Egypt's growing population increases demand for energy production

With a rapidly growing population of 80m people and a host of major energy-intensive industrial facilities, Egypt requires a large supply of power to maintain growth. Ensuring this steady production has been problematic since the end of the Mubarak era, and after several incidences of load shedding over the past few years – the legacy of underinvestment and maintenance in the country’s power sector – the government has decisively sought to increase the supply of power. This is happening through two key channels: through a more liberalised tariff framework and a more efficient market structure, as well as through a push to improve the diversity of generating sources, bulking up renewables as well as supplementing supply with nuclear and coal facilities.

Shifting The Mix

Most of the country’s domestic energy needs are supplied by oil and gas, with natural gas as the largest single source (53%) and oil at 41%. Hydropower is 3% of the total, coal 2% and other renewables 1%. Egypt’s energy mix has been changing for some time. Hydro went from producing more than 60% of the country’s electricity, after the completion of the Aswan High Dam in 1970, to accounting for only 8.1% in 2012. Natural gas, meanwhile, rose from 0% of electricity in the 1970s to 75.8% in 2012.

In 2014, the cabinet said that coal could be imported for use in power generation, and in early 2015, Maher Aziz Bedrous, a board member of the Middle Delta Electricity company, said that at least 25% and possibly 30% of the country’s electricity should be generated by coal by 2030. It is expected that $30bn will be invested in coal by 2020 and that 8 MW of generation capacity will originate from coal in the next 10 years (see analysis).

New Plants

During the summer of 2014, the country faced frequent power cuts, which prompted the government to begin a flurry of efforts to fast-track construction of new power plants. The largest was the 1300-MW Ain Sokhna plant, which was built at the cost of LE9.6bn ($1.3bn) and started experimental production in March 2015. The newly built plant received funding from the World Bank, the African Development Bank and the Arab Fund for Economic and Social Development.

According to a Ministry of Electricity spokesperson, all power plants in Egypt went through a full maintenance between October 2014 and May 2015. The government announced that they had added a total of 3632 MW to the nation’s power grid as of June 2015 and that this number would rise.

In June 2015, Egypt signed a $9bn deal with Siemens, the largest single transaction in the German company’s history. In the transaction, three 4.8-GW gas-steam power plants will be delivered, with plans to have them producing power by 2017. Additionally the company will supply 600 wind turbines for 12 wind parks. GE also signed a $1.7bn deal with the country to supply gas turbines that in total will generate 2.6 GW of power. In September 2015, it was reported that Russia would help Egypt build its first nuclear reactor, a $10bn, 1200-MW facility at Dabaa. The development of nuclear power has been long delayed in the country due to the discovery of gas and a lack of demand for other sources of power.

Efficiency

In terms of energy use, Egypt is an inefficient country, according to the World Bank. Its energy intensity, or the amount of energy that a country needs to produce a measure of GDP, is the highest in the region (meaning, it uses a lot of energy to produce a unit of economic growth). Its energy intensity is twice as high as that of Morocco and four times higher than in industrialised countries. In a 2010 report, the World Bank said that Egyptian industry and consumer appliances use 20% more electricity than is called for under international best practices.

While most developing countries have experienced a rapid decline in energy intensity over the past three decades, Egypt has only achieved small improvements. The country has been steadily industrialising, and this in part explains it intensive use of energy. While industry value added as a percentage of GDP dropped about 10 percentage points in the 1980s, down to about 27%, it has been increasing steadily ever since. The ratio hit a high of 39.95% in 2014. Industry uses far more energy than services or agriculture and its rise within the economy results in an increase in overall demand.

To meet the demand, the government has long favoured production over conservation. However, it is now starting to shift its emphasis, and believes that energy consumption can be reduced by 5-20% without significantly lowering output. In early 2015, the Energy Ministry announced a plan to replace 3.89m street lamps with more efficient lighting in order to save an estimated LE1.5bn ($204.5m). The total cost of the project is LE2.1bn ($286.2m) and will take about 28 months to complete. The government is also distributing 13m LED lamps to people in rural areas in order to lower the use of electricity, while contracts have been signed to make shopping malls in Cairo and Alexandria more energy efficient.

Reforms

In mid-2015, the government announced that a new law would be passed liberalising the electricity sector. Under the law, the state would no longer manage utilities, but instead, regulate and coordinate them. Production, distribution and transmission of electricity would be separated and privatised, and the state’s role would be limited to keeping the sector competitive. Utilities will be given six months to adjust their status to meet the requirements of the new law. The Egyptian Electric Utility and Consumer Protection Regulatory Agency will be separated from the Electricity Ministry. However, as of December 2015, there is no word on a privatisation schedule.

A new tariff scheme was contemplated that would make electricity attractive to foreign investors while still offering some subsidy support. The idea is to set up a two-track system, with one controlled by the state, so that consumers and other vulnerable parties are not harmed, and one where pricing is freely set. Over time, the two will be merged so that the entire market is liberalised. Egypt has also setup a smartcard system to combat the informal sector. “The smartcard system is being rolled out in three stages: one regulating the transport of petrol from storage tanks to stations, and the other two from stations to consumers and from storage facilities to specific industries,” Mohamed Shaban, chairman of Misr Petroleum, told OBG. “The first phase has already decreased the amount of fuel lost to the black market.”

The government had previously revised rates in July 2014. At the time, the Ministry of Electricity and Renewable Energy (NREA) said that the average selling price was LE0.22 ($0.029) per KWh while the cost to the producer was LE0.47 ($0.064) per KWh.

For residential customers using less than 100 KWh a month, the price went from LE0.05 ($0.0068) per KWh to LE0.075 ($0.0102). For those using 51-200 KWh a month, it went from LE0.12 ($0.016) to LE0.14.5 ($0.019), and for those using more than 1000 KWh/month, the tariff rate increased from LE0.67 ($0.091) to LE0.74 ($0.1). Commercial users faced similar increases, with small users (under 100 KWh a month) experiencing rate rises from LE0.27 ($0.036) to LE0.33 ($0.044) and large users (more than 1000 KWh) being charged LE0.83 ($0.11) per KWh, up from LE0.72 ($0.098).

Independent Power Potential

Egypt needs to increase its generating capacity by 5.5 GW a year through 2022 to make up for the shortfall, or roughly $5bn a year in investment. This is far more than the country can cover under its own budget, so private sector participation is essential. In addition to the tariff reforms, the country has undertaken a number of initiatives to attract international participation. In March 2015, a new investment law was passed, making it easier for foreign investors to navigate the country’s bureaucracy, while at the same time a feed-in tariff has been developed to encourage investment in alternative sources of energy (see analysis).

Other incentives are being offered. For alternative energy projects, state-owned land is being allocated on an usufruct basis in exchange for 2% of the power generated. A total of 36 plots of land will be allocated for large projects on a first come, first served basis, while those who don’t get the plots can rent their own land on a commercial basis.

Power purchase agreements (PPAs) with 25-year durations are being signed for solar and 20 years for wind. The government is also helping with financing. It is offering 4% loans for projects under 200 KW and 8% loans for projects between 200 and 500 KW in size. Projects above 20 MW will receive a state guarantee for their PPAs. While the rates are for the most part priced in dollars, the companies will be paid in Egyptian pounds, with 15% converted at a fixed rate of LE7.15 to the dollar and the rest at market rates.

Coal

In April 2014, the cabinet voted to allow for the importation of coal in order to help the country meet its energy needs, and expectations are that a significant amount of the fuel could be imported, which could contribute to the country’s energy production. Sectors approved for the use of coal include those involved in cement, iron, steel, coke, aluminium and power production. Coal imports could reach 30m tonnes a year and at some point could generate 25% of the country’s energy demand.

The decision to use coal has met with resistance from critics, even within the Egyptian government. Former environment minister, Laila Iskandar, opposed the plan and earlier, the Egyptian Environmental Affairs Agency opposed approving the use of coal to power the cement industry. It has also been argued that the shift to coal will be difficult and expensive. Ports will have to be upgraded, kilns will have to be converted for cement companies using coal, and transportation systems will have to be set up. “The logistics system will be hit by million of tonnes of coal,” said Mohamed Mashhour, COO of Nile Cargo.

However, there are also benefits. Coal has seen a jump in usage in a range of other markets across the continent, including South Africa, where nearly 7000 MW of new coal-fired production is coming online. And according to cement companies, most participants in the global sector rely on coal. Most importantly, the shortage of natural gas and the diversion of gas to electricity generation and away from industry, has had a significant impact on major consumers, like building material producers.

Some players reported a 20-30% loss of business in 2012 and 2013. To get back on track, they need a cheap and readily available fuel.

Installed Base

As a result, a number of sizeable deals have been negotiated, financing has been obtained for some and it is expected that 8000 MW of coal capacity will be built over the next decade.

A string a deals came together in March 2015. That month, Al-Nowais Investments Group, an Abu Dhabi-based company, and the Egyptian government signed an agreement for the construction of a $4.5bn, 2640-MW power plant. The plant, which will be in the South Sinai’s Oyoun Moussa area, will be the country’s first coal-fired plant. Al Nowais will be providing 70% of the equity, while investors from Singapore, South Korea, China and Egypt have expressed an interest in providing the other 30%. The plant will be know as Ayoun Moussa power station.

That same month, a consortium said that it would be building a 3000-MW plant on the Red Sea near El Hamrawein Port. About $1bn of equity will be provided by Orascom and Abu Dhabi’s International Petroleum Investment Company, while about $2bn of debt will be raised. In May, a consortium of banks said that it was preparing a syndicated loan in support of the project. The group, which included two Egyptian Banks, said that it was arranging two tranches, one of €600m ($657.6) and another of LE3bn ($408.9m).

In March 2015 the UK’s Tharwa Investments and the Egyptian Electricity Holding Company signed an memorandum of understanding (MoU) to build an $11bn plant. It is a massive project; at 6000 MW, it will be the largest coal-fired plant in the world.

Renewables

Egypt is a country well suited for alternative energy production. It has strong, steady wind, good solar insulation and the resources from the Nile. Over the years Egypt has long delayed utilising these sources of power due to other cheap sources of fuel. The country had plenty of gas and was committed to keeping the cost of electricity low.

But Egypt is quickly changing its attitude towards alternatives and is fast embracing the possibilities and opportunities that renewables offer. It is quickly taking up the cause and developing the abundant assets it has. While solar and wind are only a part of a strategy that also includes coal, nuclear and gas, they are important components of the plan to bring balance back to Egypt’s energy markets Ensuring energy storage and base load capacity is central to the success of Egypt’s alternative energy programme. While the country has the ability to generate significant amounts of power from the sun and wind, it may not come at the right times and in the right amounts. This means the government must find ways of storing the energy, which can be expensive and inefficient, and will have to build and maintain conventional power plants to make up for shortfalls.

Solar, Now

Egypt hopes to install 6 GW of solar capacity by 2022, with 2 GW coming online by 2017. Wind and solar combined would total 4.3 GW by 2017. Specific targets have been set in terms of how much of the total should be alternative. The government would like 20% of its energy to come from renewables by 2020. The effort to pivot decisively to alternative energy sources is a large undertaking. The country is expecting LE45bn ($6.1bn) of investments in renewables in the next few years.

In late 2015, it was announced that the Aswan government would establish 39 solar projects at a total cost of $3bn. The local government will be offering 8843 acres on an usufruct basis. Private companies will invest in and run the projects. In March 2015, Philadelphia Solar, of Jordan, signed an agreement with the New and Renewable Energy Authority (NREA) to build a 50-MW solar plant. Lekela Power signed an MoU with the Egyptian Electricity Transmission Company in late 2015 to build a 250-MW wind project in the Gulf of Suez region. In June 2015, the company signed an agreement with NREA to build a 50-MW wind project near Aswan, while also in June it signed an agreement for a 50-MW solar plant in Aswan.

In November 2015, Norway’s Scatec Solar signed an agreement to build five solar projects with a total output of 250 MW. Sterling and Wilson, an Indian company, has committed to building a total of 300 MW of solar power, with the first 50-MW plant scheduled for commission in mid- to late 2016. Saudi Arabia’s ACWA Power and Abu Dhabi’s Masdar have signed agreements to supply a total of 2 GW of alternative power, with 1.5 GW coming from solar and 500 MW from wind. Terra Solar is making a $3.5bn investment to build 2 GW of solar power in the country, while SkyPower Global and International Gulf Development have been contracted to build 3 GW.

Feed-In Tariff

The key to getting so much done so quickly is the incentives that are being offered. In September 2014, Egypt announced a feed-in tariff (FiT), and this is one of the most important elements of the strategy. Different rates are paid depending on the size of the project.

For residential solar, the rate is $0.109/KWh. For solar projects under 10 KW, the rate will be $0.117/ KWh, with the rate rising to $0.125/KWh for projects up to 200 KW. Between 200kW and 20 MW, the rate is $0.136, while above 20 MW the rate goes to $0.143. The government has a cap on the use of the FiT to make sure it does not take up too many obligations to developers. The limit set is for two years or 2.3 GW, whichever comes first.

After the announcement of the programme, a bidding round was held and the response was strong. Some doubts have been raised about the FiT, given the generous terms and the current parlous state of the government’s fiscus and according to local press reports, the FiT is not priced well for small, sub-500 KW, projects, and this could be a problem. However, in December 2015 the government issued its first FiT payout to the energy startup Cairo Solar for power generated by the company.

Outlook

Egypt is in need of significant generating capacity, and meeting the country’s demands will be a challenge. But the government has put into place policies and programmes that will help increase overall output and in a balanced and sustainable manner. The liberalisation of the sector will bring rates more into line with international market prices while it will also set the stage for more private investment.

The FiT, meanwhile, has attracted considerable interest from international investors. In introducing coal, the government is sure to face some resistance. But given the different options being pursued, especially in the context of the recent natural gas finds, capacity should ramp up over time to meet demand.

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The Report: Egypt 2016

Energy & Utilities chapter from The Report: Egypt 2016

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