With demand outstripping capacity additions, Egypt’s government urgently needs to bring new power
projects on line to fill the gap. But there are serious financing challenges. In order to overcome them, the
government has been pursuing an aggressive reform agenda aimed at restructuring the power sector and
removing subsidies. The government’s objective is to attract Independent Power Producers (IPPs) to revive
the industry. The failure to do so will mean that power outages will persist.
Egypt’s electricity consumption has been rising at an annual
rate of 5.6% in the past ten years. Driving this growth is a rising
population, improving income levels, industrialisation, but also
subsidised electricity prices. Egypt’s estimated capacity of
34GW is not sufficient to meet this rising demand, and power
outages are frequent – especially in summer months – when
people can experience blackouts more than three times a day.
The country has ambitious plans to invest and increase its
capacity in the medium term. Our estimates suggest that Egypt
will need to invest $28bn in power generation and a further
$15bn in transmission and distribution (T&D). This would
increase capacity in MENA’s most populous country by
approximately 20GW to reach 54GW in 2020.
To address the acute power shortage, the country has
ambitious plans to diversify its power generation mix – currently
dominated by gas-fired power plants – by introducing nuclear
and coal plants. Renewable energy will also be at the forefront
of Cairo’s efforts, with 4.3GW of wind and solar targeted by
2020. However, an ailing economy, and significant political
uncertainty will make investors wary. Financing challenges
remain the government’s biggest obstacle, with a weakening
currency and tightening financing terms from international
banks. It is therefore imperative that the government pushes
ahead with the market and price reforms that it has announced.
The country has relied on the state utility - the Egyptian
Electricity Holding Company (EEHC) - to increase capacity, with
the private sector responsible for only 10% of generating assets.
This has to change, and moving forward, IPPs will be key to the
future of Egypt’s power sector.
Ambitious plans
In 2015, Egypt announced plans to invest $43bn in the power
sector over the medium term. The country suffers from a
shortage of gas, typically prioritised for power generation. But
the discovery of the giant Al-Zohr field, coupled with BP’s West
Nile Delta upstream developments and several LNG import
contracts should improve gas supply. Meanwhile, Orascom and
Siemens are currently constructing three 4.8GW combined-
cycle gas-power plants, which will be among the largest in the
world. The three mega-projects will represent 75% of the 20GW
of projects under development and are expected to come on
line between now and 2020. Overall, gas-fired power plants
represent nearly 19GW of the 20GW of projects under
development.
In terms of renewables, the country announced plans to develop
2.5GW of wind, 1.7GW photovoltaic (PV), and 100MW of
Concentrated Solar Power (CSP) capacity by 2020, but has
been struggling to kick-start the programme. In the short term,
the country will add nearly 400MW of wind capacity in Gebel El
Zeit – expected on line in 2017. Overall, 20GW of generation
capacity is in execution and ready for commissioning by the end
of the decade, still leaving Egypt a little short of what is required
for the period 2016-20.
Beyond the medium term, Egypt has signed memoranda of
understanding with several companies for the construction of
four coal plants with a combined capacity of 12GW. However,
no investment decisions are expected until the end of the
decade. Nuclear is also part of the diversification strategy, with
preliminary agreements between Egypt and Russia in place to
build four 1.2GW reactors. The deal involves a Russian loan of
$25bn to cover 85% of the cost of the project, while the
Egyptian government will fund the remaining. Although a flurry
of optimism surrounded Egyptian nuclear plans, many financial,
political, and regulatory obstacles still need to be addressed
before any concrete progress is made. This will leave coal and
gas as the main components of new capacity beyond 2020.
The financing debacle
Financing remains the biggest threat to the government’s plans
to increase capacity in power generation. Investments and
capacity additions have long been the responsibility of the
Egyptian government, but increasing demand and low
government revenues have meant that the country has not been
able to build capacity in time to meet rising demand.
Consequently, the government is having to look abroad to
provide the necessary financing.
Although there is strong overseas interest in the Egyptian
market, the country’s acute financial situation, diminishing
foreign reserves, and weakening pound are all of major concern
to international investors. Egypt’s foreign reserves reached
$19.6bn in September 2016, down from an all-time high of
$36bn in December 2010. To help assure investors, the central
bank agreed to give currency conversion priority to the utilities
sector. This, though, is not enough, because international
commercial banks will want currency availability guarantees,
which the government is unlikely to give. Additionally, the
government’s insistence that it will purchase electricity from
private generators in the local currency has also deterred
potential investors at a time when Egypt has just adopted a
flexible currency regime. The currency was devalued by 48%
earlier this month while uncertainty of the pound’s health could
stall some projects. Earlier this year, Italian utility company Enel
withdrew from a 47MW solar PV project due to further
devaluation fears.
2 Vol. 02 No. 02 | November 2016
In response, the Egyptian government has also turned to
international lenders such as the International Finance
Corporation, part of the World Bank, and the European Bank for
Reconstruction and Development (EBRD) for financing. The
EBRD alone will provide $500m in funding in 2016 for renewable
projects. However, these organisations are not capable of
providing sufficient financing for projects, nor are they interested
in financing conventional power projects. The government is
therefore having to step up efforts to secure alternative sources
of financing. Moving forward, the UAE and Saudi Arabia are also
set to invest in conventional power sources, while the Russian
and Chinese governments, as well as private organisations in
those countries, are potential financiers for mega nuclear and
coal projects.
Much needed reforms finally taking place
Egypt’s financing struggles are also catalysing power sector
reforms. The country still relies on the single-buyer model, with
EEHC the government-owned state utility that is responsible for
the oversight of production, transmission, and distribution
through its subsidiaries. The sector is vertically and horizontally
unbundled, with several companies operating in generation and
distribution, although most of these companies are state owned
and fall under EEHC. The Egyptian Electricity Transmission
Company (EETC) holds a monopoly on transmission. It also acts
as the single buyer from the generation companies.
Power market structure
In total, six generation, one transmission, and nine distribution
entities operate in the electricity market under the umbrella of
EEHC. Additionally, three IPPs and the National Renewable
Energy Agency (NREA) provide private sector generation to the
market.
Like most power markets in the region, Egypt is undergoing
reforms with ambitious plans to promote renewable energy and
increase private sector participation. In 2015, the government
issued a new law to create a competitive electricity market
throughout the value chain. This will essentially pave the way to
end the single-buyer model and allow private generation to sell
directly to end users. At the same time, third parties will have
access to grids while the role of the EETC will become that of an
independent transmission system operator. The new law also
allows for the creation of two electricity markets. The first market
will permit large consumers to negotiate and purchase electricity
directly from various suppliers. The second market will be more
closely regulated where consumers will purchase electricity from
distribution companies at regulated prices. The transitional
period to complete the restructuring is expected within eight
years.
The government is also stepping up efforts to reform electricity
prices. Residential and commercial electricity prices have
substantially increased across all usage bands, with the
government claiming that these increases will reduce Egypt’s
electricity subsidy bill to 29bn Egyptian pounds (LE), down from
LE48bn had prices remained the same. Residential consumers
were hit the hardest, seeing increases of up to 47% in July, while
commercial customers will see their bills rise between 9-19% in
the same month with the government keen not to put additional
strains on businesses. Several factors pushed the government
to introduce these price hikes. First, a weakening Egyptian
pound has made imports of LNG and refined products more
expensive. Second, rising costs of new generation and
transmission have placed additional financial pressure on an
already constrained government budget. Third, international
development organisations – such as the IMF – have
demanded economic reforms as a condition for providing much-
needed loans. Price reform measures were fundamental in
securing the $12bn aid package by the IMF.
The 10 largest power projects seeking financing in Egypt
Project Cost Capacity Potential financiers Estimated debt gap
($bn) (MW) ($bn)
Shanghai Electric/EEHC: Coal plant 6.4 4,640 Industrial Commercial Bank of China N.A
Renewable energy feed-in tariff programme 8.0 4,300 Eight development banks 4.0
Al-Nowais Investments: Ayoun Moussa coal power plant 4.5 3,960 To be announced 3.0
Rosatom/EEHC: El-Dabaa nuclear power plant phase 1 4.0 4,800 Russian financial institutions N.A
Orascom/Ipic: El-Hamarawein coal power plant 3.0 3,000 Local banks 2.3
Benchmark Power International Kafr: El-Sheikh power plant 2.5 2,300 To be announced 1.9
Acwa Power/Hassan Allam & Sons: Dairut IPP 2.0 2,250 Chinese financial institutions, development banks 0.0
EEHC: Damanhour power plant 1.3 1,800 Development banks and funds 0.0
Engie/Toyota Tshusho: Gulf of Suez wind farm 0.5 250 Japanese and French banks 0.0
Kom Ombo solar projects 0.4 200 Development banks and funds 0.3
Source: MEED; MEED Projects
Generation
Transmission
and Single
Buyer
(EETC)
Nine Distribution
Companies
(state-owned)
Six generation
comanies (EEHC)
Three IPPs
NREA
3 Vol. 02 No. 02 | November 2016
IPPs are crucial to the sector
The primary objective of the government’s ambitious reform
agenda is to attract the private sector. Currently, IPPs have
limited presence in Egypt. Three IPPs were introduced in the
early 2000s with a combined capacity of near 2GW – offering
very competitive tariffs of 2.5¢/kWh. Like most IPPs in the
region, 20-year power purchase agreements were signed with
the state utility. Although there were plans to introduce twelve
additional IPPs, the currency devaluation in 2002 and 2003
shelved these projects. However, the government is now
becoming increasingly aware of the importance of IPPs in its
sector.
First, IPPs allow investments in power generation without the
need for the government to pay the entire upfront cost. This is
especially important for Egypt, as falling government revenues
need to be allocated towards other sectors such as education,
health and infrastructure. Second, IPP projects are usually more
cost effective than government power plants. Contracts under
the IPP model are usually awarded to developers who provide
the lowest levelised cost of electricity (LCOE) - the price per kWh
that represents all fixed and variable costs of a project
throughout its lifetime. Egypt’s first IPPs offered some of the
lowest tariffs at the time. Third, IPP projects are quicker to
execute. With at least 20GW of capacity that needs to be added
in the next five years, projects must be implemented swiftly. IPPs
provide governments with the flexibility to identify projects and
capacity needs while leaving developers to execute. This is
especially important in Egypt where project delays due to
financial and technical issues are frequent.
Egypt’s power industry stands at a crossroads. An unfavourable
balance between rising demand and insufficient capacity can
only be addressed through investment, which we estimate to be
as high as $28bn. But low foreign reserves, concerns about
currency devaluation, and an outmoded industry structure and
pricing regime make financing harder to source. In the face of
these challenges, the government has little choice but to
restructure its power sector, remove subsidies and allow
competition in order to attract investment. But despite the recent
increases in electricity prices, the government will be reluctant to
pass all costs to consumers quickly. The good news is that the
restructuring of the power sector and the electricity pricing reform
have already begun. The government must ensure that it
completes these reforms; otherwise, the power outages will
persist.
