The provision of electricity, water and sanitation services presents particular challenges in a country with a population expanding as rapidly as that of Egypt. The unrest experienced by the country since 2011 has further complicated this task. While successive governments have taken steps to increase the capacity of the nation’s utilities infrastructure, the private sector investment necessary for its continued development is proving elusive in the current environment of uncertainty.
ELECTRICITY INPUTS: Egypt remains heavily dependent on its hydrocarbons resources to meet its energy needs. According to the US Energy Information Administration (EIA), nearly all of the 3.4 quadrillion British thermal units of energy consumed by the country in 2009 was supplied by oil (47%) or natural gas (48%), the former dominating the transportation sector and the latter the most popular input in the electricity generation sector.
To reduce its reliance on oil and gas, Egypt is pursuing a renewable energy strategy, the formulation and implementation of which falls to the National Renewable Energy Authority (NREA). Approved in 2008, the strategy calls for renewable energy to contribute 20% of the nation’s electricity total by the year 2020, with hydroelectric, wind and solar all to play a part in this development.
To acquire the technologies necessary to meet its goal, the NREA has established a range of incentives by which it intends to harness private sector expertise. These include the provision of long-term power purchasing agreements of 20 to 25 years; the establishment of the energy sale price in foreign currency; and the creation of a guarantee from the central bank on all financial obligations under power-purchase agreements. Further, the body has ensured the availability of 600 sq km of land allocated for wind projects for which the NREA holds permits; exempted of all renewable energy equipment and spare parts from Customs duties, and created a renewable energy fund that will be deployed to bridge the gap between the cost of electricity produced by conventional and renewable means, as well as to finance research and development activities and pilot projects.
HYDROELECTRIC CAPACITY: Egypt has already established a significant hydroelectric capability thanks to the Aswan Dam, which was developed by President Gamel Nasser in the 1960s. The electricity generated here brought a significant leap forward in rural electrification, and today’s generation capacity of 2800 MW is just under 10% of the country’s total, according to the EIA. More hydroelectricity capacity will be delivered with the rehabilitation of a second dam near Assiut in Upper Egypt.
Egypt has contracted Andritz, an Austrian engineering firm, for the project, which will see 32 MW of capacity from four turbines added to the national grid. The additional supply is expected to be available by 2017, according to the company. However, Egypt’s long-term potential for additional hydroelectric power is limited by its finite water resource, and the sector has come under increased scrutiny in the wake of the dispute between Egypt and Ethiopia over water rights on the Nile. The commencement of construction work on the Grand Ethiopian Renaissance Dam in 2013 has highlighted the uncomfortable fact that this single source provides around 98% of Egypt’s freshwater needs, and has led to political tension between the two countries.
BLOWING IN THE WIND: The wind power industry is also gathering momentum, having benefitted from a number of experimental projects since the 1990s as well as the experience gained during the implementation of Egypt’s first major windfarm at Zafarana on the Gulf of Suez, which was established in 2001. The NREA’s most recent wind atlas, published in 2005, provides a roadmap for the future development of the industry, by which the authorities aim to build on the current installed capacity of 550 MW to meet a target of 7200 MW of wind power by 2020. Several new wind projects are in the pipeline, and the NREA has identified potential new capacity of 2370 MW to come from those already in the planning or construction phase, such as a 200-MW facility for which Spain’s Gamesa is due to supply 100 turbines by the end of 2013 (see analysis).
PLACE IN THE SUN: Egypt’s solar industry is less well developed despite the nation’s arid climate. Average annual direct normal solar radiation ranges between 2000 and 3200 KWh per sq metre, making it well suited to the technology. Although off-grid solar power has played a small part in localised energy provision for many years, the first solar input to the grid came as recently as 2011, with the establishment of the 140-MW Kuraymat Power Plant south of Cairo, a modest 20 MW of which is directly supplied by its solar mechanism.
However, with a target of producing 3500 MW of solar energy by 2027, the NREA is pushing ahead with a number of photovoltaic and concentrated solar power projects in partnership with international investors, including France’s Agence Française de Développement and Germany’s KfW. The projects will both connect to the grid and be used to provide power to isolated areas (see analysis).
ELECTRICITY REGULATION & REFORM: While the provision of electricity on a commercial basis in Egypt dates back as far as the 19th century, it was only in relatively recent times that the government played the principal role in it. From 1893 until 1961, the generation and distribution of electrical power was the sole preserve of private companies, which thrived in the liberal market conditions of that period.
However, the revolution of 1952 and the nationalistic fervour which followed it saw the government take control of the utilities sector, nationalising all generation, transmission and distribution companies, which were eventually united under the oversight of the Egyptian Electricity Authority.
Since 1990, a large array of legislation has formed to govern Egypt’s electricity market. However, despite their number and variety (which includes laws as well as presidential, prime ministerial and ministerial decrees), the common theme that unites the most salient regulatory changes applied to the sector is that of market liberalisation. In 1996, Law 100 opened the sector up to independent power projects (IPPs), the model by which energy sectors worldwide have harnessed private capital in a bid to meet rising energy demand. The following year, a presidential decree created the Egyptian Utility and Consumer Protection Agency (EgyptEra), as regulator of the electricity sub-sector. It licenses companies that operate in the electricity arena, establishes and monitors performance benchmarks and is charged with creating conditions for competitive trading arrangements, although it has no tariff-setting powers.
By 1998, the government had signed the first of three power-purchase agreements with private firms to build and operate generation plants that would feed directly into the national grid, and in 2001 a vertical and horizontal unbundling of the electricity sector took place which saw the replacement of the Egyptian Electricity Authority (EEA) with the Egyptian Electricity Holding Company (EEHC) and the emergence of the modern sector structure seen today. “In keeping with Egypt’s transition from a net exporter to being a net importer of gas, Egypt is slowly moving away from a position of controlled pricing to mixed pricing and ultimately towards open market pricing,” Patrick Allman-Ward, the general manager of Dana Gas, told OBG.
SECTOR STRUCTURE: Egypt’s modern electricity sector is organised according to a multi-tiered structure. In 2006, the prime minister created the Supreme Council for Energy (SEC), a body comprising a number of ministers and headed by the prime minister himself. The council coordinates the various policies of the wider energy sector, including their legislative and institutional frameworks, investment programmes, policy initiatives and the sensitive issue of energy pricing. In terms of provision, the ultimate authority with regards to generation, transmission and distribution is the Ministry of Electricity and Energy (MoEE), which acts as the owner of a number of entities within the power sector.
Having replaced the EEA more than a decade ago, the EEHC now acts as an umbrella organisation for the various units that were created at that time. At the generation level, this includes five thermal generation companies and one hydropower generation firm. These supply power to the EEHC, which is the single buyer for the sector. Power is then routed to the Egyptian Electricity Transmission Company (EETC), the country’s sole transmission-and-dispatch company. The EETC routes power to large consumers and to nine electricity distribution companies, which then deliver power directly to retail customers.
In addition to the 16 state-owned affiliates of the EEHC, a further six authorities operate in the electricity sector and are directly answerable to the MoEE: the Rural Electrification Authority; the Hydropower Projects Executive Authority; the New and Renewable Energy Authority; the Atomic Energy Authority; and the Nuclear Material Authority. These bodies oversee the development of projects within their respective domains, and are responsible for coordinating research initiatives.
Finally, although Egypt’s electricity sector is still dominated by state-owned agencies, a process of market liberalisation since the turn of the century has seen the beginnings of a private electricity generation segment, currently composed of three IPPs established under build-own-operate-transfer (BOOT) agreements to sell power directly to the EEHC, as well as a number of small power suppliers that provide electricity to isolated consumers.
INFRASTRUCTURE: As the region’s most populous country, Egypt’s power infrastructure is also one of the most extensive. Some 50 power plants are distributed across five companies: Cairo, East Delta, Middle Delta, West Delta and Upper Egypt. The oldest of these steam, gas, wind and combined-cycle units is the 175-MW Cairo West plant, the various units of which were commissioned between 1966 and 1979. The 150-MW Cairo North and Nuaiba 1 & 2 plants, both combined-cycle projects commissioned in 2005 and 2006, are the largest thermal power plants in the country. A sixth power generation company, Hydro Power Plants, operates Egypt’s largest power project in terms of installed capacity: the 210- MW High Dam development in Upper Egypt, commissioned in 1967.
Four other hydro projects (Aswan Dam I and II, Esna and New Naga Hamadi) add between 64 and 280 MW each. Of the generation companies, Greater Cairo oversees the largest amount of installed capacity, accounting for 21.3% of the total, according to the EEHC, while the most utilised technology is steam, accounting for 43.6% of installed capacity.
As well as the nation’s grid-connected power stations, a further 34 isolated plants, mainly diesel and gas turbine units, feed electricity into local distribution networks. These are operated by five companies. The smallest, Upper Egypt D.C., operates a plant with an installed capacity of 2.7 MW and the largest, Canal D.C., runs 21 plants with an aggregate capacity of 155.76 MW. In total, isolated power generators have a combined installed capacity of 238 MW.
NETWORK: Egypt’s transmission network runs from the Aswan Dam in the south to the urban settlements dotted along its northern Mediterranean coast, with a number of branches serving the desert settlements to the west of the Nile, the coastal towns of the Red Sea and strategic locations in the Sinai Peninsula, such as Sharm El Sheikh, Taba and Arish. The spine of the system, which runs from the Aswan Dam to Cairo, utilises 500-KV transmission lines, with branches of 400 KV, 220 KV, 132 KV and 32 KV. In total, some 43,604 km of transmission lines and cables make up the national grid.
Finally, nine distribution companies operate a medium-voltage network of 58,362 km and a low-voltage network of 246,837 km in length. Of these, the Canal Company for Electricity and Distribution oversees the largest share of these networks, with some 18% of lines and cables and distribution transformers falling within its purview. The South Cairo Company for Electricity and Distribution, meanwhile, serves the greatest number of consumers, with around 4.7m customers on its books. Just over half (50.7%) of the electricity sold by Egypt’s distribution companies on the medium- and low-voltage networks is bought by residential customers, while industry and government and public utilities are the second- and third-largest users, making up 19.3% and 16.4% of power purchases, respectively.
INTERNATIONAL CONNECTIONS: Since 1998 Egypt’s electricity infrastructure has been augmented with a number of international connections. The first, in June of that year, was a 220-KV link with neighbouring Libya, which was followed in October by a 400-KV connection with Jordan. In 2000 the Jordan link was extended to Syria, and a subsequent connection between Syria and Lebanon has led to an interconnected electricity transmission system between these four neighbours.
An agreement signed shortly after the creation of this unified network commits Egypt to supplying a capacity of 450 MW to be shared equally between the other participating nations. In 2011 the EEHC reported that it had reached this target and was continuing with a commitment to supply the Palestinian territory of the Gaza Strip with 17 MW. According to the EEHC’s 2011/12 report, Egypt continues work on the operational arrangements for a mooted interconnection structure which will include the already existing link with Libya as well as further connections with Tunisia, Algeria and Morocco.
Moreover, as of 2013 Egypt has completed the techno-feasibility study for a connection with Saudi Arabia, which would establish a transfer capacity of 3000 MW between the two countries. An intergovernmental agreement is currently under review by both parties and, should implementation go ahead as planned, the project is expected to become operational by 2015. The successful completion of the link with Egypt’s eastern neighbour would establish a strategically significant interconnection between the Maghreb and Mashreq countries of northern Africa and the Gulf Cooperation Council.
In the meantime, a number of other international connection possibilities remain. Egypt has studied the potential of trading electricity with countries in sub-Saharan Africa since the early 1990s, and has completed feasibility studies for a connection with the Democratic Republic of the Congo, as well as Ethiopia and Sudan. Discussions also continue between Egypt and Greece regarding a connection between the two countries’ transmission networks via a submarine cable, while a larger scheme to link the southern and eastern Mediterranean countries may provide Egypt with the long-term possibility of exporting renewable energy to Europe.
THE POWER CHALLENGE: Egypt’s electricity sector has achieved some notable successes in its long history, most obviously the provision of electricity supply to 99.03% of the population by 2011. However, sustained economic growth in the decade prior to its recent political turbulence has resulted in a rapid rise in electricity demand, which has placed considerable strain on the system. Between the financial years 2001/02 and 2010/11 the EEHC’s customer base grew from 18.3m to 26.7m, and although the company reduced network losses by over three percentage points from 13.48% to 10.6% over this period, demand now runs perilously close to supply.
According to EgyptEra, electricity peak demand increased by an average of 7% per annum in the first decade of this century, and in 2010 grew by more than 11% to reach 23,000 MW in August of that year as the nation responded to the summer heat by resort to air-conditioners. By 2012, according to the EEHC, peak load had reached 25,705 MW, while total installed capacity stood at 29,074 MW, a margin narrow enough to challenge the EEHC’s ability to provide continuous power to all areas of the grid. In 2012 this problem was confounded by bottlenecks in the supply of oil and gas caused by Egypt’s deteriorating external financial position.
In late December 2012 more than 15 power stations were forced to temporarily halt generation due to lack of fuel, and power outages in Cairo forced the stock exchange and subway system to shut down. Intermittent load shedding became commonplace during the first half of 2013, and the question of how to consistently meet rapidly growing demand for power became one of national importance.
STRATEGY: EnergyEra’s projections of peak energy demand see a rise from the current level of over 25,000 MW to reach 33,320 MW by 2016/17 and 54,200 MW by 2026/27. Consumer demand will play a large part of this anticipated future requirement, and so too will the nation’s growing manufacturing base. The country’s power strategy, therefore, has a direct bearing on future economic development. While the SEC and MoEE are the principal loci of strategic authority in the government, it is the EEHC itself that develops and implements the five-year plans to build needed power generation capability.
As of 2013, the EEHC is following up on the implementation of its sixth five-year plan, which called for the addition of 7000 MW of generation capacity, of which 4400 MW had been commissioned by mid-2012 while a further 2100 MW had been added by the fast-tracking of three projects at New Shabab, Damietta and 6th October power stations. The current five-year plan for 2012-17 calls for the addition of 12,400 MW of thermal generation capacity, of which 11,000 MW will be commissioned during the planned years, with the final 1300 MW to be commissioned during the financial year 2017/18.
A WIDER REACH: The nation’s transmission and distribution networks will also be expanded to meet the anticipated increase in customer numbers and improve the quality of supply. A notable feature of the strategy is its focus on securing components from the domestic market for planned electricity projects. According to the EEHC, it has succeeded in utilising locally manufactured equipment for the entire distribution network and the transmission network up to the 220-KV lines, while 42% of the components used in conventional thermal power plants are Egyptian, 30% in wind power plants and 50% in the first solar thermal plant at Kureimat.
PRIVATE & FOREIGN INVESTMENT: Another notable aspect of the current five-year plan is the significant role envisaged for the private and foreign investment in its realisation. Egypt’s electricity sector is dominated by the government and its various agencies. As of 2011 around 10% of total electricity supply was derived from private generators, while the EEHC owns about 90% of generation infrastructure, 100% of the transmission network and over 99% of distribution infrastructure. However, the sector has been open to private and foreign investment since the promulgation of Law 100 of 1996. A new investment law issued in 1997 also established a number of incentives, including tax holidays, profit repatriation, protection against nationalisation and government guarantees to secure projects.
Three significant projects have been undertaken by foreign investors as a result. Egypt’s first BOOT project, a $450m gas-fired plant with two 325-MW generating units and developed by InterGen, began commercial operations in 2001. Egypt’s second and third independent power producers (IPPs) were soon to follow, when Electricité de France won a second BOOT award to build two gas-fired projects near the cities of Suez and Port Said with a combined capacity of 1.4 GW. The IPPs came on-line in 2003 and since 2006 have been owned by Powertek. According to the latest five-year plan some 5500 MW of the capacity which is to be added by 2017 is to be obtained through private sector investment.
PRIVATE MATTERS: Yet, securing private funding has proven to be a challenge since the initial success of Egypt’s first three IPPs. This is often ascribed to unfavourable financing and off-take requirements, such as a stipulation that foreign currency must be obtained abroad rather than from domestic sources, and that local firms must contribute substantially to the project. Moreover, under the most recent IPP framework, developers must bring their own customers with them – a notable change from the previous arrangement, under which the EEHC acted as the sole buyer. “There are major challenges ahead for Egypt, and the private sector continues to have a role by investing in infrastructure. However, in this regulated market, firms need to know the pricing structures going forward so that investments can be justified,” Andy Wells, the former chairman and managing director of ExxonMobil Egypt, told OBG.
A lack of private sector interest in developing IPPs since the turn of the century has called into question Egypt’s ability to meet its target of private capital input. Instead, the government has re-taken the lead development role and secured funding for infrastructure from international development finance institutions such as the World Bank, African Development Bank, Arab Fund for Economic and Social Development, European Investment Bank, the OPEC fund and USAID. Significant donor support has also come from Islamic Development Bank, the Japanese Bank for International Cooperation and Germany’s KfW. One such project is the World Bank-funded Giza North Power Plant, a combined-cycle gas turbine project which features four gas turbines and two steam turbines with a combined capacity of 1500 MW. The first phase of the new development, which is due to be connected to the grid through 500-KV and 220-KV transmission lines, is scheduled to become fully operational by 2014.
NUCLEAR: Nuclear power in Egypt has long been a topic for debate, and the Egyptian Nuclear Atomic Authority (EAEA) was established as long ago as the 1950s to pursue the peaceful applications of atomic energy. The National Centre for Radiation Research and Technology was created in 1972, and forms one of the central divisions within the EAEA. Egypt acquired its second research reactor in 1997, a 22-MW thermal power unit purchased from Argentina, which is operated under the aegis of the EAEA.
After decades of theoretical application, in 2007 Egypt’s nuclear ambition was revived by the administration of Hosni Mubarak, which drew up plans to set the plant in operation by 2019, and thereafter to expand to four reactors spinning in two separate facilities, with a capacity of 4000 MW. In June 2009 the government hired Australia’s Worley Parsons as a consultant, and in 2010 passed a nuclear power law and enlisted the Korea International Cooperation Agency to train nuclear engineers.
These proposals gained significant local interest, with the country’s two dominant construction firms, Orascom Construction Industries and Arab Contractors, forming a joint venture in 2011 to specialise in nuclear projects. It highlighted the potential for work in Egypt and throughout the Arab world in anticipation of a heavy flow of nuclear power projects in the near future. Egypt’s Nuclear Materials Authority a division of the MoEE has identified 15,000 tonnes of uranium within Egypt that could be used. The country was set to receive bids on a nuclear plant when the Fukushima disaster in Japan in 2011 put those plans on hold, and the subsequent political upheavals have made it unlikely that any firm decision will be taken in the short term regarding nuclear development.
WATER: The ultimate authority in terms of both policy and regulation of the water sector is the Ministry of Housing, Utilities and Urban Development (MHUUD), while a range of other entities deal with aspects of municipal water supply and sanitation: The National Organisation for Potable and Sanitary Drainage (NOPWASD) plans and develops the nation’s purification and wastewater treatment plants, distribution systems and sewage collection across Egypt, except the urban areas of Cairo, Alexandria and the Suez Canal, where the Cairo and Alexandria Potable Water Organisation retains authority.
A range of general authorities, public/private companies and utilities is charged with operation and maintenance of this infrastructure across 27 governorates, all of which are supervised by the General Authority for Potable Water and Sanitary Drainage. The New Urban Communities Authority, meanwhile, has a mandate to plan and oversee the construction of water infrastructure for new satellite towns emerging outside traditional urban population centres.
The water sector in Egypt has experienced major reform since 2004, when a presidential decree grouped all drinking water and sanitation entities under a single organisation, the Holding Company for Water and Wastewater. A subsequent decree established the Egypt Water Regulatory Agency (EWRA), which has been charged with meeting several strategic objectives, including ensuring that policy is implemented by the country’s water entities.
LEGISLATION: A further strategic goal entrusted to the EWRA is that of establishing a fair balance between the cost of service and the water tariff. However, until such time as a new water law is in put place the task of tariff adjustment remains within the purview of the cabinet. The sector is currently regulated according to a range of laws and presidential decrees related to water and wastewater.
The potential for regulatory arbitrage inherent in such a dispersed regulatory framework has made a unified water law a priority for the government. A draft water law has been in existence since 2009, when it was approved by both the MHUUD and the cabinet, and as of 2013 it awaits approval by parliament and the signature of the president before a committee can be formed to develop its executive regulations. While political instability has delayed its promulgation, the publication of the draft law has allowed interested parties to assess its potential impact on the sector. One of the most significant market alterations that the new law will bring about is the strengthening of the role of the EWRA to allow it to become an independent regulator capable of setting efficient rates and tariffs.
PRIVATE SECTOR: Another objective of the draft water law is the enhancement of the role played by the private sector in sector development. The current concession laws, which until recently were applicable to the water sector (Law 129/1947 and Law 61/1958), were generally considered unfavourable to private investors, most saliently in their limiting of profit and granting of unilateral rights to the government to amend the terms of the concession. The Public-Private Partnership (PPP) Law of 2010 superseded this concession framework and provided a new model by which investors could enter the sector, establishing important principles seen in other jurisdictions that have adopted this system, such as a robust dispute resolution mechanism.
The first action under the new regime was the signing of a construction and operation contract for the New Cairo Wastewater treatment plant, which predated the promulgation of the law itself. The tender process attracted five bidders, mostly consortia of Egyptian and European firms. The winner was a joint venture between Egypt’s Orascom Construction Industries and the Spanish group Aquailia, and the resultant contract has a 20-year tenure.
The MHUUD is also working on a new Water Policy Paper which may affect the conditions by which the private sector participates in the water sector. Issues currently under consideration include the structuring of PPPs in relation to water and sanitation activity and the review and refinement of transaction documentation, and to date have involved a number of government authorities, such as NOPWASD and the EWRA, as well as foreign organisations acting in a consultative capacity, such as USAID.
THE WATER CHALLENGE: While Egypt has succeeded in providing pure drinking water to 100% of its citizens, the coverage of wastewater services stood at 55%, according to a 2010 report by the EWRA. This shortfall creates obvious environmental and public health threats, and securing the capital investment required to address them is one of the principal challenges facing the government.
The sector also faces the challenge of supply. A long-running dispute between Ethiopia and Egypt over water rights on the Nile came to the fore in 2013, when the former diverted the river in preparation for a new dam. Egypt, which relies on the Nile’s flow for a significant portion of its electricity capacity and 90% of its water supply, is allocated 55bn cu metres annually under a succession of treaties negotiated over the course of the 20th century. A number of Nile Basin countries have contested this right, and Ethiopia’s new $4.8bn dam, if completed, has the potential to reduce the volume of Nile water reaching Egypt by as much as 17bn cu metres. Egypt has therefore strongly opposed the dam’s construction, and the political disagreement remains unresolved.
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