Economic Update

30 Nov, 2016

In a bid to boost Egypt’s power generation capacity, government officials are looking to increase production from solar and other renewable energy sources.

To this end, the Ministry of Electricity and Renewable Energy (MERE) has laid out a plan to increase the amount of power generated from renewable energy sources from the current level of 12% to 20% by 2022.

Solar on the rise

In November the government announced it had signed power-purchase agreements (PPAs) worth some €600m ($662m) for approximately 400 MW of solar power capacity.

Among the eight companies awarded contracts are Saudi Arabia’s FAS Energy and local developers ARC For Renewable Energy, Infinity Solar Systems and ELF Energy Egypt, of the 100 companies eligible for Egypt’s feed-in-tariff (FIT) scheme.

FITs establish set rates for the purchase of energy production, often providing favourable terms to encourage investment in targeted segments such as photovoltaic (PV) solar and wind projects.

The rollout of solar projects has been slowed by the devaluation of the Egyptian pound in March, with the currency sinking by 13% to LE8.95:$1, before being floated in early November. With PPAs originally signed in the local currency during the first phase of the FIT scheme beginning in 2014, international developers and lenders have shied away from the contracts, which partly explains why the awards have largely gone to smaller local players.

Several major investors have pulled out of the FIT scheme, including Italy’s Enel Green Power in July. The company, which had prequalified for one solar and two wind projects last year, inked a build-own-operate agreement for a 250-MW wind project during the first round.

To attract investors in the second phase of the FIT programme, which commenced in late October, the government has agreed to allow international arbitration; only domestic arbitration was allowed in the programme’s first phase. The move towards a neutral location has ended a stand off with investors as international arbitration is a requirement for some multinational lenders.

MERE also drastically reduced tariff rates to $0.084 per KWh for smaller-scale solar PV plants with a capacity of between 20 MW and 50 MW and $0.078 per KWh for larger PV solar facilities with a capacity ranging between 200 MW and 500 MW in the second phase, down from $0.143 KWh and $0.136 KWh, respectively.

Equally importantly, Egypt’s FIT programme allows for variable exchange rates for repayment. For example, for PV solar projects 30% will be paid at the rate of LE8.88 ($), with the remaining 70% pegged to the US dollar rate on the due date.

Generation push

The renewable PPAs come as the government is looking to expand investment in the country’s grid.

Last year Egypt added nearly 6.9 GW of installed capacity, and the government also heavily invested in transmission capacity, including high-voltage transformer stations and cables.

Building on this, authorities announced plans to add 3.5 GW by the end of this year, at a value of LE52bn ($3.4bn). A further LE12bn ($774.5m) is set to be invested in transmission and another LE10bn ($645.4m) on distribution, Sabah Mashaly, first undersecretary for development at MERE, told media in May.

Among the projects behind this uptick in capacity is a €8bn ($511.2) deal Germany’s Siemens signed in 2015 with the Egyptian government to build three 4.8-GW combined-cycle gas-fired power plants. The first 4.4 GW of capacity is expected to come on-line by year-end, with a full 14.4 GW from the combined-cycle plants due by mid-2018.

Government strategy

These efforts are part of MERE’s medium-term plan for 2016-18 to add 21.9 GW, with 870 MW from wind, 2.5 GW from PV solar production, 17.3 GW from combined-cycle plants and another 1.3 GW from steam units, representing an investment of $13.9bn.

By 2030 MERE expects a total of 51.7 GW to be added to the grid, requiring an investment of $135bn. The long-term plan for 2019-30 foresees Egypt building on its goal of 20% renewables by 2022 by generating 16% from solar power and 10% from wind, with 49% from oil and gas and 15% from coal.

The government’s ongoing programme of easing electricity subsidies is also expected to help encourage investment, according to Sameh Aziz, CEO of solar energy company Solaris Innovative Solutions.

“Some investors are waiting for the phasing-out of electricity subsidies, which will boost the sector even further,” Aziz told OBG. “A major driver of demand is volume, with growing numbers of consumers. It is not an easy market, and investors need a clear investment law and to know they can move their money freely – for example to foreign suppliers – but there is a lot of interest.”

In the World Bank’s “Doing Business 2017” report, Egypt leapt 41 places for “getting electricity”, rising to 88 of 190 countries. While Egypt’s position demonstrates room for improvement, the step up is indicative of successful efforts to increase and enhance electricity capacity in recent years.

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