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Source: Office of the Quartet
3 May 2017









Office of the Quartet
(OQ)


Report for the Meeting of the Ad-Hoc Liaison Committee



May 3-4, 2017, Brussels






Executive Summary

The conflict between Israelis and Palestinians can only be brought to an end through a negotiated final status agreement. In the interim, in order to benefit Palestinians (and indirectly Israelis) and to support renewed final status negotiations, it is essential that progress be made on the ground. Economic progress is central to improving the daily lives of Palestinians and can support greater independence; however, it cannot replace final status negotiations.

Limited energy and water security remains a major impediment to development in the Palestinian Territory. The Office of the Quartet (OQ) works to ensure sectoral solutions. This report focuses on progress made in these two areas since the last meeting of the Ad Hoc Liaison Committee (AHLC) in September 2016. It emphasizes key next steps and the importance of ensuring the commercial viability of priority initiatives.

ENERGY

While the OQ works to support provision of a sector wide energy solution, it has a particular focus on two strategic initiatives: the implementation of the electricity agreement signed in September 2016 and the Gas for Gaza (G4G) project, to facilitate the construction of a gas pipeline, connecting Gaza to the Israeli natural gas network.

If implemented in full, the electricity agreement will transfer substantial control of the sector from Israel to the Palestinian Authority and will support the establishment of a commercially viable Palestinian electricity market. This will result in reduced reliance upon donor aid. The Power Purchase Agreement will be the key agreement governing the commercial relationship between Palestinian Electricity Transmission Company Ltd. (PETL) and IEC going forward. A new lower tariff for electricity will be established as part of the PPA negotiations, which is expected to bring significant cost savings to the PA and to Palestinian consumers. While progress has been made with the negotiations since September, due to delays, the target date for signing the PPA has been extended. It is crucial that the PPA is concluded in a timely manner. This will unlock progress for the sector as a whole. The parties are strongly encouraged to sign the PPA as soon as possible and ideally no later than the September 2017 meeting of the AHLC in New York. Prior to the conclusion of the PPA, PETL and the IEC are strongly encouraged to agree upon the terms to energize the Jenin substation before the height of summer at the latest.

At the request of the PA, following the September 2016 AHLC, the OQ has supported the development of a detailed and sequenced implementation plan for the electricity agreement. Key elements of the plan relate to the substations, connection points and transfer plans, billing and monitoring systems, capacity building, and legal and regulatory issues. Implementation in the transitional phase (2017-18) is estimated to cost approximately USD 36 million. Donors are encouraged to provide initial financing to help the PA to cover this amount during the transitional phase. This funding will support the sector's transition to a more sustainable state.

The ongoing electricity shortages in Gaza have recently worsened, demonstrating that continuing to run the Gaza Power Plant on diesel fuel is unsustainable. Resolving the energy crisis in Gaza requires a holistic approach to the sector's development over the short, medium and long term. This includesdevelopment of the 161kV line, upgrades to the grid and transmission network, and the Gas for Gaza (G4G) project. Connecting Gaza to natural gas is the only long term solution to Gaza's energy crisis. It will facilitate a significant expansion in generation capacity in Gaza and bring substantial cost savings to the sector.

G4G has advanced from the conceptual to the implementation stage since the last AHLC, with the completion of the technical, commercial and legal feasibility studies. The official planning and permitting process for the Israeli section of the pipeline commenced in Q2 2017. This process is expected to take around 24 months in total, and will determine the exact "East-West" route that the pipeline will take. The Gol is encouraged to expedite the permitting process to help move the project forward.

The gas sales agreement is the key commercial agreement for the G4G project, and signing this will be a significant milestone. It is essential that the PA determines the entity responsible for gas purchases, and commences negotiations on the gas sales agreement as soon as possible. This entity will need to be credit worthy and this path is time critical; a gas agreement is needed by Q2/Q3 2018 for Israeli permitting purposes and as a necessary pre-condition for building the pipeline. It is also necessary to unlock private sector investment in Gaza's generation capacity.

Establishing a commercially viable and sustainable electricity sector in Gaza is fundamental to improve energy security in Gaza, and will be required for the gas sales agreement to be concluded as part of the G4G project. This requires significant improvements in revenue collection. The PA's plans to roll out a pilot project for smart meters is a step in the right direction but more needs to be done, including investing in both the transmission and distribution infrastructure, to minimize losses, and improving GEDCO's collections. Ensuring that GEDCO is run as a transparent, commercial, credit worthy entity is essential. The cost savings generated by connection to natural gas will support these efforts, by improving the profitability and viability of the power sector in Gaza.

Donor support will be required in the short to medium term, and the international community is encouraged to provide financing for the gas pipeline, and to support improvements to collection rates (including through enforcement for non-payment) and the transparency of the cash flow cycle in Gaza. The entire pipeline is expected to cost 570-100 MUSD, and some donors have already committed financing towards this. The initial capital expenditure required for the pipeline is relatively small compared to the savings it will generate, which will reduce donor dependence and improve sustainability in the long term.

WATER

The primary long-term focus of the international community and the OQ for improving water supply to Gaza is to construct the Gaza Central Desalination Plant (GCDP). Shorter-term interventions are also necessary to address the current supply gap of over 100 MCM per year. Current immediate-term projects include the bulk purchase of water through the Red Sea-Dead Sea agreement, additional short-term purchases from Israel, as well as improvements in wastewater treatment and reuse.

Since September 2016, there has been no improvement in the water supply in Gaza. Water from the Coastal Aquifer is unusable without treatment, while there is only limited access to reliable,

alternative sources. The first phase of the Gaza Central Desalination Plant (GCDP) will provide an additional 55 MCM/year.

The tender documents for the GCDP will be ready in August 2017. The bidding process will commence in September 2017, with the proposals being evaluated by January 2018. Construction is scheduled to start in March 2018. Since the last AHLC, the PWA has completed the Donor Handbook (March 2017) and efforts have been intensified to ensure sound governance for the project. Work to secure the land for the plant's construction have started in April 2017. The key next steps include securing the land for the off-site PV plant, ensuring that the plant has the required electricity supply, and completing the arrangements to allow access for materials the Gol classifies as "dual use".

It is essential that the GCDP should be supported by a robust business model. This will ensure the project's commercial viability. Currently, there is a 35% shortfall in the funding and construction of the GCDP and its associated works. Its operational costs will be partly subsidized for the first five years. To ensure the project's institutional and financial sustainability in the long-term, PWA must continue to move forward on implementing the roadmaps for the establishment of strong regional water utilities as well as the National Water Company. This company will be responsible for managing the GCDP once it is operational and for selling the desalinated water to the municipalities. PWA is preparing a phased cost-recovery mechanism for the Gaza Strip, as well as a broader financial model that includes a detailed strategy for non-revenue water.

In order to demonstrate its financial sustainability, the GCDP business model needs to be completed by the time of the next AHLC meeting (September 2017). The implementation of cost-recovery mechanisms, the completion of tariff regulation, the adoption of a unified tariff, the development of regional water utility regulation, as well as regulation for abstraction and licensing are all important components that are part of the broader water sector reform, and will contribute to creating a financially viable water sector.

Implementation of the Red Sea Dead Sea Project will yield 10 MCM a year for Gaza. The parties have already agreed the quantities and connection points for Gaza and should reach an agreement on pricing and outstanding infrastructure issues at the earliest opportunity in order to advance implementation of the Red Sea-Dead Sea Project. In the interim, to meet its immediate needs, Gaza requires additional bulk water imports from Israel.

Almost 40% of the water currently supplied through Gaza's water network is lost due to leakages and network inefficiencies. As part of the Palestinian Water Strategy 2017-22, the PWA will produce a strategy to reduce nonrevenue water.

The Palestinian Authority also faces a major challenge in halting the flow of raw or partly treated sewage from Gaza into the Mediterranean Sea. This problem needs to be tackled urgently: currently more than 90,000 cubic meters of sewage is released into the sea each day. Four wastewater treatment plants are currently under construction in Gaza. A reliable electricity supply will be required to ensure their viability.

In the West Bank, the target is to ensure that no wastewater goes untreated and half the total volume is reused in agriculture. The parties and donors are encouraged to intensify their activities In the West Bank in order to advance water supply and wastewater treatment and reuse projects.


http://www.quartetrep.org/files/flash/Office%20of%20the%20Quartet%20Report%20to%20Ad-Hoc%20Liaison%20Committee%20-%20May%202017.pdf


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