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A focus on the Egyptian power market

Opportunities and challenges

Introduction

In 2013 power generating capacity was at 27GW, with peak demand at 24GW and frequent blackouts over the summer months. By some estimates, an additional 30GW of capacity generation will be required by 2030 to meet demand, translating to an overall capital investment of around US$5 billion per year.

Whilst development of power generation has become an increasing priority over recent years for the Egyptian government, the events of 2011 and the subsequent political uncertainty slowed progress. However, the relatively stable political environment over the past 12–18 months has seen a renewed impetus and focus on finally starting to deliver the power infrastructure Egypt so desperately needs. However the Egyptian government has shown reticence to deliver on the first round of feed-in tariff projects due to what is perceived to be an overly generous feed-in tariff. The effect that this will have on investor confidence to participate in a proposed second round with a lower tariff is yet to be seen.

Egypt is increasingly attracting interest and is seen as one of the key market opportunities in the Middle East and North Africa (MENA) region. This can be seen with the recent introduction of an ambitious renewables programme and the project announced at the Sharm El Sheikh Egypt Economic Development Conference in March. This brochure explores the potential project pipeline for power generation projects in Egypt, the regulatory framework for delivering those projects and some of the challenges which may be faced.

Challenges facing the Egyptian electricity sector

Generation capacity shortfall is the key issue.

Electricity demand growth is very high in Egypt, estimated at six per cent per annum, which creates a power generation deficit of approximately 6GW per annum through to 2022. There is currently a very high reliance on thermal assets (over 90 per cent of current installed capacity) and a low reserve margin relative to peak demand of 11.5 per cent. In addition to installing new power generation capacity, there are significant opportunities to increase power generation efficiency by up to 20 per cent without changing existing asset stocks. A third of generation infrastructure is more than 20 years old and availability and efficiency rates are five to eight per cent below benchmark assets.

The financial burden placed on the state to subsidise the current electricity sector is also significant, with energy subsidies reaching seven per cent of GDP in the financial year 2013/14. These financial commitments far outweigh spending in the health and education sectors and the Ministry of Finance is starting to fall behind on its payments to the Egyptian Electricity Holding Company (EEHC),although it is worth noting that there are no reports of Independent Power Producers (IPPs) not being paid on time. This, coupled with increasing operating and investment costs, has led to increasing pressure on EEHC’s financial position.

In July 2014, the Government announced its plans to bring electricity tariff costs to recovery levels within five years. Even if we can assume that a period of relative political stability will now follow in Egypt (a necessity for attracting foreign direct investment), the Government will need to ensure a robust legislative regulatory framework is in place to achieve these ambitious aims and secure the necessary financing.

Regulatory framework for power projects in Egypt

The power sector and market in Egypt has historically been structured on a vertically integrated basis with the Government in control of the process from generation to meter.

The Egyptian government ended its monopoly over power generation in the early 90’s, passing a series of laws that opened the possibility for private entities to own power stations. This led to a round of government sponsored IPP/privatisation programmes which ended in the mid to late 1990s. The first IPP in Egypt was the 683MW power plant at Sidi Krir. The tender was for a 20 year BOOT natural gas-fired power station. The bid was awarded to InterGen in 1998 and the plant began commercial operation in 2002.

Although the generation sector has been partially liberalised, transmission and distribution remain a monopoly controlled by the EEHC. Notwithstanding a small number of IPPs, the EEHC continues to own approximately 90 per cent of Egypt’s power generating capacity.

Conclusion

Despite the challenges which may be faced, significant progress has been made and momentum generated over the last six to nine months. The next twelve months are going to be even more important as we move from the planning and announcement stage to delivery. It is also worth noting that prior to the 2011 revolution, the Egyptian government had previously run a limited IPP programme and this experience should assist in delivering dividends as we move forward.

The energy industry wants Egypt to succeed and currently sees it as the most exciting market in the MENA region.

Source: This post was originally published in Inside Africa Law on June 17, 2016 by Simon Currie, Chris Down, Charles Whitney, Paul Mansouri, Andrew Hart & Angela Croker.

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