A shift in the power structure

11 April 2008
The Egyptian electricity sector is set for a complete overhaul as Cairo allows in private companies and introduces competition to deliver a much-needed capacity increase.

It was only a matter of time before Cairo’s economic liberalisation programme was extended to the country’s power sector. Now a new electricity law, which has been drafted by the Electricity & Energy Ministry, is set to completely restructure the industry, establishing a competitive electricity market and allowing private sector participation.

The draft law must be approved by the cabinet before it is submitted to parliament ahead of the summer recess, which starts in July 2008. Once adopted, the law will allow electricity producers and customers to enter into direct bilateral contracts for the sale and purchase of power for the first time.

Both the public and private generating companies will be able to enter into deals with end-users independently of the government.

This will replace the current system, which operates on the basis of a single buyer of power in the form of the Egyptian Electricity Transmission Company (EETC). The company buys power from Egypt’s five utilities before selling it on to high-voltage and medium-voltage users, as well as nine distribution companies that supply the residential market.

In addition to the bilateral market, three more competitive markets will eventually be established. A balancing energy market will allow EETC to act as a facilitator between consumers and producers to ensure that a balance between supply and demand is maintained. If a producer is unable to fulfil its contractual obligations to a customer, EETC will secure additional power from other generating firms.

A market for ancillary services is also planned. This means, for example, that EETC will be able to buy generating reserves, which are required when actual demand exceeds forecasted demand or some generating capacity is lost from the system.

Advance purchasing

The new law will also lay the foundations for the sale of power at short notice through the creation of a day-ahead market. As a result, it will be possible for customers to buy the power they need 24 hours in advance.

The bilateral market will be introduced first, with large industrial and commercial customers being encouraged to enter the competitive system ahead of smaller users. The government has yet to decide whether domestic consumers will also be moved across.

The implications of the new law for private investors are far-reaching. It allows them to implement independent power projects (IPPs) on a build-own-operate basis with an accord with an end-user as the only prerequisite.

Government involvement will be limited to the collection of a tariff for the transmission of electricity from the plant to the customer through the national grid.

The move marks the first time that Cairo has entertained the possibility of private power generation since the turn of the millennium. But Egypt has learned from its past mistakes and the new framework for private investment is not a return to problems that blighted the country’s previous IPP schemes.

Currency devaluation

Egypt’s three IPPs were developed as build-own-operate-transfer projects under dollar-denominated, long-term power-purchase agreements with the Egyptian Electricity Holding Company (EEHC).

When a devaluation of the Egyptian currency in 2001 pushed up the price of power for the government, EEHC requested that it be allowed to make its payments in Egyptian pounds to compensate for the scarcity of dollars. The propo-sition was rejected by the developers.

But small payments for local operating and maintenance costs have been made partially in Egyptian pounds since the devaluation. After this experience, the government and developers were reluctant to revisit the IPP model.

The original owners of the plants, France’s EDF and Intergen with Edison International, both of the US, have already sold their assets, to Malaysia’s Powertek Berhad and its owner Tanjong Energy Holdings respectively.

Developers will now circumvent the government and agree tariffs directly with an industrial or commercial end-user.

The government too stands to benefit. “It is a totally different model,” says one senior industry source. “The bills paid will not be on the Egyptian authorities. Now it will be able to tap global resources without having to fund projects itself. It is a very innovative way of getting out of the need for foreign currency.”

Opinions differ on whether the move to allow build-own-operate projects is a precursor to a return to build-own-operate-transfer schemes. “Build-own-operate-transfer will not be back again because of the dollar price issue,” says Sayed Wagih, pre-contracts manager for Australia’s Worley-Parsons Egypt. “This is an alternative.”

The availability of foreign currency is likely to be the deciding factor. “Every government needs help,” says the industry source. “But there are liquidity issues in the world today and Egypt is not exempt from them. It must look at its foreign exchange reserves. If there is a big surplus then it can fund its liabilities in foreign currency.”

Cairo says it will initially seek private investment in the form of public-private partnerships (PPPs) or by liberalising the supply business - for example, by outsourcing the operation and maintenance of resources or the provision of IT services. “We will have roundtable talks about attracting investment with support from the EU by June,” says Hafez el-Salmawy, managing director of the Egyptian Electric Utility & Consumer Protection Regulatory Agency.

Plans to add 46,500MW of new capacity to the Egyptian network between 2013 and 2027 will necessitate greater reliance on the private sector. “Egypt’s current capacity is one-third of the capacity we expect to need after 20 years,” says El-Salmawy. “The real challenge is not what is existing now, but what needs to exist.”

Since the IPP programme was abandoned, Egypt has had to fund new power projects itself, with help from multilateral and bilateral organisations. However, donors are increasingly encouraging the private sector to finance and operate infrastructure projects.

“Soft loans are not that available,” says El-Salmawy. “Egypt has 99.3 per cent electricity coverage. Soft money goes to other places that do not have the same coverage.”

International financing

“The appetite for international financing has limits,” says one Cairo-based source. “The Arab Fund for Economic & Social Development and the Kuwait Fund for Arab Economic Development are already providing $100m a year for the next few years.

“The World Bank, African Development Bank and the European Investment Bank can give yearly maybe E150-200m. This is not enough. Therefore, Egypt will have to go for private development.”

If Cairo is serious about creating a competitive electricity market, long-term power-purchasing contracts with a single buyer will not fit. The existing IPPs will continue to operate on the basis of that model, however.

It will be at least six years before the transition to the open market is complete. Cairo hopes the changes will create a stronger and more efficient power sector, which will enable the country to meet growing demand. It also hopes that private investors will recognise potential in the market.

Key fact

Electricity law will allow producers and customers to enter into direct bilateral contracts for the sale and purchase of power.

Table: EEHC generation expansion plan 2013-2027

Operation date and plant size (MW)
Type and location2012/ 132013/ 142014/ 152015/ 162016/ 172017/ 182018/ 192019/ 202020/ 212021/ 222022/ 232023/ 242024/ 252025/ 262026/ 27
Wind farm at Zafarna580600600600600600600600600100100100100100100
Hydropower plants--32------------
Steam power plant at Ain el-Sokhna1,300--------------
Thermal power plants (650MW turbines)650-1,3001,3001,300-1,3001,950-1,9501,3002,6001,9501,9501,950
Combined-cycle power plants (750MW turbines)1,0001,0007507507501,2501,0007501,2501,0001,2501,5001,0001,250250
Nuclear power plants-----1,000--1,000-1,000-1,000-1,000
Total capacity3,5301,6002,6822,6502,6502,8502,9003,3002,8503,0503,6504,2004,0503,3003,300

Source: Egyptian Electricity Holding Company

Nuclear ambitions

Nuclear power plants will play a major role in Cairo’s plans to increase the country’s installed power generation capacity. According to the Egyptian Electricity Holding Company’s (EEHC) generation expansion plan for 2013-2027, a total of 5,000MW of nuclear capacity will become operational in the 10 years between 2017 and 2027.

EEHC has already issued a tender for consultancy services on the nuclear programme. Bids are due by 16 May and it is understood that several companies including Bechtel, Sargent & Lundy, both of the US, and Australia’s Worley-Parsons will be submitting offers.

The successful bidder will select and evaluate sites for the plants. It is clear that the first 1,000MW plant will be built at El-Dabaa, 160 kilometres west of Alexandria. The site on the Mediterranean coast was chosen in the 1980s, but following the Chernobyl disaster in 1987, Egypt put its nuclear ambitions on hold.

The winning consultant will also prepare the turnkey contract, carry out technology assessment and have the option of acting as the construction supervisor and owner’s engineer.

In late March, Egypt and Russia signed a deal covering co-operation in civilian nuclear power, which will allow Russian firms to bid for the contract to build Egypt’s first nuclear plant. The deal was signed in Moscow by Sergei Kiriyenko, head of Russia’s Rosatom nuclear energy agency, and Egyptian Energy Minister Hassan Younis.

Egypt has also discussed nuclear co-operation with France, and the US has said it will support the country’s peaceful nuclear programme.

Egypt’s Nuclear Power Plants Authority is already carrying out studies to upgrade seismographic equipment used to measure earthquake activity at El-Dabaa. The Nuclear Materials Authority is also evaluating uranium reserves at nine sites across the country to determine whether it would be economic to mine the fuel.

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