Egypt reassesses programme to secure more sustainable energy sources

Egypt’s ambition to generate 20% of electricity by renewable sources is facing some challenges. The country is rich in solar and wind resources, but Egypt is still navigating hurdles in search of the ideal legal regime to encourage investment whilst also protecting the state’s balance sheet from risky commitments. Although there was some success in attracting investment through several methods, the country is seeking a longer-term solution through the use of feed-in tariffs (FITs).

This effort dates back to September 2014 when a presidential decree established a FIT to encourage the use of renewables and clearly stated what the government would pay producers for the power they generate. A 2014 law allocated land and targets were set; the state wanted 2 GW each of wind and solar energy power plants. An invitation to investors to bid on projects resulted in a flood of applications, and by January 2015 there were 110 applicants deemed qualified to lead new projects – with each generating 50 MW or less.

Speed Bumps

A date of October 2016 was set for the investors to reach financial close of round one and begin building. However, efforts slowed in the middle of the year with investors flagging concerns over dispute resolution terms – including the government’s move to rule out international arbitration – and difficulties in accessing finance.

For Egypt itself there are growing concerns over the amount of risk the state may take on – particularly given the depreciation of the Egyptian pound against many benchmark currencies, namely LE18.89:$1 as of December 2016. The power purchase agreements signed stipulated that tariffs are to be denominated in dollars but payments to generators would be in Egyptian pounds. 15% of each invoice payment would be at a fixed rate of LE7.15:$1 with the balance converted at the exchange rate at the time of invoicing. That means most of the currency risk would be borne by the government, although investors would still have to convert their pound-based revenues to foreign currencies if they wanted to repatriate that income.

By late July 2016 multiple firms were calling for programme reforms and requested a meeting with Mohamed Shaker, the minister of electricity and renewable energy, which took place in August. A press release in September 2016 announced revisions for round two, particularly regarding payment and allowing international arbitration, including a start date of October 2016, as planned.

Major Projects

Egypt is also attracting investment in renewable energy outside the FIT programme. In May 2016 the Ministry of Electricity and Renewable Energy announced a 250-MW wind farm agreement with a consortium including Toyota, GDF Suez (which became Engie in 2015) and Orascom Group. The consortium agreed to fund the project on their own and receive financial guarantees from the Ministry of Finance. The deal included a power purchase agreement for 25 years that will pay $0.047 per KW, and the terms could apply to other deals as well. According to local media, Egyptian officials said this will be the standard for negotiating further FITs in the future, although this project is larger than all those tabbed in the 2015 tendering process.

Fundamentals

Despite the challenges met in 2016, the long-term assessment of Egypt’s renew-ables potential has not changed. In addition to wind speeds of up to 10 metres per second in its most prospective areas, the average level of solar radiation in the country ranges from 2000 to 3200 KWh per sq metre annually, offering significant possibilities. “We are convinced that solar is a great fit for Egypt,’’ Akmal Zaghloul, director of business development for TAQA Arabia, the country’s largest privately-owned energy distribution company, told OBG. “We have all the desert we need to build in.’’