Interview: Tamer El Mahdi
What opportunities will plans to boost electricity production create for private sector investors?
TAMER EL MAHDI: Generally speaking, the perspective of the Egyptian government over the past few decades has been one that prefers government-led investment. The private sector, for the most part, had not really been encouraged to invest in certain fields, including electricity generation. All of this changed in 2014, when the current government decided that the country’s need for additional electrical capacity was so urgent that private investors should also be involved, and instituted policies designed to promote this involvement. This opened up a number of investment opportunities in both conventional power and renewables. The success of financing agreements by companies like GE and Siemens on the conventional side is a positive testament to this new outlook.
On the renewable side, the government has instituted a feed-in tariff (FiT) programme that aims to add 2 GW solar and 2 GW wind by allowing each private investor to build and operate developments of 50 MW maximum capacity. With each development costing about $100m, the overall investment should be around $4bn. This is part of a broader plan for renewable energy to account for 10% of generation by 2022, or around 6GW out of a total of 63 GW of energy for the country. Right now, we have about 800 MW, with about 600 MW of wind and slightly more than 100 MW from solar.
How does the FiT help to promote investment in wind and solar power generation?
MAHDI: The FiT provides such a platform by setting up prearranged prices at which the government is willing to buy wind and solar power produced by private investors according to certain terms and conditions. Once established, this should allow for more investment in this area. The government moved very quickly in establishing prices and qualifying companies to develop the 50-MW plot. In fact, the price the government is willing to pay for solar is attractive and, as such, the qualifying round for the plots was oversubscribed. Wind, however, saw less demand – so far only around 50% of the 2 GW – given that the price was considered low.
While the government acted quickly on price, it has been less quick on terms and conditions. We had been waiting for a final version of the power purchase agreement for more than a year and there are still some issues that need to be resolved. For instance, the government plans to pay companies in Egyptian pounds but there are some questions about how easy it will be for companies to convert these payments into US dollars to pay their debts to foreign investors and repatriate their dividends. This issue has become even more pronounced of late given the shortage of foreign currency the country is experiencing as well as expectations of continued declines in value in the EGP. When an investor signs a contract to provide a service to the government, it needs to know that it is watertight and the partnership will be win-win.
To what extent do you see potential for increasing local production of components for renewables?
EL MAHDI: There is some talk of building these factories, but I do not think it is the best idea. The economies of scale will be difficult for Egypt to achieve. The prices for photovoltaic cells produced in China have fallen so drastically because it can achieve the necessary economies of scale given its large size. European companies have even begun closing their factories on the continent and moving them to China and other countries in South-east Asia for this exact reason. A company can only profit from the sale of photovoltaic cells if it has a huge market and can profit from economies of scale. This is not the case here, due to its size and position in the market. If this is not feasible for Europe than it is certainly not feasible for Egypt.
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