than the 3% p.a. of the referencestrategy.

3.5 The 12% discount rate appears too low .or an upper limit, giventhe capital constraints in the economy.

3.6 The fact that petroleum still accounts for almost half ofprimary energy requirements in the year 2000 calls into question the

- 25 -

adequacy of the conservation program assumed for the reference strategy,particuLarly as the "very intensive" conservation program of the"increased security of supply" strategy gives estimated additional annualfuel savings worth some US$250 million in 1990, at the projected realfuel prices, rising to over US$1 billion in 2010 (all in 1980 escudos).

3.7 The PEN projections assume the introduction of three major newprimary energy sources (imported coal, LNG and nuclear power) within thenext 12 years. This may be difficult, given the formidable organizationand management problems involved, and the associated infrastructure re-quirements, particularly for coal and natural gas. For example, theproposed coal-handling facilities at Sines are at least two years behindschedule.

Recommendations

3.8 DGE staff are well aware of the need for an ongoing review ofthe energy projections, i.e., testing the impact of changes in signifi-cant variables, including GDP growth, energy prices, and the appropriateminimum economic rate of return on investment (rate of discount). Thefollowing recommendations are offered as a second opinion on assumptionsmade, to assist in this review.

3.9 The mission recommends, first of aLl, that planning for themedium term take account of GDP growth rates below those estimated in thePEN low growth case, 3.25% for 1980-90. According to mission estimates,using a 2.25% average annual growth rate and retaining the PEN energy/GDPelasticity assumption of 1.5 would result in an incremental growth inprimary energy demand more than a third less than in PEN. This gives anidea of the type of uncertainty Portugal faces in its macroeconomic andenergy planning for the medium term. Furthermore, the mission finds thePEN energy/GDP elasticity high relative to that of other countries at asimilar stage of economic development and considering the PEN's emphasison energy conservation.

3.10 The mission recommends an additional check on the demand pro-jections adopting a sectoraL approach, including a continuation ofpresent efforts to test the growth rates of energy demand by sector forinternal consistency. Furthermore, the mission supports extending the1979 input-output (1-0) table to include an energy sector broken downinto the main petroleum products, coal and electricity, fitting demandequations to this table and projecting through time. The missionrecognizes that this will require considerable effort and is likely toyield results only in the longer term.

3.11 At the same time, the mission recommends that the revisions ofthe projections include explicit testing of the influence of the absolutelevel of energy prices on energy demand. Pending the modification of thesophisticated models used for PEN which couLd take a considerable amountof time, a simple check could be made by comparing the results of the PEN

- 26 -

models with a single equation econometric approach which explicitlytreats the price level of energy as a variable. 11/

3.12 Once revised projections have been made along the lines out-Lined above, indicating a Likely range of energy demand, the missionrecommends testing the impact of the resulting differences on the size,composition and timing of energy projects in the energy investmentprogram. Such an approach wouLd highlight the costs of uncertainty andfocus attention on those decisions which need to be made immediately,otherwise resulting in high costs to the economy and those which may bepostponed at little cost or even benefit (cost savings).

3.13 The fuel price scenario for the reference case projection needsto be reviewed to incorporate growth rate assumptions reflecting currentprospects (e.g., about 2% for oil and 1.5X for coal).

3.14 An upper value for the discount rate greater than 12X should beused for sensitivity testing. The mission therefore strongly supportsthe recommendation now being made by the Ministry of Finance and Planningto test for sensitivity at rates up to 14%.

3.15 The costs and benefits of the conservation scenarios in PENshouLd be evaluated to determine whether the "very intensive" conserva-tion program assumed for the "increased security of supply" strategyshould be adopted for the reference strategy.

3.16 The revised suppLy projections should make allowances for themajor organizational, management and planning problems which are likelyto be encountered and the infrastructure requirements associated withintroducing major new energy sources.

Electric Power Projections

3.17 The issues relating to the general energy projections apply, ofcourse, to the electric power projections, as these derive from the sameMEDEE2/DFI models. There are also some issues related specifically tothe electricity sector, outLined briefly below.

11/ SingLe equation models of this kind gave been tested very success-fully for a number of countries by Pearce and Westoby (D.W. Pearceand R. Westoby, 'Energy and the European Economy,' in A. El-Agraa,Britain within the European Community, Macmillan, 1983; 'EnergyConsumption in Eastern Europe,' Energy Economics, January 1984; and'Single Equation Models for the Projection of Energy Demand in theUnited Kingdom 1954-1980,' University of Aberdeen, Scotland, Discus-sion Paper 83-07.)

- 27 -

3.18 The electricity demand forecasting models used make no explicitallowance for the effect of changes in the absolute level of electricityprices on demand, despite the significant increases proposed in realelectricity prices. However, MEDEE2 implicity takes account of thisvariable in the formulation of the long term energy demand scenariosadopted.

3.19 The global forecasting models used by EDP are supply-orientedrather than demand-oriented, and the most recent of them is based on onlya limited number of observations. EDP has found the price variable notto have been statistically significant over the period studied. The PENmodels use a disaggregated approach to forecast demand by sector and end-use but they do not appear to be based on reliable data on electricappliance and equipment ownership.

3.20 Both the PEN and EDP electricity forecasts assume the PENreference strategy CDP growth rates. Assuming growth rates in line withcurrent trends and prospects coupled with the PEN electricity/GDPelasticity of 1.38, the gross electricity requirement in 1990 would be23,290 GWh, or about 10% less than the PEN projection of 25,940 GWh.

3.21 The forecasts for the public supply network imply that thesystem load factor wilL remain around its present level of 58%. Theremay be some reason to believe that it will increase along with the sub-stantial expected real increases in electricity prices and the risingshare of industrial consumption. Tf so, there could be savings ingenerating capacity requirements.

3.22 The PEN reference strategy does not consider the option ofjoint power-station ventures with France or Spain, apparently because ofthe failure of past attempts (e.g., for a joint nuclear power station).

3.23 The option of using Rio Maior lignite for electricitygeneration looks questionable in view of the relatively'small quantityinvolved (sufficient for only a 125-MW station over its working life or a250-MW station for 12 years), uncertainty about the quality of thelignite, and its high cost compared with imported coal.

3.24 Some of the economic and technical assumptions used in the PENreference case for evaluating the generating plant options (Annex 2.10)are open to question. In particular, the relatively low discount rate(10%), the availability factor of 72% for nuclear power, the use of thesame escalation rates for the capital costs of all the alternatives, andthe assumption of the same real rate of increase in coal and uraniumprices appear unduly favorabLe to the nuclear power option. It should betaken into account that the average availability of existing large pres-surized water reactors, PWRs, (730 MW and over) has been only 59%,according to recent International Energy Agency data, and that nuclearpower capital costs are liable to escalate more rapidly than those ofconventional power stations, particuLarly in the pioneer stages.

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Recommendations

3.25 Given the present uncertainty about future electricity demand,the mission makes the following recommendations, which it believes wouLdbe helpful in refining electricity demand projections. First, a marketand load research section should be established to collect information onpatterns of electricity end use, including ownership of electrical appli-ances and equipment. Secondly, gLobaL projections prepared by EDP shouldbe supplemented with separate forecasts made by each of its four distri-bution offices, taking account of each region's specialized knowledge offactors influencing electricity demand and covering the same period asEDP's medium term development program, to be updated annually. Thirdly,the impact of changes in the load factor should be tested for its effecton projected peak demand, instaLled capacity and the investment program.

3.26 The mission recommends that the electric power expansionprogram be as flexible as possible to avoid any premature commitment tolarger unit sizes, with the risk of overcapacity if demand fails tomaterialize as predicted. The present EDP program meets this requirementas it includes both hydro and thermal power units which are not above 300MW each, and peak demand is estimated to increase from 3,000 MW in 1980to nearly 5,000 MW in 1990. The phasing of successive thermal units can,within limits and subject to any financial constraints, be adjustedaccording to annual updates of the demand forecast. Such flexibilityshould be particularly weighed in relation to the proposed 950-MW PWRnuclear power option.

3.27 Bearing in the mind the flexible approach to investment plan-ning mentioned above, the mission recommends consideration of the follow-inRg additional factors with regard to the least cost supply option:(a) a 60% availability factor for the PWR option, (b) a 1.5% per annumreal increase in coal prices (retaining 3.1% for nuclear fuel), (c) ahigher rate of increase in nuclear compared with coal power plant capitalcosts, and (d) with respect to net present value calculations, discountrates of more than 12%, e.g., up to 14% as recommended by the Ministry ofFinance and Planning.

3.28 Regarding the nuclear option in particular, the missionbelieves that in addition to the PWR options considered in the PEN, thefollowing two alternatives merit further consideration: (a) a naturaluranium fueled alternative such as the heavy water reactor (HWR) since itmay be available in smaller units (600 MW) with less risk of over-capa-city if electricity demand is less than expected,and (b) the possibilityof a joint nuclear venture with France or Spain, particularly in view ofPortugal's and Spain's prospective entry into the EEC.

3.29 The option of building a thermal power station fueled by RioMaior lignite should be critically evaluated in light of prospectiveprices for imported coal.

3.30 As proposed in PEN, a study should be undertaken of the distri-bution networks to determine the organizational and investment require-

- 29 - BEZI COPY AVAILABLEments of a distribution strategy to reduce losses and improve the qualityof service. It should be part of a wider study of the EDP system toimprove technical efficiency and reduce system losses. This study wouldbe applicable only to the short and medium term given the considerablelong run uncertainties associated with demand.

The Natural Gas Option

3.31 The key issue concerns the price at which natural gas can bemade available in Portugal, since this will largely determine the poten-tial market. The final price comprises the c.i.f. price of LNG, thecosts of the terminal facilities and the costs of transmitting, distri-buting and marketing the gas. The PEN treatment of these items givesrise to the following issues.

3.32 In PEN, the LNG c.i.f. price represents 83-85% of the final gasprice, leaving only 15-17% to cover all other costs. On the other hand,the PEN costs for investment, operation and maintenance, imply that theseitems would account for a quarter to a third of final unit costs (Annex2.15).

3.33 The absence in the PEN reference strategy of an appropriatestrategic reserve of gas distorts the comparison vith the imported coaloption, which includes such a provision.

3.34 The omission from the capital costs of any alLowance for retro-fitting by consumers may be valid in the case of existing town gas con-sumers, who would be supplied with gas of the same calorific value as atpresent, but not for existing household and industrial consumers of LPGwho would incur piping costs in changing over to natural gas.

3.35 The PEN figure of 1.94 bilLion escudos for annual operation andmaintenance of the LNG terminal facilities does not appear to allow forthe variable costs associated with the nattral gas marketing operation,which will be substantial. In particular, the estimated manpower re-quirements in PEN of 560 in 1990, rising to 1,130 in 2005, based on theGas de France ratio of one employee per 500 customers serviced, looksmuch too Low. Figures for another European gas undertaking with a landarea similar to Portugal and serving about 670,000 customers, which isreasonably close to the projected 600,000 in Portugal by 2005, show aratio of one employee per 140 customers, or three-and-a-half times ashigh.

3.36 The total cost estimates should take into account the costs ofadjusting supplies to the wide seasonal fluctuations typical of thedemand for gas which may represent 20% of the final gas cost.

3.37 Some provision for losses of gas in the LNG terminal and gasnetworks (about 3% of final costs) should also be made.

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The Market for Natural Gas

3.38 The other main issue is the uncertainty regarding the marketfor natural gas. There are marked differences between the PEN referencestrategy forecast and the PGP/SOFREGAZ projections. The PEN forecast isbased on optimistic economic growth rates and low final cost of naturalgas. In evaluating the potential market, the full costs involved in con-verting existing consumers of LPG and naphtha to naturaL gas shouLd becarefully assessed including various possibilities for marketing strategyand pricing policy. An astute and careful appreciation of the marketpotential for LNG is crucial, given the massive initiaL capital outlaysrequired and the need to capture quickly an adequate share of the indus-trial market in the face of competition from coal and LPG. The missionalso noted that the magnitude of the organization, manpower and trainingproblems in introducing natural gas may be understated. The establish-ment. and enforcement of stringent safety standards should also be a primeconsideration in the organizational set-up.

Alternative Gas Options

3.39 Finally, alternative gas options warrant reevaluation in viewof the mission's finding that (a) the estimated costs of a natural gaspipeline from Spain (over four times the cost of LNG terminal facilities)appear much too high; and (b) the use of LPG/air mixture has not beenconsidered. This latter method has the advantage that it can beinstalled in relatively small units to serve individual towns/areas, thusobviating the need for expensive high pressure transmission systems.

Recommendations

3.40 Given the many uncertainties and inadequacies of the existinginformation, a comprehensive reevaluation of the natural gas option wouldbe justified with particular reference to prospective demand atcompetitive prices (including relevant conversion cost), alternativeoptions of gas supply and their costs and inistitutional/manpower require-ments. Specific components of this reevaluation include:

(a) operating cost estimates for an LNG-bar-ed gas supply system,taking account of the deficiencies identified by the mission.The review should include an analysis of LNG sources, withparticular reference to the possibility of purchasing surplusLNG from existing plants, for example, in Algeria;

(b) a detailed market study, particularly of the industrial sector,to determine the potential market for natural gas in the shortand medium term (for example, to 1990 and 1995), including theimpact- on the petroleum products market and the pattern ofrefinery output;

(c) evaluation of alternative gas options including, in particular,LPG/air and piped natural gas from Spain. The LPG/air mixtures

- 31 -

should be compatible with natural gas to facilitate subsequent

conversion to the latter;

(d) based on the cost estimates for LNG and the alternatives, apreliminary study of the structure and level of gas prices tovarious categories of consumers;

(e) following the detailed market study, a preliminary design studyof the gas transmission and distribution system with due regardto storage requirements so as to optimize gas demand inrelation to supply 12/;

(f) a study to determine whether local gas undertakings should beestablished based on LPG/air, as forerunners of a futurenational gas authority.

(g) a study of the organization, manpower and training requirementsfor a national gas industry. This should include a review ofthe adequacy of existing safety standards. 13/

3.41 Further study is needed to reevaluate the gas option in itsvarious aspects to determine the conditions of technical and economicfeasibility and to define any subsequent studies as appropriate. Themission estimates that this study would require a gas industry specialistand an energy economist for a total of about 25 man weeks, at anestimated cost of US$90,C00.

12/ Since the Assessment Misbion (July 1983), two studies have beencarried out -- one on the optimal pipeline design and another onstorage options for security of supply.

13' Also since July 1983, some studies have been made on appropriatecodes and safety regulations for gas system operations.

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IV. ENERGY PRICES

Overview

4.1 Given its dependence on imports for over 80% of its primaryenergy requirements, Portugal is a 'price taker' in that its ability tomodify internal prices rests almost entirely with its fiscal ability toadjust ret;ail prices through indirect taxes and subsidies. The statedaim of the Portuguese Government is to remove energy subsidies in thesense of direct financial subsidies wherever possible. Because of thedomestic system of pricing petroleum products on the basis of theirf.o.b. costs in the Persian Gulf, the removal of financial subsidies is,by and large, equivalent to pricing energy products at, or above, theirborder prices. To this extent, Portuguese Government policy also entailsthe removal of 'economic' subsidies -- the difference between internalprices and the opportunity cost of energy products as measured by theirborder prices.

4.2 Tn July 1983, the prices of most petroleum products were raisedfor the third time since July 1982, thereby eliminating most of thefinancial subsidies (Table 4.2). ELectricity prices remain below thelong-run marginal cost of supply but with the fuel price adjustmentmechanism, final electricity tariffs are increased automatically, inaddition to regular discrete tariff adjustments. EDP expects, witnGovernment support, to approach marginaL cost prices for electricity by1988. This chapte-; reviews the evoLution of prices for all energyproducts, identifies remaining financial and economic subsidies andfocuses on areas where further action appears warranted, particularly thepricing of town gas in Lisbon, electricity tariff distortions throughnon-compliance of municipaLities with national tariff rules, preferentialtreatment of fishing and agriculture through gas oil pricing, and therelative price distortion between gas oil and gasoline. The town gaspricing issue is related to one aspect of the proposed introduction ofLNG into Portugal. The gas oil/gasoline pricing issue also relates torefinery policy in Portugal.

Petroleum Products

4.3 The Government sets both retail and ex-refinery prices forpetroleum products and ex-refinery prices are based on an import paritysystem to encourage efficient refinery operations. For retail pricesthere is a differentiated structure, as in many middle-income developingcountries: petroleum products for private use, such as gasoline, havebeen taxed heavily, while products like fuel oil and gas oil used in keyeconomic sectors, such as industry and electric power, and in publictransportation, have been less heavily taxed or in some cases subsi-dized. Another objective of Government petroleum pricing policy has beento generate substantial tax revenues for the Fundo de Abastecimento

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(Supply Fund), which is used to subsidize key commodities, including somepetroleum products.

4.4 Since 1971, real petroleum product prices have increased at anannual average rate of some 5-6% for gasoline, 11% for kerosene, 9% forgas oil, and 11-12% for fuel oil. Prices rose relatively slowly in theearly part of the period, particularly for kerosene, fuel oil and gas oilbut acceLerated sharply after 1977 (Table 4.1).

Table 4.1: Petroleum Product Prices a/ 1971-83(1981 escudos)

January January July Growth Rate, % p.a.1971 1977 1983 1971-77 1978-83 1971-83

Super gasoline 32.80 37.20 56.87 2.1 6.8 4.6Regular gasolin 28.30 31.90 54.84 2.0 8.8 5.6Kerosene 9.30 8.50 31.48 -1.5 22.5 10.6Gas oil 11.60 12.80 31.14 1.7 14.8 8.6Fuel oil 3.30 4.30 11.90/13.20 b/ 4.5 17.0/19.0 11.3/12.2

a/ Per liter, except for fuel oil, which is per kilogram.b/ For electricity/non-electricity use.

Source: AnneY 4.1.

4.5 The Government's pricing formula for petroleum products (Annex4.2), which has operated unchanged for a number of years, treats ex-re-finery products as if they had been imported from the Middle East. Thestarting point is the price f.o.b. Persian Gulf, to which are addedfreight, insurance and an evaporation allowance, to obtain the pricec.i.f. Portugal. Specified margins are added to the c.i.f. price for theoil companies' profit (about 15% of net assets in operation), distribu-tion and retailing costs. Taxes comprise customs duty, a national taxand a "taxa de compensacao", in the form of a tax (or subsidy) paid into(or out of) the Supply Fund.

4.6 Traditionally, the most heavily taxed product has been gaso-line, followed by gas oil (except for agricuLture and the fishing indus-try) and kerosene. Until July 1, 1983, the subsidized products comprisedLPG, refining gas, naphtha (for fertilizers and town gas), gas oil foragriculture and fishing, and fuel oil. Since then, the price changesintroduced by the current Government eliminated the financial subsidiesfor all except fuel oil, naphtha and refinery gas as feedstock for towngas and a negligible residual subsidy on bottled propane (Table 4.2).

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Table 4.2: Petroleum Product Prices, Taxes and Subsidies

June 30, 1983 July 1, 1983

Net tax (subsidy) Net tax (subsidy)

Product Price Amount % Cost Price a/ Price Amount % Cost Price a/

Bulk butane, esc/kg 39.0 (2.3) (5.6) 45.0 3.7 9.0

Bulk propane, esc/kg 39.0 (0.4) (1.0) 45.0 5.6 14.2

Piped propane, esc/kg 41.5 (7.9) (16,0) 51.0 1.6 3.2

Bottled butane, esc/kg 39.0 (12.1) (23.7) 50.5 (0.6) (1.1)

Bottled propane, esc/kg 40.0 (9.8) (19.7) 51.0 1.2 2.4

Super gasoline, esc/liter 74.0 44.7 152.6 84.0 54.7 186.7

Regular gasoline, esc/liter 70.0 43.7 166.2 81.0 54.7 208.0

Naphtha (fertiliser), esc/kg 20.0 (9.2) (31.5) 29.2 0.0 -

Naphtha (town gas), esc/kg 3.6 (25.7) (87,7) 3.6 (25.7) (87.7)

Kerosene (lighting), esc/liter 40.0 9.6 31.6 46.0 15.6 51.3

Kerosene (heating), esc/liter 41.0 8.5 26,2 47.0 14.5 44.6

Gasoil, b/ esc/liter 40.0 12.5 45.5 46.0 18.5 67,3

Fuel oil (electricity),

esc/kg 17.5 (3.1) (15.0) 17.5 (3.1) (15.0)

Fuel oil c/ (non-electricity)

esc/kg 17.5 (3.1) (15.0) 19.5 (1.1) (5.3)

a/ "Cost price" = Price plus net subsidy (or minus net tax).

b/ Except for agriculture and fishing.

c/ Fuel oil with 3.5% sulphur.

Source: Ministry of Energy and missior estimates.

4.7 The remaining subsidies and preferential arrangements call forthe following comments:

(a) Fuel oil As a result of the latest reduction, the subsidy fromthe Supply Fund in 1983 is expected to be about US$87 million,compared to US$157 million in 1982. The Government intends toremove the remaining subsidy beginning 1984, which is desirableconsidering that the subsidy has (i) reduced net Governmentincome from the Supply Fund and hence investible public sectorsavings; (ii) kept down electricity prices artificially,encouraging electricity consumption, with consequent demands onlimited capital funds; (iii) subsidized some industrial produc-tion, notably cement; (iv) increased imports of fuel oil atheavy foreign exchange costs; and (v) discouraged energy con-servation.

(b) Gas oil In the case of the fishing industry, the basicphilosophy is that the industry should not pay the tax on gasoil, at present 18.5 escudos (Table 4.2). This is a protectivemeasure for an industry in economic difficuLties as elsewherein Europe. On this basis, the price would be 27.5 (instead of

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46.0) escudos/liter, but the actual price ranges from 27.04 to27.41 escudos/liter. A smnalL net subsidy remains, and theestimated cost in foregone tax revenues ir about US$20 millionfor 1983. Agriculture receives a rebate on the fixed price.The rebate was five escudos/ liter before July 1, 1983 and isnow 9.5 escudos/liter, giving an effective price of 36.5escudos against 35 escudos/liter previously. The estimatedcost to the Supply Fund in forgone revenue is about US$37million p.a. at present levels of consumption.

(c) Naphtha The current net subsidy on naphtha for town gas isnearly 90% of the fixed price (Table 4.2). The estimated costin foregone tax revenues is nearly US$8 million for 1983.

4.8 The latest price changes have continued to narrow the gapbetween the prices of gas oil and gasoline. During most of the 1970s,the trend was the other way, with the price of gas oil falling from 41%of the regular gasoline price in 1971 to 27% in 1976. In 1980, it wasstill below the 1971 ratio at 37%, but it has since risen to 57%. Thisis still a wide differential, providing a strong incentive to substitutegas oil for gasoline in transportation, which consumes nearly 60% of thegas oil. In order to partially offset this price differential, the Gov-ernment imposed a surtax on diesel vehicles; however, this tax has notkept pace with the widening relative price gap between the fuels.

4.9 Thus, between 1973 and 1982, gas oil consumption approximatelydoubled, from one million tpy to 1.85 million tpy, while chat ofgasoline, having risen from 700,000 tpy in 1973 to 800,000 typ in 1975,subsequently declined and regained its 1975 level only in 1982. Thisdemand pattern has exceeded domestic refinery capacity to suppLy gas oil,resuLting in additional gas oil imports amounting to 12% of total 1982gas oil consumption, a situation which has also led PETROCAL to considerinvestment in a costLy hydrocracking facility to maximize refinery outputof gas oil, taking into account the Government's policies for fuel oilsubstitution and gas oil pricing.

4.10 The July 1983 petroleum product price changes also haveeliminated economic subsidies, except on naphtha for town gas and thesmall remaining subsidy on fuel oil.

4.11 The overall structure of prices for selected petroleum productsis shown in Table 4.4. Gasoline remains the most heaviLy taxed product,followed by gas oil (except for agriculture and fishing) and kerosene.

Electricity

4.12 After declining in real terms during the earLy 1970s, electri-city prices have risen since 1976, although the 1971 levels were notachieved again until 1980 in the domestic seccor and 1981 in the indus-trial sector (Table 4.5).&, The average tariffs presented in Table 4.5

- 36 -

disguise the fact that some municipalities outside EDP charge much lowertariffs. The Porto tariff, for example, was only about 60% of the EDPtariff in 1974 and in 1982 only 25%. The overall con,.tant price of elec-tricity and the lower rates charged by some municipalities have contri-buted to the relatively rapid growth of electricity demand.

Table 4.3: Ratio of Domestic to Border Prices of Petroleum Products

Domestic/C.i.f. Domestic Price c.i.f. Price RatioPrice June '83 July '83 June '83 July '83

Super gasoline, esc/liter 26.8 74.0 84.0 2.76 3.13Regular gasoline, esc/liter 23.8 70.0 81.0 2.94 3.40Kerosene, esc/liter 28.8 40.5 46.5 1.41 1.61Gas oil, esc/liter 25.4 40.0 46.0 1.58 1.81Fuel oil to electri-city, esc/kg 19.8 17.5 17.5 0.88 0.88

Fuel oil to other uses, esc/kg 19.8 17.5 19.5 0.88 0.98Naphtha to fertilizers, esc/kg 29.3 20.0 29.2 0.68 1.00Naphtha to town gas, esc/kg 29.3 3.6 3.6 0.12 0.12LPG, esc/kg 50.5 39.5 50.7 0.78 1.00

Source: Ministry of Energy and mission estimates.

Table 4.4: Petroleum Product Price StructureSelected Products, July 1983(US$/metric ton) a/

Ex-Refinery Distribution Net Taxes/ RetailProduct Price Margins (Subsidies) b/ Price

Super gasoline 372 23 736 1,131Regular gasoline 345 24 722 1,091Kerosene (lighting) 362 28 201 591Kerosene (heating) 383 19 180 582Gas oil c/ 314 18 224 55i6Fuel oil (electricity) 203 2 (28) 177Fuel oil (non-elec-tricity) 203 2 (8) 197

a/ At US$1 = 99.068 escudos.b/ Includes customs duty, special national tax and "taxa de compen-

sacao" (or subsidy) to (from) the Supply Fund.c/ Except for agriculture and the fishing industry.

Source: Annex 4.2.

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Table 4.5: Electricity Prices, 1971-83(1981 a/ escudos per kWh)

1st Qtr.1971 1975 1980 1983

Domestic 3.505 2.556 4.136 4.920Industrial 2.505 1.815 2.363 3.803

a/ Using GDP deflator.

Source: Annex 4.3.

4.13 EDP's tariff takes into account marginal costs. Consumers areclassified in four groups: low voltage (up to 1 kV); medium voltage(1-30 kV); high voltage (60 kV); and very high voltage (above 60 kV).Low-voltage (LV) consumers are further subdivided into two groups accord-ing to subscribed demand: above and below 13.6 kVA. Except for LV con-sumers below 13.6 kVA, all groups have a two-part tariff (demand chargeand energy charge) with additional tariff structures (interruptibledemand, time-of-day, etc.) also available at the customer's option. Afuel adjustment charge was introduced in 1977. Since 1978, EDP's tariffrates have increased at Least once a year by an average of about 35%,more than keeping up with inflation. Although each increase has movedprices closer to the long-run marginal cost of supply (LRMC), currentrates still fall short of this level, with deviations in the order of 25-29% for very high-voltage, 20-23% for high-voltage, 16-22% for medium-voltage, and 24-45% for Low-voltage consumers (Annex 4.3).

4.14 EDP expects, with Government support, to approach full LRMCtariff rates by 1988. Table 4.6 shows the projected changes in pricesdesigned to achieve this. Progress towards LRMC-based electricitytariffs is satisfactory, apart from a question mark concerning the cross-subsidization of low-voltage commercial and residential consumers (Annex4.4). The real problems, which could seriously jeopardize EDP's achieve-ment of 30% self-financing by 1986 as agreed with the Bank, do notconcern the overall tariffs. The first problem arises from the failureof some municipalities supplied by EDP, but outside the EDP system, toadjust their own rates in line with the rates charged by EDP. Thisproblem goes back to the time when some municipalities, notably Porto,were supplied with cheap electricity. Following the international oilprice increases in the mid-1970s, these municipalities were faced withmuch higher rates, which many of them, especially Porto, chose not topass on in their entirety to their customers and, from 1979, ignoredcompletely. They were able to do this because the retaiL tariff ratesapproved by the Government set only upper limits, within which themunicipalities were free to set their own tariffs and some municipalitiesfailed to pay for supplies received from EDP. The result has been anincreasing degree of de facto subsidization of electricity consumers inthese non-compliant municipalities. The cumulative arrears of payments

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due to EDP at the end of 1982 amounted to some 31 billion escudos (aboutUS$300 million).

Table 4.6: Projected Electricity Rate Increases, 1982-86

1982 1983 1984 1985 1986

GDP deflator 100.0 120.0 141.6 164.3 187.3Rate increase, %:

(a) Discretionary 22.0 20.0 18.0 8.8(b) Fuel price adjustment 12.1 12.5 6.5 5.9

Rate index 100.0 134.1 177.6 221.1 253.7Unit revenue index a!:

(a) Nominal 100.0 149.4 191.6 238.9 274.5(b) Real 100.0 124.5 135.3 145.4 146.6

Real unit revenue increase, % 24.5 8.7 7.5 0.8

a/ Rise above rate index in 1983 is due to a payment by consumers toEDP from the Thermal Support Fund.

Source: EDP.

4.15 A Government decree issued in 1982 required the non-compliantmunicipalities to raise existing prices for low voltage consumers by 25%on the basis of prices ruling on August 31, 1982, and again by 50Z of theAugust 31, 1982 price in April 1983. In July 1983, municipal tariffswere to rise by 20% of the difference between the national and municipaltariff prevailing in June 1983, provided the resulting increases were inthe range 0.4 to 0.9 escudos/kWh. For customers supplied at other volt-ages, existing prices were to increase in 1982 by 50% of the differencebetween the prevailing national and municipal tariffs. By July 1983,allmunicipal tariffs were to be equivalent to the national tariffs. How-ever, a number of municipalities, accounting for about 9% of nationalelectricity consumption, failed to implement this decree. Porto's sharealone was nearly six percent. As of mid-1983, their average rates weremostly around half of the average EDP rates, but in the case of Porto,they were only about one-quarter (Annex 4.5). The resulting de factosubsidy to consumers in these municipalities is estimated to be at least4.3 billion escudos for 1983 14/ (US$40 million). Porto, which accountsfor nearly three-quarters of the total subsidy, was expected to increaseits tariffs by 25% in July 1983. This would reduce the totaL annualsubsidy to about US$32 million, and it was expected that it would befollowed by further tariff action by Porto and the other municipalitiesto fulfill all the requirements of the decree.

14/ Based on 1978 consumption data, the most recent availabLe.

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4.16 A second financial problem relating to electricity pricing con-cerns the operation of the Thermal Support Fund (TSF). This is supposedto compensate for shortfalls or excesses in actual electricity revenuescompared with those projected, arising from the fact that EDP, in formu-lating each year's tariff rates, assumes hydropower output correspondingto average hydrological conditions. If actuaL output is above average,EDP will obtain more net revenue than projected, because the extra hydro-power output will replace more costly thermal generation; if hydropoweroutput is below average, EDP will suffer a loss of net revenue becausemore costly thermal output or additional imports of relatively expensiveelectricity from Spain will be needed. In years of above-average hydro-power output, therefore, the surplus revenues are credited to the TSF, tobe drawn on to compensate EDP for loss of revenue in years of below-average hydropower generation.

4.17 The TSF is designed to balance over a 30-year cycle. However,a succession of exceptionally dry years and low hydropower output has ledto mounting deficits, which totalled 43 billion escudos (about US$400million) at the end of 1982. EDP has had to cover these deficits byshort-term borrowing at high interest rates. In 1982, EDP proposed thatthe arrangements be changed to permit EDP generation of sufficientrevenues to cover interest and repayment of loans incurred on behalf ofthe TSF. If tariff increases to achieve this were not approved, EDPproposed that the difference would be made good to EDP by the Govern-ment. In addition, if the TSF had an operating deficit in any yearexceeding 15% of EDP's electricity revenues in the previous year, EDPshould be authorized to immediately apply a provisional 10% increase intariff rates until the deficit was fully recovered.

4.18 No definitive action had been taken on this proposal at thetime of the mission, but the new Government intended to issue a decree tosegregate the TSF accounts from those of EDP and empower the Ministry ofEnergy to approve a tariff surcharge to cover the TSF deficit within fiveyears, whenever the accumulated deficit amounted to 15% or more of EDP'selectricity revenues in the previous year. In addition, the Governmentwould be responsible fo:- ensuring that loans were available to the TSFwhenever necessary. These arrangements should resolve tne financialproblems which the past operation of the TSF has catsed for EDP.

Coal

4.19 Almost all domestic coal production is sold directly by thestate company, Empresa Carbonifera do Douro (ECD), to EDP for electricitygeneration. The contract requires ECD to seLl, and EDP to buy, 170,000-230,000 tonnes of coal from the Pejao mine near Porto, at a price relatedto ECD's manpower and 'major' materiaL costs. The coal price may not,however, rise above the equivalent value of fuel oil, the dominant fossilfuel input for electricity generation in Portugal. The relevant fuel oilprice is the official administered price, the subsidy element of which isshortly to be phased out. The coal price paid by EDP to ECD is regulated

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by the Government and has in the past restricted ECD's ability to makeprofits for reinvestment in projected coal schemes in Portugal. 15/

4.20 As shown in Table 4.7, the relationship between the domesticprice for coal and world prices for coal and fuel oil have been sub-stantially altered by international and internal price changes as well asexchange rate movements. The recent trend of domestic coal prices showsthat domestic coal has been priced significantly lower than fuel oil on aheat equivalent basis, about 30% less in 1983. Compared to imported coalon a similar basis, the domestic coal price was slightly above the c.i.f.value of imported coal during 1979-81, with the latter likely to havebeen more expensive, including the additional handling and inland trans-portation charges that would have been required for its use. However, in1982 and 1983, the c.i.f. price of imported coal fell significantly belowthe domestic coal price by 19% and 22%, respectively. However, at thesame time, the price of domestic coal appears too low to provide a satis-factory return to ECO. Whether, therefore, this coal should continue tobe produced is essentially a question of the social costs and benefitsinvolved, a detailed study of which is outside the scope of the presentreport.

4.21 In addition to coal in Pejao, there are lignite deposits at RioMaior, with an average calorific value (c.v.) given as 1,283 kcal/kg. Aprevious Bank mission put the 1981 cost of producing this lignite atUS$21/tonne. Based on a c.v. of 6,670 kcal/kg for imported thermal coal,the cost of producing this lignite would be nearly US$110 per tonne.This compares with the current price of about US$56/tonne for importedthermal coal (Table 4.7), making the use of Rio Maior lignite for elec-tricity generation, the only major possible use, clearly uneconomic.

Town Gas

4.22 In 1982, about 60% of households in Lisbon, (or 180,000 resi-dences) were supplied by town gas, mainLy for hot water and cooking. Thegas is manufactured from refinery gas and naphtha by the state companyPetroquimica e Gas de Portugal (PGP) and distributed by EDP (Annex 4.7).

15/ It should be noted that there are currently no other markets for thecoal, as its high ash content (about 40%) and local transportationinhibit competitiveness in other local markets. The 150-MW Tapadado Outeiro power plant, the sole user of the coal, is about 20 yearsold, and uses a 50/50 coal/fuel oil mixture. It is expensive tooperate and is primarily used to provide power in dry years whenhydro electric capacity is low. There is not much scope forincreasing the domestic coal share in the fuel mix which, given thecoal's poor quaLity, would lead to technical difficulties andincreased operating and capitaL costs.

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Table 4.7: Prices of Domestic Coal, Imported Coal and Fuel Oil, 1979-83

1979 1980 1981 1982 1983

Price, escudos/tonneDomestic coal a/ 1,317 1,707 2,483 3,808 5,314a/

Imported coal 2,200 2,650 3,997 5,024 6,776Fuel oil 4,000 5,500 9,000 13,500 17,500

Price, US$/tonne fuel b,oil equivalent c/Domestic coal 63.1 79.9 94.5 113.6 102.8Imported coal c/ 64.7 76.2 93.5 92.1 80.6Fuel oil 81.8 110.0 146.3 171.9 144.6

a/ Price paid by EDP to ECD, excluding taxes.b/ At annual average exchange rates, except for 1983, which is the

average for July 1983 (121 escudos = US$1).c/ Assuming c.v. of 9,600 kcal/kg for fuel oil, 6,670 kcal/kg for im-

ported coal and 4,100 kcal/kg for domestic coal.

Source: EDP and ECD.

4.23 The upper limit on the price of town gas is set by LPG pricesbecause of the substitutability of the two fuels. The 1982 price struc-ture was as follows:

Escudos/m3 Percent

Price to PCP 4.71 49.0EDP's net margin 4.48 46.6Supply Fund tax 0.43 4.4Price to consumer 9.62 100.0

EDP's net margin is used to meet all the distribution costs.

4.24 Town gas is heavily subsidized through the Low prices paid byPCP for the refinery gas and naphtha used in its manufacture. The re-finery gas price of 5,000 escudos/tonne is only about 13% of its esti-mated economic cost of 37,630 escudos/tonne, and the naphtha price of3,600 escudos/tonne is only about 12% of its normal price of 29,263escudos/tonne. Assuming the 1980 tonnages of 32,000 tonnes of naphthaand 31,000 tonnes of refinery gas, the total subsidy in 1983 would be

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1,833 million escudos 16/ (US$18 million). At estimated sales of 137mi 1.on s3 , to remove the subsidy the current gas price of 16.5escudos/m would have to increase by 13.4 escudos (81%) to 29.9 escudos,or 29.5 escudos if the Supply Fund tax were eliminated. No such pricerise could be effective without a corresponding increase in LPG prices,which are at approximace parity with town gas. However, because 80% ofLPG is sold outside Lisbon, this would largely penalize consumers whohave no effective choice of fuels.

4.25 One proposal is to substitute LNG for naphtha as feedstock, butthis assumes the proposed LNG project goes ahead. Tentative costings, onfairly optimistic assumptions about the cost of LNG, suggest that thisoption would still result in a town gas price that, in the absence of anysubsidy, would be substantially above the price of LPG, so that thedilemma of either continuing the large town gas subsidy or a steep risein the price of LPG would remain unresolved.

Pricing Issues

4.26 The Government's pricing formula for petroleum products givesrise to several problems. The first is that some of PETROCAL's costs arenot included, notably the cost of borrowing to pay for crude oil imports,as well as the foreign exchange risk on these borrowings. PETROGAL isalso required to use Bank of Portugal 180-day credit notes, which are too"long" for PETROGAL's needs, while the interest rate may be higher thanwhat PETROGAL could obtain elsewhere. These 'imposed' costs are substan-tial. The accounts of PETROCAL do not reveal losses because 'one-off'adjustments are made at the end of the financial year, but for the yearending October 1982 the loss reported to the mission was 11 billionescudos (about US$140 million), which is likely to rise to some 20 bil-lion escudos (about US$220 million) in 1983. These losses include con-tinued nonpayment of monies owed to PETROGAL so that the exact role ofthe financing cost is difficult to assess.

4.27 Under the Bank Petroleum Exploration Project (Loan 2024-PO) theGovernment agreed to ensure that ex-refinery prices would be adjusted asnecessary to cover the full costs of efficient purchasing and refining ofcrude oil, including net financial costs. As of July 1983, the pricingformula had not yet taken all these considerations into account.PETROGAL now has proposed a revised formula for pricing up to the pointwhere the "taxa de compensacao," for which it has no responsibility, isapplied.

4.28 The problem of PETROGAL's financing costs raises the widerquestion of the appropriate economic foundation for the pricing formulafor petroleum products. What it effectively does is to ensure that

16/ [31,000 x (37,630-5,000) + 32,000 (29,263-3,600)] escudos.

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product prices in Portugal reflect border prices unLess the "taxa decompensacao" is used to subsidize the product. In July 1983, most of theremaining subsidies were removed, so that most domestic petroleum productprices equal or exceed, border prices. However, the formula makes littleallowance for actual refinery costs other than through the various com-mercial margins (Annex 4.8). With 50% utilization of refinery capacity,it would be surprising if the reported losses by PETROCAL were not alsoreflecting high unit costs of operation.

4.29 The continuing price preferences for gas oil in agriculture andthe fishing industry are costly (about US$60 million p.a.) in terms ofrevenue foregone to the Supply Fund. Their impact on the costs, pricesand international competitiveness of these industries is not known, buttheir removal clearly would be politically sensitive.

4.30 Although it has been narrowing, the gap between the prices ofgas oil and gasoline remains wide in favor of gas oi.. This gives thewrong signal to consumers regarding the economic cost.s of gas oil con-sumption, arising from (a) the need to import gas oil as a finished pro-duct (12% of 1982 total consumption); (b) the encouragement to use heavyvehicles with consequent road track costs; (c) the environmental costs interms of diesel exhaust emissions and noise in urban areas; and (d) in-creased urban congestion through the encouragement given to using privatevehicles and taxis over public transport.

4.31 The present configuration of refinery output in Portugal, whichis heavily weighted towards fuel oil (43%) and gas oil (25%), is likelyto be inconsistent with the future pattern of demand, as fuel oil pricesrise internally and coal substitution takes place. The decision ofwhether or not to install a hydrocracker to meet anticipated increases ingas oil demand has been postponed pending further study by PETROCAL.

4.32 The main outstanding issue on electricity prices is that of themunicipalities which manage their own distribution systems. EffectiveGovernment action to deal with this is now established by legislation,but it will be important to ensure that the momentum is maintained inorder to stop the accumulation of arrears to EDP, bring electricity ratesin these municipalities in line with those of EDP as quickly as possible,and regularize the payment of amounts past due.

4.33 The contir.uing subsidy to town gas is costly in relation to therelatively small number of consumers supplied. It is not clear whetheralternatives to the present arrangements have been properly considered.

Recommendations

4.34 The mission's recornmendations on these pricing issues are asfollows:

(a) The long standing negotiations for revising the ex-refinerypricing formula should be concluded, and a formula agreed uponwhich would assure full cost recovery for efficient importing

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and refining of crude oil by PETROGAL. This should include netfinancial costs, the treatment of the foreign exchtange risksand interest on arrears in payments to PETROGAL from theForeign Exchange Risk Fund and the Supply Fund. Thereafter,this should be reflected appropriately in the accounts of allconcerned parties.

(b) To narrow t'ae gap between gas oil and gasoline prices, theprice of gasoline should be held constant in real terms whilethe price of gas oil should be allowed to rise closer to thatof gasoline with the objective of eventual parity, particularlyif Portugal joins the EEC. At the same time, a study should beundertaken on the implications of a closer aLignment of gas oiland gasoline prices, with particular reference to the impact onmodal choice of transport and the associated costs and bene-fits. Suggested terms of reference are attached (Annex 4.8).

tc) The system and procedures of the gas oil preferences to agri-culture and the fishing industry should be examined with a viewto reducing the net fiscal costs involved.

(d) Refinery policy in Portugal should be reviewed in light of adetailed forecast of petroleum product demand; special refer-ence should be given to different scenarios on relative pricesof petroleum products resulting from the recommended removal ofsubsidies on gas oil and action on the relative prices of gasoil and gasoline. The option of importing refined products asan alternative to the proposed hydrocracker should be properlyevaluated.

(e) The Government should ensure timely implementation of theprogram as legislated regarding the introduction of a uniformnational electricity tariff and regularization of the arrearsowed by the municipalities to EDP.

(f) In view of the costs of the subsidy on town gas, a smalltechnical study should be undertaken to evaluate alternativesto the present arrangements. Suggested terms of reference areattached (Annex 4.9).

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V. ENERGY CONSERVATION IN THE TRANSPORTATION SECTOR

Overview

5.1 The transportation sector is second only to industry as anenergy user, accounting for 29% of final energy consumption in 1982 and39% of petroleum consumption, compared to 45% and 41%, respectively, inindustry (Annex 1.1). Given its almost complete dependence on petroleum(99%), the sector is expected to become the main consumer of petroleumproducts. Transportation is, therefore, a key sector for any energyconservation program, particularly since short-term measures can produceimmediate effects in reducing erqrgy consumption. The main focus must beon road transportation as this accounts for 83% of final energy consump-tion for transportation (Table 5.1).

Table 5.1: Energy Consum2tion inTransportation. 1980

'000 toe z

Aircraft 203 9Marine 110 5Rail 77 3Tramways 5 -Road 1,878 83

2,273 100

Source: Ministry of Energy.

Road Transportation Trends

5.2 The present road vehicle fleet comprises 1.371 millionvehicles, 1.04 million private cars, and 331,000 light and heavycommercial vehicles. New car registrations increased rapidly in theearly 1970s to about 90,000 p.a. in 1972-1974, but are now 70,000-75,000a year. Annual registrations of light commercial vehicles rose from7,500 in 1970 to 42,000 vehicles in 1981, and are currently 39,000 ayear. Heavy truck registrations rose from 3,000 in 1970 to 9,000 in1981, but have since tended to decline (Annex 5.1).

5.3 The average mileage by private cars appears to be declining;the estimated figure for 1983 is 10,000 km compared to 12,000 km forearlier years. 17/ For commercial vehicles the trend has been upwards,reflecting more "empty" vehicle journeys as a result of the general re-cession and the excess of transportation supply over demand.

17/ Transport Sector Memorandum, World Bank, August 1983.

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Private Cars

5.4 According to the latest information available (1979), the pri-vate car accounts for 62% of passenger traffic, the railways and publicbuses for 16% each and light goods vehicles for the remaining 6% (Annex.5.2). The average age of the private cars is high, over 76% being morethan six years old. The renewal period for the car pooulation is about20 years, compared with ten years in France. The proportion of dieselcars has increased rapidly in the last ten years and is now 7% of thetotal, reflecting the increased rate of diesel car sales (5% of car salesin 1970, 10% in 1981). An estimated 50% of the road mileage covered bycars occurs in urban and suburban aretas, which translates into about 60%of total fuel consumption by cars, allowing for the higher consumptionper kilometer in town driving. Despite the high average age of the cars,there is no technical inspection of vehicles to ensure they are insatisfactory condition.

Public Road Transport

5.5 The state enterprise Rodoviaria Nacional 18/ (RN), with its3,000 vehicles, handles most passenger traffic by public road trans-port. The present average age of its fleet is 8.5 years, but a renewalprogram is expected to replace 38% of the vehicles by 1986.

5.6 After a period of decline, public road transport in Lisbon hasincreased the number of passengers carried by 43% since 1975. It nowhandles about two-thirds of the total passenger traffic in the Lisbonarea, carrying 1.925 million passengers/day, mostly by bus (66%), fol-lowed by the underground railway (22%) and electric trams (12%). Thisincrease in traffic was secured by a series of measures which improvedemployee productivity by 16% and increased the average speed from 13.2 to15 km/hour. The measures included restructuring and additional routes,modernization of the fleet, a halt to the abolition of tramways, provi-sion of better information services, the issue of tickets valid for useon all city transport services and reorganization of the Lisbon transportcompany CARRIS. However, since 1979, the Lisbon public transport systemhas deteriorated because of a failure to keep pace with the growth ofdemand and increasing road congestion from private cars.

Road Freight Traffic

5.7 The annual volume of freight transported is estimated at 11.4billion tonne-kilometers, of which 92% is by road and 8% by rail. Thegreat bulk of the road traffic is handled by companies' own vehicles.Only 10% of commercial vehicles are owned by specialized transportcompanies. Most of these are very small, two-thirds of them operating

18/ National Road Services.

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only a single vehicle. The road freight market is badly organized andsubject to complicated regulations. There is overcapacity, an!d 45% ofjourneys are made by empty vehicles, with the resulting waste in fuel.

Fuel Consumption for Road Transportation

5.8 After following similar trends from 1960 to 1973, the consump-tion of gasoline and gas oil has since diverged considerably (Annex 5.3).Gasoline consumption rose from about 700,000 tonnes in 1973 to 800,000tonnes in 1975, but then declined, only regaining the 1975 level in1982. Taken in conjunction with the increase in the number of privatecars since 1975, and the increasing proportion of diesel cars, this trendconfirms the decline in average mileage per vehicle. The consumption ofgas oil, on the other hand, has risen sharply -- from about one millionzonnes in 1973 to just over 1.85 million tonnes in 1982. Transportationaccounts for 62% of this total, nearly all of it (93%) for road vehicles(Table 5.?).

Table 5.2: Gas Oil Consumption in theTransportation Sector, 1980

Percent

Coastal shipping 2Railways 5Road vehicles 93

of which:Heavy trucks 35Public transport 9Light trucks a! 36Private cars b/ 13

a/ Up to 3.5 tonnes.b/ Including taxis.

Source: Ministry of Energy.

Railway Transportation

5.9 Passenger rraffic accounts for most of the business of thenational railway company (CP). The numbers carried rose from about 170million in 1974 to 210 million in 1982, after peaking at 215 million in1981. CP projects an increase to over 250 million by 1988. The suburbanlines of Lisbon, Porto and Coimbra carry more than 80% of the passengers.The inter-city lines suffer from an inadequate volume of traffic, result-ing in poor economic performance and inefficient use of energy. Only theLisbon-Porto line, with an electrified double track, carries a signifi-cant volume of traffic (60 million passengers p.a.).

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5.10 The railway's share of freight traffic is even less than itsshare of passenger traffic. In 1982, it carried about 3.5 milliontonnes, which was below its 1982 level, but CP's current projection showsit nearly doubling by 1988.

Transportation in the National Energy Plan

5.11 According to the PEN reference strategy projection, energy con-sumption in the transportation sector is expected to increase 42/ duringthe 1980s (Table 5.3). This projection seems high considering thatconsumption in the sector grew by only 1.5% in 1981 and actually declinedin 1982. One reason is the unrealistically high economic growth ratesassumed in the PEN reference strategy (para 3.2), but another is therelatively small improvement which PEN assumes in the efficiency ofenergy utilization in the transportation sector, (i.e. in the proportionof final energy converted into useful energy) -- only 3.3% by 1985 and of20% by 2010 (Table 5.3). These are very low, given the reduction inconsumption attainable through vehicle renewals alone.

Table 5.3: Energy Consumption in the Transportation Sector, 1980-2010('000 toe)

1980(actual) 1985 1990 2000 2010

PEN Reference projection 2,453 2,920 3,480 4,780 6,850Efficiency improvement %(compared with 1980) 3.3 20.0Consumption at 1980 efficiency 3,016 8,220Projected PEN saving 96 1,370Saving, % 3.2 16.7

Source: National Energy Plan (1982 version).

5.12 PEN assumes that energy savings in the transportation sector,as in the industrial sector, are a function of investment in conservationand that the marginal cost per annual toe saved rises as the totalsavings to be secured increases. PEN estimates the marginal cost ofachieving the projected 1985 annual savings of 96,000 toe at 13,000escudos per annual toe and the total cost at 600 million escudos (at 1980prices). However, the analogy with the industrial sector is not veryhelpful for evaluating the scope for energy savings in transportation,and the purported relationship between marginal investment costs andenergy savings has no direct relevance to how fuel consumption canactually be reduced in the transportation sector.

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5.13 Finally, the PEN analysis of the factors determining energyconsumption in the sector in the long term (i.e., by 2010) does not takeinto sufficient account the structural factors affecting the long-termdemand for energy such as town and country planning policies, the policyof decentralization, changes in life-styles and deveLopments in telecom-munications and information technologies.

5.14 In the mission's view, future energy requirements in the trans-portation sector are likely to be significantly below those in the PENprojection, assuming a satisfactory energy policy, particularly withrespect to energy conservation, and the probability of lower rates ofeconomic growth than assumed in the PEN reference strategy. The follow-ing is suggested as a plausible range of values, the lower end assumingan intensive energy conservation policy, while the upper end assumes amore moderate conservation effort, with the main savings resulting fromthe replacement of old by new vehicles:

million toe

1990 2.7 - 3.02000 3.6 - 4.02010 4.4 - 5.0

Major Issues

5.15 Although the PEN report recognizes the importance of fuelsavings in the transportation sector, there is no clearly defined con-servation policy for achieving them. A successful conservation policywill depend in part on effective political direction and coordination,which could be improved, given that:

(a) Central responsibility is divided between the Ministries ofTransport and Energy, and coordination and working liaisons areweak;

(b) Within the Ministry of Transport, liaison between the depart-ments concerned respectively with the different transport modesand with traffic movements could be improved;

(c) The Ministry of Finance takes decisions independently of thetwo technical ministries on vehicle and fuel taxation;

(d) Regional and local officials need to become more involved inthe problems of energy consumption in transportation, anddevelop means for effective action;

(e) The municipalities responsible for urban traffic and parkingproblems lack the expertise for integrating the energydimension into their decision processes; and

(f) Finally, the road haulers are not aware of the scope forreducing fuel consumption.

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5.16 There is no technical regulation of vehicles. Considering thehigh average age of vehicles, a system of vehicle inspections would re-duce fuel consumption, air pollution and the high level of road accidents(three times as high as in France and one-and a-half times as high as inSpain).

5.17 After some improvement in the mid-1970s, the quality of thepublic transport networks in Lisbon has begun to deteriorate since 1979.The transport services have not kept pace with population growth. Thecongestion caused by private cars is a major obstacle to any improvementin the efficiency of public transport, as evidenced by a virtual triplingof the number of kilometers lost by public vehicles for this reason overthe last five years (from 250,000 km in 1977 to 692,000 km in 1982).

5.18 An effective system of planning is required to deal with thesepublic transport problems but this does not exist because of the policyof regional decentralization, the absence of a defined transport policy,particularly for route management, and the constant changes in the poLicyof financing public transport.

5.19 The road haulage market is badly organized and inefficient.There is overcapacity, leading to underutilization, relatively low annualmileage, poor rates of return and hence an inability to invest in new,more efficient vehicles, an increasing percentage of "empty" journeys,and excessive fuel consumption. At the same time, the lack of intramodaland intermodal coordination of the transportation of goods has unfavor-able consequences for the railways.

5.20 The general crisis in the road haulage part of the sector hashad the further undesirable effect of pushing into the background anyconcern about reducing fuel consumption. Although fuel accounts for 28%of the total cost per kilometer, there is no explicit action program toreduce fuel costs.

5.21 The large price advantage of gas oil over gasoline (para 4.8)has no economic justification. A special tax on diesel cars is supposedto compensate for this differential, but the amount of the tax has notkept pace with changes in the prices of the two fuels (Annex 5.4). Be-tween 1976 and 1979, the price gap widened from 11.50 to 26 escudos perliter, but the compensatory tax on diesel cars remained unchanged at18,000 escudos. 19/ This is likely to have contributed to the ropidincrease in the share of diesel cars in total new registrations, ft-m4.6% in 1975 to a peak of nearly 15% in 1978.

19/ This highlights the need discussed in para. 5.15 (c) for theMinistry of Finance to set fuel taxes with regard to their broaderenergy policy implications.

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5.22 The mission's recommendations are designed to further thefollowing main objectives of energy conservation in the transportationsector:

(a) To regulate fuel consumption in the sector by (i) reducing theunit consumption per passenger/km and per tonne/km, (ii) opti-mizing traffic volumes and the length of journeys through anappropriate land use policy and improved systems of production;and (iii) progressively influencing consumer demand towards themost economic modes, taking account of social and economiccosts.

(b) To reduce the excessive dependence of the sector on hydro-carbons by (i) developing the use of electricity by promotingmodes which use this form of energy, and (ii) encouraging re-search to find partial or complete substitutes for petroleumfuels.

(c) To ensure the safe and reliable operation of the transportsystem in all circumstances. This aspect is not examined herebut is covered in the terms of reference Eor the proposedfollow-up study (Annex 5.5).

Recommendations

(a) An inter-ministerial commission should be appointed with theresponsibility for establishing coordinating machinery withrespect to energy conservation in the transportation sector.rts main functions will be to define: (i) the form of a per-manent body responsible for an energy management plan in thetransportation sector; (ii) the scope of action and powers ofthis body; and (iii) arrangements for collecting reliablestatistical information on energy consumption and trends in thesector by mode, type of usage etc. and establishing methods forevaluating the results of policy measures.

(b) A phased program should be introduced for regular vehicleinspections, initially on a voluntary basis. In addition,vehicle suppliers should be required to publicize the fuelconsumption of new vehicles (e.g. in accordance with EECstandards), and a study should be undertaken of the merits offixing license fees for vehicles according to their fuel con-sumption.

(c) Trucks and buses should be fitted with modern control equipmentfor measuring consumption of fuel (Annex 5.6), possibly in con-nection with the regulation of drivers' working hours (e.g. ifPortugal joins the EEC), which would require such equipment.

(d) The procedures for fixing speed limits should be simplified andeffective control measures established. This should help toreduce the number of traffic accidents.

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(e) Urban car traffic and parking should be more strictly con-trolled, road space reallocated in favor of public transport,and the use of electrical transport modes promoted.

(f) Goods transportation should be improved through: (i) a morerational organization of goods deliveries in towns by groupinglight-weight truck operators; (ii) the establishment of"freight offices" or information systems to optimize vehiclemovements and reduce the number of empty return journeys. Thiscould be accomplished along the lines of the system recentlyintroduced in France (Annex 5.7); (iii) a review of the presentconditions of railway freight traffic; and (iv) a study of themerits of developing combined forms of transport (by containersand trailers) for long journeys.

(g) The present differential between the prices of gas oil andgasoline has no economic justification, as the energy advan-tages of diesel cars are a sufficient incentive to gas oildemand. The prices of gas oil and gasoline should be progres-sively aligned while making corresponding reductions in thecompensatory tax on diesel vehicles. The aim should be toreach parity by 1990, which would bring Portugal into line withAustria, Switzerland, the Federal Republic of Germany and theU.K. (Annex 5.8). In particular, if Portugal joins the EEC,then under the "value-added tax" regime, operators of dieselcommercial vehicles would have a refund of the tax, equal atpresent to 18.6% of the final price of gas oil, so that theywould still be paying only about 80% of the gasoline price.

(h) The Government should carry out publicity campaigns to educatethe public about the energy and financial costs of trans-portation, emphasizing the economic advantages of pu'lictransport in urban areas and the high cost of short journeys byprivate car.

(i) Training courses in good driving practices should be introducedfor new drivers, who should also be given some elementarymechanical instruction to encourage an interest in drivingskills and regular vehicle maintenance.

(j) Regarding inter-city traffic, equitable competition should beencouraged among different modes. In particular, the operationof the seccndary railway lines should be reviewed to def:ne aneconomic system of operation. A new, smaller energy-savingtype of train ("rail bus") should be introduced in due courseon these lines.

(k) A follow-up study should be undertaken to establish the feasi-bility of the proposed measures and assist in their implemen-tation (Annex 5.5). The proposed technical assistance wouldrequire 70 man-weeks at an estimated total cost of US$280,OO0.

- 53 -

Costs and Benefits

5.23 The estimated capital costs of the recommended measures toreduce energy consumption in the transportation sector total about US$80million (Annex 5.9). The costs of control equipment in trucks and busesaccount for US$75 million, with an estimated payback period of two tofour years. The estimated benefits in terms of fuel savings amount to225,000 toe p.a. (Annex 5.9), representing a savings of about ten percenton the present level of consumption of petroleum products in the trans-portation sector. At 1983 prices, this would mean an annual saving ofabout US$50 million, all in Eoreign exchange. This does not count otherbenefits of the proposed measures suich as reductions in traffic accidentsand air pollution. The proposed follow-up study (Annex 5.5) will definea feasible action program more precisely and develor specific benefit/cost calculations.

ANNEX 1.1Page 1

Energy Consumption and Supply. 1965-80('000)

1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

I. Final energy consumption 3706 5136 5449 5842 6259 6380 6575 6818 7309 7593 8046 8454 8823 8994of which:

(1) By SectorHouseholds & services a/ 889 1054 1784 1603 1628Industry & construction 2155 2555 3241 3763 4007Transportation 1641 2222 2453 2451 2647Agriculture & fishing 334 321 456 540 382Non-energy uses 430 423 520 276 330

(2) By Form of EnergyPetroleum products 3786 4217 4609 4731 4871 5065 5386 5516 5847 6056 6480 6754Coal 397 314 295 229 259 253 287 286 280 126 184 166Electricity 583 638 701 768 797 858 965 1047 1150 1233 1250 1323Gas 63 68 75 72 75 73 72 76 74 59 57 57Wood 620 605 580 580 575 570 600 667 696 980 852 694

II. Intermediate Consumption a/ 314 834 825 884 979 1092 1382 1424 1221 1308 1525 1654 2477 3186III. Primary Energy Supply

Internal production 1132 1296 1379 1419 1389 1420 1316 1164 1623 1757 1829 2027 2144 2347Net imports 2923 4770 4911 5226 5693 6135 6404 7350 7179 7064 8747 8081 8662 9716Changes in stocks c/ 35 96 16 (81) (156) 83 (237) 272 272 (80) 1005 - 142 117

Total primary energy supply 4020 5970 62?4 6726 7238 7472 7957 8242 8530 8901 9571 10108 11300 12180of which: Petroleum 4511 5003 5454 5755 6316 6618 6633 6805 7399 7965 8637 9327

Coal 473 417 487 385 397 391 401 432 434 213 326 350Hydroelectricity 549 619 631 682 571 569 814 916 950 851 1483 1809Wood 622 687 666 650 673 664 682 748 788 1079 852 694Industrial Residues 119

Commercial primary energy supply.d/ 5533 6039 6572 6822 7284 7578 7848 8153 8783 9029 10448 11486

a/ Services comprise public administration, commercial establishments (including banks, insurance companies, etc.), schools, hospitals,hotels and restaurants.

bJ Intermediate consumption = energy consumed by the energy sector in the conversion, transport and distribution of energy.c/ Stock changes in parentheses denote reductions from additions to stocks.dJ Commercial primary energy supply = total primary energy supply, less wood and industrial residues.

Source: National Energy Plan, 1982 Version; DGE.

ANNEX 1.1Page 2

Energy Consumption and Supply, 1965-80

Ratios and Percentages1965 1970 1971 1973 1975 1980 1981 1982

Primary Energy Supply, % SharesNet imports 72 79 78 80 85 80 77 80Intermediate consumption 8 14 13 14 17 16 22 26Energy Source:

Petroleum 71.9 75.4 79.4 78.8 76.5 76.6Coal 7.5 6.7 5.0 2.1 2.9 2.9Hydroelectricity 8.8 8.7 7.2 8.4 13.1 14.8Wood 9 91 9.2 7.2 9.7 7.5 5.7Industrial residues 1.9 1.2 1.0

Final Energy Consumption, % Shares(1) By Sector

Households & services 16.3 16.0 21.1 i8.6 18.1Industry & construction 39.6 38.9 38.3 43.5 44.6Transportation 30.1 33.8 29.0 28.4 29.4Agriculture & fishing 6.1 4.9 5.4 6.3 4.2Non-energy uses 7.9 6.4 6.2 3.2 3.7

(2) By Form of EnergyPetroleum products 69.5 73.6 74.1 71.6 73.4 75.1Coal 7.3 4.7 3.9 1.5 2.1 1.9Electricity 10.7 11.2 12.1 14.6 14.2 14.7Gas 1.2 1.2 1.1 0.7 0.6 0.6Wood 11.3 9.3 8.8 11.6 9.7 7.7

Ratios

Primary ene:gy cons./cap., toe 0.48 0.7b 0.74 0.84 0.87 1.08 1.19 1.28Final energy cons./cap., toe 0:.': MA3 0.64 0.73 0.72 0.89 0.91 0.95Primary energy intensity,

toelmill. esc. a/(a) Total ftnal energy 8.01 8.84 8.66 8.22 9.38 9.20 10.10 10.60(b) Commercial Primary Energy b/ 7.64 7.47 8.49 8.22 9.35 9.98

Final energy intensity,toe/mill. esc. a/

(a) Total final energy 7.39 7.61 7.52 7.11 7.67 7.70 7.72 7.81(b) Commercial final energy b/ 6.67 6.45 7.00 6.81 6.96 7.21

a/ At 1980 prices.b/ Excludes wood and industrial residues... Not available.

Source: National Energy Plan (1982 Version), Bank Economic Reports DGE and Missionestimates.

- 56 -

ANNEX 1.1Page 3

Portugal Energy Balance: Actual 1982('000 toe)

Solid Fuels a/ Oil Gas b/ Hydro Electricity Total

GROSS SUPPLYProduction 794 - - 1,553 - 2,347Imports 267 9,871 - - 290 10,428Exports - -251 - - -34 -285Bunkers - -427 - - - -427Stock Change 17 +134 - - - 117

Total 1,044 9,327 - 1.553 256 12,180

CONVERSIONS -184 -2,573 57 -1,553 1,067 -3,186Elect. Production -142 -1,828 - -1,553 3,523 c/ 0Gas Production - -60 58 - -3 -5Oil Refining - -672 - - -20 -692Losses/Energy Sector Use -42 -13 -1 - 2,433 -288

FINAL DEMAND 860 6,754 57 - 1,323 8,994Industry 506 2,743 3 - 755 4,007

- Iron/Steel 127 41 - - 44 212- Non-Ferrous Metals 33 8 - - 79 120- Chemicals 37 807 - - 109 953- Non Metallic Minerals 188 853 - - 106 1,147- Others 121 1,034 3 - 417 1,575

Transport - 2,625 - - 22 2,647- Road - 2,064 - - - 2,064- Other - 561 - - 22 583

Commerce/Services 3 206 12 - 231 452Households 351 478 42 - 305 1,176Agric./Fishing - 372 - 10 382Non-Energy Use 330 - - - 330

Notes:

A/ Supply breakdown estimated as follows: Fuelwood, 694,000 toe and coal 100,000 toe. Detailedbreakdown of demand not available.

b/ Town gas from naphtha and refinery gas.c/ Corresponds to total generation of 15,370 GWh including 7,810 GWh from petroleum products, 6,950

GWh from hydropower and 610 GWh from coal.

Source: Portugal, Doc. IEA SLT (83) 30, 1st revision; mission estimates.

Ah'NEX 1.2

Consumption of Petroleum Products, 1960-1982(tonnes)

HeavyYear Propane Butane Gasoline Naphtha Kerosene Diesel Fuel Oil

1960 5,449 30,221 203,599 11,942 156,223 304,905 439,4281961 8,381 43,765 211,177 17,769 144,421 334,494 462,0891962 11,177 54,985 223,829 53,504 140,279 345,105 499,2901963 15,206 67,235 231,322 8B,529 135,058 364,887 561,3621964 18,680 84,302 255,581 124,596 127,014 419,484 575,9491965 23,440 98,349 281,386 143,577 120,561 448,457 619,2711966 28,039 118,416 312,035 145,667 111,507 494,399 617,6961967 34,825 132,473 346,762 149,120 99,906 542,325 716,0341968 44,882 152,660 377,112 156,209 95,770 574,580 814,6771969 55,990 174,610 428,436 217,960 89,376 855,301 797,7581970 68,061 186,837 478,273 219,484 82,992 715,378 1,039,555 t1971 86,956 217,282 553,358 286,695 72,424 814,433 1,420,145 t1972 103,388 234,163 612,853 283,001 70,951 899,913 1,592,1921973 118,273 242,541 712,109 282,192 69,320 988,852 1,779,8361974 120,378 252,599 881,916 289,318 64,261 1,004,871 2,033,4421975 112,243 279,672 803,827 279,726 68,789 1,085,878 2,290,1491976 119,855 314,462 780,741 259,768 71,494 1,209,014 2,666,2651977 119,816 332,518 760,109 293,418 76,273 1,228,338 2,454,7191978 122,552 333,645 753,824 260,448 82,091 1,360,850 2,543,896

(126,292) (326.,362) (780,000) 282,068) (82,500) (1,500,000) (2,820,000)1979 128,287 343,776 748,598 275,605 80,501 1,503,368 3,045,643

(139,210) (356,128) (1,030,000) (283,037) (127,600) (1,890,000) (3,830,000)1980 156,044 342,511 751,325 253,396 67,273 1,698,186 3,453,995

(160,448) (355,563) (970,000) (249,593) (98,900) (1,950,000) (3,750,000)1981 190,685 339,744 1,110,000 254,737 71,900 2,090,000 4,100,0001982 190,444 346,375 856,510 n.a. 50,800 2,040,000 3,940,000

Source: Ministry of Energy and mission estimates.

- 58 -

ANNEX 1. 3

Petroleum Refinery Output, 1978-82(million tonnes)

1978 1979 1980 1981 1982

Output by Refinery

Porto 3.9 1.9 2.2 3.1 2.6Lisbon 1.6 0.7 0).1 . ..Sines 0.1 5.3 4.9 4.4 4.8

Total 5.6 7.9 7;7 73 7.4

Refinery Output by Share of Products

Gasoline 13.7 13.0 13.4 14.6 11.7Gas Oil 22.9 24.0 25.5 27.1 25.1Fuel Oil 45.4 47.0 44.2 40.2 43.1LPG 2.3 2.1 3.3 3.5 3.2Naphtha 5.3 3.9 2.8 2.0 4.0Jet Fuel 6.2 5.9 6.1 7.2 5.5Other 4.2 4.1 4.7 5.4 7.4

Total 100 100 100 100

negligibleSource: PETROGAL.

ANNEX i.4

Page 1

Electricity Supply and Consumption. 1971-82(GWh)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Growth Rate, x P.A.

1971-76 1976-82 1971-?Z

SupplyHydropower Production 6207 7151 7354 7888 6437 4887 10010 10865 11251 8072 5193 6358

of which: EDP 6957 7473 6079 4768 9872 10723 11106 7947 4991Other Public a/ 364 378 328 91 104 109 107 89 166Autoproducers 33 37 30 28 34 33 38 36 36 a/ 36 a/

Thermal Power Production 1726 1753 2467 2857 4291 5258 3809 3788 4901 7191 8755 8409of which: EDP 1863 2271 3601 4525 3061 3023 3971 6117 7654

Other Public - - - - - - - - - -Autoproducers a/ 604 586 690 733 748 765 930 1074 1101

Gross Production 7933 8904 9821 10745 10728 10145 13819 14653 16152 15263 13948 15267 5.1 7.0 6.1of which: EDP 8820 9744 9680 9293 12933 13746 15077 14064 12645

Other Public 364 378 328 91 104 109 107 89 166Autoproducers 637 623 720 761 782 798 968 1110 1137

Station Use 161 179 231 267 318 348 359 416 476 537 571 584of which: EDP 231 267 318 341 359 416 476 526 556

Other Public - - - 7 - - - 11 15Station Use, % 2.0 2.0 2.4 2.5 3.0 3.4 2.6 Z.8 2.9 3.4 4.1 4.1Storage Pumping 53 93 42 85 38 143 61 77 54 3Z 108 87Net Production 7719 8632 9548 10393 10372 9654 13399 14160 15622 14644 13269 14596 4.6 5.4 5.0

of which: EDP 8547 9392 9324 8809 12513 13253 14547 13456 11981Other Public 364 378 328 84 104 109 107 78 151Autoproducers 637 623 720 761 782 798 968 1110 1137

Net Imports b/ 178 38 (10) 44 200 1724 (545) (Z18) (203) L8Z7 3060 Z969Available Supply 7897 8670 9538 10437 10572 11378 12854 13942 15419 16471 16329 17565 7.6 7.5 7.5Transmission & Discrib. Losses 970 1077 1222 1326 1144 1234 1462 1592 1782 1870 1860 1995Transmission & Distrib. X 12.3 12.4 12.8 12.7 10.8 10.8 11.4 11.4 11.6 11.4 11.4 11.4Final Consumption 6927 7593 8316 9111 9428 10144 11392 12350 13637 14601 14469 15570 7.9 7.4 7.6

of which: Households 1448 1623 1763 2062 2254 2582 2714 2931 3160 3392 3235 3494 12.3 5.2 8.3Services 926 1042 1163 1433 1502 1559 1703 1913 2135 2388 2476 2650 11.0 9.2 10.0Industry 4318 4669 5122 5335 5378 5697 6664 7187 8010 8469 8409 9050 5.7 8.0 7.0Transportation 198 214 218 221 226 233 232 234 242 245 243 262 3.3 2.4 2.6Agriculture 37 45 50 60 68 73 79 85 90 107 106 114 14.6 7.7 10.8

a/ Estimated.bl Figures in parentheses are net eXports.

Source: DGE, except for estimated figures.

- 60 -

ANNEX 1,4Page 2

Electricity Supply and Consumption 1971-82

Ratios and Percentages1971 1973 1976 1980 1982

PRODUCTIONHydropower % 78.2 74.9 48.2 52.9 44.9Thermal % 21.8 25.1 51.8 47.1 55.1Public % 93.5 92.5 92.7Private % 6.5 7.5 7.3

Total SupplyDomestic Production, % 97.8 100 85.5 89.3 83.7Net Imports, % 2.2 - 14.5 10.7 16.3

ConsumptionIntermediate % a/ 14.6 15.2 14.5 14.6 14.6Final % 85.4 84.8 85.5 85.4 85.4

Final Consumption, % ShareHouseholds 20.9 21.2 25.4 23.2 22.4Services 13.4 14.0 15.4 16.4 17.0Industry 62.3 61.6 56.2 58.0 58.1Transportation 2.9 2.6 2.3 1.7 1.7Agriculture 0.5 0.6 0.7 0.7 0.8

Population Served % 80.5 84.5 93.2Gross Consumption/Cap., kWh 761 1018 1204 17713

Electricity Intensity,kWh/mill. esc. b/

Gross Consumption 11195 11149 12988 15563 15679Final Consumption 9561 9450 11101 13297 13899

a/ Intermediate consumption comprises power station use, storage pumpingand network losses (transmission and distribution).

b/ MLllion escudos of GDP at 1980 prices.

Source: EDP; mission estimates.

ANNEX 1.5

Energy Sector Investment, 1971-80(million current escudos)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Energy Sector Investment

Electricity a/ 2,291 2,606 3,130 4,220 5,820 7,410 9,360 13,281 17,566 26,849Other Fuels 327 406 387 243 1,151 42051 b/ 8,519 b/ 9,030 b/ 5,298 b/ 6,315 b/

Total 2,618 3,012 3,517 4,463 6,971 11,461 17,879 22,311 22,864 33,164

National Gross FixedInvestment 37,259 47,526 57,256 66,761 73,992 88,931 125,500 156,500 189,900 252,500

Energy as % National 7.0 6.3 6.1 6.7 9.4 12.9 14.2 14.2 12.0 13.1

a/ Includes town gas.b/ PETROGAL only.

Source: National Energy Plan (1982 version).

- 62 -Ak4NEX 1.6

pnBe t

PORTUGALEnergy Sector Orgonization

Aw~~~~~~~~~oa ~ ~ ~ ~ E'ma .

~~ ~~o,g~~~) ~E1*ME ~~~~ & e

(mv)

| Sv d ~El L Motd

DSOM _ ~ ~o( ,o.o ,~g&W~ GEP Co#ti',&~a 9F Er&&

doATC Enwh noOot,t Tdo,~~COON |tO.. ECD,d ,DP ENJd BO,& I{ITGA FGF&oo O oNoo~dCo

DEWNWETsi

Reo ACES CPNon

DEr I,g, I EQM* m CNW.CDxlm aE CIf.l*&WM EnI I I I

DE>STMENTBSTCOY VALAL

- 63 -

ANNF,X 1.6Page 2

PORTUG'.L ENERGY SECTOR ORGANIZATION BY FUNCTION AND AGENCY

Function Agency Comments

GENERAL POLICY/LEGISLATION DGE Gtves advice on energy policies and drafts legisla-tion.

ENERGY IMPORT ARRANGEMENTS

Petroleum PETROGAI Imports crude petroleum and prodticts. Overseesrefining and distribution operations.

Coal EDP* An arrangement currently under consideration plansPFTROGAL* for FOP to import coal for power requirements and

PETROGAIL for all other uses.

Flectricity EDP Special agreements exist with France and Spain.

Gas POP PGP produces "town gans from naphtha and refine:yEDP gas. EDP distributes the gas to the Lisbon area.

No institution has been set up to superv'se theimport. handiing and distribution for the proposedLNG program but various alternatives are beingdiscussed.

ENERGY PRfCING DGE DGE makes recommendations but Ministry of FinanceMOF (MOF) has ulttmate authority for pricing policy.

including taxation.

ENERGY CONSERVATION

Industry DGE Supervises energy management program for indus-

try and administers programs for energy conservationsubsidies.

LNETI* Training of energy auditors and managers of energyEMAC* enterprises.

IAMPEI Technical assistance and advisory services to smallenterprises for energy conservation.

Transport/Other None Potential for energy conservation in transport andother sectors is discussed in the PEN but there areno formal agencies charged with the development andimplementation of special programs.

DOMESTIC ENERGY DEVELOPMENT

Coal ECD Ferrominas is currently a holding company for coalDGGM and iron ore development. It plans to take over the

FERROMINAS production functions of ELW. uGGM supervises coalexploration.

Electricity EDP Generates and distributes electricity to customersserved by the national grid. Also sells electricityto certain municipalities with their own distribu-tion system.

Uranium/Nuclear Energy DGGM ENU produces uranium for stockpiling and/or for ux-ENU port. Both DGGM and ENU cooperate In uranium explo-

LNET1 ration. LNETE is conducting research on variousaspects of nuclear power devalopment ircludingtechnologtes, safety standards and training pro-grams.

Nydropower DGRAH DCRAH is concerned with Portugal's overall water re-EDP source development and EDP is in cbarge of hydro-

power instaltations. They cooperate through a ointgeneral council.

Petroleum GPEP Oversees oil and gas exploration programs, grants

concessions and makes recommendations for governmentexploration policy.

*Proposed function.

RMT IPY AA AII ARI F

- 64 -

ANNEX 2.1Page 1

PEN Assumptions for Energy Projections

I. Economic Variables

(a) Growth of population: 0.5% p.a.

(b) Growth of GDP, % p.a,

1980-85 1985-90 1990-2000 2000-2010 1980-2010

Scenario A 4.0 5.5 6.5 6.5 5.9Scenario B 3.0 3.5 4.5 4.5 4.1

Note:Scenario A assumes a significant recovery in the world economyas a result of international cooperation to remove tradebarriers, reduce North-South inequalities, control inflation andimprove the balance of payments in industrialized and developingcountries.

ScenariG 3 assumes continuing relative stagnation of the worldeconomy va3 a result of negative developments in relation to thefactors assumed for Scenario A.

(c) Discount rate: 8%, 10% and 12%.

3.I. Energy Sector Variables

(a) Energy conservation: two alternatives were considered,moderate conservation (CM) and intensive conservation(CI). PEN does not specify the energy savings associatedwith CM, but gives the following figures for C1:

Savings from Intensive Energy Conservation Policy

1985 2010Primary Energy Final Energy Primary Energy Final Energy('000 toe) (%) ('000 toe) (X) ('000 toe) (X) ('000 toe) ()'

Scenario A 822 5.4 703 5.7 14,796 22.0 13,407 27.5Scenario B 552 3.9 442 3.8 6,946 16.0 6,440 20.1

- 65 -

ANNEX 2.1Page 2

(b) Fuel prices - average real increase Z p.a.:

ScenariosPi P2 F3

Petroleum 3.3-4.0 a/ 3.3-4.0 a/ 1.3-2.0 a/

Natural gas 6.3 b/-4.0 4.0 c/ 2.0 c/

Coal 6.0 d/ 3.0 1.5

Uranium 2.4 3.1 3.1

a/ The lower end of the range assumes four percent p.a.increase of the FOB price combined with a reductionin freight rates by SOPONATA (the national shippingcompany) to make them equal to the 1980 internationalrates.

b/ The higher end of the range is the rate which wouldequalize the FOB price per calorie of petroleu'u andnatural gas in 1990.

cf The rates which would maintain the relationshipbetween the CIF prices per calorie of fuel oil andnatural gas.

dl This is below the rate which would equalize the costof steam from coal and fuel oil in 2000 (7.1% p.a.).

(c) Equipment prices:

(i) Constant prices (E1)

(ii) Three percent p.a. real increase (E2)

ANNEX 2.1Page 3

Macroeconomic ProjectionsReference Strategy - Low Growth Scenario

(billion 1980 escudos)

1980 Average growth 1985 Average Growth 1990 Average Growth 2000 Average Growth 2010(actual, rate, X p.a. rate, % p.a. rate, % p.a. rate, x p.a.

Consumption )080 3.1 1257 3.6 1503 4.5 2338 3.2 3216

Gross investment 307 3.0 356 5.0 455 6.0 815 6.0 1459

1xports 33b 5.0 429 5.5 560 6.0 1003 7.0 1973 10\

Imports 518 4.5 646 5.5 844 6.0 1512 5.0 2462 1

GUP at market prices 1205 3,0 1396 3.7 1674 4.7 2644 4.7 4186

GOP at Eactor cost 1098 3.0 1273 3.5 1512 4.5 2348 4.5 3646

Investment, % of GDP 25 25 27 31 35

Source: National Energy Plan (J982 version).

Annex 2.2Page 1

Energy Demand and Supply, 1980-2010Reference Strategy - Low Growth Scenario

('000)

Growth Rates, 2 p.a.1980 1985 1990 1995 2000 2010 1980-85 1985-90 1990-95 1995-2000 2000-2010

(Actual)

1. Useful Energy ConsumptionHouseholds and ServicesSpace Heating 256 294 333 379 414 501 2.8 2.5 2.6 1.8 1.9Water Heating 111 170 270 400 580 734 8.9 9.7 8.2 7.7 2.4Specific Elec. 320 373 431 509 594 713 1.0 2.9 3.4 3.2 1.S.Cooking 182 191 196 204 211 224 1.0 0.5 0.8 0.7 0.6

Subtotal 869 1,028 1,230 1,492 1,799 2,172 3,4 3.7 3.9 3.8 1.9Industry and ConstructionFurnaces (any fuel) 721 934 1,244 1,692 2,241 3,969 5.3 5.9 6.3 5.8 '.8Furnaces (clean fuel 97 126 176 249 345 610 5.4 6.9 7.2 6.7 5.9Steam 718 886 1,119 1,365 1,638 2,358 4.3 4.8 4.1 3.7 3.7Specific Elect. 662 941 1,283 1,636 2,062 3,201 7.3 6.4 5.0 4.7 4.5Motor Fuels 1L,3 182 233 316 413 732 4.9 5.1 6.3 5.5 5.9

Subtotal 2,341 3,069 4,055 5,258 6,699 10,870 5.6 5.7 5.3 5.0 5.0

TransportationPrivate Cars 1,144 1,252 1,374 1,505 1,632 1.952 1.8 1.8 1.8 1.6 1.8Trucks/Buses 919 1,349 1,919 2,595 3,352 5,592 8.0 7.3 6.2 5.2 5.2Trains/Shipping 159 168 178 192 204 235 1.1 1.2 1.5 1.2 1.4Aviation 203 210 217 225 232 249 0.7 0,7 0.8 0.6 0.7Electric Trains 21 23 25 27 29 35 1.8 1.7 1.6 1.5 1.9

Subtotal 2,446 3,002 3,713 4,544 5,449 8,063 4.2 4.3 4.1 3.7 4.0

Agriculture and FishingHeating 6 6 6 7 7 10 - - 3.1 - 3.6Motor Fuels 328 332 352 385 425 545 0.2 1.2 1.8 2.0 2.5Specific Elec. 8 8 8 9 11 14 - - 2.4 4.1 2.4Fuel for fishing boats 107 111 118 125 145 185 0.7 1.2 1.2 3.0 2.5

Subtotal 449 457 484 526 588 754 0.3 1.2 1.7 2.3 2.5Total

Motor Fuels 3,003 3,604 4,391 5,343 6,403 9,490 3.7 4.0 4.0 3.7 4.0

Specific Elect. 1,011 1,345 1,747 2,181 2,696 3,963 5.9 5,.4 4.5 4.3 3.9Other 2,091 2,607 3,344 4,296 5,436 8,406 4.5 5.1 5.1 4.8 4.5

Total Useful Energy 6,105 7,556 9,482 11,820 14,535 21,859 4.4 4.6 4.5 4.2 4.2

RPrT NI.PV AVAiII ARIF

Annex 2.2Page 2

Energy Demand and Supply 1980-2010Reference Strategy - Low Growth Scenario

('000 toe)

Gr-h RatesZ7, p±.

1980 1985 1990 1995 2000 2010 1980-85 1985-9 990-95 1995-2000 2000-2010 1980-2010(Actual)

II. Final Enerew Consumotion 8,454 11,064 13,105 15,389 18,010 25,610 5.5 3.4 3.3 3.2 3.6 3.8of which, (1) By Sector:

Households and Services 1,784 1,844 1,985 2,169 2,370 2,810 0.6 1.5 1.8 1.8 1.7 1.5Industry and Const. 3,241 4,100 5,240 6,610 8,200 12,950 4.8 5.0 4.8 4.4 4.7 4.7Transportation 2,453 2,920 3,480 4,100 4,780 6,850 3.5 3.6 3.4 3.1 3.7 3.5Agriculture & Fishing 456 460 480 500 550 700 0.2 G.8 0.8 1.9 2.4 1.4Non-Energy Uses 520 1,740 1,920 2,010 2,110 2,300 27.3 2.0 0.9 1.0 0.9 5.1

(2) by Form of EnergvPetroleum Products 6,056 7,905 8,320 9,960 12,570 5.5 4.0 1.8 2.3 2.4Coal 126 480 900 2,470 5,180 12.1 13.4 10.6 7.7 10.3Electricity 1,233 1,550 1,950 2,880 4,220 4.7 4.7 4.0 3.9 4.2Gas 59 65 800 1,230 1,770 1.9 65.2 4.4 3.7 12.0Solar Energy - 4 7 20 40 - 11.8 11.1 7.2Biogas - 10 40 160 300 31.9 14.9 6.5Wood 980 1,050 1,088 1,290 1,530 1.4 0.7 1.7 1.7 1.5

a/ bI a/ bIIII. Losses 1,653 2,492 3,178 4,988 640 7,950 T 7X

IV. Primary Energy PC4qSuD. 10,107 13,556 16,283 22,998 24,410 33,560 36,380 6.0 3.7 3.5/4.1 3.9/4.1 4.1/4.4Of which: Petroleum 7,965 10,575 10,480 11,260 8,260 13,260 7,260 5.8 (0.2) 0.7t(2.4) 2.4/(1.3) 1.7/(0.3)

Coal 213 930 2,700 4,438 8,850 ' 205 15,025 15.8 11.3 5.1/12.6 3.4/5.4 11.9/15.2Natural Gas - - 800 1,175 1,175 ,.52 1,652 3.9 3.5Uranium - - - 2,993 2,993 8,404 8,404 10.9Hydroelectricity S51 852 980 1,115 1,115 1,279 1,279 - 2.8 1.3 1.4 1.4Wood 980 1,065 1,170 1,680 1,680 2,260 2,260 0.8 1.0 3.7 3.0 2.8Industrial Residues 99 130 145 310 310 450 450 5.6 2.2 7.9 3.8 5.2Solar Energy - 4 7 20 20 40 40 11.8 11.1 7.2Wind Energy - - 1 7 7 10 10 21.5 3.6

RatiosPopulation, *000 9,423 9,661 9,906 10,156 10,413 10,946

GDP Billions of 1980 Escudos 1,098 1,273 1,512 2,348 3,646 3.0 3.5 4.5 4.5 4.5 4.1Energy Consumption/Capita,TOE

- Primary Energy 1.073 1,403 1.644 2,209/2.344 3.066/3.324- Final Energy 0.897 1.145 1.323 1.515 1.730 2.340

Primary EnergyiGDP Ratio,TOE]Million Escudos 9.20 10.65 10.77 9.79/10.40 9.20/9.98

Final Energy/GDP Ratio,Toe/Million Escudos 7.70 8.69 8.67 7.67 7.02

Losses, x Primary Energy 16.4 18.4 19.5 21.7/26.2 23.7/29.6Primary Energy GDP Elasticity 2.0 1.06 0.78j0.91 0.87/0.91Final Energy GDP Elasticity 1.83 0.97 0.73 0.71 0.80

a/ without SYNCRUDE"b/ with -SYNCRUDE'.

Source: National Energy Plan (1982 Version) and Mission Estimates. RFRT VVPY AVAII ARI r

- 69 -

ANNEX 2.2Page 3

Structure of Energy Demand and SupplyReference Strategy Low Growth Scenario

1980 1985 1990 1995 2000 2010(Actual) (Percentage Shares)

Final Energy by SectorHouseholds & Services 21.1 16.7 15.i 14.1 13.2 11.0Industry & Construction 38.3 37.0 40.0 43.0 45.5 50.6Transportation 29.0 26.4 26.6 26.6 26.5 26.7Agriculture & Fishing 5.4 4.2 3.7 3.2 3.1 2.7Non-energy Uses 6.2 15.7 14.6 13.1 11.7 9.0

Final Enegy byForm of Energy

Petroleum Products 71.6 71.5 63.5 55.3 49.1Coal 1.5 4.3 6.9 13.7 20.2Electricity 14.6 14.0 14.9 16.0 16.5Gas 0.7 0.6 6.1 6.8 6.9Solar Energy - - - 0.1 0.1Biogas - 0.1 0.3 0.9 1.2Wood 11.6 9.5 8.3 7.2 6.0

Primary Energy byEnergy Source

a/ b/ a/ b/Petroleum 78.8 78.0 64.4 49.0 33.d 39.5 20.0Coal 2.1 6.9 16.6 19.3 36.2 18.5 41.3Natural Gas - - 4.9 5.1 4.8 5.0 4.6Uranium - - - 13.0 12.3 25.1 23.1Hydroelectricity 8.4 6.3 6.0 4.9 4.6 3.8 3.5Wood 9.7 7.9 7.2 7.3 6.9 6.7 6.2Industrial Residues 1.0 0.9 0.9 1.3 1.3 1.3 1.2Solar Energy ) _ - _ 0.1 0.1 0.1 0.1Wind Energy )

a/ without "SYNCRUDE."b/ with "SYNCRUDE."

- 70 - ANNEX 2.3

Structure of Final Energy Consumption in 2010(x of Total Consumption

1. Scenario B Cases

1 2 3 4 5 a/ 6 b/ 7 g/ 8 9 10 11S%MPl 12X M PI 8Z M P2 12% M P2 12X M P2 12% M P2 12 MP 2 8% M P3 8% M PI 82 I P2 121P

F7uel1LPG 3.1 3.1 2.7 2.6 2.7 2.2 2.4 2.7 2.8 2. 2.5Gasoline 8.0 8.5 8.0 8.5 8.5 8.5 8.5 8.1 7.9 7.9 8.2Gas oil 29.2 28.8 28.2 27.7 27.7 27.7 27.8 28.4 27.5 26.3 26.0Fuel oil 16.5 16.6 13.4 13.3 13.3 13.4 13.1 13.9 17.0 14.0 14.3

Total Petroleum Products 56.8 57.0 52.3 52.1 52.2 51.8 51.8 53.1 55.2 50.7 51.0

Coal 16.3 16.0 21.1 21.1 21.2 21.2 21.9 19.9 15.4 20.5 20.7Gas 3.7 4.3 4.0 4.5 4.7 5.1 4.6 4.8 4.1 4.2 4.2Electicity 15.5 15.0 15.2 14.9 14.9 14.8 14.6 15.0 16.9 16.6 16.3Wood 6.1 6.3 6.0 6.2 6.1 6.1 6.2 6.0 6.8 6.4 6.4Solar Energy 0.08 o.n5 0.06 0.04 0.04 0.05 0.04 0.04 0.13 0.10 0.08Biogas 1.5 1.2 1.3 1.2 0.8 1.0 0.9 1.2 1.4 1.4 1.3

Final Consumption.'000 toe 28048 28050 28050 28086 28053 27963 28042 28019 25596 25594 25758

a/ Allowing for consumer preferences.b/ Including city gas in the base year, with consumer preference and different fuel reaction times.ci Including city gas, and with different fuel reaction times.

Kemo Notes: Column headings refer to three elements in the following order: the discount rate (%); moderate (X) or intensive (I)energy conservation; and price scenarios (PI, P2, P3).

2. Scenario A Casea

12 13 14 1 5 d/ 1 6 el12% I-PI 12% IIP 12% ZIPj 122 I1P' 12% I P,

LPG 2.6 2.2 2.3 2.2 2.2Gasoline 8.6 8.6 8.6 8.4 8.6Gas oil 29.4 28.7 28.8 28.8 28.6Fuel oil 15.4 12.2 15.3 14.5 12.0

Total Petroleum Products 56.0 51.6 52.5 53.0 51.4

Coal 14.1 18.8 17.6 18.7 18.7Gas 3.9 3.9 4.4 3.9 4.3Electricity 19.8 19.7 19.7 17.3 19.8Wood 5.1 5.0 4.9 5.2 4.9Solar Energy 0.08 0.06 0.05 0.04 0.07Biogas 1.0 0.9 0.8 0.9 0.8

Final Consumption, '000 toe 35210 35282 35249 29690 35253

e/ With real increase in equipment prices.f/ Allowing for consumer preferences.

Source: National Energy Plan (1982 Version).

BEST COPY AVAILABLE

- 71 -

ANNEX 2.4

Energy Consumption by Industry, 1980

Industry Energy Consumption

('000) (% Total)

Cement 851 18.5Steel 641 13.9Textiles 559 12.2Food 513 11.2Chemicals 508 11.0Ceramics 404 8.8Metal Products 236 5.1Paper Pulp 208 4.5Paper 191 4.2Glass 1A9 3.2Wood 1 20 2.6Other 220 4.8

Total 4,600 100.0

Source: National Energy Plan (1982 version)

- 72 -

ANNEX 2.5

Growth of Gross Value Added by Industry, 1980-2010Low Growth Scenario

(% p.a.)

Industry 1980-1985 1985-1990 1990-2000 2000-2010 1980-2010

Food 2.4 2.5 3.0 2.2 2.5Drink 4.9 3.9 3.5 3.1 4.5Tobacco 1.1 1.3 1.5 1.5 1.3Textiles and Clothing 2.5 3.5 2.0 2.0 2.5Footwear 5.2 4.3 2.9 2.5 3.7Wood, Cork and Furniture 3.7 3.9 3.3 2.8 3.4Paper Pulp 1.7 2.9 2.8 1.0 2.1Paper 5.5 7.0 5.2 4.0 5.4Printing and Publishing 2.4 3.5 5.4 4.5 3.9Rubber 2.0 3.8 2.6 2.5 2.7Chemicals 10.2 7.6 5.6 6.0 7.4Non-Metallic Minerals 5.6 5.9 5.6 5.0 5.5

- Ceramics 6.3 6.7 6.6 6.1 6.4- Glass 4.5 4.1 3.5 2.6 3.7- Cement 6.0 7.0 7.0 6.5 6.6

Basic Iron and SteelIndustries 3.6 8.9 3.0 1.3 3.5- Steel 3.9 10.9 2.4 0.5 3.5

Basic Non-Ferrous Metals 7.5 9.5 6.0 4.0 6.2Metal Products 5.3 5.2 5.9 5.2 5.4Mechanical and Electrical

Equipment 5.6 5.6 6.1 6.4 5.9Transportation Products 2.8 8.2 5.7 4.3 5.2

- Automobiles 3.1 12.7 5.3 3.5 5.5Miscellaneous Industries 4.4 5.3 4.3 4.1 4.4All Manufacturing Industries 4.4 5.3 4.3 4*1 A4Extractive Industries 15.5 19.9 5.6 4.5 9.1

Source: National Energy Plan (1982 version)

ANNEX 2.6

Energy Sector Investment, 1983-2010Reference Strategy

(billion 1980 escudos)

Electric Natural Energy National Energy %

Period Power Petroleum Coal Gas Conservation Other a/ Total Investment Nat onal

1983-1985 79.4 18.0 12.7 2.7 10.5 4.5 127-8) 2694.8 11.81986-1990 123.1 15.9 3.7 11.8 27.3 7.2 189.07 2 11991-1995 174.2 4.2 3.5 12.2 44.8 10.6 249.5 2718.7 9.21996-2000 189.7 127.9 0.5 6.5 64.2 18.3 407.1 3638.3 11.22001-2010 534.6 154.9 7.2 7.5 135.2 43.0 882.4 11384.4 7.8 -

a/ Rene-wable energy, evaluation of national energy resources and energy research, developmentand demonstration.

Source: National Energy Plan (1982 Version).

- 74 -

ANNEX 2.7

Estimated Foreign Exchange Costs of ReferenceCase Energy Projections 1983-2010

(billion 1980 escudos)

1983-90 1991-2000 2001-2010Amount % Amount % Amount %

Investment a/Electric Power 66.0 63.0 175.0 65.8 262.0 70.7Petroleum 23.8 22.7 78.9 29.6 97.2 26.2Coal 7.3 7.0 3.8 1.4 6.9 1.9Natural Gas 7.6 7.3 8.5 3.2 4.6 1.2

Subtotal 104.7 100 366.2 100 37L} J 100

Fuel ImportsPetroleum 1208.7 92.5 2137.6 79.4 1867.1 53.8Coal 68.7 5.3 339.3 12.6 1168.9 33.7Natural Gas 28.8 2.2 196.0 7.3 324.0 9.4Nuclear . 19.5 0.7 108.9 3.1

Subtotal 1306.2 100 2692.4 100 3468.9 100

Total 1410.9 2958.6 3839.6Exports 3739.0 7826.0 14828.0Energy as % Exports 37.6 37.8 25.9

a/ Including inveatment in security" stocks of fuels.

Source: National Energy Plan (1982 version).

- 75 ~ ANNEX 2.8

Energy Demand and Supply. 1980-2010Increased Security of Supply Strategy - Low Growth Scenario

1980 1990 2000 2010 Growth Rates, X p.a.(Actual) 1980-90 1990-2000 2000-2010 1980-2010

Final Energ:v Consumption 8,454 12,700 17,000 22,450 4.2 3.0 2.8 3.3of which:

(1) By SectorHouseholds & Servicees 1,784 1,900 2,200 2,400 0.6 1.5 0.9 1.0Industry & Construction 3,241 5,110 7,800 11,600 4.7 4.3 4.1 4,3Transportation 2,453 3,300 4,380 5,550 3.0 2.9 2.4 2.8Agriculture & Fishing 456 470 5,510 600 0.3 0.8 1.6 0.9Non-energy Uses 520 1,920 2,110 2,300 14.0 1.0 0.9 5.1

(2) By Form of EnergyPetroleum Products 6,056 7,870 9,367 10,750 2.7 1.8 1,4 1.9Coal 126 900 2,200 4,300 21.7 9.4 6.9 12.5Electricity 1,233 1,900 2,678 3,700 4.4 3.5 3.3 3.7(Gas 59 800 1,150 1,650 30.1 3.7 3.7 3.7Solar Energy - 10 40 100 - 14.9 9.6Siogas - 48 160 300 - 12.8 6.5Wood 980 1,100 1,250 1,430 1.2 1.3 1.3 1.3Industrial Residues - 72 155 220 - 7.9 3.6

Losses 1,653 2,812 3,911 5,578

Primary Energy Consumption 10,107 15,512 20,911 28,028 4.4 .0 3.0 3.5of which:

Petroleum 7,965 9,656 10,686 11,885 1.9 1.0 1.1 1.3Coal 213 2,700 4,154 5,250 29.0 4.4 2.4 11.3Natural " - 800 1,095 1,531 - 3.2 3.4Uranium - - 1,662 5,074 - - 11.8Iydroelectr ...ity 851 1,000 1,200 1,400 1.6 1.8 1.6 1.7Wood 980 1,200 1,750 2,300 2.0 3.8 2.8 2.9Industrial Residues 99 145 310 450 3.9 7.9 3.8 5.2Solar Energy - 10 41 102 - 1 5.1 9.6Wind Energy 1 13 30 - 29.2 8.8

RatiosEnergy Consumption/Capita, toe- Primary Energy 1.073 1.566 2.008 2.561- Final Energy 0.897 1.282 1.633 2.051Primary Energy: GDP,

TOE/iillion escudos 9.20 10.26 8.91 7.69Final Energy: GDP,

TOE/million escudos 7.70 8.40 7,24 6.16Primary Energy:

GDP Elasticity 1.38 0.67 0.67Final Energ;,

GDP Elasticity 1.31 0.67 0.62Losses, % of Primary Energy 16.4 18.1 18.7 19.9

Source: National Energy Plan (1982 Version) and Mission Estimates.

BEST COPY AVAIUBt

ANNEX 2.9Page 1

Electricity Consumption and Supply, 1980-2010Reference Strategy - Low Growth Scenario

(GWh)

Growth RatesX p.a.1980 1985 1990 1995 2000 2010 1980-85 1985-80 1990-95 1995-2000 2000-2010 1980-2010

Final ConsumptionHouseholds and Services 5,791 6,233 7,419 8,081 8,860 10,349 1.5 3.5 1.7 1.8 1.6 2.0Industry 8,198 11,406 14,883 19,081 24,221 38,256 6.8 5.5 5.1 4.9 4.7 5.3Transportation 244 291 279 291 302 349 3.6 - 0.8 0.7 1.5 1.2Agriculture and Fishing 105 93 93 105 105 116 - - 2.5 - 2.0 0.3

Total 14,338 18,023 22,674 27,558 33,488 49,070 4.7 4.7 3.9 4.0 3.9 4.1Of Which: Public Network 13,616 17,350 21,740 26,300 31,790 46,700 5.0 4.6 3.9 3.9 4.1 4.2

Autoproducers 722 673 934 1,258 1,698 2,370Network Losses a/ 1,677 !,660 2,159 2,359 2,532 3,189Network Losses, Z a/ 11.0 8.7 9.0 8.2 7.4 6.4

Net Supply 16,015 19,683 24,833 29,917 36,020 52,259 4.2 4.8 3.8 3.8 3.3 ';.0Of Which: Public Network 15,293 19,010 23,899 28,659 34,322 49,889 4.4 4.8 3.7 3.7 3.8 4.0

Autoproducers 722 673 934 1,258 1,698 2,370Station Consumption a/ 753 827 1,089 1,179 1,260 1,332Station Consumption, Z a/ 4.7 4.2 4.8 4.0 3.5 2.6

Gross Supply 16,768 20,510 25,922 31,096 37,280 53,591 4.1 4.8 3.7 3.7 3.7 3.9Of Which: Public Network 16,046 19,837 24,988 29,838 35,582 51,221 4.3 4.7 3.6 3.6 3.7 3.9

Autoproducers 722 673 934 1,258 1,698 2,370

Production by Energy Source a/ aHydropower 9,895 9,907 11,395 12,326 12,965 14,872Thermal Power 6,151 9,930 13,593 17,512 22,617 36,349Of Which: Oil Fired Steam 5,547 8,000 6,233 3,430 3,047 105

Coal-Firea Steam 360 1,837 7,360 8,105 8,012 4,000Combustion Turbines 244 93 - 395 58 -Nuclear - - - 5,582 11,500 32,244

Fuel Consumption. '000 ToePublic Network

FPeel Oil 1,296 1,851 1,450 797 675 22Gas Oil 77 26 - i05 15 -Coal 87 450 1,800 1,989 1,950 980

AutoproducersFuel Oil 100 85 85 80 7 78Gas Oil. 3 3 8 8 10 10Industrial Residues 99 130 145 243 310 450

Public and PrivateFuel Oil 1,396 1,936 1,535 877 750 100Gas Oil 80 29 8 113 25 10Coal 87 450 1,800 1,989 1,950 980Indue':rial Residues 99 130 145 243 310 450

Total 1,662 2,545 3,488 3,222 3,035 1,540

a/ PubLic Network

Source: National Energy Plan (:i82 Version).

BEST COPY AVAILBlE

- 77 - Annex 2.9Page 2

Electricity Consumption and Suppli 1980-2010Reference StLategy_- Low Growth Scenario

198& 1985 1990 2000 2010

Final ConsumptionHouseholds and Seivices 40.4 34.6 32.7 29.3 21.1Industry 57.2 63.3 65.6 69.2 78.0Transportation 1.7 1.6 1.2 1.1 0.7Agriculture and Fishing 0.7 0.5 0.4 0.4 0.2

Gross SupplyPublic network 95.t; 96.7 96.4 96.0 95.6Auto Producers 4.14 3.3 3.6 4.0 4.4

Proe,uction a/Hydropower 61.7 49.9 45.6 36.4 29.0Thermal power 38.3 50.1 54.4 63.6 71.0Of Which:Oil-Fired Steam 34.6 40.3 24.9 8.6 0.2Coal-Fired Steam 2.2 9.3 29.5 22.5 7.8Combustion Tuirbines 1.5 0.5 - 0.2Nuclear - - - 32.3 63.0

a/ Public Network

Electricity: GDP Elasticity

1980-85 1985-90 "'90-95 1995-'2000 2000-2010 1980-2010

Final Elec. Cons.: GDP 1.57 1.34 0.87 0.89 0.87 1.02Gross Supply/GDP 1.37 1.37 0.82 0.82 0.82 0.95

Electricity Intensigykwh/million 1980 escudos of GDP

1980 1985 1990 2000 2010

7inal consumption 13,058 14,158 14,996 14,262 13,459Gross supply 15,271 16,112 17,144 18,877 14,719

Source: National Energy Plan (1982 Version) and mission calculations.

ANNEX 2.10Page 1

Electricity Consumption and Supply. 1980-2010Peblic Network (Electricidade de Portugal)

National Energy Plan Projections - Reference Strategy

1980 1985 1990 1995 2000 2005 2010 Growth Rates, I p.a.1980-85 1985-90 1990-95 1995-2000 2000-2010

Final Consumption, GWh 13,616 17,350 21,740 26,300 31,790 38,500 46,700 5.0 4.6 3.9 3.9 3.9Gross Production, a/ GWh 16,046 20,625 25,940 30,780 36,495 43,590 51,940 5.1 4.7 3.5 3.5 3.6Net Supply, b/ GWh 15,400 19,800 24,900 29,700 35,400 42,500 50,900 5.1 4.7 3.6 3.6 3.7Network Losses, GWh 1,784 2,450 3,160 3,400 3,610 4,000 4,200Network Losses, % 11.6 12.4 12.7 11.4 10.2 9.4 8.3Peak Demand, MW 3,000 3,860 4,800 5,900 7,000 8,400 10,150 4.8 4.7 4.2 3.5 3.8System Load Factor, % 58.6 59.' 59.2 57.5 57.7 57.8 57.2

Installed Capacity. KWThermalOil-Fired Steam c/ 1,315 1,815 !,815 1,315 1,065 565 -Coal-fired _/ Steam 150 450 i,350 1,950 1,950 1,950 1,950Combustion Turbines e/ 164 330 330 166 166 - -Nuclear - - - 951 1,900 3,800 5,700Total Thermal 1,629 2,595 3,495 4,381 5,081 6,315 7,650 9.8 6.1 4.6 3.0 4.2

Hydropower 2,276 2,872 3,923 4.583 5,012 5,647 6,492 5.5 6.4 3.2 1.9 2.6Total Installed Capacity 3,905 5,467 7,418 8,964 10,093 11,962 14,142 6.7 6.3 3.9 2.4 3.4

Capacity Margin, MW 905 1,667 2,618 3,064 3,093 3,562 3,992Capacity Margin, Z of Peak Demand 30.2 43.9 54.5 51.9 44.2 42.4 39.3

Guaranteed Capacity, MWThermal

Oil-Fired Steam 883 1,233 1,233 908 583 233 -Coal-Fired Steam 97 307 937 1,357 1,357 1,357 1,357Combustion Turbines 132 264 264 132 132 - -Nuclear - - - 665 1,330 2,660 3,990Total Thermal 1,112 1,804 2,434 3,062 3,402 4,250 5,347

Hydropower 1,82! 2,298 3,138 3,666 4,010 4,518 5,194Total Guaranteed Capacity 2,933 4,102 5,572 6,728 7,412 8,768 10,541 6.7 6.3 3.9 1.9 3.6Margin over peak, MV -67 302 772 828 412 368 391Margin, I of peak -2.2 7.9 16.1 14.0 5.9 4.4 3.9

Energy Capability, GWhThermal power 8,874 14,068 19.587 25,956 28.934 37,230 46,840Hydropower, average 9,642 10,851 12,309 13,183 13,678 14,652 15,397Hydropower, firm 5,854 6,447 7,254 7,837 8,126 8,563 8,843Total, average 18,516 25,019 31,896 39,139 42,612 51,882 62,237 6.2 5.0 4.2 1.7 3.9Total, firm 14,728 20,515 26,841 33,793 37,060 45,793 55,683 6.9 5.5 4.7 1.9 4.2

at Derived from net supply projections, assuming power stations' consumptior of 4% of gross production in 1985 and 1990. 3.5% in 1995. S% in2000, 2.5% in 2005 and 2% in 2010 (as in DFI model).E/ EDP Projections, which are the same as the gross production projections in the DFI model.

c/ Projections assume retirement of Carregado I-IV (500 MW) in 1995, Carregado V-VI (250 MW) in 2000, Setubal I and It (500 MW) in 2005.d/ Includes the existing Tapada Do Outeiro station, which buins coal and fuel oil.e/ Assuming retirement of Tunes I and 11 (32MW) in 1992, Alto de Mira (132 MW) in 1995 and Tunes III and IV in 2002.

Source: National Energy Plan (1982 version).

GrCT 1.DY AUJAII ARI F

- 79 -

Annex 2.10Page 2

Technical and Economic Assumptions

Generation Plant

1. The generating plant candidates considered in PEN fordetermining the long-term development program were 100 MW combustionturbines (CT), coal-fired steam p'.ants of 300 and 600 MW capacity (C300and C600), fuel oil fired steam plants of the same capacity (F300 andF600) and nuclear power plants of 950 and 1300-MW capacity (N950 andN1300), assumed to be of the pressurized water reactor type (PWR). Thetechnical characteristics and capital costs are as follows:

CT C300 b/ C600 b/ F300 b/ F600 b/ N950 N1300

Availability,% of capacity 80 70 70 70 70 72 68

Station consuraption, % 1 8 8 7.5 7.5 5 5Specific fuel or numption

kg/kwh sert cUlt 0.272 0.422 0.411 0.232 0.226Stock of fuel a/,

'000 tors 58 251.5 490 139.5 271conomic life. years 18 25 25 25 25 25 25

Capital cost perkW c/(1) In 1980 escudos: (i) 14,238 61,167 49,728 51,992 42,269 73,238 59,985

(ii) 15,947 80,128 65,144 68,1CB 55,373 105,293 88,040

(2) In 1980 US$: d/ (i) 284 1,222 993 1,038 844 1,463 e/ 1,198 e/(ii) 318 1,600 1,301 1,360 1,106 2,103 e/ 1,759 e/

a/ Sufficient for 90 days cortinmous operation at full plart availability.b/ Including provision for S02 rerval.c/ (i) Excluding interest during corEtrution, (ii) Including interest durirg

construction.d/ At average 1980 e=hag rate of US$1 = 50.062 escudos.e/ Including provision for disanrtlirig at erd of awlear station's Iffe.

Source: National Energy Plan (1982 version).

- 80 -

ANNEX 2,10Page 3

Fuel Prices

2. The base prices used were the actual 1980 prices (except for uranium,which was the 1981 price) as follows:

1980 Esc./toe 1980 US$/toe a/

Crude Oil 12070 241Gas Oil 15170 303Fuel Oil 9900 198Coal 4310 86 b/Uranium 1420 28

a! At exchange rate of US$1 = 50.062 escudos.b/ Includes cost of handling in Sines coal facility.

3. These prices were then adjusted to a 1982 basis as follows:

1980 ESC/toe

1981 1982% Change Price % Change Price

Crude Oil +20.0 14490 -13.0 12610Gas Oil +15.2 17470 - 8.6 15970Fuel Oil +23.9 12270 - 7.7 11330Coal +33.6 5760 + 3.0 a/ 5930Uranium - 1420 + 3.1 b/ 1460

a/ In P2 price scenarios (see below). In P1 and P3 scenarios 6%and 1.5% respectively were assumed.

b/ In P2 and P3 price scenarios. In P1 scenario the increaseassumed was 2.4%.

4. Real fuel prices on a c.i.f basis (in 1980 escudos) were thenprojected as follows: (price scenario P2 is the reference case):

- 81 -

ANNEX 2.10Page 4

(a) Growth Rates, % p.a.

1983-90 1991-2000 20001-2010P1 P2 P3 P1 P2 P3 P1 P2 P3

Crude oil 3.3 3.3 1.3 4.0 4.0 2.0 0 0 0Gas oil 4.0 4.0 2.0 4.0 4.0 2.0 0 0 0Fuel oil 4.0 4.0 2.0 4.0 4.0 2.0 0 0 0Coal 6.0 3.0 1.5 6.0 3.0 1.5 0 0 1.5Uranium 2.4 3.1 3.. 2.4 3.1 3.1 2.4 3.1 3.1

(b) Fuel Prices, 1980 escudos/toe

1985 1990 1995 2000 2010

Crude oil, P1 & P2 13910 16380 19930 24250 24250P3 13120 14020 15480 17090 17090

Gas oil, P1 & P2 17960 21850 26590 32350 32350P3 16950 i8710 20660 22810 22810

Fuel oil, Pl & P2 12740 15500 18860 22950 22950P3 12020 13270 14650 16180 16180

Coal P1 7280 9740 13030 17440 17440P2 6480 7520 8710 10100 10100P3 6120 6590 7100 7650 8880

Uranium P1 1560 1760 1980 2230 2820P2 & P3 1600 1870 2180 2540 3440

5. In the case of nuclear fuels, the actual 1981 values assumed were asfollows, based on information supplied by the International Atomic EnergyAgency (IAEA):

Natural uranium US$24/lb U30 8Conversion to hexafluoride US$5.5/kgUEnrichment US$176/SWU a/Fuel fabrication US$192.5/kg UFuel transport US$38.5/kg UReprocessing of spent fuel US$605/kg UPlutonium credit US$13.2/kg U

a/ SWU - separative work unit.

- 82 -

ANNEX 2.10Page 5

6. The calorific values assumed for fossil fuels were 10100 kcal/kg forgas oil, 9600 kcal/kg for fuel oil and 5,800 kcal/kg for coal.

Operation and Maintenance Costs

7. The fixed and variable 0 and M costs assumed were as follows:

1980 EscudosCT C300 C600 F300 F600 N950 N1300

Fixed 0 and M, kw/year 1282 780 1068 652 1800 1320Variable 0 & M per kwh 4.78 1.87 1.74 3.08 2.93 0.41 0.40

Generating Costs

8. The resulting generating costs per kwh sent out (i.e., excluding eachpower station's own consumption) are as follows:

1980 escudos/kWhCT C300 C600 F300 F600 N950 N1300

Fuel Cost 4.78 1.65 1.61 2.88 2.80 0.40 0.40Variable 0 and M - 0.22 0.13 0.20 0.12 0.01 0.01Fixed 0 and M 0.51 0.32 0.20 0.27 0.17 0.36 0.28Capital Charge 1.87 1.57 1.27 1.32 1.08 1.94 1.71

Total 7.16 3.76 3.21 4.67 4.17 2.71 2.40

- 83 -

ANNEX 2.11

EDP Medium-Term Electricity Forecasting Model

1. The traditional method used in Portugal for forecasting electricityconsumption has been the so-called analogy method, which takes the pastevolution of electricity consumption per capita in more advancedcountries as the basis for determining the future trend of consumption inPortugal. This approach yielded good empirical results in the period1976-80, observed real growth in this period showing only small devia-tions from the forecast trend.

2. However, the analogy model takes no explicit account ofeconomic activity and prices, and provided no explanation of the widefluctuations in year-to-year growth rates of electricity demand. In anattempt to overcome this defect, EDP Planning Department has developed asimple regression equation relating the growth rate of electric energyconsumption (ELEC) to the growth rate of GDP, the real price ofelectricity (PE) and the rate of change of the price of electric energyrelatively to the change in the price index of other fuels (PR). Theprice variables are lagged one year.

3. Applied to annual data for 1975-81, i.e.. only seven observa-tions, the equation gave results which were very close to the observedgrowth rates for those years. Taking account of GDP growth (3% and 3.5%assumed) and price values for 1981, and with the electricity growth rateadjusted to average temperature conditions, and PE and PR corrected toallow for municipal tariffs which have not been adjusted for changes inEDP tariffs, the resulting equations are as follows:

For 3% GD? growth in 1982:

LECt = 1.67 GDPt - 0.015 PEt-I - 0.0335 PRt_. (1)

For 3.5% GDP growth in 1982:

ELECt - 1.62 GDPt + 0.002 PEt.. - 0.0356 PRt-1 (2)

4. The results suggest an income elasticity of demand of 1.6-1.7,negligible or zero own price elasticity of demand (although the sign inequation (2) indicates that it is statistically not significant) andrelatively high cross-elasticity of demand (0.3-0.4). However, resultsbased on such a limited number of observations must be open to doubt.The predictive value of the equation has also been called in question bythe behavior of electricity demand in the first few months of 1983.Given the stagnation of the economy, with zero growth projected for theyear, and the bigh real electricity price increases in 1982, the modelwould indicate ::ero growth of electricity consumption in 1983. However,demand so far has been runnirg about 9% above the 1982 level, or 7% on atemperature adjusted basis.

ANNEX 2.12

Final Consumption of Gas, 1980-2010

1980 1990 1995 2000 2010'000 toe % al '000 toe Z a/ '000 toe X a/ '000 toe % a/ 'OvO toe Z a/

Households/ServicesSpace heating 4 0.5 77 13.0 285 38.6Water heating 18 10.3 111 20.4 240 26.3Cooking 34 6.4 117 23.4 135 29.6

Total 56 3.1 230 11.6 305 14.1 400 16.9 660 23.6

Industry'Clean" fuel processes 3 2.0 188 53.1 473 63.8Steam-raising - - 115 b/ 4.8 227 7.2

Total 3 0.1 160 3.1 303 3.7 425 b/ 5.1 700 5.0

Non-energy Uses - - 410 21.4 410 20.4 410 19.4 410 17.6

Total final consumption 59 0.7 800 6.1 1018 6.1 1235 6.9 1770 6.9of which:Natural gas - 800 1000 1175 1652Town gas (from naphtha 59 - - -Coal gasification - 4 12 29Biogas - 14 48 89

a/ % of total final energy consumption for the end-wze concerned.b/ 1995 and 2000 figures include natural gas supplied to combustion turbines for electricity

generatio- (28,000 toe in 1995, 5000 toe in 2000).

Source: National Energy Plan (1982 version).

-85 -

ANNEX 2.13

Household Gas Consumption, 1985-2005 -PGP/SOFREGAZ Market Survev

1985 1990 1995 2000 2005

(a) Number of Consumers, '000)1st Phase

Greater Lisbon & Setubal 185,4 300,0 391.6 429.2 462.7

2nd PhaseLisbon - Porto Axis -Greater Porto - 12.9 80.1 108.9 121.9

3rd PhaseGuimaraes & Braga - 1.6 10.4 12.7 15.1

Total 185.4 314.5 482.1 550.8 599.7

(b) Specific Consumption per Household, therms

1st PhaseGreater Lisbon & Setubal 3000 3300 3650 4000 4000

2nd PhaseSouth Axis - 3000 3300 3650 4000North Axis & Porto - 3500 3850 4250 4700

3rd PhaseGuimaraes & Porto - 3500 3850 4250 4700

Source: National Energy Plan (1982 version).

- 86 -

ANNEX 2.14

Natural Gas Investment Costs(million 1980 escudos)

1. LNG TerminalBuildings & civil engineering 402.7Initial storage reservoirs

- 2 x 35,000 m3 1610.92 x 120,000 m3 a/ -

Additional storage reservoirs- 5 x 120,000 m3 a/

Regasification 237.5Additional vaporisers a/ 278.8Auxiliary plant 691.9Dredging & earthworks a/ 444.0Wharf & Jetties a/ 423.4

Subtotal 4089.2

2. Primary network (high &medium pressure transmission)Equipment 2188.0Erection 4290.0Other 1116.0

Subtotal 7524.0

3. Secondary network (low &medium pressure distribution)Equipment 8174.0Erection 4401.0

Subtotal 12575.0

TOTAL 24188.2

a! These items not considered in DFI model.

Source: National Energy Plan (1982 version).

ANNEX 2,15- 81 -

Final Costs of LNG

1. The PEN report provides the following information concerning thecobts of LNG assumed for the reference strategy:

(a) The c.i.f. prices of LNG at five-year intervals from 1985 to2010, from which the prices for the intervening years areeasily obtainable, since PEN assumes a 4% p.a. real increase upto 2000, and constant real prices thereafter.

(b) The annual capital expenditures under the proposed investmentprogram for the associated LNG terminal installations,transmission and distribution networks.

(c) The average annual operating and maintenance costs, both fixedand variable, of the LNG terminal and the transport anddistribution networks.

(d) The final cost per kgoe of the natural gas for each year of the20-year period 1988-2000.

The detailed figures are shown in Attachment 1.

2. At the 12% discount rate (the 'rate assumed for the PENreference strategy evaluation of the LNG option) the present worth of theproposed capital investment program is 18.625 billion escudos. Thepresent worth of the LNG tonnages consumed is 4.542 million toe, so thatthe average capital cost per kgoe is 4.10 escudos. The average O&M costworks out at 3.19 escudos per kgoe. As shown in Table 1, the resultingfinal costs of natural gas are significantly higher (12-22%) than thosegiven in PEN.

Table 1: Natural Gas Final Costs, 1990-2000(1980 escudos/kgoe)

1990 1995 2000PEN Mission PEN Mission PEN Mission

LNG c.i.f. price 15.36 15.36 18.69 18.69 22.75 22,75Capital costs (a) ) 4.10 ) 4.10 ) 4.10

) 3.23 ) 4.42 ) 4.07O&M costs ) 3.19 ) 3.19 ) 3.19

Total (a) 18.59 22.65 23.11 25.98 26.82 30,04

Source: National Energy Plan (1982 version) and mission estimates.

- 88 - ANNEX 2.15Attachment 1

LNG Costs - PEN Reference Strategy( 1980 escudos)

Average LNGG'apital Investment O&M c.i.f. Final cost of gas Gasmillion -escudos Costs Price esc./kgoe Consurption

Year mnill.esc. esc./kgoe '000 toe

1984 554.9 - - -1985 1343.1 - - -1986 :'346.9 - - -1987 2045.2 - -1988 640.7 1940 14.21 17,50 7001989 6i7.1 1940 14.78 18.03 7501990 853.9 1940 15.36 18.59 8001991 2912.7 1940 15.97 19.22 8361992 4037.5 1940 16.61 20.09 8751993 1155.2 1940 17.28 21.79 915'994 1158.9 1940 17.97 22.44 9561995 1160.1 1940 18.69 13.11 10001996 1205.9 1940 19.44 23.80 10331997 482.7 1940 20.21 24.53 10671998 464.3 1940 21.02 25.34 11021999 656.5 1940 21.86 26.05 11382000 607.9 1940 22.75 26.82 11752001 435.5 1940 22.75 26.72 12162002 327.6 1940 22.75 26.55 12582003 324.2 1940 22.75 26.47 13022004 280.7 1940 22.75 26.32 13472005 277.1 1940 22.75 26.18 13942006 279.1 1940 22.75 26.04 14422007 25.91 1492

Source: National Energy Plan (1982 version).

ANNEX 4.1

Petroleum Product Prices. 1960-83

Premium Gasoline Regular Gasoline Kerosene Gas Oil/Diesel Fuel OilNominal Real a/ Nominal Real a/ Nominal Real a/ Nominal Real at Nominal Real a(

Esc/liter Esc/l Esc/l Esc/l EscJ1 Eec/i E Esc/l Esc/l Esc/kg Esclkg

Jan. 1960 5.00 37.70 4.30 32.50 1.85 14.00 2.50 18.90 0.90 6.801961 5.00 37.00 4.30 31.80 1.85 13.70 2.50 18.50 0.90 6.701962 6.00 43.40 5.30 38.40 1.85 13.40 2.50 18.10 0.90 6.501963 G.00 43.70 5.30 38.60 1.85 13.50 2.50 18.20 0.90 6.601964 6.00 42.60 5.30 37.70 1.85 13.20 2.50 17.80 0.90 6.401965 6.00 40.90 5.30 36.10 1.85 12.60 2.50 17.00 0.90 6.101966 6.00 39.50 5.30 34.90 1.85 12.20 2.50 16.50 0.90 5.901967 6.00 37.40 5.30 33.00 1.85 11.50 2.50 15.60 0.90 5.60

- 1968 6.50 39.00 5.60 33.60 1.85 11.10 2.60 15.60 0.90 5.401969 6.50 37.30 5.60 32.10 1.85 10.60 2.60 14.90 0.90 5.201970 6.50 34.90 5.60 30.10 1.85 9.90 2.60 14.00 0.80 4.30 t1971 6.50 32.80 5.60 28.30 1.85 9.30 2.30 11.60 0.65 3.30 O1972 6.70 31.20 5.70 26.60 1.85 8.60 2.40 11.20 0.65 3.00 @1973 6.70 28.20 5.70 24.00 1.85 7.80 2.40 10.10 0.65 2.701974 7.50 28.10 6.30 23.60 1.85 6.90 2.60 9.70 0.65 2.401975 12.50 37.20 11.00 32.70 3.00 8.90 4.00 11.90 1.30 3.90197T 17.50 44.70 15.00 38.30 3.00 7.70 4.00 10.20 2.00 5.101977 17.50 37.20 15.00 31.90 4.00 8.50 6.00 12.80 2.00 4.301978 26.00 44.40 23.00 39.30 6.00 10.20 7.50 12.80 3.30 5.60

- 1979 31.00 44.50 28.00 40.20 9.00 12.90 10.00 14.40 4,00 5.701980 39.00 45.50 35.00 40.80 13.00 15.20 13.00 15.20 5.50 6.401981 50.00 50.00 46.00 46.00 22.50 22.50 22.50 22.50 9.00 9.001982 58.00 48.30 54.00 45.00 28.00 23.00 28.00 23.00 13.50 11.301983 b/ 74.00 50.10 70.00 47.40 35.00 23.70 35.00 23.70 17.50 11.90

July 1983 84.00 56.87 81.00 54.84 46.50 31.48 46.00 31.14 19.5/ 13.2/17.5 ^J 11-90 c/

a/ 1981 prices.bJ Provisional rate of inflation.cJ For non-electricity/electricity uses.

Sources: Ministry of Energy.

ANNEX 4.2- 90 Page 1

Pricing Formula for Petroleum Products

1. Petroleum product prices are determined by a 'formula' whichtreats ex-refinery products s if they had been imported as finishedproducts from the Middle East. The formula has not been changed for someconsiderable time and may be presented as:

P PI + F + I - E + B + C .... (1)

where P administered price

PI = international product price, Persian Gulf, f.o.b.

I insurance costs

E = evaporation adjustment

B = a set of taxes and margins (see below)

C a tax or subsidy, the 'taxa de compensacao', from thenational Supply Fund (SF).

in addition:

F F .... (2)

i.e., freight charges are invariant with products and are themselvesadministered prices which do not necessarily reflect actual freightcosts. When summed across products F may thus exceed or be below actualfreight costs, in which case lump sum transfers are made from the SF atcertain time intervals.

Also I 0.5 PI + F100 00.... (3)

and E 1 PI + F I100 0.... (4)

2. The 'B' taxes and margins are comprised of four elements.

B1 = direct customs duty levied by the PortugueseGovernment; agents' fee, plus a national tax which hasreplaced the National Salvation Tax.

B2 = distribution costs for PETROGAL and other comapanies,averaged across companies as an equal charge. Certaincosts are not included (see text), and geographicaldifferentials in distribution costs are reimbursed fromthe SF.

B3 - rate of return equal to about 15% on all companies' netassets in distribution.

ANNEX 4.2- 91 - Page 2

B4 retailer margins based on a sample in the previousyear.

The size of the various 'B' components is as follows:

Composition of Taxes/Margins on c.i.f. Price(escudos/liter) a/

Super Regular Kerosene KeroseneGasoline Gasoline 1 b/ 2 c/ Gas Oil Fuel Oil

B1 4.6640 4.4692 0.9176 0.9344 0.3157 0.2444

B2 0.6090 0.5848 0.5243 0.5444 0.4277 0.2159

B3 0.8410 0.8080 0.7131 0.7402 0.5646 0.3887

B4 1.1300 1.1300 1.7000 0.9900 1.0300 0

Total 7.244 6.992 3.855 3.209 2.338 0.849

a/ Escudos/kg for fuel oil.b/ For lighting purposes._/ For heating purposes.

Source: PETROGAI.

9 2 - ANNEX 4.2Page 3

Petrolewn Product Price Formation: Selected Products July 1983

Super Regular Kerosene Kerosene Fuel Oil a/ Fuel Oil d/Gasoline Gesoline 1 a/ 2 b/ Gas Oil 3.57. 3.5%

PI (US$/tame POB) 327.08 306.89 319.73 340.27 275.27 168.85 168.85

PI (esc/tauie FMB) e/ 32,403 29,809 31,675 33,710 27,271 16,728 16,728

+ F 2,750 2,750 2,750 2,75) 2,750 2,750 2,750

+ 1 176 163 172 182 150 97 97

-E 353 327 346 366 302 196 196

PI (esc/tome CIF) 35,682 33,049 34,943 37,008 30,473 19,771 19,771

= PI (esc/litre) 26.76 23.80 27.43 30.16 25.44 - -

PI (escfkiio) f/ - - - - - 19.77 19.77

+ 'B' taxes/margins 7.24 6.99 3.86 3.21 2.34 0.85 0.85

= Base Price 34.00 30.79 31.29 33.37 27.78 20.62 20.62

+ 'C' (ta:ca decawieacao) 50.00 50.21 14.71 13.63 18.22 -3.12 -1.12

Retail Price (P) 84.00 81.00 46.00 47.00 46.00 17.50 19.50

a/ For lighting purposes.b/ For heating purposes.c/ To EDP (electricity generation).d/ To other consumers.e/ At 99.068 esc/US$.f/ Market prices for fuel oil are quoted per kilogram.

Source: PFIROGAL and mission estinmates.

- 93 -

ANNEX 4.3

Electricity Prices, 1971-83(esc/kWh)

Current Prices Constant Prices (1981 esc.)Year Domestic Industrial Domestic Industrial

1971 0.694 0.496 3.505 2.5051972 0.705 0.504 3.279 2.3441973 0.684 0.489 2.886 2.0631974 0.707 0.505 2.648 1.8911975 0.859 0.610 2.556 1.8151976 1.096 0.689 2.803 1.7621977 1.483 0.863 3.155 1.8361978 2.042 1.177 3.485 2.0081979 2.386 1.419 3.423 2.0361980 3.545 2.025 4.136 2.3631981 4.220 3.048 4.220 3.0481982 5.947 4.438 4.956 3.6981983 a/ 7.085 5.476 4.920 3.803

a/ First quarter only.

Source: Current price data from Ministry of Energy. Mission estimates forconstant price series using GDP deflator.

AMNEX 4.4

1983 Electricity Prices and their Relation to Marginal Costs of Supply(esc/kWh)

V8V HiV MVNo Load Full Av. Pull Av. Full Av. Av. LVat Peak Load Load Load Load Load Load Size Small Size DomesticHours Charge Curve Charge Curve Charge Curve Industrial Industrial Commercial Sector

MarginalCost:Capital 0.759 0.707 1.139 0.724 1.168 0.645 1.060 2.080 2.273 6.819 8.524Fuel 5.004 5.098 5.207 5.380 5.511 5.848 6.037 6.185 8.847 7.483 7.483Total 6.763 5.805 6.346 6.104 6.679 6.493 7.077 8.265 11.120 14.320 16.007

Price:Capital 0.134 0.124 0.201 0.304 0.489 0.356 0.574 1.148 0.648 1.944 2.430Fuel 3.963 4.240 4.447 4.557 4.683 5.100 5.235 5.340 7.800 6.450 6.450Total 4.097 4.364 4.648 4.861 5.172 5.456 5.809 6.488 8.448 8.394 8.880

Price asX of LRNC 71.1 75.2 73.2 79.6 77.4 84.0 82.1 78.5 76.0 58.6 55.5

DeviationZ 28.9 24.8 26.8 20.4 22.6 16.0 17.9 21.5 24.0 41.4 44.5

V'V = Very high voltage (above 60 kV)HV = High voltage ( (60 kV)11 = Hedium voltage (1-30 kY)LV = Low voltage (up to I kV)

Source; EDP.

REST COPY AVAILABLE

ANNEX 4.5

Electricity Rates i. Non-Compliant Municipalities; Mid-1983

Average EDP Tariff Rate Estimated b/ % of National Effective(esc/kWh) Consumption (MWh) Consumption Subsidy

RV LV WV LV million esc.

Average EDP TariffRate 4.822 6.655

Municipality Rates a/

Espinho 2.155 3.163 136 13,455 0.1 47.35

Ge,adomar - 5.155 - 60,005 0.5 90.00

Mala 4.822 3.865 9,832 51,828 0.5 144.60 "

Oporto 1.104 1.700 137,208 523,280 5.7 3,102.99

Povoa do Varzim 3.911 5.330 1,340 19,324 0.2 26.83

l1alongo 2.410 - 32,165 0.3 136.54

Viana do Castelo 2.793 3.865 1,293 30,959 0.3 88.99

Vila Lova de Gala 2.155 3.163 7,178 178,789 1.6 643.47

a/ Excludes Arouca, Murtosa and Mealhada which, since 1982, are integrated with EDP through notnecessarily charging EDP rates yet. Also excludes Matosinhos which is integrated with EDP andcharges EDP rates.

b/ 1978 consumption figures because of data difficulties.

- 96 -

ANNEX 4.6

Imported Coal and Coke Prices, 1971-82(Average prices, escudos/tonne)

Coke CoalCurrent Prices Constant Prices Current Prices Constant Prices

(1981 -scudos) (1981 escudos)

1971 1,500 7,576 700 3,535

1972 1,354 6,298 600 3,163

1973 1,590 6,709 641 2,705

1974 2,250 8,427 1,356 5,079

1975 3,050 9,077 1,870 5,565

1976 3,165 8,095 1,968 5,033

1977 3,632 7,724 2,338 4,974

1978 4,698 8,017 2,609 4,454

1979 4,872 6,990 3,346 4,801

1980 6,397 7,464 4,748 5,540

1981 8,813 8,813 5,800 5,800

1982 9,800 8,167 7,466 6,222

Source: Current price data from Ministry of Energy. Constant price estimatesby mission using GDP deflator.

- 97 -

ANNEX 4,7

Town Gas Sales, 1977-82

1977 1978 1979 1980 1981 1982

Sales (million m3)

Households 101.2 103.6 101.2 101.1 101.7 99.0Commercial 24.0 25.5 25.4 26.2 26.4 25.2Other 11.1 11.9 12.8 14.0 12.2 12.2

Total 136.3 141.0 139.4 141.3 140.3 136.4

Outlet B (thousand)

Lisbon 161.7 163.8 165.8 167.3 170.5 172.8Oeiras 2.1 2.5 3.0 3.5 4.0 4.3Amadora - - - 0.6 1.7 3.0Loures 0.1 0.1 0.2 0.3 0.6 0.7

Total 163.9 -166.3 169.0 171.6 176.7 180.9

Source: EDP

- 98 -ANNEX 4.8

Terms of Reference for a Study of the Relative Prices of GasOil and Gasoline in Portugal

1. The study is designed to seek an appropriate set of recommenda-tions for changing the relative price of gas oil (diesel) so that itapproaches more closely the price of gasoline. The study should resultin a clear statement of what the appropriate target relativity shouldbe. Portugal has a high growth rate of demand for gas oil and importssome 20% of national consumption as a refined product. The price iscurrently some 57% of the price of gasoline.

2. In order to establish the appropriate target, the study shouldgive consideration to the following factors:

(a) a detailed examination of the end-uses of gas oil inPortugal;

(b) an estimate of the price elasticity of demand for gas oil;

(c) a comparison with other European countries' prices for gasoil and gasoline;

(d) the foreign exchange implications of increased gas oilprices with due allowance for fuel switches;

(e) the impact on government revenues of increased gas oilprices;

(f) the impact on modal choice in the transport sector withseparate attention being paid to (i) passenger transportand (ii) road freight transport;

(g) via the impact on modal choice, some assessment of theenvironmental benefits that may be obtained (i) in termsof any changes in levels of congestion in Lisbon and (ii)reduced noise, vibration, and non-stationary airpollution. It is not expected that monetary measures ofenvironmental benefit will be obtained and physicalindicators should be attempted;

(h) attention should be given in a broad manner tc any impacton the configuration of refinery output in Portugal.

3. The study should take 25 manr-weeks and an essential part of themanpower requirement is for a transport economist. The other inputs maycome from a further transport economist familiar with environmentalimpact analysis or from a non-economist familiar with this type ofanalysis. It is not thought that a transport engineer is required. Aperiod of some 12 man-weeks should be spent in Portugal. The focus ofthe study should be Lisbon, but the study should liaise with the separateteam investigating the impacts of gas oil subsidy removal in thefisheries and agricultural sectors(Annex 4.9). The recommendations fromthe two studies should be consistent.

- 99 -ANNEX 4.9

Terms of Reference for a Technical/Economtc Studyof Town Gag Supply Options in Lisbon

1. The existing gas supply in Lisbon uses a 'cocktail' of refinerygas and naphtha. It is estimated that the system operates with animplicit subsidy of some US$18 million p.a. An upward movement in pricesis constrained by the price of LPG: town gas is priced at parity withLPG. Any move in town gas prices would thus result in a switch to LPG.Equally, there is no rationale for raising LPG prices beyond levelslikely to be dictated by world oil market conditions. The study shouldtherefore delineate all feasible options for changing the feedstock forthe town gas system and should estimate the comparative rates of returnof these options. The study should include in the options completeclosure of the system.

2. While the study should consider itself free to include any setof options, attention should be paid to the fo'tlowing:

(a) closure of the system and the consequent likely increasein demand for LPG and electricity;

(b) the proposal to 'nix' imported LNG with refinery gas,which should be evaluated in terms of the savings ofnaphtha (its value-added in alternative uses) and likelyLNG costs. The latter should be assessed, initially atleast, on the basis of data on LNG costs in the PlanoEnergetico Nacional;

3. The study should occupy 10 man-weeks and should be carried outby a gas engineer with expertise in investment appraisal techniques. Aperiod of three weeks in Lisbon should suffice for on-site work andattention should focus on the expertise of EDP (responsible for the saleof town gas) and PGP.

- 100 - ANNEX 5.1

PORTUGAL

New VehicLe Registrations, 1.979-83

.. Private C&rs

Light Connercial Vehicles

Heavy Trucks

-T.~ ~ ~ ~ ~ ~ ~ ~~~

Source: ACAP If~TIaPY AVAILABLE

- 101 -

ANNEX 5.2

Passenger and Goods Traffic by Mode, 1979

Passenger-km % of Ton-km % of(billion) Total (billion) Total

RoadCars 22.2 62 - -Light goods vehicles (vans) 2,0 6 1.3 11Buses 5.9 16 - -Trucks - - 9.2 81

Subtotal 30.1 84 10.5 92

Rail 5.6 16 0.9 8

Domestic aviation 0.1 0 0.0 0

Inland waterways and coastalshipping 0.1 0 0.0 0

Total 35.9 100 11.4 100

Sources: Road: Draft Transport Sector Memorandum, World Bank, April 1983.Rail: Aviation and Shipping - Instituto Nacional de Lstatistica,Estatiscicas dos Transportes et Communicacoes, 1979.

TONNES

1,800,000

1,700,000

PORTUGAL ENERGY ASSESSMENT.

1,600,000- Gas Oil and Gasoline Consumption, 1960-1982

1,500,000.

1,400,000.

1,300,000/

1,200,000

1,100,000/

1,000,000 o

900,000

800,000

700,000 Gas Oil

600,000 -

500,000./ 500,00- Gasoline

400,0oCq

300,000

200,000

100,000

, .r -, , , , S , U, , . , _ _

1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1.976 1977 1978 1979 1980 1981

- 03 -

ANNEX 5.4PORTUGAL ENERGY ASSESSMENT

Trend of Gas Oil a:d Gasoline Prices andRelation to CommLunaatory 'Tax on Diesel

Vehicles

Annual increase required forsavings in gas oil costs to

o]~~~~~~~~~~~~~~~~~ I LI I V

1 ~~~~~~~~~~~~GASOLINE r

r- X r ~~~~~~~~~~~GAS OIL

3-TA 't9 5 6 iz 1B 1 1.3

- 104

ANNEX 5.5Page 1

Terms of Reference for Study to Establish the Feasibilityof an Energy Management Policy in the Transportation Sector

A. General Objectives

On the basis of the findings of the Bank/UNDP energy sectorassessment mission to Portugal in July 1983, the study should providefor:

1. assistance to the Portuguese commission recommended by themission to establish an energy management policy in thetransportation sector;

2. establishing the feasibility conditions for the measuresproposed to reduce energy consumption (accounting records,costs, practical means of proceeding, energy gains, etc.); and

3. direct participation in the implementation of the initialact4.on program proposed.

B. Means

The consultant should:

1. Establish a statistical service to obtain accurate data on:

- the development of energy consumption in the sector bytransport mode;

- the actual vehicle fleet in use and the characteristics ofthe vehicles in it.

2. Evaluate the practical requirements for establishing technicalcontrol centers for vehicles, with particular reference to

- the type of equipment needed;

- the required investment;

- manpower requirements and training needs;

- means of verifying proper implementation of the controlmeasures;

- juridical status of the control centers and relations withexisting agents (garages, vehicle concessionaires,equipment suppliers).

- projected operating costs of the technical centers.

- 105 -

ANNEX 5.5Page 2

3. Study the compatibility of the present regulatory and fiscalarrangements with the policy for rational energy utilizationwith particular reference to:

- relative fuel prices (gas oil, super gasoline)

- the detenmination ol the vehicle license fee and themerits of relating tile amount of the fee to the vehicle'sspecific fuel consumpLion, with the object of favoring themost economic models.

4. Analyze the national transport plan and review the recentstudies by Kampsax International and Canadian PacificConsulting Service, taking account of the energy dimension(which was insufficiently considered), with particularreference to the investment programs.

5. With regard to the present organization of road hauliers

- examine means of reducing the number of empty journeys,such as the establishment of regional freight offices, andthe development of a system (including the use of telex)for the daily circulation of the flows of informationbetween customers and carriers, along the lines of theFrench "TRANSCLUB";

- study methods and procedures for reducing the fuelconsumption of trucks, such as (a) carrying out energydiagnoses of large transport undertakings (e.g. R.N.,Transfac) and formulating an energy conservation plan; and(b) instituting a plan for training drivers in fuel-savingdriving techniques and education of management to improvethe management of the fuel account by transport workers.

6. With regard to the plan for rail transport of goods, study thevalidity of the plan for restructuring stations open to trafficand the associated measures, with special reference to:

- commercial policy;

- the efficiency of terminal installations on branch lines;

- the policy for management of the fleet of railway wagons;

- the possible development of combined road-rail transport(containers or trailers);

- coordination with road transport for forwarding of goodsat terminals.

- 106

ANNEX 5.5Page 3

7. In connection with the railway passenger lines of localinterest, examine the possibility of replacing the present modeof operation by an economic system of operation based on

(a) a new type of rail-car of modest size (60-80 seats withlow fuel consumption (35-40 liters/100 kin);

(b) a reduction in the costs of personnel and fixedinstallations, and ia variable expenses (maintenance, fuelconsumption, etc.); and

(c) a comparison between the present system, the proposedeconomic system and the alternative road transportsolution.

8. Formulate an urban traffic plan for Lisbon taking explicitaccount of the "energy" variable. A similar plan can be madesubsequently for Porto.

9. Study means for creating greater awareness amongst electedlocal officials, engineers, and industrial managers of theproblem of energy management in ,he transportation sector.These means should include arrangements, based either onexisting bodies or on a new Institute of Transport, forfamiliarizing students and engineers with transport energyeconomics.

10. Review the mutual consistency of the forecasts in the NationalEnergy Plan for the transportation sector and establishalternative assumptions concerning the effectiveness of theproposed energy management policy. In this connection, theconsultant should also study a plan for the allocation of fuelsin the event of a long or short supply crisis.

C. Expertise and Man-Weeks Required

Execution of the study would require a multi-disciplinary teamincluding one transportation economist (team leader), one generaleconomist, one transport operations/management advisor, one mechanicalengineer, one civil engineer, one urban planner, one sociologist and onetraining specialist for an estimated total of 70 man-weeks.

- 107 -ANNEX 5.6Page 1-

Energy Savings in Heavy Road Transport - Possible Courses of Action

I. Actions Relating to the Vehicle Fleet

(a) The first measure for reducing consumption is replacement ofvehicles, given the continuous technical improvements bymanufacturers (more aerodynamic designs, reduced vehicleweight, improved engine design). For example, the reduction inthe consumption of a 1982 versus a 1970 26-ton truck is about20%.

(b) The choice of the most suitable replacement vehicle andequipment (gear box, engine, body design, tires) is animportant factor in energy savings.

(c) The adoption of certain types of equipment for existingvehicles can lower their fuel consumption. Examples are:

- aerodynamic deflectors (savings of 2 to 6% according tovehicle weight and type of journey);

- speed limiters, particularly effective on long journeys(savings of 3 to 6% according to the type of journeys);

- devices to assist driving, such as ind±.cators ofconsumption and engine performance, which allow the driverto adopt an optimal driving regime (savings up to 6%);

- the tachygraph for recording fuel consumption is amanagement tool (identification of the fuel cost of ajourney) which can bring savings of 2 to 5%, if it isfully utilized. This type of tachygraph requires the useof a consumption computer between the fuel tank and thepetrol pump. It is particularly useful when a significantpart of fuel intakes is made outside the enterprise.

(d) Improvements in vehicle maintenance (savings of 1 to 4%):

- installation of diagnostic equipment in vehiclemaintenance workshops, allowing immediate correction ofany irregularity;

- the maintenance contracts offered by certain manufacturerswhich allow good supervision of vehicles;

- analysis of engine oil, which provides information aboutthe mechanical condition of the vehicle.

- 108 -

ANNEX 5.6Page 2

II. Actions at the Enterprise Level

(a) Personnel

- Fuel-conscious driving can reduce the required power by 15to 25%. On the other hand, under-inflation of tiresresults in an extra power requirement of 5 to 15%.Consequently, training of drivers in fuel-saving drivingtechniques is one of the surest ways of securing bettermanagement of the energy account, especially if it isaccompanied by a policy of incentives within the enter-prise (bonuses, publicity for consumption rates). It canbe carried out in various ways, either by using aspecialized outside organization, or within the firmitself. The latter approach ensures more durable resultsthrough regular refresher courses.

- The variety of potential sources for energy saving in alarge road transport enterprise may make it necessary toappoint an individual responsible for the choice andcoordination of measures and evaluation of the results.Depending on the size of the enterprise, an outsideconsultant or the appointment of an internal energymanager, combining technical, information, training andmanagement functions, may therefore be useful, if notindispensable.

(b) Management

Taken in conjunction with the preceding measures, closesupervision of the energy account and its share in the oper-ating costs of the enterprise can result in energy savings of 2to 4%. Modern technical methods for enterprises include:

- systems for recording fuel distribution, which are usefulif internal fuel inputs are significant;

- equipment for the automatic analysis of tachygraph discswhich allows full exploitation of the information providedby the devices for recording consumption;

- programs of management information concerning the costprice per km, allowing a check on the operation of eachvehicle and its optimization.

The institution of these various actions (see table in theAttachment showing the estimated returns) presupposes the establishmentof a detailed diagnosis of the enterprise assess the scope for energysavings and the areas of possible intervention (as a function of the typeof equipment used, type of transport assumed, etc.) Other possiblesavings can be Investigated at the level of the service supplied by the

- 109 -

ANNEX 6Page 3

enterprise, especially through optimization of turn-around time andjourneys and adoption of combined road-rail transportation (use ofcontainers).

- 110 -

ANNEX 5.6Attachment

Profitability of Proposed Measures(expressed in payback period for the investment)

Assumptions for the calculation

Fuel ConsumptionCategories of vehicle km/year a/ liters/100 km b/

A. 22.1-38 tons 55,000 52B. 11.5-22 tons 41,500 36

Financial assumptions - equipment prices as in France at June 1, 1983- price of gas oil in PGrtugal 46 escudos/liter

(July 1, 1983)

Proposed Action Payback Period, YearsA B

3-dimensional deflector 1-2 2-4Speed limiter 1-2 1-2Driver assistance device (with computer) 1-2 2-3Tachygraph (with 4 "stylets") 2 3-4Diagnostic equipment varies according to vehicle

fleet sizeVehicle maintenance contract varies according to vehicle

fleet sizeEngine oil analysis Assured AssuredTraining in fuel conscious driving Variable VariableRecording fuel distribution 1 yr/10 veh. 1 yr./10 vehiclesAutomatic analysis of semi-automatic 1-2 years/ 2-4 years/

discs 10 vehicles 10 vehiclesManagement program on cost price

per km Assured Assured

a/ Transport Sector Memorandum, World Bank, August 1983.

b/ 1983 ANTRAM report.

- 3l1l -

ANNEX 5.7Page 1

"TRANSCLUB" (France)

Objective

By establishing close links between road haulers and theircustomers, with the object of limiting the energy costs of the former andassisting the latter to obtain information, each of the parties shouldget to know each other better thanks to the TRANSCLUB infrastructure,making it possible to contribute effectively to the campaign for energysavings. (Extract from "Journal Officiel" of July 25, 1982).

Definition

TRANSCLUB is a system of information on traffic flows ("SIFT"),anonymous, impartial but indispensable between the carrier and thecustomer. From this fact, TRANSCLUB cannot be assimilated by anyprofessional group associated with transport at the national or inter-national level.

Operation

SIFT/TRANSCLUB relies on telecommunications (utilizing nationaland international telex networks) and "micro-information" services. Thesoftware program is designed to mrtch every offer and demand for carriageof goods by road, and also the various parameters, within a geographicalradius of 80 km. It cani likewise calculate every distance in km betweena loading point and a delivery point, and inform participants who haveopted for a tariff based on distance of the amount of the charge.

Limiting Empty Vehicle Journeys

Each year journeys totalling 1.3 billion km are made by empty38-ton trucks in France. Very often the lack of information is the maincause of these journeys by empty vehicles. In the sector for perishablefoodstuffs which are transported under controlled temperature conditions,public transport, supposed to be available on demand, generates manyjourneys by empty vehicles. The TRANSCLUB system's first year of opera-tion (1984) is expected to result in a saving of 4,000 toe, or 20% of thefuel consumption of the 400 enterprises involved. The cost of setting upthe system are US$75,000 and the annual operating cost, mainly telexcharges, are about US$600,000.

Other Advantages of TRANSCLUB

Apart from the reduction in wastage of energy, the system has anumber of positive indirect effects:

- 112 -

ANNEX 5.7Page 2

(a) better utilization of existing transport capacity, and henceincreased turnover for the carrier;

(b) a reduction in the amount of the charges to the customer'saccount, with the possibility of a consequent reduction inprices to the consumer and for export;

Cc) a reduction in driving time, and in congestion and trafficjams, resulting in a reduction in the social costs attributableto heavy truck traffic; and

(d) elimination of the costly day-to-day work in which carriers andcustomers are involved at present in trying to seek out eachother.

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- 114 -

ANNEX 5.9Page 1

Costs and Benefits of Recommended Measures to ReduceFuel Consumption in Transportation Sector

A. COSTS

1. For technical control of vehicles (Recommendation No. 2):

15 vehicle inspection centers at a cost of about US$125,000per center

Total cost - 15 million French francs (US$1.9 million)

2. Fuel control equipment for trucks and buses (RecommendationNo. iii):

Speed limiter US$ 400Tachygraph US$ 500Consumption computer US$ 350

US$1250

Total cost (for 60.000 units) - about USY75 million(estimated pay-back period 2-4 years)

Note: It is estimated that the Government could finance 20-30percent of the total amount under its energy conservationpolicy, i.e. US$15-22.5 million.

3. Establishment of "freight offices" (Recommendation No. vi):Cost per "office" US$200,000Total cost (five offices) - US$1 million

4. For parking meters to control urban traffic (RecommendationNo. v).

1000 meters (one or two spaces) at US$100/unit100 meters (10-15 spaces) at US$1800/unit

Total cost - US$280,000

SUMMARY OF COSTSUS$ million

Technical control of vehicles 1.9Control equipment for trucks & buses 75.0"Freight Offices" 1.0Parking meters 0.3

Total 78.2

Source: Mission estimates.

- 115 -

ANNEX 5.9Page 2

B. BENEFITS

From measures related to vehicles

- Providing incentive to purchase new vehicles with low fuelconsumption through establishing vehicle license feesbased on specific fuel consumption (EEC standards).

- Establishment of compulsory technical control of existingvehicles (inspection of general condition of vehicle,especially lights, carburettor, fuel injection). Averagefuel saving per vehicle five percent.

Secondary benefits - improved safety, abatement of noxiousemissions and employment creation.

Total potential fuel saving: five percent - 45.000 toe

From measures relating to vehicle users

- Encouragement of fuel-economizing driving techniques bypublicity campaigns on the energy costs of poor driving,excessive speed (emphasizing the fuel-saving aspects) andshort car journeys in urban areas.

- Practical training course in fuel-economizing drivingtechniques for people taking their driving licence.Training for driving-school inst¢xctors and equipment ofdriving-school cars with consumption iteters.

Potential fuel saving five percent - 45,000 toe

From measures related to the organization of urban transport

- Improving the efficiency of urban public transport.

- Reducing traffic congestion.

- Regulating the conditions of access by private cars tourban centers.

- Establishing a policy of parking fees in towns todiscourage the use of private cars for travel from home toplace of work.

Secondary benefits - reduction of harmful environmental effectsof traffic and improvement in the quality of life.

Potential fuel saving - 10 perce'it reduction in fuelconsumption of car traffic in towns - bO.000 toe

- 116 - ANNEX 5.9Page 3

From measures related to !oad transportation of goods

- Advice to companies on the following main points:

measurement and recording of fuel consumption;

equipment for economizing in fuel;

improved vehicle maintenance;

training of drivers in rational driving techniques.

- Measures to improve vehicle efficiency

reduction in "empty" return journeys through (a) creationof regional freight offices and the establishment of aninformation system along the lines of the French"TRANSCLUB", and (b) regrouping individual road hauliersinto small cooperp+- ves;

encouragement of independent road haulage companies.

Potential saving of 15 percent in fuel consumption of roadtransport (goods and passengers) - 75,000 toe

Summary

Total potential annual fuel saving - 225,000 toeEstimated value (at 1983 prices) - about US$50 million p.a.

Source: Mission estimates.

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