With a surplus of electricity, why do we still get power cuts – part 3
What a truly privatized electricity grid in Egypt could look like: Part 1 of our ongoing series on electricity started off as a deep dive into why we have been experiencing power cuts, an electricity production capacity surplus of nearly 30 GW. We found that our investment in generation capacity has far outpaced the rate at which we’ve strengthened the transmission infrastructure of the national grid. In part 2, we looked at the main components of the smart grid and how it would completely change the electricity sector and the way it operates.
In Part 3 today, we explore the upcoming changes in policies that are meant to increase the role of the private sector across the electricity value chain, with the ultimate goal being to reduce the immense expenses incurred by the government as a result of being the sole operator. But notable hurdles remain: namely, an electricity supply glut which slowed down the pace of private sector-led renewables projects — and what the government sees as an outdated framework for buying and selling electricity.
A history of deregulating electricity in Egypt: Since the Sisi administration kicked off its economic reform program in 2016, cutting subsidies and privatizing the electricity sector were the overarching goal. Legislative changes were first introduced back in 2016 as part of the Electricity Act, which transformed the state from the sole market player to a market regulator, while separating the activities of production, transmission, and distribution. This supervisory role was handed to the Egyptian Electricity Transmission Company (EETC), which would also be setting a strategy for deregulating and expanding the national grid over 5-10 years. Shortly after, the EETC began procedures to splinter off from the Egyptian Electricity Holding Company and restructure to meet its new role.
This deregulation helped set the groundwork for the FiT program: With the introduction of the new legislation, Egypt began allowing the private sector into the renewable energy market through the introduction of the Feed-in Tariff (FiT) program, which governed the price and system through which private energy producers would sell to the government. After a rocky start, the FiT got underway with the government agreeing to pay USD 0.084 per kWh for 20-50 MW projects with 30% of the 25-year contract being paid in USD. This framework helped bring us the acclaimed Benban solar park.
While ensuring speedy construction, the framework ultimately became too expensive for the government. The Electricity Ministry was prompted to look into ditching the FiT in favor of the independent power producer (IPP) framework. The move was meant to open up space for the private sector to produce and sell power independently to consumers while paying the state a fee to use the national grid for transmission. A government source tells Enterprise that now the government is considering stopping the IPP framework because of…
…the great electricity glut, which made renewables a less attractive option for the private sector: As we noted in our previous feature, as of June 2020 our electricity capacity reached 58 GW, with consumption reaching a height of 32 GW during the summer. This capacity was largely on the back of government projects. The government took steps this year to limit renewable energy generation so as to not exacerbate the oversupply issue, largely through changes to Egypt’s net metering system — a pay-as-you-go billing system for renewable energy producers. The Egyptian Electric Utility and Consumer Protection Regulatory Agency (Egyptera) began imposing caps on how much solar energy private-sector players can generate, starting at 20 MW for most independent producers. The decision also lowered the price the state pays producers for excess feed.
We’re now seeing upcoming investors freeze plans or lower the capacity they intend to generate. One CEO told us that we can expect investment in renewables to slow down substantially for the next 18-24 months. Meanwhile, TAQA Arabia recently announced that it will be focusing on small-scale solar projects to the tune of 2-10 MW in Egypt for the next two years because of the glut.
The gov’t envisions that one way out of the supply glut problem is exporting: The government is looking to export around 15 GW of the excess capacity to neighbors in Europe, Africa, and the GCC, the source noted. Egypt’s grid is currently linked with Jordan, Palestine, Libya, and most recently Sudan and is hoping to move forward with an interconnection agreement with Saudi Arabia, which has reportedly been delayed. The first phase of the USD 4 bn EuroAfrica project is scheduled to connect Egypt’s grid to Cyprus by December 2022.
But ultimately the government has had to rethink its pipeline of private sector-led projects until 2025, a government source told Enterprise. The World Bank is consulting on a government study that will determine the number of projects and their capacities that were planned to be launched this year, the source explained. The government has since scrapped a tender to establish a 250 MW wind farm and a 200 MW solar plant in the West Nile region, the source tells us.
And it’s now looking to offload fossil-fuel-fired plants to the private sector. The Sovereign Wealth Fund of Egypt has been charged with selling the three Siemens-built combined-cycle power plants. Blackstone Group’s Zarou and Malaysian company Edra Power Holdings have both expressed interest in taking over the operation of the plants and take on the responsibility of meeting debt repayments for the EUR 6 bn facilities.
In tandem, the country is testing new contracting models, including reverse auctions: This type of auction will see producers bid by quoting their selling prices while the government decides at the end of the auction who to buy from. Unlike a tender where the vendor would present a closed envelope with the financial and technical offer, the process in the reverse auction would take place entirely online at an agreed date so that sellers can compete among themselves, the source explained.
Egypt is set to offer reverse auctions for solar power plants before the end of the year, Electricity Minister Mohamed Shaker told the local press. While Shaker did not state what the timetable was, sources told Enterprise that the ministry will offer one pilot project under the reverse auction that will be decided on the recommendation of the World Bank. The project will have a relatively small capacity of 50 MW (again, thanks to the glut).
The privatized value chain of electricity: The hope is that these policy changes will expand the role of the private sector beyond the generation stage to distribution and all the way down to bill collecting. The government is now making pre-paid meters available through specialized private sector suppliers, Electricity Ministry spokesperson Ayman Hamza tells Enterprise. Private companies will be involved at every stage, from manufacturing and installing meters to running payment systems through e-payment firms such as Fawry, Khalis and e-Finance, Hamza added.
The ultimate goal? A truly privatized and efficient electricity market in less than 10 years: With further deregulation, customers will be able to choose their energy provider just like they choose a mobile operator based on their location, needs, and budget. This vision may be only a few months away in new areas like the new capital or new Alamein but would eventually be the new normal in many existing cities around Egypt in less than a decade, former Head of the New and Renewable Energy Authority (NREA) Mohamed El Sobky tells Enterprise.