Analysis

Energising Egypt’s power sector

Renewable energy projects are the need of the hour, experts say

PHOTO: “Egypt is dependent on oil and gas for almost 92% of its electricity. In summer, this percentage reaches almost 95-96%” Credit:

For most residents in the Middle East, the thought of weathering a summer in the region without electricity and air conditioning is unbearable. For Egyptians, however, power cuts have become a fact of life in the past years, particularly in the summer, as the demand from air-conditioning units overwhelms the country’s power generation systems.

Last year, the Guardian reported that Egypt was suffering one of its most serious energy crises for decades, with parts of the country facing around six power cuts a day, for up to two hours at a time. Electricity demand hit a record daily high of 27,000MW, 20% more than power stations in the country could supply, state media reported.

“Egypt has lived through probably its most dramatic energy crisis last summer. There was frequent load-shedding, there were days of entire outage,” says Cornelius Matthes, managing director – MENA at Building Energy, an Italian clean energy firm.

The severity of the blackouts led President Abdel Fattah el-Sisi to announce last September that the country would need to add 12,000MW to its grid over the next five years, at a capital cost of $12 billion.

The problem of power outages goes beyond the discomfort of braving the heat for the roughly 88 million inhabitants of North Africa’s most populous nation. These outages also impact businesses, leading to a downturn in production and boding ill for the economy as a whole.

The Egyptian government, therefore, has an uphill battle ahead to not just tackle the power crisis and address growing energy needs, but also work further on eliminating wasteful subsidies that are taking their toll on the national budget.

The International Monetary Fund (IMF) estimates that in 2011, pre-tax subsidies for petroleum products, natural gas and coal reached 37.9% of government revenues, while subsidies for electricity accounted for 10.4%. This exceeds expenditure even on critical social services, such as healthcare and education. However, steps are already being taken in this direction, with the government cutting subsidies last year, resulting in a dramatic increase in fuel prices by as much as 78%.

While this hike may not have gone down well with the public, the step is much needed as the country finds its feet in a post Arab Spring-era. Egypt, historically an exporter of oil and gas, is now struggling to meet its own energy needs as reserves prove insufficient to meet local demand.

The push for renewables

Analysts and experts have increasingly begun to call for a move away from oil and gas dependency into renewable energy sources. “On the energy side, I think Egypt is probably the most exciting country on the continent,” Matthes said at a panel discussion at the recent Africa Energy Forum. “Egypt is not only blessed with good gas resources, it also has world-class solar and wind conditions.”

Despite these advantages, the country has been slow to tap into renewable energy because of heavily subsidised fuel, points out Mohamed Shoeib, managing director, Qalaa Holdings Energy Division.

“Egypt has good reserves from the oil and gas point of view, but our utilisation of these resources was not good. We depend completely in Egypt on oil and gas as a primary energy source in all our consumption needs. For example, Egypt is dependent on oil and gas for almost 92% of its electricity. In summer, this percentage reaches almost about 95-96%.”

This dependence on fossil fuels has hampered efforts to switch to renewable energy sources, which have been considered expensive due to the cheap fuel for conventional power plants, Shoeib says. But the price of fossil fuels is artificially low on account of subsidies, which not only hurt the economy but also deprive the country of using such resources in other industries, like petrochemicals.

However, the government now seems to be taking note of the importance of renewable energy, and major wind and solar projects are set to add to the grid in coming years.

One major project in the news recently is a $9 billion deal between with Siemens AG to build gas and wind power plants in the country. The energy deal is the single biggest order Siemens has received till date, and is expected to boost Egypt’s power generation by 50%. It will add 16.4GW to Egypt’s national grid, 14.4GW of it supplied from three combined cycle gas plants and 2GW from wind.

Under the agreement, Siemens will deliver up to 12 wind farms in the Gulf of Suez and West Nile areas, comprising around 600 wind turbines. The German company will also work with Egyptian partners Elsewedy Electric and Orascom Construction to supply three natural gas-fired combined cycle power plants, each with a capacity of 4.8GW.

Although the country has favourable conditions for both wind and solar, Joe Kaeser, president and CEO of Siemens, says wind is possibly a more feasible source of energy for Egypt. “Wind is a very, very cheap source of energy in Egypt, and also in Saudi Arabia and desert countries,” he said on the sidelines of the second session of the German-Egyptian Joint Economic Committee in Berlin.

Countries in the MENA region certainly receive a lot of sunshine, but solar energy is often not as practical because the efficiency of photovoltaic cells decreases the hotter it gets, he noted. Solar panels also need to be cleaned extensively to prevent dust from gathering. “If you have to build a desalination plant just to get the water to clean the solar [panels], you’d better go after wind.”

Commenting on the deal, Kaeser says Siemens will focus not just on power generation but also on improving distribution capacity to ensure power reaches areas where it’s really needed. “It doesn’t matter how much power generation you build. It matters more how much power gets to the people,” he says, noting that Siemens has developed comprehensive grid and distribution planning for the contract.

Rocky road ahead

Egypt’s energy needs will not be met by renewable sources only anytime soon, but the country needs to head in that direction to be self-sustaining and reduce reliance on fossil fuels, the experts agree. However, the road ahead is rocky and challenges persist, key among them being the issue of currency convertibility.

Under the government’s feed-in tariff scheme, announced last year for wind and solar projects, the power purchase agreement tariffs for large-scale projects have been set in US dollars but will be payable in Egyptian pounds. The government will guarantee 15% of each invoice amount converted at a fixed rate of 7.15 pounds to a dollar, while the remaining 85% will be converted at the prevailing rate. Thus, the government will more or less assume exchange risk, according to a report by New York-based law firm Chadbourne & Parke, which is advising companies looking at Egypt’s power sector.

This has raised investor concerns on the convertibility of the Egyptian pound, amid scarcity of available US dollars in Egypt, the National reported.

Despite these issues, renewable energy is the long-term solution to the troubled nation’s economic woes, as it will reduce the amount of fuel imported for electricity generation, Shoeib says. This will in turn improve Central Bank reserves, he notes. “When Egypt will reach a balance and have the capability to export its resources, this will improve completely.”

Other issues with renewables that the nation will need to tackle include electricity storage and fluctuations in output. To combat the latter, Kaeser says the country’s energy needs will need to be addressed by a mix of renewables and clean, conventional power plants for base load supply.

What’s clear for now is that the country will need a lot more energy going forward, for which renewable sources will need to be increasingly harnessed. Egypt’s electricity demand will be almost 120GW by 2030, Shoeib estimates. “This of course needs a lot of energy sources. Renewable will play a big role in that. Egypt could then utilise its reserves and production of gas to increase its downstream industry, especially in petrochemicals.”


Egypt’s feed-in tariff scheme

In September 2014, Egypt’s cabinet approved new feed-in tariffs to encourage the production of renewable energy. According to electricity minister Mohamed Shaker, the tariffs allow the government to guarantee a fixed price for energy produced, in order to encourage investment in renewable energy. Under the scheme, commercial and household producers supply the government, which redistributes electricity through the national grid, Shaker said, quoted in Egyptian daily Al-Ahram.

The tariffs depend on production categories, with the government paying EGP0.848 for each kilowatt per hour (kWh) produced by households; EGP0.901 per kWh for commercial producers under 200kW; and EGP0.973 for producers of 200-500kW.

For large-scale projects, however, tariff rates were calculated in US dollars as they would be expected to resort to foreign financing for lower costs. In this case, projects producing 500KW-20MW are paid 13.6 cents per kWh and those producing 20-50MW receive 14.34 cents per kWh.

Although the rates are set in dollars, they will be paid in domestic currency according to the exchange rate at the time of payment. Tariffs will also be regularly reviewed, as the cost of renewable energy production is expected to decrease, Shaker added.

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