Egypt: How to solve Egypt’s energy problems

Egypt is in the throes of an energy crisis. Both rising demand and falling gas (and oil) output have in recent years transformed the country from exporter to importer of both, a shift that poses a substantial threat to its economy.

Nevertheless, a solution to the problem, one that the EBRD has long experience of and is indeed a specialist at, is at hand.

Egypt can harness the sun and wind power with which it is so abundantly blessed to help bring more of its citizens and companies the electricity they need in their daily lives.  The Gulf El Zeit, for example, boasts some of the best wind resource in the world.

And it can reform a still mostly state-run energy sector by inviting more flexible, small-scale, private-sector investment in renewables.

Although renewables can only ever be one feature of the overall energy landscape, within Egypt they are about to gain a new prominence – for a number of reasons.

At about the same time as Egypt reluctantly started to import gas, its government, making every effort to find smart ways to meet its growing energy needs, passed the comprehensive energy subsidy reform of July 2014. This set out a five year programme of increasing tariffs to reach a level that reflects the true cost of electricity to the consumer. More reforms welcomed by investors are on the way, including a revised Electricity Law which will set the stage for a gradual liberalisation of tariffs.

And simultaneously with those developments, the cost of solar and wind power, which used to be much more expensive than oil and gas, has been falling dramatically as technology improves. Two tenders in the last eight months – one for solar power in Dubai and the other for wind power in Egypt itself – stunned renewables experts by pricing solar and wind power as no more costly than gas.

As I pointed out in a recent PWC/Eversheds report, the Egyptian power sector is reforming and changing because it has to, but also because it has a great opportunity to grasp. Just as it faces an energy crisis, the renewable energy sector is delivering cost and efficiency that, in a country with Egypt’s world-class natural resources, make it truly competitive with conventional energy.

This change in pricing makes the emphasis on renewables already so dear to the EBRD’s heart an excellent energy option for Egypt as well.

Such an approach is as cheap as building thermal gas-based power. It is very low risk and easy to build. And it has no environmental impact.

Egypt is pursuing a number of options to exploit this vast potential. And, excitingly, the country is really pushing the role of the private sector in this field. The authorities realise that Egypt has an abundance of very good and experienced private sector companies ready to help out and that the old state-dominated model cannot raise the financial or managerial resources to deliver such project.

Egypt is working hard to attract investors. On one hand the authorities are running tenders for the largest projects. On the other they have also launched a very ambitious feed-in tariff scheme: 4 gigawatts, when the total Egyptian system is 30 gigawatts.

The latter is a major project, half wind, half solar. Those interested can launch a 50 megawatt project and be guaranteed  a certain price over several years. But they have to do the building and raise the financing. This is a flagship programme for demonstrating foreign interest in Egypt and it has attracted a lot of attention.

Egypt’s new direction sits well with the EBRD’s proven expertise in the fields of sustainable energy and engagement with the private sector.

One important element is assisting renewable energy; helping diversify the energy sector away from reliance on hydrocarbons, which entail carbon emissions and water consumption, and steering it towards a growing use of sources of power with no emissions at all, which barely use any water and which also insulate Egypt from commodity price volatility.

It is also a vehicle for introducing a huge number of private sector players. It provides a more diverse ecosystem of investors and exerts pressure on everyone to be much more transparent and structured.

And successful private sector investment in the energy sector is likely to have a spinoff effect in the rest of the economy as well.

The EBRD has been investing a lot of effort in this programme in the last six months.  One track has been policy dialogue – using workshops, conferences, meetings and informal discussions to engage with the Egyptian authorities about how to put in place a contractual framework that will make projects bankable.

Another has been technical cooperation. In the short term, the EBRD is paying to draft a solar grid code, a “cookbook” setting out for electrical engineers how to build a solar plant and connect to the grid. An Energy Efficiency and Climate Change fund has supplied €75,000 for the draft, which will be ready by next month.

In the medium term, the EBRD is also sponsoring a tender for a 200 megawatt solar plant in  Kom Ombo, through an EU programme, Med5P, which supports public private partnerships in the SEMED region. A €1.5m consultancy project being tendered now will provide advisers – lawyers and technical people - to run that programme.

Longer term, the EBRD is carrying out an environmental and social assessment for the second phase of a US$ 2 million development on the East Nile.

Ultimately, we are, of course, looking at investments in this sector ourselves. Work is already underway on a number of projects - in the hope that Egypt’s energy problems can soon be solved.