pacific-data.sprep.org€¦ · Web viewGeneral Overview. Geography. Papua New Guinea (PNG) is a collection of over 600 islands in the south-west Pacific ocean, and includes the

PAPUA NEW GUINEAEnergy Strategic Review

Samantha Duncan

Table of Contents

Table of Contents...................................................................................................................................................... i

Glossary........................................................................................................................................................................ ii

1. Papua New Guinea Overview...................................................................................................................1

1.1. General Overview.................................................................................................................................1

1.1.1. Geography......................................................................................................................................1

1.1.2. Society.............................................................................................................................................2

1.1.3. Politics and Government.........................................................................................................3

1.1.4. Economy.........................................................................................................................................4

1.1.5. Macroeconomic and Fiscal Management, and Trade Policy....................................7

1.2. Energy Overview..................................................................................................................................8

1.2.1. Current Energy Demand.........................................................................................................8

1.2.2. Projected Energy Demand...................................................................................................16

1.2.3. Energy Supply...........................................................................................................................21

1.2.4. Energy Institutions.................................................................................................................30

1.2.5. Recent Energy Plans and Policies.....................................................................................32

2. Critical Energy Related Problems........................................................................................................33

3. Priorities to Respond to Critical Problems......................................................................................34

4. Policies to Implement Priorities...........................................................................................................35

Reference List.........................................................................................................................................................44

Appendix A: Geographical Areas of Energy Poverty.............................................................................48

Appendix B: PNG Economic Corridor Concept.........................................................................................49

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Glossary

ADB – Asian Development Bank

BP – British Petroleum

DEC – Department of Environment and Conservation

DF – Department of Forestry

DPE - Department of Petroleum and Energy

DPE-ED – Department of Petroleum and Energy, Energy Division

DPE-PD – Department of Petroleum and Energy, Petroleum Division

EIP – Energy Industry Policy

ICCC – Independent Consumer and Competition Commission

IPP – Independent Power Provider

IPBC – Independent Public Business Corporation (owner of PNG Power)

PIC – Pacific Island Country

PIREP – Pacific Island Renewable Energy Project

PNG – Papua New Guinea

PNG Power – PNG Power Limited

PNGSDL – PNG Sustainable Development Limited

PNGSEL – PNG Sustainable Energy Limited

PREA – Pacific Renewable Energy Assessment (World Bank-led initiative)

PV – Photovoltaic

REA – Rural Energy Authority

REF – Rural Energy Fund

TFED – Total Final Energy Demand

TPED – Total Primary Energy Demand

UOT – University of Technology

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1. Papua New Guinea Overview1.1.General Overview1.1.1. Geography

Papua New Guinea (PNG) is a collection of over 600 islands in the south-west Pacific ocean, and includes the eastern half of the New Guinea island. Located directly to the north of Australia and to the east of Indonesia, PNG occupies an area of 462,840 square kilometres, making PNG the largest of the Pacific Islands Countries (PICs) with a land area slightly larger than the size of California.1 The eastern half of the New Guinea island constitutes 85 percent of PNG’s total land area (396,500 square kilometres) and also houses the majority of the country’s population.2 Politically, PNG is broken into 18 provinces, one autonomous region (Bouganville), and one district surrounding the capital city, Port Moresby.

Source: World Bank Country Strategy Report (2010)

The PNG ‘mainland’ (being the eastern half of the New Guinea island) is extremely rugged, and with one of the most challenging topographies in the world, has been described as “the last frontier” by more than one explorer.3 Moreover, PNG’s location on the Pacific Ring of Fire brings frequent earthquakes, tsunamis and mud slides, and with a number of active and recently

1 CIA Factbook: Papua New Guinea, 2011.2 Pacific Island Renewable Energy Project (PIREP), “Pacific Regional Energy Assessment 2004: Papua New Guinea National Report, Volume 10,” page i.3 Quote from interview with Mahesh Sharma, former PNG Country Director at the World Bank.

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violent volcanoes, PNG has been categorized as the PIC most affected by natural disasters.4 Topographically, it is estimated that 58 percent of land in PNG is subject to strong to severe erosion and 18 percent is permanently indundated or regularly flooded.5 The physical earth in PNG has also been described as one that is “constantly moving;” a factor that has presented severe challenges to the country’s provision of adequate infrastructure.6

As the term ‘the last frontier’ would imply, PNG is one of the world’s least explored nations, with many undiscovered species of plants and animals thought to exist in the country’s interior. A true hub of biodiversity, PNG has a tropical climate which is more temperate in the highlands, and receives a lot of sun. PNG is also naturally endowed with substantial mineral resources including significant endowments of gold, copper, natural gas, oil and timber. Given its island nature, the country is also abundantly endowed with fisheries and ocean life. As it relates to land-based agriculture, however, only one quarter of PNG’s landmass is suitable for agriculture due largely to its challenging terrain.7

With its rich biodiversity, environmental risks in PNG centre on risks to the preservation of forest life and ecosystems. The most notable environmental issues include threats to the national forests from industrial logging (a major issue in PNG since the early 1980s), clearing for agriculture and plantations, and over-hunting; and challenges to local marine life from over-fishing. Extensive deforestation has also been evident in recent years as a result of increasing population densities and more regular agricultural burning; while increased mining activities have continued to compromise some local waterways through effluent leaching.8

1.1.2. Society

Papua New Guinea has one of the most culturally diverse and ancient populations in the world, with over 860 different languages spoken (representing over one tenth of the world’s total). 9 Thousands of different communities that evolved directly from tribal groups still persist today, and such strong tribal allegiances have indeed created problems with the formation of a national unified identity, and a system of national self governance. In fact, extremely high crime levels in PNG have been touted as the modern-day form of tribal warfare, and the introduction of modern weapons has only exacerbated this problem.10 Alongside PNG’s tribal history and culture, however, missionaries and church groups have also existed in PNG in number since the early 1950s, and have had an increasing prominence with PNG’s population as a source of spiritual relief and service provision.11

The current population of PNG is estimated to be 6.7 million.12 Of the population, an estimated 85 percent live in rural areas,13 and approximately 80 percent of the population live on the main

4 PIREP, 2004, p 1.5 PIREP, 2004, p ix.6 Dorney, Sean. 2000. Papua New Guinea: People, Politics and History since 1975.7 Bourke and Harwood, Food and Agriculture in Papua New Guinea, p3. 8 PIREP, 2004, p 4.9 CIA Factbook, 2011.10 Dorney, 2000.11 Government of PNG, 2010, PNG Development Strategic Plan (DSP) 2010-2030, p 6.12 World Bank, 2011, World Development Indicators: Papua New Guinea. Note: the most recent national population census in PNG was completed in 2000, with updates expected in 2011.13 Asia Pacific Energy Research Centre, 2009, “APEC Energy Demand and Supply Outlook, 4th Edition, Economy Reviews: Papua New Guinea, p 76.

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New Guinea island.14 Population growth has been very rapid in recent decades, with an average annual growth rate of 2.7 percent from 1980 to 2000, and an implied annual growth rate of 2.5 percent from 2000 to today. 15 Interestingly, urbanization has been slow at just 0.1 percent over past decades,16 and with little information to indicate otherwise, seems to persist at about 13 percent today.17 In recent decades there has been a shift in urbanization towards PNG’s two main cities: Port Moresby and Lae; and the proportion of the urban population living in smaller towns has actually been decreasing. In 2000, in response to such a trend, the National Population Policy 2000-2010 was created to encourage rural-urban migration away from the two major cities and towards the provincial capitals or other smaller towns in an attempt to minimize urban infrastructural pressure.18

With such an extremely low rate of urbanization, the sheer divide between rural and urban economic and social opportunity is great, and has caused much rural-urban tension in recent years. When looking at country-wide statistics, PNG ranks 149 on the Human Development Index out of a total of 179 countries (only slightly above the average for Sub Saharan Africa), and PNG’s progress towards the Millenium Development Goals has been woeful with the country not expected to meet any of the targets by 2015.19 As it relates to intra-country dynamics, approximately 37.5 percent of PNG’s population live below the poverty line, but close to 94 percent of these people are located in rural areas. 20, 21 This rural-urban divide economically also extends to basic infrastructure and social services, and only 32 percent of PNG’s rural population have access to safe drinking water, while this number is approximately 88 percent in urban areas.22

With PNG’s rural-urban economic divide, it is certainly no surprise that rural communities have fought tirelessly to retain their links to the land and to resist urban-initiated development activity in rural areas. Importantly—and as a result of the country’s tribal origins—over 97 percent of land in PNG falls under clan ownership,23 and while the consequences of such land entitlements have been improved flexibility for tribal land-holders in managing their own land, such rights have brought extreme difficulties for onshore development—particularly mining exploration and infrastructure provision. The simple attempted erection of transmission lines in rural areas has been met with fierce tribal resistance in the past,24 but exploitation of less-organized clans by land developers has also existed, and has continued to generate civil conflict and exacerbate rural-urban resentment.

14 PIREP, 2004, p2.15 PNG National Statistics Office, 2011, “Population Household Characteristics,” http://www.nso.gov.pg/census-a-surveys/demography-a-health-survey-2006/population-household-characteristics. 16 APERC, 2006, “APEC Energy Demand and Supply Outlook 2006,” p65.17 PNG NSO, 2011.18 PIREP, 2004, p3.19 Government of PNG, 2010, “PNG DSP 2010-2030,“ 2010, p10.20 World Bank, 2007, “Project Appraisal Document on a Proposed GEF Grant in the amount of US$9.48 million equivalent to Fiji, Papua New Guinea, Republic of Marshall Islands, Solomon Islands and Vanuatu (Pacific Islands) for a Sustainable Energy Financing Project,“ p19.21 World Bank 2007, p19.22 PIREP, 2004, p9.23 PIREP, 2004, p4.24 Dorney, 2000.

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1.1.3. Politics and Government

Officially the Independent State of Papua New Guinea, PNG is a parliamentary democracy that forms part of the Commonwealth, with the head of state being Queen Elizabeth II. PNG achieved independence on September 16, 1975, after having been governed by Australia as part of a United Nations Agreement following World War I. Independence was actually seen as ‘premature’ by some in PNG in 1975, and was pushed for by the Australian government. 25 Nonetheless, the process of independence was peaceful, and close ties between Australia and PNG remain.

Today, PNG is run by a House of Assembly that is elected by popular vote under free and fair elections for five-year terms.26 However, politics have been extremely volatile due largely to a constitutional arrangement that was in place until 2000, and that allowed parliamentary ‘votes of no confidence’ at any time after the first six months of a President’s term. 27 Practically, the consequences of such an arrangement were extreme instability in political terms and distorted incentives, with a large proportion of the central government’s time being spent aligning political interests to preserve party positions. Further complications also came from political alliances according to tribal (instead of ideological) values, and bribery, corruption, and patronage in the awarding of economically lucrative posts or ministry positions became commonplace. The development of a number of monopoly State Owned Enterprises (SOEs) is likely another direct consequence of such patronage and political positioning. In 2000, the Political Parties Bill was implemented which removed this no confidence clause, and as a result PNG has had its first elected government to serve a full five-year term; ironically, this was current President Somare who was also the first Prime Minister of PNG upon independence in 1975.28

In other indicators, PNG has an independent judiciary, free press and robust civil liberties.29 Despite this, and as previously indicated, national unification has been difficult given the vast number of tribal and rural communities, the sheer number of different languages spoken, and the lack of education and infrastructure until recent years. Partly as a result, the provinces of PNG do in fact have quasi-federal status, and Bouganville Island acts as a fully autonomous state due do an independent successionist revolt that claimed around 20,000 lives from 1988 until settlement was agreed in 1997.30 Practically, local governments have born the responsibility for financing, managing and planning local energy needs while the central government has maintained control over national energy policy making (see more detail in section 1.2). Furthermore, and while yet to be implemented, the PNG Development Strategic Plan 2010-2030 promotes an economic corridor concept whereby the management and entire development of local regions or “corridors” would be governed by regional heads, thereby divulging more prominent responsibility to regional centres (see Appendix B for more information). Finally, it is worth noting that the reputation of the central government to get things done in regional centres is extremely unfavourable, and a lack of confidence among rural communities in the central government is pervasive.

25 Dorney, 2000.26 PIREP, 2004, p5.27 PIREP, 2004, p7.28 Government of PNG, 2010, “PNG DSP 2010-2030,” p10.29 PIREP, 2004, p.vi.30 PIREP, 2004, p5-6.

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1.1.4. Economy

The PNG economy is made up of two distinct economies: a modern, formal economy dominated by mining, timber processing and agriculture; and a traditional, subsistence economy made up of subsistence and semi-subsistence agriculture upon which approximately 85 percent of the population depend.31 The formal economy is dominated by mining for oil, gas, copper and gold (PNG is the world’s 11th largest gold producer32), and complemented by other industry including petroleum refining and timber processing, and agricultural production and export of coffee, cocoa, tea, oil palm, sugar and copra. While mining dominates economically, employment directly attributable to mining is estimated at just 5 percent of the total available workforce and 20 percent of the formal workforce.33 The majority (over 75 percent) of PNG’s formal workforce is employed in agriculture,34 with construction being an increasingly prominent formal sector area of employment. It should be noted, however, that formal sector employment only provides about 200,000 jobs and employs just 5 percent of high school graduates every year. In this regard, it is estimated that 9 out of every 10 Papua New Guineans make a living in the informal sector, mainly in agriculture.35

In 2009, GDP totalled US$7.8bn, with real growth of 4.5 percent over 2008.36 From 2002 to 2009, PNG achieved average annual GDP growth of 4.2 percent, benefiting greatly from stronger commodity prices from 2002 to 2008, and a huge US$15 billion LNG export project led by ExxonMobil that started early construction in 2009 (representing the biggest private investment in PNG’s history).37 Recent 2010 estimates also put growth at 7.1 percent for 2010 alone, driven largely by the LNG project and strong minerals prices.38 Such impressive growth, however, is a relatively recent phenomenon, and the PNG economy—with its high dependence on primary production in mining and agriculture—is extremely susceptible to swings in commodity prices. From 1990 to 2003, for example, average GDP growth was flat and actually negative from 1994 to 2003 (see chart below). With rapid population growth over this period, real per capita GDP actually declined, and is today in real terms lower than it was in 1991. In current US dollar terms, per capita income today is estimated at US$1,172.39

31 PIREP 2004, p.vi.32 Asian Development Bank (ADB), 2009, “Technical Assistance Report: Papua New Guinea: Power Sector Development Plan,” p8.33 ADB, 2009, “Technical Assistance Report: Papua New Guinea: Power Sector Development Plan, Appendix A,” p8.34 World Trade Organization, 2011, “Trade Policy Review: PNG,” p62.35 ADB, 2009, “Technical Assistance Report: Papua New Guinea: Power Sector Development Plan, Appendix E,” p5.36 World Bank, 2011, “World Development Indicators: Papua New Guinea.”37 Government of PNG, 2010, “PNG DSP 2010–2030,” p11.38 Asian Development Bank, 2011, “Economic Trends and Prospects in Developing Asia: The Pacific, Papua New Guinea.” In Asian Development Outlook 2011, p226.39 World Bank, 2011, “World Development Indicators: Papua New Guinea.”

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GDP

/ Ca

pita

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)

Real

GDP

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Real GDP Over Time

Real GDP (Constant 2000 US$) GDP per capita (Constant 2000 US$)

Source: World Bank World Development Indicators 2011

A breakdown of GDP by sector in 2008 and historically is presented below. More information on PNG’s economic sectors is provided in Section 1.2.

Agriculture, Forestry & Fishing 33.0%

Mining28.0%

Manufacturing6.0%

Construction11.0%

Wholesale and Retail Trade7.0%

Other13%

GDP Breakdown By Sector, 2008

Transport and Communication

2%

Source: IMF, 2010, “Papua New Guinea: 2010 Article IV Consultation,” p5.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Sector Contributions to GDP Over Time

Industry Agriculture Services

Source: ADB, 2010, “Key Indicators for Asia and the Pacific 2010: Papua New Guinea,” p2.

To give an indication of PNG’s export dependence, in 2008 71 percent of GDP was generated by exports,40 and according to the ADB, minerals constitute approximately 77 percent of all exports, agricultural products 17 percent and forestry products 5 percent.41 PNG’s largest

40 Government of PNG, 2010, “PNG DSP 2010-2030,” p11.41 Asian Development Bank (ADB), 2010, “Papua New Guinea Country Partnership Strategy (CPS): 2011-2015,” p2.

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export partners are Australia and Japan, and imports come mainly from Australia, China, Singapore, the US and Japan.42

In terms of ownership over economic activity, most of PNG’s mining activities are controlled by foreign corporations, and Exxon-Mobil, Shell, British Petroleum (BP) all have long histories of exploration in PNG. Furthermore, operations in timber and fishing are largely foreign owned.43 State Owned Enterprises (SOEs) in PNG are prominent in many other industries including ports and electricity, but in recent years significant advances have been made in privatization, specifically in telecommunications and aviation. 44 Significant barriers to private investment continue, and include law and order problems, weak property rights, poor infrastructure, lack of credit access, weak competition and the dominant role of the state in the economy.45 Substantial work on reform, however, with the assistance of the ADB, has been undertaken in recent years.

In terms of outlook, the ExxonMobil-led LNG project is expected to be online in 2014 and to contribute substantially to GDP, with some estimates that the project could quadruple PNG’s GDP after 2014.46 In addition, a second LNG project valued at US$4 billion has been proposed, but not yet confirmed.47 The ADB also anticipates an up-tick in agricultural production as a response to strong commodity prices, and other metal mining activities will stimulate growth over the medium term, while revenues from oil will slowly decline as reserves are depleted.48 In 2011, the ADB anticipates growth of 8.5 percent, easing to 6.5 percent in 2012 as LNG construction tapers off, and then settling to an average of 3.5 percent over the 2010-2030 term.49

1.1.5. Macroeconomic and Fiscal Management, and Trade Policy

The currency in PNG is the Kina, with a current exchange rate of 2.55 Kina to the US dollar. The Kina was pegged to a basket of currencies until 1994, but was forced to float following severe macro mismanagement and exhaustion of foreign currency reserves.50 Stronger macro management has recently strengthened and stabilized the Kina, and a recent appreciation is evident in the weighted average annual Kina value against the US Dollar in the chart below.51

42 CIA Factbook, 2011.43 ADB, 2011, “Economic Trends and Prospects in Developing Asia: The Pacific, Papua New Guinea.” p227.44 ADB, 2010, PNG CPS 2011-2015.45 ADB, 2010, PNG CPS 2011-2015.46 APERC, 2009, “APEC Energy Demand and Supply Outlook 2009,” p78.47 ADB, 2011, Economic Trends and Prospects in Developing Asia: The Pacific, PNG.” p227.48 Ibid, p228.49 ADB, 2009, “ADB Energy Outlook 2009: PNG,” p169.50 Government of PNG, 2010, PNG DSP 2010-2030, p30.51 Ibid, p30.

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1980 1985 1990 1995 2000 2005 2010

Kina

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USD

Exchange Rate Trend: Annual Weighted Average Kina per USD

Source: World Bank World Development Indicators 2011

Fiscally, the government budget has also been strong in recent years thanks to a boom in government revenues from persistently high commodity prices between 2003 and 2007. By 2008, government revenue was 33 percent of GDP, and total government debt had been reduced to 31 percent of GDP from an average of 63 percent between 2000 and 2003.52 Historically, poor fiscal management and persistent budget deficits have been a driver of persistently high government debt, but positive near-term growth outlooks will provide great financial leverage for the Government of PNG to further reduce public debt and implement socially-focused programs.

In terms of trade, PNG has historically had a positive trade balance, but this has declined in recent years due to a fall in commodity prices and a huge rise in imports from the LNG project, but in 2009 remained at US$2.9 billion.53 In terms of trade policy, PNG has largely reduced barriers to trade in recent years through the abolishment of a number of import quotas and a reduction in import tariffs. On a sector basis, PNG is practically duty-free on the imports of all machinery, transport equipment, minerals, metals, chemicals, and non-domestically-produced manufactures. In key growth-generating domestic industries, however, such as coffee, tea, sugar, tobacco, fish, wood products and clothing manufactures, import tariffs do still persist, and marketing boards control the export of all agricultural exports except palm oil.54 PNG has been a member of the World Trade Organization since 1996,55 and is currently also negotiating a regional free trade zone with Australia and New Zealand and other Pacific Island countries.56

52 Ibid, p30.53 ADB, 2010, “Key Indicators for Asia and the Pacific 2010: Papua New Guinea.”54 Ibid.55 WTO, 2011, “PNG and the WTO.” 56 Government of PNG, 2010, “PNG DSP 2010-2030,” p39.

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1.2.Energy Overview1.2.1.Current Energy Demand57

With approximately 87 percent of the population living in rural areas and 93 percent of the population without access to commercial electricity,58 Papua New Guinea has the lowest per capita commercial energy demand (excluding biomass) in the Asia Pacific. In 2007, for example, per capita commercial energy demand was just 0.29toe compared to an average of 2.57toe for the Asia-Pacific Economic Cooperation (APEC) region. Given the predominantly rural nature of the population and the severe lack of rural electricity, however, biomass use is significant. Fuelwood for cooking is the predominant source of biomass in PNG, with agricultural residues such as coconut husks, copra shells, and even sawdust from the timber industry also used in smaller amounts.59 In terms of commercial energy, demand grew robustly from 1990 to 2008, from 0.9Mtoe in 1990 to 2.0 Mtoe in 2008 at an annual average rate of 4.7 percent per annum. Total Final Energy Demand (TFED, excluding biomass) grew by 3.9 percent over the same period. These trends are shown graphically on the following page.

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Commercial Energy Demand relative to GDP

Total Primary Energy Demand Total Final Energy Demand GDP (Constant 2000 US$)

Source: APEC Energy Database Statistics, World Bank World Development Indicators 2011

Energy Demand by Fuel Type

Oil is the dominant source of commercial energy in PNG, and is supplemented by natural gas, hydro, and some geothermal capacity utilized by one mine on Lihir Island. While data on traditional energy use (biomass) in PNG is not collected on a national level, estimates based on prior grassroots studies by the World Bank (as part of the Pacific Renewable Energy Assessment (PREA)) and methodologies of the Pacific Islands Renewable Energy Project (PIREP, 2004), put estimates of total biomass use in 2008 at 1.4Mtoe, constituting 40.1 percent

57 Unless otherwise stated, energy data for PNG (and all discussion of statistics) have been sourced from the APEC Energy Database of statistics (http://www.ieej.or.jp/egeda/database/database-top.html), and the 2009 APEC Energy Demand and Supply Outlook (4th Edition), which is used as a primary source by the ADB and can be accessed here: http://www.ieej.or.jp/aperc/. 58 World Bank, 2007, “Project Appraisal Document on a Proposed GEF Grant in the amount of US$9.48 million equivalent to Fiji, Papua New Guinea, Republic of Marshall Islands, Solomon Islands and Vanuatu (Pacific Islands) for a Sustainable Energy Financing Project,“ p22.59 Pacific Renewable Energy Assessment (PREA), 1992, “Volume 8: Papua New Guinea: Issues and Options in the Energy Sector.” p46.

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of total energy demand (see residential and commercial, and agriculture sector break-downs for biomass assumptions). This estimate is consistent with PREA estimations in 1990 and with the energy breakdown of other PICs.60 Finally, while there is some small use of solar energy for urban water heaters, rural “C-Centres” (see more detail below) and rural telecommunication power in PNG, aggregate data on total solar energy generation is unavailable and therefore excluded from the analysis below. The total use of solar is expected to be relatively insignificant, and not constitute more than 2 percent in aggregate primary energy demand.61

Total Primary Energy Demand, by Type (2008)

Oil46.6%

Natural Gas 10.0%

Hydro 2.2% Geothermal 1.1%

Biomass 40.1%

Total: 3.4Mtoe

Commercial Primary Energy Demand, by Type (2008)

Oil77.8%

Natural Gas 16.7%


Total: 2.0Mtoe Source: APEC Energy Database statistics, PIREP biomass inferences 2004, PREA biomass inferences 1992

Oil, extracted from indigenous sources and refined domestically in PNG since 2004, is used as a direct end-use in the industrial and transport sectors, for commercial electricity generation, and also for numerous diesel generators in rural areas. While constituting the majority of TPED, oil use for electricity generation has been reduced with the discovery of indigenous natural gas, substituting gradually for oil in thermal plants. As a result, oil’s share of TPED has declined from 87.0 percent in 1990 to 79.2 percent in 2008 while natural gas (with no significant end-uses other than electricity generation), has risen from 8.3 percent of TPED in 1990 to 17.0 percent in 2008. Hydropower’s share of TPED has been flat from 4.4 percent in 1990 to 3.7 percent in 2008, with a doubling of hydropower capacity in mid-late 1990s.

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Commercial Primary Energy Demand, by Fuel (1990-2008)

Oil Natural Gas Hydro Other

Source: APEC Energy Database Statistics

Commercial electricity in PNG is generated using oil, natural gas, hydro and some small geothermal capacity produced via auto-generation on Lihir Island. While PNG Power Limited is the monopoly commercial power provider in PNG, auto-generation in the mining sector is

60 PIREP 2004, p53, and PREA 1992, p11.61 PREA, 1992, p11: total solar energy was estimated at 1.7 percent of TFED in 1990.

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substantial. A breakdown of electricity generation by fuel for all electricity production in PNG (including public and auto-generation) is presented below.62

Total Electricity Generation, by Fuel Type (2008)

Oil 52.7%

Natural Gas 10.9%

Hydro23.9%

Geothermal12.4%

Total: 3.6TWh

Source: APEC Energy Database Statistics, APEC Energy Demand and Supply Outlook 2009, own analysis.

While not included in the analysis above, a number of smaller C-Centres of electricity generation also exist in rural areas, with many run by local governments, NGOs and/or churches. These are generally fuelled by diesel generators, small hydro and, less frequently, solar photovoltaics (PVs). The prevalence of these sources is discussed in the section on Energy Supply below.

Energy Demand by Economic Sector

The primary user of commercial energy in PNG is the industrial sector, followed by transport, buildings (residential and commercial) and agriculture. Non-commercial use of biomass is significant in the rural residential and commercial sector for cooking, and the agriculture sector where smallholder farmers and larger harvesters alike use fuelwood and agricultural residues for crop drying. When incorporating estimates of biomass use, contributions for the residential & commercial and agriculture sectors therefore increase.

Total Final Energy Demand, by Sector (2008)

Industry 29.4%

Transport 13.5%

Residential & Commercial52.1%

Agriculture 5.0%

Total: 2.6Mtoe

Commercial Final Energy Demand, by Sector (2008)

Industry 62.0%

Transport 28.5%

Residential & Commercial8.5%

Agriculture 0.9%

Total: 1.2Mtoe

Source: APEC Energy Database Statistics, PIREP biomass inferences 2004, PREA biomass inferences 1992

62 Source: APEC statistics used for electricity breakdown between thermal (oil and natural gas) and hydro. The split between gas and oil in thermal electricity generation is assumed to be the same as in 2005, detailed in the APEC Energy Demand and Supply Outlook 2009 (p78). Geothermal generation is calculated using capacity information (6MW from 2003 to 2004, 36MW 2005-2006 and 56MW from 2007 onwards (information from NewCrest mining), and assuming a capacity factor of 0.9 (Geothermal Power Technology and Generation website). Conversion from TWh to Mtoe uses a conversion factor of 0.085985.

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An analysis of historical commercial energy demand is illustrative of the weight of industry in driving country-wide energy use. From 1990 to 2006, the share of TFED attributable to the industrial sector grew from 31.0 percent to 53.8 percent, and in 2008 represented 62.0 percent with the recent ramp-up in energy demand from the LNG project. Transport’s share of energy demand (mostly freight diesel and aviation kerosene) was approximately flat from 34.1 percent in 1990 to 33.5 percent in 2006, declining to 28.5 percent in 2008 as the industrial sector has expanded. The total share of residential, commercial and agriculture fell from 34.9 percent in 1990 to 12.7 percent in 2006 and was just 9.5 percent in 2008, with little to no recorded growth in total demand in this sector.

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Commercial Final Energy Demand, by Sector (1990 - 2008)

Industry Transport Residential/Commercial/Agriculture

Source: APEC Energy Database statistics

Industry

The industrial sector in PNG is dominated by mining for oil, gas, gold and copper, refining of crude petroleum and timber logging. These major industries are complemented by construction and smaller manufacturing activities in food processing (e.g. refined palm oil and canned tuna) and timber processing. The mining sector in PNG is controlled by large foreign corporations, and Shell, Exxon-Mobil and British Petroleum (BP) all have long histories of operation.63 In 2004, InterOil, a US-run, NYSE-listed company focused solely on oil activities in PNG, also built PNG’s first petroleum refinery and acquired a number of distribution assets from Shell and BP, with future plans for further oil exploration and distribution. In terms of timber, the timber industry in PNG is dominated by five Malaysian multinational companies that control over 80 percent of the market, and issues over forestry control and over-logging have been long-standing. Approximately 90 percent of timber is exported as logs, leaving only 10 percent processed domestically, and more than 80 percent of these logs go to China, Korea and Japan.64

Given the predominance of heavy industry and petroleum refining in PNG, the industrial sector is characterized by a large relative use of oil and petroleum-based products to that of electricity. In 2008, total final energy consumption in the industrial sector was 758ktoe, with oil and petroleum-based products accounting for 76.5 percent (an increase of almost 10 percent from 2006), and electricity for the remaining 23.5 percent.65 In addition, there is some use of

63 PIREP, 2004, p13.64 PNG Department of Forestry, “Forest Industry Overview,” http://www.forestry.gov.pg/site/page.php?id=40.65 APEC Energy Database: Papua New Guinea.

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combined heat and power generation from wood waste in the wood processing industry, however information on this is limited and excluded from the energy composition presented here.66 Using relative energy use as an indicator, end-uses of energy in the industrial sector could be divided into processed heat and motors accordingly:

Estimated Industrial Sector End-Uses (2008)

Processed Heat (Oil) 76.5%

Motors (electricity) 23.5%

Total: 0.8Mtoe

Source: APEC Energy Database statistics

Transport

Despite a targeted long-term focus by the Government of PNG to improve the quality and reach of the country’s roads,67 roads in PNG are for the most part under-developed, not well maintained, and frequently not even existent due to the challenging topography of the country. 68 As a result, a significant part of transport in PNG is achieved by air, and PNG relies on aviation for tourism, business, exports and imports, and domestic freight.69 Given the island nature of PNG, maritime travel is also significant, but this is mostly in the form of non-motorized, indigenous watercraft, and transport by motorized maritime is lacking.70 Rail transport is non-existent in PNG for similar reasons of challenging geography.

The commissioning of PNG’s first oil refinery has allowed domestic refining to supply most of PNG’s transport sector oil needs. Furthermore, a break-down of fuel-type sales domestically (from data provided by APEC), allows a break-down of transport sector end-uses as follows:71

66 PREA 1992, p46.67 And also features prominently in the PNG DSP 2010-2030 (see page 65)68 Road reconstruction has also been the target of over 50 percent of ADB financing for PNG (see ADB, 2011, “Asian Development Bank and PNG: Factsheet,” p2).69 ADB, 2011, “Asian Development Bank and PNG: Factsheet,” p2.70 PIREP, 2004.71 Assumes diesel oil used by trucks, buses and the maritime sector; aviation kerosene used by the aviation sector; and gasoline used by light road vehicles. Breakdown by transport fuel is assumed to be the same as that in 2005 (detailed in APEC Energy Demand and Supply Outlook, p78).

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Estimated Transport Sector End-Uses (2008)

Road: Light Vehicles 26.9%

Air23.4%

Road: Trucks and Buses; Maritime49.7%

Total: 0.3Mtoe

Source: APEC Energy Demand and Supply Outlook 2009

Residential and Commercial

The Residential and Commercial sector is characterized by a large proportion of the population living in ‘energy poverty.’ Specifically, it is likely that more than 93 percent of the population in PNG are not electrified by any means (including grid, self-generation, nearby industry, small-scale hydro or solar), which is one of the lowest electricity coverage areas in the world.72 National statistical data from the 1996 Demography and Health Survey indicates that 87 percent of households cook with fuelwood (approximately equal to the rural population), and only 12 percent of households use electricity for lighting.73 In fact, fuelwood and woody biomass have been found to be practically the only sources of energy for cooking in rural PNG today, and the sale of fuelwood in commercial centres also serves as an important source of rural cash income. Interestingly, while hundreds of charcoal stoves were reportedly sold in the mid 1980s, there is little evidence of charcoal use today.74 As it relates to commercial activities in PNG, these include energy used by government buildings, street lighting and small-scale service industries—many of which also use fuelwood for domestic cooking—and the commercial sector is characterized by the same geographical level of energy poverty as that of the residential sector. A map of PNG’s geographic areas of energy poverty is presented in Appendix A, and detailed information on energy sources for lighting and cooking is presented below.

72 World Bank, 2007, “Project Appraisal Document on Proposed GEF Project..” p22.73 PIREP, 2004, p22.74 PIREP 2004, p53.

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Energy for lighting Fuel for cookingElectricity 11.8% Electricity 3.3%Pressure lamp 3.6% LP Gas 2.8%Kerosene lamp 56.7% Kerosene 6.5%Candles 0.3% Charcoal 0.1%Open fire 25.6% Fuelwood 87.1%Other 2.1% Other 0.3%Total 100.1% Total 100.1%

Energy for lighting Fuel for cookingElectricity 75.8% Electricity 28.9%Pressure lamp 3.6% LP Gas 18.7%Kerosene lamp 18.0% Kerosene 38.9%Candles 2.1% Charcoal 0.0%Open fire 0.0% Fuelwood 13.5%Other 0.6% Other 0.1%Total 100.0% Total 100.0%

National Household Energy Use in 1996/1997

Port Moresby Household Energy Use in 1996/1997

Source: PIREP 2004, p22

Commercial energy use by the residential sector consists of petroleum products (LPG and kerosene) and electricity which in 2003 (the last year for which dissected energy information is available) constituted 38 percent and 62 percent of commercial energy demand respectively. Using this information75 and estimates of biomass constructed through the methodology employed by PIREP, 76 end-uses in the residential and commercial sectors could be estimated as follows:

Estimated Residential and Commercial End-Uses (2008)

Cooking and Open-FireLighting(Biomass)92.2%

Lighting, Urban HVAC and Appliances

(Electricity) 4.8%

Cooking and Lighting (Kerosene and LPG)3.0%

Total: 1.3Mtoe

Source: APEC Energy Database statistics, PIREP 2004 biomass inferences

Agriculture

75 Energy proportions are unlikely to have changed substantially given the little progress made on rural and urban electrification. 76 Biomass build up in the residential sector assumes a total population in 2008 of 6,576,822 (data from World Bank World Development Indicators), with 13 percent of the population living in urban areas. Furthermore, given household consumption patterns presented in the table above (PIREP 2004, p22) it is assumed 100 percent of the rural population cook with fuelwood (or 87 percent of the total population), and 13.5 percent of the urban population cook with fuelwood. Finally it is assumed total fuelwood consumption is 642.4kg/capita/year (PIREP 2004, p53), with a conversion rate of 0.33toe/tonne of wood used. These estimates build to a total fuelwood use of 1.237Mtoe in 2008.

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The agricultural sector in PNG can be divided into subsistence agriculture (the dominant source of livelihood for most of the population) and industrial agriculture for export. Subsistence agriculture provides between 76 and 83 percent of the food consumed in the country, and cash sales of products such as coffee, fresh vegetables, cocoa, betel nut, copra, oil palm and fish are an important source of cash income for PNG’s rural population.77 As for industrial agriculture, PNG’s main exports (in order of tonnes exported in 2009) are palm oil, coffee, copra, cocoa, copra oil, tea and rubber, and in 2009 agricultural exports made up 19 percent of total PNG exports.78 In the agricultural export industry a number of large firms trade crops (usually through marketing boards), but much of the crop is sourced from small-holder farmers; a trend that is illustrative of PNG’s land tenure system.79 In fact, the small-holder structure has greatly compromised productivity, and crop production has been flat in absolute tonnage produced since 2001.80

Geographically, the agricultural industry in PNG is extremely rural, and as such is a relatively small consumer of commercial energy given PNG’s lack of rural electrification. Biomass waste from agriculture (e.g. copra shells, coconut husks) is used substantially in crop drying, and fuelwood also features prominently in this regard. Formal data on the commercial and non-commercial energy use in the agriculture sector in PNG is limited, but rough inferences can be made using historical data.81 In this vein, in 2008 total commercial energy demand attributed to the agriculture sector is estimated at just 0.01Mtoe, the majority of which is petroleum. In terms of biomass use, World Bank PREA estimates indicated that the agro-processing industry uses significant amounts of agricultural waste (biomass) for crop drying, with the biomass-to-commercial-energy ratio being approximately 12:1 in 1990.82 Using these rough estimates and adopting a ratio of 10:1 for biomass-to-commercial-energy use in the agriculture sector to reflect some improvements in rural electrification since 1990, approximate end-uses for the agricultural sector could be estimated as follows (chart shown on following page):

77 Bourke and Harwood, 2009, p6.78 Bank of Papua New Guinea statistics, 2011.79 WTO, 2011, “Trade Policy Review: PNG,” p62.80 Ibid.81 Utilizes 2003 APEC statistics to deduce the split in “other” category between agriculture and residential/commercial, and assumes this split has remained constant (reasonable given little change in rural activities). Agricultural use of petroleum and electricity is arrived at by deducting known residential and commercial demand for petroleum and electricity (calculated using relative use of electricity and petroleum in the residential/commercial sector from 2003 data) from the total for the “other” category as reported by APEC statistics from 2004 onwards.82 See World Bank PREA report (1992, p 42) for breakdown of end-uses by agriculture sector. Breakdown implies a biomass: commercial energy ratio in the agriculture sector of 12:1 in 1990. This has been reduced to 10 for projections assuming small increases in rural electrification.

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Estimated Agricultural End-Uses (2008)

CropDrying (Biomass)90.9%

Irrigation & Lighting

(Electricity) 1.4%

Tractors, Crop Drying by Heat (Petroleum Products)7.7%

Total: 0.1Mtoe

Source: APEC Energy Database statistics, PREA 1992 biomass inferences

1.2.2.Projected Energy Demand

As previously emphasized, PNG is a relatively small economy dominated by mining and as such, a single mine closure or opening can have a huge immediate impact on energy demand. 83 Nonetheless, energy projections here have been made assuming a “business as usual” case that incorporates the significant LNG export project currently in construction phase, but that does not include other projects at a more preliminary stage. The projections that follow have been derived with reference to APEC projections in 2009, but have been updated to reflect more recent economic forecasts.

Projected Energy Demand by Fuel Type

Total Primary Energy Demand (TPED) is expected to increase at an average annual rate of 3.8 percent from 2008 to 2018, with commercial energy demand alone driving the increase and growing at an annual average rate of 5.2 percent (4.5 percent from 2008 to 2013 and 6.0 percent from 2014 to 2018 with the coming online of the LNG project). This translates to an absolute increase from 3.4Mtoe in 2008 to 4.9Mtoe in 2018 (including biomass). Growth in biomass consumption is expected to broadly reflect population growth, growth in oil is expected to be consistent but slowing as reserves are slowly depleted, and natural gas growth is expected to increase substantially and meet the increased demand for power generation going forward.84 Small increases in hydro capacity are assumed, but the proportion of hydro in overall TPED is expected to remain relatively constant and reflect historical trends. No further geothermal capacity is expected under the “business as usual” case. A graphical representation of projected total energy demand and projected commercial energy demand is presented on the following page.

83 PIREP, 2004, p26.84 Overall growth rates and fuel shares are based on projections by APERC in the APEC Energy Demand and Supply Outlook 2009, p78. Projected biomass consumption is based on a bottom-up build-up from residential and agriculture sectors, the assumptions for which are outlined in those sections below.

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Projected Total Primary Energy Demand, by Fuel Type

2008

Oil46.6%

Natural Gas 10.0%


Biomass40.1%

2018

Oil38.5%

Natural Gas 26.8%


Biomass31.1%

Total: 3.4Mtoe Total: 4.9Mtoe

Source: APEC Energy Demand and Supply Outlook 2009 projections, p78; own biomass estimates

Projected Total Commercial Energy Demand, by Fuel Type

2008

Oil77.8%

Natural Gas 16.7%

Hydro 3.7%Geothermal 1.9%

2018

Oil56.0%Natural Gas

38.9%



Source: APEC Energy Demand and Supply Outlook 2009 projections, p78

Total final energy demand (TFED) is expected to grow by 2.1 percent from 2008 to 2018, the difference between TFED growth and TPED growth coming from increased use of electricity in the mining sector and gradual increases in rural electrification over the forecast period. In this regard, electricity demand is expected to increase from 3.6TWh in 2008 to 6.2TWh in 2018, which translates into an average annual growth rate of 5.6 percent. Increased electricity generation is assumed to be powered by an increased use of natural gas as supplies become available in the Port Morseby area, and PNG is also expected to add a further 160MW of hydro capacity. Under APEC’s business as usual assumptions, no additional geothermal capacity expected to be added, but the existing 56MW capacity on Lihir Island will be maintained. The expected relative fuel source for electricity generation is detailed below. 85

85 Based on projections in APEC Energy Demand and Supply Outlook 2009, p78. Proportions have been pro-rata’d between 2008 actuals (APERC statistics) and estimates for 2015 and 2030 (APEC 2009, p78) to arrive at the expected share in 2018. All capacity additions for hydro come from APEC forecasts.

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Projected Electricity Generation, by Fuel Type

2008

Oil52.7%

Natural Gas 10.9%

Hydro23.9%

Geothermal 12.4%

2018

Oil43.6%

Natural Gas 20.5%

Hydro27.0%

Geothermal 8.9%

Total: 3.6TWh Total: 6.2TWh


Projected Energy Demand by Economic Sector

The majority of demand growth will be driven by industry, with some growth in residential electricity demand as urbanization continues and electrification of semi-urban areas increases. Given geographical constraints, transport’s share of total energy demand is expected to remain constant from 2008 to 2018 (see more detail on sector demand below). Biomass usage is expected to trend broadly with population growth across the forecast period (see more detail in residential/commercial and agriculture sectors below).

Industry

Commercial energy demand in the industrial sector is expected to increase by an average rate of 3.5 percent from 2008 to 2018. Energy (and electricity) intensive mining sectors are expected to expand with the coming online of the LNG export project in 2014, and the continued operation and potential expansion of downstream oil refining has been projected. In the non-mining industrial sectors, increased scale of production is expected, but the existing structure of light manufacturing and agricultural processing is expected to be maintained. Within the industrial sector and due largely to increased extraction activities, electricity demand is expected to grow by an average annual rate of 6.2 percent, and is expected to constitute 30.6 percent of total energy demand in 2018, up from 23.5 percent in 2008. As a result, the relative inferred end-uses in the industrial sector are expected to shift to more motorized extraction activities as shown on the following page.86

86 Growth rates for the industrial sector are taken from APEC Demand and Supply Outlook 2009. Relative contributions of electricity and oil are also based on APEC projections, but are pro-rata’d to calculate expected share in 2018 given a base-year actual share in 2008 and an APEC projected share of electricity in 2030 of 39.1 percent (p79).

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Projected Industrial Sector End-Uses

2008

Processed Heat (Oil)76.5%

Motors (electricity) 23.5%

2018

Processed Heat (Oil) 69.4%

Motors(electricity) 30.6%



Transport

Commercial (and total) energy demand in the transport sector is expected to increase by an average annual rate of 1.7 percent from 2008 to 2018, leaving per capita transport levels basically unchanged due to little expected improvements in road networks (this is consistent with historical trends). On an absolute basis, energy demand in the transport sector will grow by 0.1Mtoe, from 0.3Mtoe in 2008 to 0.4Mtoe in 2018. It is expected that this growth will come mainly from increased demand for diesel oil as construction and mining activities pick up, and next by aviation oil as flights increase with economic growth. Actual growth in diesel oil is expected to be 2.2 percent per annum, and growth in aviation kerosene is expected to be 2.3 percent per annum. Absolute levels of gasoline demand are expected to stay relatively flat over the forecast period.87

Based on these forecasts, the projected end-uses for the transport sector are presented below.

Projected Transport Sector End-Uses

2008

Road: Trucks and Buses; Maritime49.7%

Air23.4%


2018

Road: Trucks and Buses; Maritime 52.2%

Air24.8%




Residential and Commercial

Commercial energy demand in the Residential and Commercial sector is expected to increase at an average annual rate of 3.4 percent from 2008 to 2018, while biomass use is expected to increase at an average annual rate of 1.0 percent translating to a total energy demand growth

87 Growth projections for the transport sector are based directly on those reported in the APEC Demand and Supply Outlook 2009, p79.

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(including biomass) of 1.2 percent. In terms of commercial energy, growth is expected to come from an increasing demand for electricity as electrification increases and urbanisation continues. Electricity is expected to increase most rapidly at 3.8 percent, while demand for petroleum products (including LPG) will increase by 2.8 percent per annum. The proportion of the population living in urban areas is expected to remain low, but increase from 13.0 percent in 2008 to 14.0 percent in 2018, a rate that is consistent with historical trends. Overall population growth is expected to be 1.7 percent over the outlook period and will drive the growth rate in biomass use.88

Biomass for cooking is expected to remain as the predominant end-use in the residential sector over the outlook period, while use of electricity and petroleum products will increase slightly.

Projected Residential and Commercial Sector End-Uses

2008

Cooking and Open-Fire Lighting (Biomass) 92.2%


(Electricity) 4.8%

Cooking and Lighting (Kerosene/ LPG) 3.0%

2018

Cooking and Lighting (Kerosene/ LPG) 3.4%

Cooking and Open-Fire Lighting (Biomass) 90.4%


(Electricity) 6.2%


Source: APEC Energy Demand and Supply Outlook 2009, APERC Statistics; own inferences

Agriculture

Growth in commercial energy demand in the agricultural sector is expected to increase by an average annual rate of 3.0 percent from 2008 to 2018, consistent but slightly below long-term expected GDP growth. The structure of the agricultural sector is assumed to remain unchanged, but electricity use in agriculture for irrigation is expected to increase slightly with improved rural electrification. Biomass is expected to continue to supply the majority of energy used in this sector, and the biomass-to-commercial energy ratio is expected to remain at 10 over the outlook period, as substitutes for biomass energy in agriculture are expected to be limited.89

88 Growth projections for commercial energy demand are equal to APEC projections for the “other” sector as detailed in the APEC Energy Demand and Supply Outlook 2009, p79. Biomass projections assume an annual average population growth rate of 1.7 percent (APEC estimate 2009), and assume a slight increase in urbanization from 13.0 percent in 2008 to 14.0 percent in 2018. The proportion of the rural population cooking with fuelwood is expected to decline from 100 percent in 2008 to 95 percent in 2018 as electrification increases slightly, and the proportion of the urban population cooking with biomass is expected to decline to 10 percent in 2018 from 13.5 percent in 2008. Biomass consumption per household is assumed constant at 642.4kg/year and the conversion rate of toe/tonne of wood is assumed to remain at 0.33.89 Projected growth rates are consistent with the APEC Energy Demand and Supply and Outlook 2009 for the other sector.

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Projected Agriculture Sector End-Uses

2008

Crop Drying (Biomass) 90.9%

Irrigation and Lighting

(Electricity) 1.4%

Tractors, Crop Drying by Heat (Petroleum Products) 7.7%

2018

Crop Drying (Biomass) 90.9%

Tractors,Crop Drying by Heat (Petroleum Products) 7.6%Irrigation and

Lighting (Electricity)

1.5%


Source: APEC Energy Demand and Supply Outlook 2009, APERC Statistics; own inferences

1.2.3. Energy Supply

PNG relies entirely on indigenously extracted fuels to meet energy demand. In fact, PNG has been described as a hotspot for oil and gas, and as “an island of gold in a sea of oil.”90 As would be implied by such a comment, PNG has significant (albeit declining) indigenous sources of oil and natural gas, and also substantial hydro and renewable energy sources. A more detailed description of each fuel currently used in PNG is provided below.

Oil

Papua New Guinea has proven oil reserves of 660 million barrels, but it is expected that there remains significant additional and unexploited reserves both onshore and offshore (inferred, mean-risk reserves alone would increase oil reserves by one million barrels).91 PNG has been extracting light crude oil since 1990, and refining crude domestically in Port Moresby since construction of the first oil refinery in 2004.92 Prior to 2004, PNG imported all domestic oil needs, but domestic refining has substituted for all petroleum imports except LPG. 93 From this domestic refinery, approximately 65 percent of output is consumed domestically, and the remaining 35 percent is exported.94 A map of current oil and gas projects relative to all mining activities is provided on the following page.

90 Newport Oil and Gas, 2011, “Our Assets: Papua New Guinea,” http://newportoilandgas.com/assets.html.91 APERC, 2009, “APEC Energy Demand and Supply Outlook 2009,” p76.92 PIREP, 2004, p18.93 APERC, 2006, “APEC Energy Demand and Supply Outlook 2006,” p65.94 APERC, 2009, “APEC Energy Demand and Supply Outlook 2009,” p77.

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Source: PNG Chamber of Mines and Petroleum Archives, “Map of Petroleum Projects.”

Source: PNG Chamber of Mines and Petroleum Archives, “Map of Mining Projects.”

Until recently, there has been little additional exploration for oil due to issues with land tenure rights and the country’s challenging topography. In order to address this trend, in September 2003, the Government of PNG implemented special fiscal terms to incentivize oil and gas exploration by foreign corporations. The special terms were called ‘incentive rate petroleum operations’ and offer a lowered income tax rate of 30 percent for petroleum projects established between 1 January 2001 and 31 December 2017. As a result, oil exploration has picked up slightly, and has predominated in the North New Guinea basin, and the Cape Vogel, New

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Ireland and Bougainville basins.95 Near-term depletion of oil reserves, however, remains a significant concern, with recent estimates speculating that PNG’s currently exploitable oil reserves will be depleted by 2015.96

As illustrated in the energy demand data detailed above, PNG has been extremely reliant on oil as its primary source of fuel for electricity generation and industrial heat generation even before crude extraction commenced in 1990. Such over-dependence on oil has resulted in an extreme susceptibility of the economy to swings in oil prices, and domestic consumption has weighed against the importance of oil as a foreign exchange earner for the economy more broadly.

Natural Gas

Papua New Guinea has proven natural gas reserves of 17.3Tcf and gas condensates equivalent to 262 million barrels, dwarfing PNG’s reserves of oil.97 Similar to oil, however, unexploited and unexplored natural gas is expected to be substantial, and adding inferred, mean-risk reserves alone would increase natural gas reserves by more than 10Tcf.98 Natural gas was also first indigenously extracted in 1990, but has become increasingly prominent, with the Hides Gas Field in particular (located in the Southern Highlands of PNG) being the focus of a number of large-scale LNG export proposals over recent years.

In terms of recent natural gas activity, in 1998 a Chevron-led pipeline project was proposed to transport LNG from the Hides gas field to Australia via a 4,000 kilometre offshore pipeline that would feed directly into Australia’s existing infrastructure. This was abandoned in 2007 due to cost overruns and a lack of foundational load customers, but a similar project was reconstructed and re-presented in 2008. This project, an LNG extraction project that includes the construction of a natural gas liquefaction plant with a capacity of 6.3 million tonnes per annum, commenced construction in 2009 and is more generally termed the “PNG LNG Project.” The project is expected to enter production in 2014, and is being led by ExxonMobil (with a 41.6 percent ownership stake), with Oil Search, Santos, AGL Energy and Nippon oil being other major owners. The project is the biggest resource investment in PNG’s history, and is expected to cost up to US$14 billion and potentially quadruple GDP when it comes online in 2014.

Like oil, natural gas is and increasingly will be an important foreign exchange earner for PNG. In efforts to reduce the country’s oil dependence, natural gas will likely play an increasing role in electricity generation. Simply substituting natural gas for oil for domestic energy use, however, will weigh on its value as a foreign exchange earner, and should therefore be considered in light of other renewable power generation alternatives.

Electricity

Electricity in PNG is generated by PNG Power Limited (“PNG Power”)—the national electricity provider and a wholly government-owned private corporation—and by Independent Power Providers (IPPs) and private mines. No national grid exists in PNG due to vast distances between various towns or load centres, and the country’s challenging topography. Instead, PNG Power operates three separate urban grids and 14 other independent provincial systems, while a number of rural C-Centres and privately owned facilities exist in more rural areas. There are

95 APERC, 2009, “APEC Energy Demand and Supply Outlook 2009,” pp76-77.96 WTO, 2011, “Papua New Guinea: Trade Policy Review,” p82.97 Ibid, p76.98 Ibid, p76.

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vague plans to connect the Port Moresby and Ramu grids if roads can be built between the urban areas.99 A graphical representation of PNG’s current electricity infrastructure is presented below.

Source: ADB, 2009, “Technical Assistance Report: Papua New Guinea: Power Sector Development Plan,” p6.

In terms of commercial power provision by PNG Power, sixty five percent of power is generated by hydro. The majority of the remainder, including generation in peak-load plants, provincial centres and some base load generation to supplement hydro in the dry season, is diesel generated. There has also been an increasing trend to use natural gas in power generation, and a number of gas turbines have been installed in recent years.100 The three grids operated by PNG Power are described in more detail below:101

1. Port Moresby System: This grid services the commercial and industrial needs of the nation’s capital and surrounding areas in the Central Province. Power comes mainly from hydro generation within the Rouna System, utilizing four hydro stations on the Laloki River and hydro generation from the Sirinumu Dam. Electricity is also sourced from a 30MW thermal station outside of Port Moresby, and PNG Power also buys electricity from the privately owned Kanudi Power Station—a diesel-generated power plant.

2. Ramu System: The nation’s most extensive network, the Ramu system services the load centres of the Momase Region and the Highlands. This area is an industrial hub of mining, oil, gas, coffee, tea, timber and industrial production. Power is sourced mainly from the Ramu Hydro Power Station (75MW capacity), and from a run-of-the-river station in the Western Highlands (12MW). Stand-by and peak generation comes from diesel plants in the major urban areas, and additional power is also purchased from the privately owned Baiune Hydro Power Station when needed or available.

3. Gazelle Peninsula System: Services the Gazelle Peninsula area, which is rich in copra, coconut oil and cocoa farming, timber production and fishing. The system is powered by a

99 PNG Power Limited Archives, 2011, “About Our Network,” http://www.pngpower.com.pg/aboutus/aboutnetwork.html100 Malum Nalu Blog, 2011, “Power Blackouts to Continue in Port Moresby.”101 PNG Power Limited Archives, “About Our Network”

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10MW run-of-the-river hydro station and supplemented by diesel generation facilities in the dry season or for peak loads, totalling about 9MW capacity.

4. Other: PNG Power also operates a number of smaller, mini hydro and diesel generation systems in rural and provincial areas.

While hydro systems comprise the majority of PNG Power’s capacity, most systems are at least 30 years old and have not been properly maintained due to the previously poor financial position of PNG Power. As a result, power outages have been prevalent and increasing for many years, and have recently reached new heights with the increase in industrial demand on PNG Power’s urban grids. Recent initiatives and private capital have made some refurbishments possible, but reliance on stand-by diesel generation is still high in both urban and peri-urban/rural areas.102

Outside PNG Power, electricity is also generated by private mining companies, and by about 150 to 200 small rural electricity systems (called ‘C-Centres’) that are operated by local government authorities.103 In terms of private generation, total installed capacity meets or even exceeds the installed capacity of PNG Power, and will likely greatly outweigh PNG Power generation as mining activity increases. 104 According to APEC, most private generation relies on thermal fuels, with only limited hydro generation.105 As for rural C-Centres, these are generally powered by diesel generators, mini hydro facilities or occasionally PV systems. The financing, managing and planning of these systems has historically been the responsibility of the provincial governments, with oversight of operation falling to the local (district or sub-district) governments.106 Some facilities have also been run by churches, NGOs or other public and private organizations such as the Ministry of Education, Health and Communications, the Civil Aviation Authority, Telikom PNG Limited, and the National Maritime Safety Authority.107

Future rural electrification will be limited by the profit-focused nature of PNG Power, and its limited financial capacity for lower-paying rural centres. The focus of near-term supply increases, for example, currently centres on servicing new mineral explorations, and the particular development of a new Ramu 2 system to supplement Ramu 1. Moreover, transmission to rural areas from existing grids is often not feasible due to high costs, topographical considerations, and problems with land rights that have inhibited transmission lines in the past.108 Notwithstanding this, some efforts by PNG Power have been made to increase rural electrification, but these have largely centred on expanding power access to rural communities directly affected by hydro power dams and facilities.109 Even these initiatives have been compromised by a lack of funding, but where made were funded by capital contributions from provincial governments and local Members of Parliament.110 More recently (beginning at the end of 2006), PNG Power has also taken over the operation of some C-Centres, and has been able to do so as part of a US$25 million government-funded rural electrification

102 PNG Power Limited Archives, “About our Network: Generation.” http://www.pngpower.com.pg/aboutus/generation.html103 PIREP, 2004, p13.104 PIREP, 2004, p13.105 APEC Energy Database statistics, “Electricity Generation.”106 PIREP, 2004, p13.107 ADB, 2009, “Power Sector Development Plan,” p9-10.108 Dorney, 2000. 109 PNG Power Limited Archives, 2011, “Rural Electrification Projects.” http://www.pngpower.com.pg/projects/rural.html 110 Ibid.

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initiative.111 Private providers have also been noted to service surrounding rural areas as part of corporate social responsibility initiatives.

Hydro

Papua New Guinea has significant hydroelectric potential, reflective of nine large hydrological drainage divisions on the main New Guinea island. The largest river basins are the Serpik (catchment area of 78,000 sq km), Fly (61,000 sq km), Purari (33,670 sq km), and Markham (12,000 sq km). Furthermore, on the mainland mean annual rainfall ranges from less than 2,000 mm to 8,000 mm in some mountainous areas, while the island groups receive a mean annual rainfall of between 3,000 and 7,000 mm. The gross theoretical hydropower potential for Papua New Guinea has been estimated at 175 TWh per year.112

In terms of existing capacity, PNG currently has three main hydroelectric systems that supply the Port Moresby area (Laloki Dam), Eastern Highlands (Yonki Dam) and the Warongi facility in the Gazelle Peninsula.113 Development of new dams has, however, been historically limited given lack of substantive demand near supply sources, making large dams economically infeasible.114 In September 2010, PNG and the state of Queensland in Australia agreed to pursue plans to construct a 1,800MW hydropower plant on the Purari River in PNG, which would supply 1,200MW of electricity to Queensland through an undersea cable. The project is extremely ambitious and would involve the construction of a 250 kilometre undersea cable, but would also supply an additional 600MW to local communities in PNG.115 Other planned expansions include new run-of-the-river Divune and Ramazon hydropower plants to be funded by the ADB as part of the Town Electrification Project to be completed by 2013.116

In addition to large dams, a number of small hydro facilities exist in rural areas. Construction of small hydro in rural areas actually began in 1985 as part of a Diesel Power Replacement Program (DPRP) to limit rural area dependence on rural generators. Reports indicate that three micro-hydro systems were installed between 1988 and 1992, and as the DPRP evolved into the Micro-Hydro Development Programme (MHDP) in 1991, plans for an additional seven systems were put forward but fell through due to lack of financing. While small hydro development has been limited since 1992 due to lack of financing, micro-hydro has been popular with missions and NGOs who have promoted the sale of these systems through numerous specific initiatives.117 These systems, however, have suffered from lack of technical maintenance, which continues to be a barrier to rural initiatives in PNG.118

Renewables

111 Ibid.112 APERC, 2009, “APEC Energy Demand and Supply Outlook,” p77.113 PNG Power Limited Archives, 2011, “About Our Network: Generation,” and PIREP 2004, p23.114 APERC, 2009, “APEC Energy Demand and Supply Outlook,” p77.115 New Energy World Network (NEWNET), “Hydro brings baseload renewable power to Papua New Guinea and Queensland.” http://www.newenergyworldnetwork.com/renewable-energy-news/by-technology/water/hydro-brings-baseload-renewable-power-to-papua-new-guinea-and-queensland.html116 PNG Power Limited Archives, 2011, “Rural Electrification Projects.”117 See PIREP, 2004, pp.38-41 for all information in this section.118 PIREP, 2004, p.90

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It has been noted by the Pacific Islands Greenhouse Gas Abatement through Renewable Energy Project (PIGGAREP) that PICs like PNG have about the highest renewable energy potential in the world, given their small size, location in the tropics along the Pacific Rim of Fire, and the fact that they are surrounded by vast ocean.119 The two most promising renewable energy sources in PNG are geothermal and solar. While some preliminary research has been done into the potential for ocean based energy technologies (expected to be significant given PNG’s island nature) and wind, these technologies have featured less on the agenda for near-term development potential.120 Finally, it should be noted that there is a long-standing interest within PNG’s two universities to develop RE technologies.121

Geothermal

Papua New Guinea has huge geothermal potential. Located on the Ring of Fire, the Geothermal Energy Association (GEA) has stated that PNG could, in theory, meet all of its electricity needs well into the future from geothermal power alone, and recent estimates put PNG’s geothermal power potential at around 3,000 to 4,000MW. 122,123 As reported by the GEA, surface geothermal activity has been identified in 55 areas (mostly in the northern coast of New Britain Island), and exploration surveys have been carried out in many of these areas. As of today, however, just one plant has been commissioned by Newcrest Mining on Lihir Island, and at a current capacity of 56MW, this plant powers 75 percent of the energy demands of the Lihir gold mine.124

A map of PNG’s geothermal potential is presented on the next page. Predominating along the Melanesian Arc, most of PNG’s geothermal activity exists in remote, isolated regions where population density is low, but where prospects for gold and copper mining do exist. These exact challenges to base-load demand (small populations and low levels of industrial development) have limited development of geothermal in PNG to-date, but potential does exist for geothermal-powered mining activities to benefit and electrify smaller surrounding communities.125

119 PIGGAREP, 10120 PIREP, 2004, p.31-33.121 PIREP, 2004, p.30.122 APERC, 2009, “APEC Energy Demand and Supply Outlook 2009,” p.77.123 Ibid, p.77.124 Newcrest Mining Archives, 2011, “Operations Overview: Lihir,” http://www.newcrest.com.au//operations.asp?category=8.125 PIREP, 2004, p.30.

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Source: McCoy-West et al, 2011, p3.

Solar

According to some specialists, solar energy is among the energy sources with the greatest potential in PNG, with year-round sun in most areas (excepting cloud forests). 126 The average sunshine per day is estimated to be between 4.5 to 8 hours, with insolation of 400-800W/m2.127 Port Moresby is PNG’s sunniest destination with 2478 sunshine hours per year, and the lowest is Tambul in the Western Highlands with 1292 hours. In addition, some of the best locations for solar energy are the offshore islands and southern regions, where energy access is currently limited.128

Actual use of solar PVs in PNG has gradually spread, but financing, poor installation and poor security (with numerous thefts) have been inhibitors to wide-spread use. Between 1989 and 1994, for example, there were at least 25 applied research projects involving solar energy in the fields of solar drying, water heating and solar pumping. As reported by PIREP, in the 1980s the use of solar drying by small-holder farmers for copra, cocoa and coffee was widespread, and during this time the Government of PNG also supported a solar water heating retrofit program for commercial users, industry and households, installing approximately 3,000 household systems.129 More recent activity in solar energy include the sale of solar home lighting systems, the installation by PNG Telikom of more than 170 sites with solar panels, the use of PV pumping systems in agriculture, and the use of PV refrigeration systems in rural health centres.130 In 2005, a GEF/World Bank funded project piloted the introduction of solar panels to

126 Ibid, p.33.127 Ibid, p.33.128 Ibid, p.33.129 PIREP, 2004, p.ix.130 Ibid, p.48.

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2,500 teacher households in rural villages in PNG, and found there is significant demand among retail groups for renewable energy systems if appropriate financing is made available.131

Biomass and Biofuel Potential

With forests covering 78 percent of the total land area in PNG,132 the country does indeed have a large supply of fuelwood that does not appear to be in shortage.133 Increasing population densities, persistent logging by the timber industry and a lack of funding for forestry replanting, however, all present serious long-term threats to forest replenishment and environmental biodiversity.134 Furthermore, with biomass being the predominant source of energy for rural livelihood (including cooking and income generation), a lack of alternate rural energy will put increasing pressure on PNG’s forests.

Biomass use in PNG consists mainly of fuelwood (the overwhelming majority) and agricultural and forestry residues. For rural households, fuelwood is generally sourced from nearby forests and commercial sale of fuelwood is limited. Commercial sale is more prominent, however, in urban areas. For villages located near agricultural centres, coconut husks, copra shells, coffee husks, oil palm residues and sugarcane bagasse are sources of agricultural residue also used in cooking, whereas sawmill residue from a large timber industry has also been noted to be used for cooking. In the agriculture sector itself, there is some small production of electricity from biomass waste in the oil palm industry, and combined heat and power generation from wood waste in the timber processing industry.135 In addition, there appears to be large use of agricultural residues for crop drying in the agricultural sector.136

In theory, PNG could manufacture a large volume of biofuel from palm oil, coconut oil, sugar cane, molasses, sago palm and nipa palm,137 but little domestic processing of timber logswill limit biomass potential in this sector.138 To-date, heat gasifiers have been used in the agricultural processing industry to replace diesel fuel burners, most prominently in the copra, cocoa, coffee and tea industries.139 In addition, PNG has also produced some ethanol from waste molasses in the sugar industry (estimated at 4 million litres in 1990), and Ramu Sugar Mills has reportedly established a 50 hectare plantation to grow fuelwood and supplement bagasse (sugar cane waste) as a fuel. 140, 141 Furthermore, the PNG University of Technology (UOT), with key research activities aimed at assisting rural communities develop renewable energy sources, have experimented with the application of coconut diesel and jatropha to replace kerosene use in rural communities.142

131 World Bank, 2007, “Project Appraisal Document on a Proposed GEF Grant in the amount of US$9.48 million equivalent to Fiji, Papua New Guinea, Republic of Marshall Islands, Solomon Islands and Vanuatu (Pacific Islands) for a Sustainable Energy Financing Project,“ p.6.132 ADB, 2009, “Power Sector Development Project, Appendix C,” p.4. 133 PREA, 1992, p.22.134 PNG Forestry Authority Archives, “Forestry Industry Overview.”135 PIREP, 2004, p.54.136 PREA 1992, p.22.137 PIREP, 2004, p.ix.138 PNG Forestry Authority Archives, “Forestry Industry Overview.”139 PREA, 1992, p.22.140 PREA, 1992, p.22.141 PIREP, 2004, p.54.142 ADB, 2009, “Power Sector Development Plan,” p.12.

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1.2.4. Energy Institutions

The key energy institutions in PNG and their role in influencing energy policy are outlined below.

Name Public/ Private

Responsibility

Department of Petroleum and Energy (DPE)

Public Oversight of oil and natural gas exploration and development

DPE – Energy Division (DPE-ED)

Public Energy policy development; energy planning; data collection; energy advice to PNG Government including in areas of fuel prices, subsidies and electricity tariffs

DPE – Petroleum Division (DPE-PD)

Public Oversight of oil and gas exploration and development

PNG Chamber of Mines and Petroleum

Private Industry association (by membership) that represents the interests of the mining and petroleum industry in PNG

Department of Finance and Treasury

Public Decisions on all tax rates and tax incentives (e.g. for oil and gas exploration)

Department of Forestry (DF)

Public Awards timber permits; biomass assessments; replanting of plantations; implementation of forestry policies

Department of Environment and Conservation (DEC)

Private Establishing environmental standards; conducting environmental impact assessments; coordination of Green House Gas policies, and centre for accessing GEF financing and carbon credit support

Independent Consumer and Competition Commission (ICCC)

Public Sets electricity tariffs; fuel-price control; awards power generation licences

Independent Public Business Corporation (IPBC)

Public Owns PNG Power (on behalf of Government of PNG)

PNG Power Limited Private (SOE)

Generation, transmission and distribution of power nationally; technical regulation of electricity provision (through agreement with ICCC, but general sentiment to transfer this to DPE-ED)

Telikom PNG Limited Private Independent provider of power for telecommunications purposes

PNG Sustainable Development Program Ltd (PNGSDL)

Private A private corporation charged with using funds from the Ok Tedi Mine in the Western Province to pursue sustainable development initiatives in surrounding communities

PNG Sustainable Energy Limited (PNGSEL)

Private Joint Venture between PNGSDL and Origin Energy (Australia); very active in promoting sustainable, renewable energy in rural PNG

Provincial Governments Public Rural energy planning and supplyLocal Governments Public Operation and management of most C-Centres

(those not controlled by PNG Power)Other PlayersPNG University of Technology

Public Research focus on renewable sustainable energy alternatives for rural communities

University of Papua New Public Research focus on renewable sustainable energy

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Guinea alternatives for rural communitiesPNG Chamber of Commerce and Industries

Private (NGO)

Representative voice of the business communities in PNG, committed to making PNG a better place to do business

InterOil Private Owner of PNG Oil Refinery and most of PNG’s oil distribution assets; has control over domestic oil prices through import-parity agreement with Government of PNG

Exxon-Mobil Private Large multinational leading the PNG LNG project - PNG’s largest foreign investment project valued at US$14 billion.

In terms of electricity regulation, the ICCC is responsible for issuing four types of general electricity licences: generation, distribution, transmission and retail licences. At the present time, PNG Power holds a monopoly on the retail sale of power, as well as on generation of under 10MW, and within 50km of its existing lines.143 In practice, however, private retail provision is permitted outside of PNG Power service areas (and happens in many areas of the country), and transmission and distribution are deemed “contestable” outside the 50km boundary.144 PNG Power, however, is the only corporation regulated by the ICCC. With regards to tariffs, a single, nation-wide tariff is set by ICCC that is a ‘Maximum Average Price (MAP)’ and PNG Power’s average tariff must not exceed this. In practice, due to the government ownership of PNG Power, tariffs are often—if not always—set below this level, but are high on a relative basis.145 This policy is reviewed every 10 years, a relatively long lag time compared to other developing economies.146 A graphical representation of overall power sector regulation is provided below.

Source: ADB, 2010, “Power Sector Development Plan,” p.10.

143 ADB, 2009, “Power Sector Development Plan,” p.14.144 Ibid, p.14.145 Ibid, pp.14-15.146 Ibid, pp.14-15.

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For pricing of petroleum products, imports of petroleum products have been prohibited by the ICCC under a 30-year government agreement with the owners of PNG’s only domestic oil refinery, InterOil. In conjunction with InterOil, however, import-parity pricing is administered country-wide.147

Finally, it is worth noting the involvement of PNGSEL in recent times as a catalyst for rural electrification through sustainable and renewable energy. As outlined in the ADB’s Power Sector Development Plan report (page 16), PNGSEL have been involved in the development of a 36MW Stanley Gas Plant plus transmission/distribution facilities in Western Province, which will supply the Ok Tedi Mine and local villages in the area, and also various other rural electrification projects including small hydro projects (2MW-8MW), a 3MW biomass plant based on sawmill waste, a bio-diesel project in East New Britain Province and solar power projects in Western Province. Inclusion of this organisation in any future rural electrification strategy therefore seems most efficient and effective.

1.2.5. Recent Energy Plans and Policies

As described by a World Bank expert on PNG, with respect to energy policy “there is nothing in PNG that has not already been tried.”148 With this in mind, however, a brief summary of the major and recent energy plans and policy initiatives in PNG are outlined below.

1. Power Sector Development Plans. An increase in the frequency and severity of power outages in PNG has increased the urgency for a more rigorous and thorough power development strategy. Specific initiatives include work by the ADB and the World Bank on scoping an additional hydro power facility for Port Moresby to cope with the increasing demand that will come from the LNG project in particular.

2. Promoting Rural Electrification. The need for a rural electrification strategy in PNG has been talked about on-and-off since 1993 when decentralized diesel generators were advocated.149 In recent years, however, a Draft Energy Industry Policy (EIP) and a Draft Rural Electrification Policy have been circulated.150 The EIP—the policy at the most advanced stage of development—has an emphasis on rural electrification; in particular the establishment of an Electricity Trust Fund (ETF) for rural electrification purposes to be funded by the government, and specific rural electrification targets. In 2004, it was also proposed that an independent Rural Electrification Authority be established. The development of this policy has been supported by the ADB through its US$120 million Town Electrification Investment Program,151 and the World Bank is also providing technical assistance in power sector management. A 2006 US$25 million initiative for rural electrification on behalf of the Government of PNG—implemented through PNG Power—is one example of the Government’s renewed commitment to rural electrification.

3. Promoting Energy Efficiency. Approved on April 8, 2011, a US$12.4 million technical assistance package from the ADB, GEF, the Government of Australia, and the Asian Clean Energy Fund will help PNG (and other PICs) reduce dependence on diesel for power generation, gain comprehensive information on energy use by sector and appliance, mainstream energy efficiency programs into government processes and policies, improve

147 WTO, 2011, “Papua New Guinea: Trade Policy Review,” p.61. 148 Interview with Mahesh Sharma (May 11, 2011), former Country Director for PNG at the World Bank.149 PIREP, 2004, p.vii.150 ADB, 2009, “Power Sector Development Plan,” p.12.151 Ibid.

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the implementation of energy efficiency programs, and raise public awareness on the benefits of energy conservation.152

4. Sustainable Energy Financing Project (SEFP). Launched domestically in 2008 and funded by the World Bank and the IFC, SEFP aims to increase the adoption of renewable energy technologies by rural households, by working with local banks to increase the provision of finance for such purchases.153 Implementation has been overseen by PNG Sustainable Energy Limited, and has fostered the adoption of Solar PVs, pico-hydro systems and coconut oil generators, working most closely with ANZ bank in PNG. 154 The project was discontinued in the Solomon Islands in 2009 due to low uptake, but little information exists as to the project’s success in PNG.155

5. Focus on Renewable Energy. As part of the development of Rural Electrification Policy, the Government of PNG has advocated for the creation of a Long Term Goal of Renewable Energy Supply and Action Plan (2008-2027).156 Papua New Guinea’s two main universities—the University of Technology and the University of PNG—also have a strong research focus on renewable energy technologies.157

2. Critical Energy Related ProblemsWith the context of the energy demand and supply drivers outlined above, the most ‘critical’ energy related problems in PNG are defined below. These problems are deemed critical in the sense that if not adequately addressed, they will present severe challenges to PNG’s ongoing economic and social development.

1. Over-Dependence on Oil. As previously highlighted, PNG’s currently exploitable reserves of oil are likely to be exhausted in a matter of years, and further exploration will likely continue to be hampered by issues of land rights and geography. If not addressed, PNG’s extreme over-dependence on oil—which is currently used for heat generation in industry, for electricity generation and for transport—will translate to rising imports, a rising economic susceptibility to fluctuations in oil prices, and seriously unfavourable consequences for the maintenance of foreign currency reserves. Furthermore, the environmental consequences of PNG’s oil dependence are already becoming evident, and could further compromise biodiversity and clean air if dependence is not addressed. The problems associated with PNG’s oil dependence have been recognized by the Government of PNG, and were a feature of the National Energy Policy Statement and Guidelines released early 2007.

2. Urban Power Shortages.Problems with commercial power provision through urban grids have been long-standing, but power-outages and brown outs have become increasingly frequent and severe as a result of increased mining activity and construction that is utilizing the urban commercial

152 ADB, 2011, “ADB, Partners to Help Five Pacific Nations reduce Fossil Fuel Use.” http://www.adb.org/Media/Articles/2011/13523-pacific-energies-efficiencies/default.asp?p=pngmain 153 World Bank, 2007, “Sustainable Energy Financing Project Information.”154 The Masalai Blog, “Sustainable Energy Financing Project.” 155 World Bank 2009, “ World Bank and CBSI Discontinue Sustainble Energy Financing Project in Solomon Islands.” 156 ADB, 2009, “Power Sector Development Plan, Appendix L,” p.8.157 Ibid, p.12.

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system.158 Such power shortages severely compromise urban economic activity, and will also further compromise PNG’s international attractiveness as an investment destination if not addressed. Furthermore, power shortages have increased reliance on stand-by diesel power generators that only further increase the country’s dependence on oil and petroleum products detailed above.

3. Extreme Lack of Rural Electrification. When it comes to electrification, rural areas in PNG have been largely left behind. Without electricity, rural communities and citizens suffer from lower levels of education due to a lack of quality, after-dark light, and lower levels of health service provision as medical supplies and medication cannot be refrigerated. Furthermore, agricultural productivity is also compromised given the traditional (versus electric) irrigation methods that must be used. For PNG as a whole, a continued lack of rural electrification presents a severe challenge to wide-spread economic growth and equal opportunity, and could theoretically exacerbate existing rural-urban animosity. In addition, lack of rural electricity limits income generating activities, and indirectly puts pressure on local forests as fuelwood collection continues to constitute a main revenue source for rural families. And finally, while urbanization has thus far been slow, continually low levels of rural electrification may put further strains on urbanization and urban power supplies and grids.

4. Primary dependence on fuelwood for rural cooking. The extreme dependence by most rural communities on fuelwood as a primary energy source for cooking not only compromises the sustainability of national forests, but also compromises the economic productivity of rural communities due to the time it takes to collect. Nationally for PNG, increasing population densities in rural areas will only further increase fuelwood use and extraction, exacerbate current forest degradation issues, and be an economic barrier to broad-based economic growth of rural communities and citizens.

3. Priorities to Respond to Critical Problems With the above critical energy related problems in mind, outlined below are proposed policy priorities that will help address these identified problems.

1. In response to the problem of over-dependence on oil, the Government of PNG should work with relevant stakeholders to: a. Improve the efficiency of heat generation processes in the industrial sector;b. Substitute natural gas for oil use in industrial sector heat generation; c. Replace oil with natural gas or renewable energy for auto electricity generation in the

industrial sector;d. Substitute natural gas for oil in stand-by (peak-load) electricity generation by PNG

Power. 2. In response to the problem of urban power shortages, the Government of PNG should

work with relevant stakeholders to: e. Increase independent renewable electricity generation in existing government,

residential and commercial buildings, specifically targeting an increase in the use of solar panels for lighting and water heating;

f. Increase the use of energy efficient, peak-load products in existing government, residential and commercial buildings;

158 Malum Nalu Blog, 2011, “Power Outages to Continue in Port Moresby.”

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g. Train and incentivize the construction industry to build using energy efficient design and materials;

h. Improve the energy efficiency of motorized processes in urban industries;i. Investigate nation-wide, run-of-the-river hydro potential to increase the base-load

capacity of urban grids;j. To supplement hydro, evaluate the potential for base-load natural gas power plants to

increase power capacity where hydro is not viable or seasonally limited. 3. In response to the problem of limited rural electrification, the Government of PNG, in

close collaboration with local and provincial governments, should work with relevant stakeholders to:k. Increase the involvement of local community leaders and locally significant NGOs or

churches in identifying community-based energy needs and developing locally acceptable—and sustainable—electrification solutions (through collaboration with the other actors identified in priorities l. to n. below);

l. Increase research in national universities on renewable, community-based electrification options that could be piloted and then scaled;

m. Increase the involvement of local banks in providing micro-loans for rural electrification initiatives;

n. Provide incentives for rural industries to electrify surrounding communities;o. Investigate larger-scale, run-of-the-river hydro potential for electrification of more

densely populated rural areas; p. Formalize private licensing of electricity provision in rural areas that are outside the

reach of PNG Power.4. In response to the problem of a primary dependence on fuelwood for rural cooking, it

is proposed that the Government of PNG, again in close collaboration with local and provincial governments:

q. Increase the prominence of community fuelwood lots;r. Pursue priorities k. through m. above with the goal of developing alternate and

culturally acceptable cooking fuels to substitute fuelwood use in cooking.

4. Policies to Implement Priorities The specific policies and programs proposed to execute the above priorities are outlined below.

1. Problem of Over-Dependence on Oil a. Improve the efficiency of heat generation processes in the industrial sector:

i) The Government of PNG, through the Department of Treasury and in collaboration with the DPE-ED, should offer low-interest loans for the industrial implementation of combined heat and power (CHP) processes, including infrastructure to sell back to the PNG Power grid if feasible. These loans could be funded by a portion of future natural gas revenues. To maximize the impact of limited funding, these loans should first be directed towards the largest, heat-intensive industrial users such as the oil refinery. It is important, however, that these loans be available for both oil and non-oil heat processes so as not to conflict with priority c. – i.e. not to incentivize oil use by only offering such loans to oil-combustion processes.

ii) The Government of PNG, through the ICCC and the DPE-ED, should formally incorporate a CHP sell-back tariff in electricity tariff regulations so as to create

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certainty urban-based around CHP returns. Such an incentive structure for CHP processes would also assist in alleviating the urban power problem identified below.

b. Substitute natural gas for oil use in industrial sector heat generation:i) The Government of PNG, with the DPE-ED, must formalize a national LNG

infrastructure strategy as part of the Energy Industry Policy (EIP). As first priority, this strategy will set the foundation of PNG’s transition from oil to LNG, and will enable actual industrial and power transitions. Specific considerations must include infrastructure requirements for an urban LNG pipeline network, and identification of major industrial heat users and power generators as first-stage targets for LNG access. A formal investment plan should be defined, and may involve co-investment strategies with private sector gas users depending on location of lowest-cost investment alternatives;

ii) The Government of PNG, through the Department of Treasury and in collaboration with the DPE-ED, should offer low-interest loans for industrial conversion from oil use in combustion processes to LNG. With some LNG already used domestically, these loans could be offered immediately but scaled up in priority once new natural gas supply comes online in 2014 and infrastructure is laid in accordance with the EIP mentioned above. Loan recipients should be consistent with the phasing of first-stage pipeline infrastructure in the EIP;

iii) The Government of PNG, through DPE-ED and in collaboration with the PNG Chamber of Commerce and Industry, should establish requirements for new industry entrants to install LNG combustion processes, and to tap into the future gas network. Implementation of these requirements will necessarily need to lag LNG infrastructure implementation, but should be gradually phased in as infrastructure becomes available. If requirements prove culturally impractical, tax or tariff surcharges could penalize companies for not tapping into the national gas network.

c. Replace oil with natural gas or renewable energy for auto electricity generation in the industrial sector:i) Dependent again on the implementation of LNG infrastructure, the Government of

PNG, through the Department of Treasury and in collaboration with the DPE-ED, should offer low-interest loans for conversion of industrial auto-generators from oil to renewable or LNG;

ii) The Government of PNG, through the Department of Treasury and in collaboration with the DPE-ED, should offer a complete tax write-off for Research & Development costs associated with investigating renewable energy sources of electricity generation. Geothermal or run-of-the-river hydro would be promoted depending on the industry’s location.

iii) The Government of PNG, through DPE-ED and in collaboration with the Chamber for Commerce and Industry, should establish legislative requirements for new industry entrants to install non-oil power generators. Implementation of these requirements will necessarily need to lag LNG infrastructure implementation, but should be gradually phased in as infrastructure becomes available.

d. Substitute natural gas for oil in stand-by (peak-load) electricity generation by PNG Power:i) The Government of PNG, in collaboration with the DPE-ED and as part of the EIP,

should formalize a National Power Policy that includes regulations requiring fixed proportions of LNG to be used in PNG Power’s commercial electricity supply by

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2020. The timing of fixed requirements must coincide with LNG infrastructure development outlined in the EIP;

ii) The Government of PNG, in collaboration with the Department of Treasury and the DPE-ED, should investigate and identify a small number of high-use peak-load facilities for transition to LNG generation (on a cost-benefit analysis), and should provide low-interest loans to PNG Power for their conversion. The identification of these plants should consider the potential for IPP generation as an alternative (see iii below);

iii) The Government of PNG, in collaboration with the DPE-ED, the ICCC and the Department of Commerce, should run a tender licence process for Independent Power Providers (IPPs) to establish urban LNG peak-load plants, and orchestrate guaranteed buy-back agreements between the IPPs and PNG Power. Such a strategy would account for the limited financial capacity of PNG Power and would promote competition and efficiency in generation. IPP licences would be awarded on the basis of cost efficiency, technical and financial capacity.

2. Problem of Urban Power Outages e. Increase independent renewable electricity generation in existing government,

residential and commercial buildings, specifically targeting an increase in the use of solar panels for lighting and water heating:i) The Government of PNG should establish a Renewable Energy Fund to be financed

by (i) a fixed percentage of future oil and gas revenues, and (ii) donor funding from GEF or the ADB given the attractiveness of renewable energy strategies to these institutions. The Renewable Energy Fund will be used for the policy priorities described below. This fund should be overseen by an independent board including members of PNGSEL, PNGSDL, and the ADB and/or World Bank to increase transparency and public awareness of the fund;

ii) The Government of PNG, through collaboration with PNGSEL, should re-ignite a campaign for the increased use of solar panels in government and residential/commercial buildings, which could be titled “Sun for PNG.” Being one of the largest employers in urban regions, the Government of PNG should first announce the target to implement solar panels in all government buildings by 2015. Such a program should draw on the low-cost suppliers of the GEF solar program in rural areas, and negotiate lower bulk-rates for government implementation. Purchase of solar panels by residential and commercial users would be targeted at higher-income, peak-load users, and would be subsidized by (1) the Government of PNG’s bulk-buy rates, and (2) a government rebate funded by the Renewable Energy Fund. Local banks should also be implicated in the program to increase the availability of credit for the non-rebateable costs of solar purchases.

iii) The “Sun for PNG” campaign must be supported by a nation-wide education and marketing campaign involving urban celebrities or icons to increase program visibility. Such a campaign should clearly explain the benefits of solar panels which include: less susceptibility to urban power outages, clean energy alternative, lower cost electricity supply. Such a campaign would also connect buyers to qualified technicians to ensure panel maintenance and security (see iv) below).

iv) The “Sun for PNG” campaign must also be supported by capacity training program for local solar distributors to ensure the capacity for panel maintenance and security. The Government of PNG could seek tenders from otherwise capable technicians to service government solar panels after first being trained in their ongoing

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maintenance. The cost of this capacity building could be covered by the Renewable Energy Fund, or from a specific Technical Assistance package from the ADB. Furthermore, technicians selected could be provided with other revenue-generating opportunities by being marketed in residential educational materials detailed in iii) above.

f. Increase the use of energy efficient, peak-load products in existing government, residential and commercial buildings:i) Alongside purchases of solar panels under the “Sun for PNG” program described

above, energy efficient lighting, refrigerators and other appliances could be sourced in bulk from similar suppliers in China and rolled out in government buildings nationwide. Such a strategy should be considered in light of the “Sun for PNG” strategy and may be delayed so as not to over-burden financial resources. Funding for such a strategy could be drawn from existing ADB commitments towards promoting energy efficiency in PNG, and/or extra-budgetary allocations when revenues pick up from the LNG project in 2014;

ii) In conjunction with the roll-out of energy efficient products in government buildings, tax rebates could also be offered for the retail purchase of such products by the residential and commercial sector. Local distributors could be chosen on the attractiveness of their retail margins so as to minimize the retail price of such products;

iii) As in f) above, a nationally publicized campaign including prominent celebrities would be necessary to improve education on the importance of using energy efficient products, and also their visibility and branding.

g. Train and incentivize the construction industry to build using energy efficient design and materials:i) With construction playing an increasing role in PNG’s economy, the Government of

PNG, through collaboration with the Department of Education and national universities such as the University of Technology and the University of PNG, should introduce ‘sustainable architecture’ degrees focusing in energy sustainable buildings into university curriculum. In order to provide initial technical training, technical specialists could be hired from abroad or could be contracted from larger international corporations already operating in PNG. Such a program could either be supported by Technical Assistance packages from the World Bank or ADB (or combined as part of the ADB’s financial package on improving energy efficiency detailed above), or could be orchestrated as a ‘win-win’ corporate social responsibility campaign with international corporations who would also benefit from educated local expertise in years to come;

ii) As part of the Technical Assistance package for architects detailed above, a similar strategy should be pursued with major domestic construction companies. Capacity building in energy efficient construction would be the key goal, and could be offered to a select number of companies based on a tender process, whereby successful tenders would be guaranteed future government projects if agreeing to undertake capacity building training;

iii) Finally, with most (if not all) building materials already imported, the Government of PNG, through the Ministry for Trade, should impose regulations on the energy efficiency of building material imports, and could again source these energy-efficient materials in bulk from China for domestic distribution. With regulation of such

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imports, demand would be assured and lower, bulk-buy costing could potentially be sourced.

h. Improve the energy efficiency of motorized processes in urban industries:i) The Government of PNG, through the Department of Treasury and in collaboration

with the Chamber of Commerce and Industry, should offer a tax incentive (lower income tax rate for a defined period) for new industry entrants that implement energy efficient motors in industrial processes. Standards of motor efficiency should be defined to specify which types of motors qualify for tax incentives, and could be achieved through a request for Technical Assistance from the ADB, potentially as part of the current energy efficiency initiative.

ii) Prioritized in relation to other initiatives above to determine adequate funding, the Government of PNG, through the Department of Treasury and in collaboration with the Chamber of Commerce and Industry, should also provide low-interest loans to existing industry participants for the implementation of more energy efficient motors.

iii) Ideally, upon implementation of both initiatives, PNG Power would ultimately phase in a discriminatory tariff based on motor efficiency (on the power factor of industrial motors) for industrial users. Such a tariff would likely fit under current average-tariff pricing regulations and the current metering system that exists under PNG Power’s profit-focused collection system.

i. Investigate nation-wide, run-of-the-river hydro potential to increase the base-load capacity of urban grids:i) The Government of PNG, as part of the National Power Policy proposed above, and

in collaboration with PNG Power, the DPE-ED, the ADB and PNGSEL, should commission an extensive, national viability study for small-hydro. Funding for such a study could likely be sourced from the ADB’s Technical Assistance fund given the Technical Assistance previously provided on power sector issues. PNGSEL should be involved to leverage the work this organization has already done in the rural small hydro area. The results of the study should be incorporated into a defined investment and construction plan as part of the National Power Policy, and a lowest-cost strategy should be pursued to expand base-load power for commercial grid supply.

ii) Building on the defined investment and construction plan from policy i), and with the goal of increasing the investment leverage of PNG Power, the Government of PNG, in collaboration with the DPE-ED, the ICCC and the Department of Commerce, should seek tender offers from IPPs for the construction and operation of identified hydro sites. Guaranteed buy-back agreements should be orchestrated between the IPPs and PNG Power. IPP licences would be awarded on the basis of cost efficiency, technical and financial capacity.

j. To supplement hydro, evaluate the potential for base-load natural gas power plants to increase power capacity where hydro is not viable or seasonally limited: i) The Government of PNG, as part of the National Power Policy proposed above, and

in collaboration with PNG Power, the DPE-ED and the ADB, should commission a national identification strategy for natural gas power potential, complementing policy e.ii) above and recognizing that base-load natural gas generation capacity will likely be necessary given the down-time of some smaller hydro facilities during the dry months. The results of the study should be incorporated into a defined investment and construction plan as part of the National Power Policy, and a lowest-

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cost strategy should be pursued to expand base-load power for commercial grid supply.

ii) Building on the defined investment and construction plan from policy i), and aligned with policy k.i) and e.iii) above, the Government of PNG, in collaboration with the DPE-ED, the ICCC and the Department of Commerce, should seek tender offers from IPPs for the construction and operation of identified natural gas sites. Guaranteed buy-back agreements should be orchestrated between the IPPs and PNG Power. IPP licences would be awarded on the basis of cost efficiency, technical and financial capacity.

3. Problem of Limited Rural Electrification k. Increase the involvement of local community leaders and locally significant NGOs

or churches in identifying community-based energy needs and developing locally acceptable—and sustainable—electrification solutions (through collaboration with the other actors identified in priorities l. to n. below): i) A national, Rural Energy Authority should be established to oversee the

development and implementation of a Rural Energy Policy that targets improvements in rural electrification and energy use, through specific policies and programs outlined below. The Rural Energy Authority (REA) should be publicly overseen by the DPE-ED and its creation could be mandated by constitutional implementation of the EIP. Independent organizations such as PNGSEL and PNGSDL should form part of the oversight committee, as well as representatives from PNG Power, locally significant NGOs, community representatives, and even the ADB or World Bank. Local government representatives should be involved in REA discussions and decisions that relate to their locality. Such a holistic committee would be necessary to adequately address the local and contextual challenges of rural electrification.

ii) A Rural Energy Fund (REF) should also be established as part of the legislation creating the Rural Energy Authority. The REF should be financed by a fixed percentage of future government oil and gas revenues and used by the Rural Energy Authority to implement the Rural Energy Policy.

iii) The Rural Energy Policy (REP) should outline a clear strategy for rural electrification, and should be formally developed by the Rural Energy Authority and its associated stakeholders. In-country development of the REP should consider incorporation of the following components:1. Through collaboration with the ICCC and the Government of PNG, formal

licenses for the private provision of rural electricity outside the geographical reach of PNG Power should be created. These licences should be for an initial term of 10-15 years (or similarly appropriate duration to provide long-term security to IPPs) after which they could be re-evaluated given the development in rural services by PNG Power;

2. Reflective of the recognition that rural electrification solutions will necessarily be off-grid and community specific, a national competition entitled “Sustainable Energy Diversity” should be launched. This national competition would comprise the following elements:i) A nationally publicized competition for the best rural electrification ideas,

specific to a rural community. Winning ideas would be: supported by on-the-ground collaboration between idea applicants and leaders of local communities; customized to the energy specific needs of one (or a handful)

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of initial pilot communities; endorsed (and wholly supported) by the rural leader of the community themselves; provide plans for the ongoing technical maintenance of proposed ideas; financially stable (or clearly articulate government subsidies required); and would have the potential for scale after initial implementation in pilot communities. Promising but not-yet-fully-formed ideas could be supported by the expertise of the Rural Energy Authority in bringing them to ‘pilot-able’ fruition. Best-in-class ideas could involve creation of an electrified community revenue generating activity to sustainably finance electricity provision;

ii) Publication and promotion of the competition would be national, but would be heavily targeted to local NGOs, church groups, national universities and strongly motivated communities as key idea generators. As a result, winners of the competition and their relevant communities should be highly motivated towards actual implementation of ideas;

iii) The competition would be sponsored by the Renewable Energy Fund, but could also seek local financier (bank) support and co-sponsorship to promote visibility. Actual ideas would be funded on a pilot basis by the Renewable Energy Fund and co-financed by local banks in the specifically identified communities, and could then provide a benchmark for scaling workable ideas.

iv) An important part of the pilot process will be community engagement and technical training, and this would be funded through the winning grant, and implemented through the plan identified in the grant application.

3. A Monitoring and Evaluation mechanism for rural electrification initiatives must form an essential part of the Rural Energy Policy from the outset. Such evaluations should form a basis to draw on lessons learned and evaluate the impact of potentially scalable ideas, and should be funded from the Rural Energy Fund;

4. In collaboration with the Department of Treasury, the Rural Energy Authority should offer mini-concessions or low-interest loans (depending on the financial capacity of the Rural Energy Fund) to rural industries to incentivize electrification of nearby communities. Technical Assistance should be provided to industrial companies by the Rural Energy Authority (for example through PNGSEL) to adequately assess the primary energy needs of surrounding communities and their capacity and/or willingness to pay. For rural communities with limited capacity to pay, corporate social responsibility initiatives could be orchestrated and nationally publicized to promote private funding of rural electrification strategies from private mines;

5. The Rural Energy Policy should align with the national run-of-the-river hydro assessment undertaken as part of the National Power Policy outlined above, and identify opportunities for collaboration with PNG Power in electrifying more densely populated rural and peri-urban communities. An ability-to-pay analysis of surrounding communities would be the primary contribution of the Rural Energy Authority in this regard, in contributing to the national hydro assessment.

l. Increase research in national universities on renewable, community-based electrification options that could be piloted and then scaled: i) In collaboration with the Department of Education and national universities,

scholarships should be offered to promising students to support study in the field of

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locally sustainable renewable energy. Scholarships could be granted from the Renewable Energy Fund under the Rural Energy Authority;

ii) Idea generation among national universities would also be practically incentivized through the “Sustainable Energy Diversity” competition described above.

m. Increase the involvement of local banks in providing micro-loans for rural electrification initiatives: i) Local banks should be involved in the promotion of the “Sustainable Energy

Diversity” competition described above, in order to include them in the identification of financially sustainable ideas and highlight the potential of ongoing finance of sustainable energy ideas. Specific banks to target include ANZ and others associated with implementation of the Sustainable Energy Financing Project discussed previously;

ii) A specially tasked committee should be formed under the Rural Energy Authority to expand the offering of micro-credit products for the financing of defined retail renewable technologies such as those promoted under the Sustainable Energy Financing Project (solar panels, micro-hydro and coconut-oil generators). Given the community and tribal orientation of rural PNG, group-lending for micro-credits should be considered instead of individual lending.159 Alternatively, community-based business-generation schemes may be feasible through which a local business is established and forms the primary demand for electricity, and is therefore financially able to repay the micro-loan.

n. Provide incentives for rural industries to electrify surrounding communities:i) Refer to component 4 of the Rural Energy Policy outlined under priority l. above.ii) Additionally, the Rural Energy Authority should collaborate with Telikom PNG to

investigate the potential for electrification of rural communities close to telecommunication bases. Renewable energy is already used widely and remotely by Telikom PNG, and mini-concessions could be offered to expand the reach of existing or upcoming bases. With the recent removal of the telecommunications monopoly and the entrance of Digicel into PNG, such a proposal could benefit PNG Telikom from a corporate perspective by expanding their market for rural sales; potentially increasing demand for rural cellular phone use in newly electrified communities.

o. Investigate larger-scale, run-of-the-river hydro potential for electrification of more densely populated rural areas: i) Refer to component 5 of the Rural Energy Policy outlined under priority l. above.

p. Formalize private licensing of electricity provision in rural areas that are outside the reach of PNG Power:i) Refer to Component 1 of the Rural Energy Policy outlined under priority l. above.

4. Problem of Dependence on Fuelwood for Rural Cooking q. Increase the prominence of community fuelwood lots:

i) Until alternate income-generating opportunities exist (i.e. through rural electrification), sustainable and attractive alternatives to fuelwood foraging will be challenging. Furthermore, and due to the extremely remote nature of PNG’s most rural communities, fuelwood is likely the only truly viable source of fuel for cooking, especially given an extreme lack of roads or distribution networks to replenish and replace other fuel alternatives (for example LPG or coconut oil stoves).

159 This was proposed and advocated by Mahesh Sharma, former Country Director for PNG at the World Bank (interviewed May 11, 2011).

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As such, and until rural electrification and alternative economic opportunities improve, the Government of PNG, through close collaboration with local governments and local NGOs or churches, should identify 5 to 10 pilot communities to trial fuelwood lots for cooking purposes (mandating the use of these lots for income generation seems infeasible). Funding for planting of rural fuelwood lots should come from the Rural Energy Fund, and should be implemented by the leaders of local communities in collaboration with local governments, NGOs or churches. A local education program on the benefits of fuelwood lots must be championed by local leaders, and would ideally be run alongside a rural electrification pilot as outlined in l) above, to better orchestrate a ‘give-and-take’ initiative structure (i.e. work towards protecting the forests in exchange for rural electricity) and thereby maximize viability.

r. Pursue priorities k. through m. above with the goal of developing alternate and culturally acceptable cooking fuels to substitute fuelwood use in cooking:i) Idea generation for alternative cooking fuels will be an important component in any

successful strategy to reduce dependency on local forests. However, rural electrification must be a first priority due to the lack of financial capacity to pay for alternate cooking methods described in r). Nonetheless, idea generation in alternate cooking fuels could also be promoted via the “Sustainable Energy Diversity” competition outlined above. Initially feasible research activities on behalf of PNG universities have tested coconut oil as a fuel alternative for cooking, but other alternative options may exist. Given the key challenge of rural capacity to pay, however (also existent with electrification but potentially solvable due to the added opportunities for income generation), such an alternate cooking fuels program might therefore need to accompany or follow community electrification.

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Appendix A: Geographical Areas of Energy PovertyA recent, bottom-up, power mapping exercise completed by the ADB160 gives valuable insight into the geographical location of families that are overwhelmingly reliant on fuelwood and other biomass as their primary energy source:

Map: Areas of Household Energy Poverty in PNG

160 ADB, 2009, “Power Sector Development Plan,” p 21-22.

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Appendix B: PNG Economic Corridor ConceptThe PNG government has identified ten corridors in PNG to implement the ‘economic corridor’ concept with the goal of driving economic growth. Individual Economic Corridor Implementation Authorities (ECIAs) would be incorporated as formal corporate entities and be responsible for the infrastructure, social and economic coordination of projects among investors and SOEs. ECIAs, however, will not have authority for development initiatives at the provincial or local levels.161 At the time of writing, however, the only economic corridor approved by the Government of PNG was the Petroleum Resource Area Economic Corridor (PREAC), driven by the PNG LNG project.162 Furthermore, the ECIAs for the PREAC were yet to be established, but were intended to provide a benchmark for establishing other ECIAs. The location of these ten proposed economic corridors can be seen in the map below.

Source: Government of PNG, 2010, “PNG DSP 2010-2030,” p.23.

A detailed model of the economic corridor concept is outlined in the PNG DSP 2010-2030. Specifically, a fully developed economic corridor would ideally have the following features:163

1. An electricity grid powered mainly by hydro or other renewable and connected to the national grid where feasible;

2. Utilities such as water and sewerage, telecommunications, broadband internet, and a post office;

3. Transport infrastructure comprising a network of roads, marine facilities and air that is integrated with the national network;

161 Government of PNG, 2010, “PNG DSP 2010-2030,” p.19.162 Ibid, p.20.163 Ibid, p22.

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4. Social infrastructure including health and education programs;5. Agricultural, forestry and/or fishery based industries, for example sago, livestock, fish

processing and plantation forests; and6. Industrial estates and well services residential housing estates.

A depiction of a fully-developed economic corridor is also provided in the PNG DSP 2010-2030:

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