After a law liberalizing the electricity sector, Egypt scores major investments at summit

This weekend in Sharm el-Sheikh, electricity sector deals dominated at the Egypt Economic Development Conference.

President Abdel Fattah al-Sisi devoted much of his speech to attendees to discussing new deals for power generation, noting that 13 gigawatts of power were expected to come online in the near future, helping to close an energy gap that has led to frequent electricity cuts and hampered industrial production.

Some of the biggest investment deals at the conference have been in the electricity sector, including projects to build power plants fired by coal, natural gas and renewables.

The timing of some of the deals was clearly for show, such as the announcement of ongoing projects with GE and Orascom and the public signing of a well-established financing deal with the Islamic Development Bank. Their completion, however, was clearly facilitated by a raft of reforms passed in the run-up to the conference, key among them a draft law approved by the Cabinet on February 18 that paves the way for privatization of the energy sector.

Making deals

On Sunday, Tharwa Investments, the parent company of investment and project management group FourWinds, announced that it had signed a memorandum of understanding with Egypt’s electricity minister to build a 6 gigawatt coal-fired power plant, an US$11 billion project it says will be the largest single-site coal plant in the world.

Earlier, GE announced that it is “on schedule to support Egypt’s power grid with 2.6 gigawatts by summer 2015,” according to a press release on the official conference website. Working in a consortium with Orascom, GE will provide 46 gas turbines, 32 of which were said to be in place as of March 13.

The company has also committed to building a US$200 million “multimodal manufacturing, engineering, services and training center” in Suez, which will focus on industries including power generation and renewables.

German energy firm Siemens said it had reached “firm agreements” with the Egyptian government to build a 4.4 gigawatt combined-cycle power plant in Beni Suef and to install 2 gigawatts of wind energy and build a factory to manufacture wind rotor blades. The company also agreed to develop concepts an additional 6.6 gigawatts of combined cycle power plants, as well as 10 electricity substations.

Egypt also signed non-binding memorandums of understanding with Abu Dhabi-based renewable energy company Masdar and ACWA Power of Saudi Arabia to explore developing up to 4 gigawatts of renewable and natural gas power plants in Egypt.

Also on the schedule were Skypower, which has previously been in talks with the government about developing 3 gigawatts of renewable energy projects in Egypt.

More established projects were also promoted, such an Orascom-led project to build a coal plant on the Red Sea, and a coal plant planned for Ayoun Mousa in Sinai. Orascom Chairman Nassef Sawiris also told Reuters he had signed up to develop 50 megawatts of solar energy.

On the financing side, Egypt signed a US$220 million lease financing deal with the Islamic Development Bank to link up the Egyptian and Saudi Arabian energy grids, firming up a financing arrangement announced in December.

FourWinds Capital Management announced the creation of a US$1 billion capital fund for infrastructure projects.

Law paves the way

According to a Cabinet statement the day the draft law was approved, the new law aims to move the state toward a regulatory role and away from directly managing the electricity sector. It calls for the creation of an independent entity to “ensure the preservation of the interests of consumers and providers of the service and balanced relationship between them.”

The new law will introduce rules to allow “free competition” in the production, transfer, distribution and sale of electricity, and will separate the transport, production and distribution of electricity.

In principle, these changes to the law would allow private companies to transmit and sell electricity directly to consumers, cutting the Egyptian Electric Holding Company out of the process.

The law still requires administrative approval and presidential ratification, and has not been released for public review, but in the current climate, the law is unlikely to be met with much resistance.

The electricity sector has been in a state of acute crisis since the revolution, with frequent power outages disrupting manufacturing, commerce and daily life across the country.

The bulk of the electricity problems comes down to two factors, explains Akram Youssef, an engineer who works as a consultant to the Ministry of Electricity.

The first major factor is the well-publicized shortage of natural gas, which fuels roughly 70 percent of electricity production in Egypt. Not only has the shortage of gas caused existing power plants to shut down, it has also made potential investors reluctant to sink funds into building new plants that could end up sitting idle.

An import platform scheduled to arrive in April should reduce the problem and Egypt is working on import deals with a number of international exporters. However, importing gas won’t solve the second, deeper problem: a lack of electricity generating capacity. Even without a gas shortage, if every power plant in Egypt was operating at full capacity, it would not be enough to meet summertime peak demand.

According to estimates published on the conference website, Egypt needs to build 5.2 gigawatts worth of new generating capacity every year until 2022, translating to an investment requirement of around US$5 billion per year.

Liberalizing the sector is just one of a number of policies the government has adopted in an attempt to overcome this crisis: relaunching plans to build a nuclear reactor and allowing the import of coal for industrial use and power generation are among the highest-profile and most controversial plans.

In September 2014, the government also introduced a feed-in tariff that sets the basic guidelines governing the sale of renewable energy to the national grid.

What’s new in the law?

The private sector is already heavily involved in power generating in Egypt, mostly under build, own, operate, transfer (BOOT) agreements, in which the public sector grants right to private company to build a facility like a power plant and operate it for a certain period intended to cover costs and provide return on investment, before transferring it to public sector grantor.

There are also a few off-grid projects in industrial areas like 10th of Ramadan and Borg al-Arab, where private power generators transmit and sell electricity directly to nearby factories.

The most significant change in the new law is that both transmission and sales will be opened to the private sector, a step away from the current system in which only the state-owned EEHC is allowed to transit and sell electricity via the national grid.

The government is already preparing transmission and distribution projects for public bidding.

Speaking on a panel at the EEDC on Sunday, Electricity Minister Mohamed Shaker said the government will be looking to the private sector to provide substations with a total capacity of 68 gigawatts, 35 kilometers of high-voltage transmission lines and transformers with a total capacity of 85 gigawatts.

Turning to the private sector is an attractive choice for the government because, at the moment, Egypt simply cannot afford to upgrade its energy infrastructure on its own.

Speaking at a workshop during the conference, Shaker said the sector will need US$70 billion in investment through 2022. Of that total, US$45.7 will likely be public, he said, while over US$24 billion is expected to come from the private sector.

Without a sovereign fund to finance projects, Egypt has to depend on donors like USAID, multilateral funders such as the World Bank and private banks to raise capital for to build power plants.

This means that Egypt has struggled to build new power plants at the rate it needs to keep ahead of rising demand for electricity. Dependence on donors leaves the country vulnerable to fads in the donor community. Egypt cannot depend on these sources to finance new power plants every year, nor are banks always interested.

A new model at what cost?

The new model will give the private sector a larger scope of activity in the energy generating sector and open up new models for funding and growth.

If the deals announced at the conference are any sign of things to come, liberalization shows great promise as a way to get more electricity online in Egypt. But it comes at a cost.

“They will have more hands helping in the infrastructure development, but they will not be able to control the sector,” says Youssef, referring to the government’s position under the new law. “If you want to increase investment in energy and grow the role of private sector, you will not be able to control the price.”

As the monopoly buyer in the energy sector, the EEHC currently has wide scope to set conditions, including energy prices. It will lose that when it opens up the market for competitors to transmit and sell power.

Any increase in prices will come at a time when Egypt is already moving to eliminate the energy subsidies that have kept electricity cheap for generations. The government says it plans to completely eliminate subsidies within three to five years.

Yet the money has to come from somewhere.

“The question is, who will bear the burden? Factories and big businessmen, or the people in houses?” says Youssef. “This is a question they have to answer.”

In his opinion, the government is likely to favor big business, especially as it makes a big push to attract foreign capital into the market.

“The government wants more investment, wants a competitive sector, so they don’t want a burden on factories,” he says. “They’re negotiating with businessmen and the chambers of commerce all the time, but they are not negotiating with the people.”

Isabel Esterman 

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