Mind the gap: Keeping pace with rapid growth in electricity demand is a major challenge

A large and rising population presents Egypt’s government with the challenge of keeping up the current level of basic services while meeting the demands of the growth to come. In the electricity sector, that means remaining in expansion mode for decades to come. However, the growth cannot follow the path it has in the past, when Egypt used natural gas extracted from its domestic reserves as the basic feedstock for electricity generation. Gas supplies are finite, and most of the biggest potential finds are in the deepwater areas that Egypt has yet to successfully mine on a large scale.

The focus is likely to turn increasingly to non-traditional forms of energy, an area where there have been some successes already. Egypt gets 10% of its power from hydroelectricity already, and is a strong candidate to leverage wind and solar power thanks to its climate and geography. All options are on the table, including nuclear power.

In a best-case scenario, Egypt can harness all the various non-traditional options and become a net exporter of electricity to three continents. Future plans will connect it via a transnational grid to most of the Arab world, Turkey, southern Europe and some parts of East Africa. For now, however, the focus remains on the domestic market. “Egypt is managing the increase in demand well,’’ said Lutz Eikmeier, the general manager of DSD Ferrometalco, a Cairo-based and German-owned producer of steel structures such as wind towers. “But it means building two to three new plants per year.’’ DYNAMICS: Egypt had an installed capacity of 28,860 MW at time of press, and in recent years the sector has seen peak load expanding at a steady clip. It increased by an annual average of 7% in the three years leading up to the global financial crisis that began in 2008. However, consumption has also been growing rapidly. Domestic demand ticked upwards at a compound annual growth rate of around 8% in 2009 and 2010. Peak demand in the summer of 2011 hit 23,500 MW. As a result, reserves margins have been shrinking significantly since the onset of the crisis, necessitating widespread load-shedding in 2009 and 2010 during peak hours. Outages and shortages in the summer of 2010 affected some large-scale industrial consumers and are thought to have cost millions of dollars in lost production.

As a result, a concerted effort is being made to boost output. The long-term plan is to get to 58,000 MW of capacity by 2027, and to generate 20% of capacity from renewable resources by 2020. Estimates rise as high as $110bn worth of capital spending by 2027 in pursuit of this. “The government’s goal of switching 20% to renewables has certainly given the industry a boost, but there has been too much indecisiveness over the past year,” Mohamed Saad, the country president for Egypt and North-east Africa at Schneider Electric, told OBG.

STRUCTURE: In terms of generation, transmission and distribution, the sector falls under the purview of the Ministry of Electricity and Energy (MEE), although the Supreme Council for Energy serves as a policy advisory and coordinating body at the cabinet level, helping oversee the sector’s regulatory, legislative and institutional frameworks. Tariffs are also set at the cabinet level.

The MEE is also the owner of the state and parastatal entities in the power sector, which was once consolidated in the shape of the Egyptian Electricity Authority. However, since 2000 that body has been unbundled, with 16 subsidiaries now operating under the aegis of the Egyptian Electricity Holding Company, including a hydropower company, five thermal generating firms, nine distribution companies and a transmission body.

A number of specialist authorities within the MEE target specific areas of the power sector, including the Rural Electrification Authority, the Hydropower Projects Authority, the New and Renewable Energy Authority, and the Nuclear Power Plants Authority. A consumer protection agency was also established in 2002 to license companies in the generation and distribution sectors, and monitor performance.

Generation has been fully liberalised, although the state continues to dominate, with roughly 90% of total capacity. Currently, the power market requires generating firms to sell to a single buyer: the state-owned transmission company, which then sells it on to either major industrial users directly or to the nine state-owned distribution companies. There are seven private distribution firms currently active but, all told, they have only around 1% of the total market share. The national grid does not set balancing or transfer fees, and although there are considerable costs associated with rural electrification, tariffs are consistent nationwide.

FURTHER REFORM: While the state continues to dominate all segments of the power sector, there are plans to further overhaul the system and liberalise transmission and distribution. The government has been laying a foundation by working to improve the legal and regulatory environment, including the creation of a new comprehensive energy bill that was completed in April 2012, and this will likely be among the new president’s chief priorities.

It is hoped that the new law will encourage private investment – in particular in renewables – in lieu of the ad hoc government purchase guarantees and incentives currently in use to ensure private sector participation. The former minister of electricity, Hassan Younis, told local media that there is also a plan for a dedicated renewable energy fund to finance non-petroleum-based power projects, which was to be started in part with $400m from the African Development Bank. Other government moves to aid the long-term goal include the New and Renewable Energy Authority’s (NREA) work on a master plan.

There is also a focus on efficiency, though progress has been more modest in this area. The MEE plans to install prepaid electric meters in residential areas in several urban districts, including Sixth of October City and Damietta. These will be topped up using prepaid cards in a bid to encourage energy efficiency and consumption rationalisation.

PRIVATE PLAYERS: For potential investors, however, what has worked in the past will not be abandoned. Egypt has had an independent power producer (IPP) programme in place for nearly 15 years, having started with US firm InterGen’s two-unit, gas-fired, 682-MW facility upgrade in Sidi Krir, near Alexandria. Over the past two years at least five thermal IPPs were under planning, including a $1.5bn plant in the Nile Delta, the tender for which attracted requests for quotation from 19 companies and consortia.

In a move appropriate for a country that pioneered the concept of private participation contracts with the Suez Canal in the 19th century, IPPs are tendered on a build-own-operate basis. Long-term purchase agreements will be offered in order to provide investors with certainty about the rates at which the state will buy their output. Electricity supply agreements extend up to 30 years in some cases, which provides IPPs with a steady long-term income outlook. Egypt is also willing to set those prices in foreign currencies instead of basing them on the Egyptian pound, thereby taking on currency risk and removing it from the equation for potential private sector partners. “The fluctuations in the currency have made companies very selective on importing new stock, and this can have some very serious implications for supply lines if the stock rates are not carefully managed,” Ahmed Hashem, the managing director of Proserve, told OBG.

For wind projects, which have significant potential and are expected to account for more than half of the “20% by 2020” goal, officials at the NREA are currently engaged in obtaining the required permits for the sites it has flagged as suitable, as well as preparing environmental-impact assessments.

Similarly, Customs duties on wind farm components have been drawn down and there have been some negotiations in the past over the potential for concession agreements for land, although uncertainty in regards to land pricing and transfers – as seen in the real estate sector – has dampened discussion. In addition, the MEE has established a localisation programme that will be used for designing and building components, and the target is to have 70% of content in renewables plants come from domestic manufacturing sources by 2020.

More targeted policies aim to reduce overall demand on the grid, particularly from the 80 or so large-scale industrial consumers that the transmission company sells to directly. In 2010 the Ministry of Trade and Industry announced that investors selected for 12 new cement production licences that were up for grabs had the option to source their own power – either by generating it themselves or importing it directly – in a bid to minimise consumption by the power-hungry cement plants.

However, the overall package may take some months, or even years, before yielding results. Existing projects are going ahead, but new investors are likely to hold off on signing deals until the orientation of the new government becomes clearer.

HYDROELECTRIC: Egypt’s chief accomplishment in non-traditional electricity generation is the Aswan Dam, which was built over several years in the 1960s. The hydroelectricity generated here brought a great leap forward in rural electrification, and today’s generation capacity of 2800 MW is just under 10% of the country’s total. A further addition is on the way with the rehabilitation of a dam at Assiut in Upper Egypt, albeit a small one: 32 MW of capacity to be generated from four turbines. Egypt has contracted Andritz, an Austrian engineering firm, for the project. The additional supply is expected to be available by 2017, according to the company.

Although Egypt’s long-term potential for additional hydroelectric power is relatively limited, the sector has come under increased scrutiny in the wake of the dispute between Egypt and Ethiopia over water rights on the Nile. Egypt, which is not only reliant on the river for a significant portion of its electrical capacity but also for 90% of its total water, is allocated 55bn cu metres annually under a succession of treaties negotiated during the 20th century. One of those, signed in 1929, gives Egypt the right to veto upstream developments on the river, but that has not stopped neighbouring Ethiopia – which is the source for more than three-quarters of the Nile’s water – from going ahead with plans for a new $4.8bn, 6000-MW dam. If built, the dam has the potential to reduce Egypt’s Nile flow by up to 17bn cu metres – a huge concern for the arid country.

WIND: Though some small experimental projects predate it, such as the 5-MW-capacity wind farm at Hurghada, Egypt’s first large-scale wind farm was at Zafarana, on the Gulf of Suez. Installed capacity is 550 MW. Winds along the coastline average between 7 and 10 metres per second, making it the most potential-rich area in the country. Others include parts of the Sinai Peninsula and areas on both sides of the Nile in which wind speeds of up to 8 metres per second have been recorded.

The NREA’s wind atlas, published in 2003, has helped to identify the best spots to build wind farms. Based on those calculations there is an estimated 7200 MW of potential that could be developed by 2020, which would account for 12% of capacity by then, or three-fifths of the renewables goal. Certainly the growth trajectory in previous years has made that target seem realistic, and the sector saw a compound annual growth rate of 16% between the 2004/05 and 2008/09 fiscal years.

Several new wind projects are in the pipeline, and the NREA has identified potential new capacity of 2370 MW to come from those at various stages from planning to construction, such as a 200-MW facility for which Spain’s Gamesa will supply 100 turbines by 2013. Aid agencies such as Denmark’s DANICA and the Japan International Cooperation Agency, and development banks, including KfW Bankengruppe of Germany, are playing a role in financing these.

Private sector groups have committed to three new facilities with a total of 1370 MW in capacity, and estimates of the size of the role private investors will play in the coming years run to as high as two-thirds of the total investment.

INCENTIVES: This is due to the fact that a hefty number of the projects will be IPPs, and is no doubt encouraged by the range of incentives that are currently in place for both renewable projects and wind farms in particular. The reasoning behind this comes from the government’s aim to channel investment into certain areas of the country, such as Upper Egypt, that also offer potential for renewable generation and benefit from broader frameworks to spark greater socioeconomic development.

Investors in governorates such as Minya, for example, are eligible for export rebates, and they may in some cases have their operating costs partially subsidised with government funds.

DSD Ferrometalco produces 85% of wind towers in Egypt, including the 596 now working at Zafarana, and hitting the aforementioned 7200 MW by 2020 will require rapid construction. If each tower represented a capacity of 2-2.3 MW, that would mean 3000 new towers are required in order to meet the target, an average of more than one a day between now and 2020. In an indication of the demand for construction materials that can be expected from the sector over the long term, Eikmeier estimated that building wind towers at such a pace will require at least 400,000 tonnes of steel.

SOLAR: Egypt is ideal for solar energy, given its vast amount of space and high insolation levels. The country’s average solar energy irradiance is 612 W per sq metre, around three times the global average. Though the total is lower than for wind, and more expensive, solar energy remains a key part of the mix for Egypt. Although there are still cost and storage issues associated with the technology, there is considerable international interest in the resource in North Africa, including the Desertec Initiative, a German-led effort to increase renewable electricity generation in the world’s deserts. Primarily, the project aims to put combination solar-thermal plants in select spots in the Sahara Desert, and then send the electricity to European markets. National programmes are also making headway: Algeria has embarked on a sizeable scheme to increase solar generation, while Morocco is in the process of putting together a 500-MW concentrated solar plant at Ouarzazate.

Egypt’s first power plant to utilise solar energy is Kuraymat, situated about 90 km south of Cairo. The 150-MW capacity facility is a hybrid, generating electricity from solar panels by day and from natural gas by night. The technology remains expensive – between four and five times pricier than petroleum-based plants, according to a study by the Egyptian German Joint Committee on Renewable Energy, Energy Efficiency and Environmental Protection. The solar power and renewable energy industry faces other financial challenges, according to Mohamed El Ansary, the CEO of Tri-Ocean Energy, a regional energy company. “Investments in solar have been discouraged by the lack of incentives, as well as the tough competition with subsidised energy,” he told OBG.

However, sizeable inroads are being made at the retail and micro level, where there are the greatest potential multiplier effects – particular in rural areas, where transmission and distribution capacity may be weak or inefficient. Reducing prices for small-scale solar appliances or generators, combined with their relative ease of installation and low operating costs, has meant that communities with less capital are able to supplement their generating capacity.

NUCLEAR: Egypt was set to receive bids on a nuclear plant when 2011’s Fukushima disaster in Japan put those plans on hold (see analysis). The idea had been revived in 2007 after several decades on ice. Egypt had wanted to have a plant in operation by 2019, and by 2025 expand to four reactors spinning in two separate facilities, with a capacity of 4000 MW.

In June 2009 the government hired Australia’s Worley Parsons as a consultant, and in 2010 it passed a nuclear power law and enlisted the Korea International Cooperation Agency to train Egyptian nuclear engineers. These proposals aroused significant local interest, with the country’s two dominant construction firms, Orascom Construction Industries and Arab Contractors, forming a joint venture in 2011 to specialise in nuclear projects. It highlighted the potential for work in Egypt and throughout the Arab world, in anticipation of a heavy flow of nuclear power projects in the near future. Egypt’s Nuclear Materials Authority, one of the MEE’s three specialised nuclear and atomic agencies in the country charged with developing the nuclear sector, has identified 15,000 tonnes of uranium within Egypt that could be used. Although no concrete plans are in place at present, nuclear projects could well be revived in the future.