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Feed-in tariff: A small step in the right direction
 
 
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When Egypt finally approved a feed-in tariff on September 16, the move was initially hailed as the government’s first clear indication of how they plan to integrate private energy projects into the national grid.

As the country continues to suffer from a persistent power crisis, experts and potential investors lauded the vital, long-overdue regulation as a step toward a workable business model for alternative energy companies in Egypt.

But a closer look at the legislation shows several holes in the overall regulatory framework, highlighting the need to swiftly create a more holistic strategy to drive interest in renewable energy products.

For one, the incomplete regulatory framework does not outline how the government will spur consumer demand for renewables. Some investors are also concerned that many of the pending issues are still left up to the government’s decision making process. Decisions will be dependent on the country’s political and economic context and, therefore, carry more risk. Moreover, they remain wary that inefficient bureaucracy will ultimately stand in the way of potential investment plans.

Still, the measure was needed before any serious talk about investing in renewable energy could begin.

In his speech before the United Nations Climate Summit last Tuesday, President Abdel Fattah al-Sisi emphasized the need for private and foreign investment in renewable energy in order to fight climate change in Egypt and beyond.

“Our countries are suffering from a worsening power crisis at a time when we are aiming to achieve high growth rates, which requires the expansion of renewable energy projects,” he declared. “With this in mind, I invite developed countries, financial institutions and the private sector to invest in these projects.”

The feed-in tariff sets guaranteed rates at which alternative energy producers can sell the electricity they generate to the grid, ranging from LE0.848 for each kilowatt hour produced by household set-ups to US$0.1434 (roughly LE1) per kilowatt hour for commercial operations producing up to 50 megawatts of electricity.

Officials say the initiative targets production of up to 4,300 megawatts worth of renewable energy in the next three years, and have hailed it as a means to blaze a path for investment in the sector.

“I believe it’s a very good opportunity for people to rush for the first 2,000 megawatts that will be provided in this area. Egypt needs it. It’s a very good opportunity for investments in that area,” said Tourism Minister Hesham Zaazou at a conference the day the Cabinet approved the tariff.

“There is a commitment from the government that gives guarantees to investors in that area,” he said, adding that “it buys production at a very attractive rate.”

After almost five years of discussion about setting a feed-in tariff, Mohamed al-Sobky, director of Cairo University’s Energy Research Center, says he’s happy to finally see some real progress.

“Definitely it will have a positive impact. It will have an impact on overall electricity balance in the economy,” he says.

However, the tariff still falls short of ideal, Sobky cautions, adding that “what’s being done is perfect as compared to where we were, but I wish it had been a bit more aggressive.”

“The basic idea is whoever will generate electricity from wind or solar energy will sell to the network. That will help the penetration of renewable energy into the system,” he explains.

The tariff is not accompanied by legislation to increase consumer demand for renewables, such as quotas or subsidies for consumers. Instead, it’s mostly “governed by the appetite of investors to come into the market.”

According to investors, the existing legislation isn’t enough enough to lure big players into the market.

In setting a feed-in tariff, the government guarantees that it will buy alternative energy at “normal levels,” says Mohamed Hawary, managing director of Giza-based Andalucia Financial Consultancy and Investment. However, it does not offer any further guarantees to investors who, after years of political turmoil, are wary of sinking millions of dollars into infrastructure projects.

“The latest changes in prices are a good step, but they are not enough,” Hawary says. If the government is committed to fostering a renewable energy industry in Egypt, it needs to level the playing field by either removing all fossil fuel subsidies, or subsiding green energy in the way it currently subsidizes petroleum products.

As an advisor to start-ups in the field, Hawary says he doesn’t think alternative energy entrepreneurs have a better chance of success now than they did a year ago.

“If he’s a gambler, he might trust the minister that subsidies will be removed in the next five years. But for the serious investor — we’re talking real money — no,” he says.

Ahmed Elsewedy, president and CEO of Elsewedy Electric — one of the largest manufacturers of electrical products — is the kind of serious investor Hawary is referring to. Speaking during a panel discussion at the Cairo Climate Talks last week, Sewedy was eager to assert his company’s support for the government and its policies.

“I believe that with the feed-in tariff, this is the only way to encourage investors to invest in energy,” he said.

When it comes to putting down his own company’s money, however, Sewedy admitted he was not so happy with the new tariffs.

“I’m thinking, really, we as a company will not join this,” he added.

Ahmed Zahran, founder and CEO of Karmsolar, Egypt’s largest off-grid solar installation company, also said his company had no immediate plans to take advantage of the new regulations. 

“We’re not betting on the feed-in tariff,” he said. “The prices are good, but we do not know the details yet. We don’t know how we are going to get the land, we don’t know how the price is going to change in the future. There are many things that are still dependent on government decisions and that’s the problem.

“When you create a business model that is dependent on political and government decisions, then you’re taking a risk that it can be reversed,” he explained.

Part of the reason investors are skeptical is that a complete package of legislation has not yet been passed. The government has set purchasing prices for small wind and solar project for the next three years, but those prices will be re-evaluated at the end of the period, explained Hafez al-Salmawy, managing director of electric utility regulator EgyptEra, when speaking at the Cairo Climate Talks. This creates uncertainty for investors.

Moreover, many key details are still pending, such as how state land will be allocated for energy projects, and what contracts between private companies will look like. Final decisions are waiting on a presidential decree, which Salmawy said would come in “one to two months.”

Other energy companies speak of even more fundamental challenges that need to be resolved, such as the cumbersome, inefficient bureaucracy obstructing every single step of the way to developing new power stations.

Speaking at the Euromoney Egypt Conference earlier this month, Italgen Managing Director Giuseppe De Beni gave an example of the challenges investors faced when. His company started similar wind energy projects simultaneously in Morocco, Bulgaria and Egypt.

“What’s amazing is that in Morocco, we have already been running since three years. In Bulgaria, we are up and running since three years. In Egypt, hopefully we can start the preliminary construction this year,” he said.

The delays have stemmed largely from structural problems, De Beni explained, like unclear regulations and the need to coordinate decisions and agreements with multiple ministries and ministers — including five different energy ministers since the project began.

Simply setting purchase prices for energy tariffs is not enough to spark growth and investment in Egypt’s renewable energy sector. Far deeper changes are needed to follow through with the intentions shown in the feed-in tariff, says Andalucia’s Hawary.

“I am more optimistic that someday we might get there,” he offers, “but we are not there yet.”

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Isabel Esterman