Cairo cuts costly electricity subsidies

02 November 2014

The Egyptian government hopes subsidy reform and its plans for the country’s beleaguered power sector will attract private investors

In July, Egypt took a major step towards tackling its chronic energy supply problems. After years of planning and several false starts, Electricity Minister Mohammed Shaker announced that power prices would be raised for commercial, industrial and household customers.

The persistence of subsidised power prices is one of the key underlying factors behind Egypt’s increasing inability to keep pace with rising electricity demand. The artificial suppression of prices has offered little incentive for consumers to rationalise power usage, the growth of which has been outstripping that of generation capacity for several years.

Incremental increases

The new measures announced by Shaker in Decree 1257 include provisions for a series of price increases each year up to 2018, by which time it is predicted that the price of electricity will match the cost of its production. Specific details of the price increases for different user groups in the coming financial year have been laid out, with incremental price increases to be introduced in July each year.

Top 10 power and water projects in Egypt
ProjectOwnerBudget ($m)Status
New Sinai power plantAl-Nowais Investments7,500Study
El-Dabaa nuclear power plantEgyptian Electricity Holding Company6,000Design
Dairut IPPEgyptian Electricity Holding Company2,500Main contract bid
South Helwan power plantUpper Egypt Electricity Production Company2,400Execution
Solid waste-to-energy facilitiesMinistry of Housing Utilities & Urban Communities2,000Study
North Giza combined-cycle power plantCairo Electricity Production Company1,900Execution
Beni Suef power plantMinistry of Electricity & Energy1,800Main contract PQ
Suez thermal power plantMinistry of Electricity & Energy972Execution
Abu Rawash WTP expansionMinistry of Housing Utilities & Urban Communities752Main contract bid
Asyut steam power plantEgyptian Electricity Holding Company750Main contract bid
IPP=Independent power project; PQ=Prequalification; WTP=Wastewater treatment plant. Source: MEED Projects

The increases are not insignificant, and will inevitably be met with some resistance. Residential users will face a range of tariff rises between 17 per cent and 50 per cent in the first year alone. International businesses tell MEED that their electricity bills have risen by 200 per cent “overnight”.

A local lobby group, the Egyptian Initiative for Personal Rights, claims that the new residential tariffs have a disproportionate impact on poor families. According to sources close to the Finance Ministry, the government has earmarked £E5bn ($699m) to alleviate the burden of the subsidy reduction on the least well off, although the details of how this will be distributed have not been made public.

Reducing burden

If the programme can be implemented as proposed, however, the long-overdue reduction in subsidies will have huge benefits for Egypt’s struggling economy. The increase in electricity tariffs will reduce the tremendous burden of subsidies on the state treasury. Electricity subsidies cost the government almost $2bn in 2013/14, in addition to fuel products subsidies of about £E100bn ($14bn).

This relief is desperately needed. The Finance Ministry estimates that its budget deficit for the 2013/14 fiscal year, which ended in June, was about 11.5 per cent – even with huge support from bilateral donors. In the six months since the removal of President Mohammed Mursi in July 2013, foreign donors – chiefly Saudi Arabia, Kuwait and the UAE – pledged $15bn in deposits, grants and project spending, the majority of which had already reached the treasury by early 2014. In May, Finance Minister Hani Dimian predicted that the 2014/15 budget deficit would rise to 14 per cent unless action was taken to reduce subsidies.

Positive impact

Subsidy reform will also alleviate the financial contagion that has seeped into Egypt’s state-led energy sector. The sale of electricity at below cost prices has created arrears in payments from the electricity sector to public oil and gas companies, which in turn has led to arrears in their payments to foreign operators of the country’s gas fields. The combination of these arrears with political instability and the low prices Egypt pays for its gas has meant that in recent years there has been little appetite for exploration and development, exacerbating feedstock shortages to the power sector itself.

The tariff changes should also have a positive impact on the efficiency of electricity usage. Low power prices have meant that there has been little incentive for customers to rationalise their electricity consumption. Residential power demand increased by 40 per cent between 2008-13, and overall power demand by 28 per cent.

The additional government revenues will also help to free up capital to invest in the proper maintenance of power networks, cutting down on leakages from the system. The main danger the government must guard against is that higher electricity prices could exacerbate the existing problem of unlicensed access by consumers to the electricity grid.

Frequent blackouts

Slowing the rate of electricity consumption is fundamental to Egypt’s task of balancing supply and demand. The gap between peak demand and generation capacity has narrowed severely in recent years. In June 2012, official installed capacity was 29,074MW, comfortably greater than peak demand of 25,705MW. But the ageing network meant that functional capacity was closer to 26,000MW. There were widespread blackouts in the summers of 2011, 2012 and 2013, and in late 2013 Egypt experienced winter blackouts for the first time. Blackouts have continued in the summer of 2014, with an early September outage bringing one of Cairo’s metro rail lines to a halt.

Demand-side measures alone will not be sufficient to resolve Cairo’s power supply challenge. Demand growth is about 7 per cent a year, and the government needs to add at least 1,500MW in new capacity each year just to keep up. According to some estimates, an additional 30,000MW will be needed in the next seven years alone to address the current power shortages, replace ailing generation units and meet incremental demand.

Power plans

The government has no shortage of plans. The current five-year plan of the Egyptian Electricity Holding Company (EEHC), the state-owned body responsible for power production, transmission and distribution systems, aims to add 11,100MW in new capacity by mid-2017 and a further 1,300MW by mid-2018. The Electricity & Energy Ministry puts the total figure for planned new generation at 17,840MW by mid-2017, including almost 3,000MW in renewable energy capacity.

The plan includes three projects to be developed on a build-own-operate (BOO) basis: a combined-cycle plant at Dairout comprising three 750MW units; a steam power plant at Qena with two units of 650MW; and a steam power plant at Beni Suef with three 650MW units. The balance of the incremental production capacity will be made up from 3,000MW of combined-cycle capacity at Giza North and Benha, and 3,900MW of steam turbine units at Suez, South Helwan and Safaga.

Investor appetite

Political instability and the related difficulties of raising finance have meant that there has been little international appetite for developing major projects in Egypt. Plans for the Dairout facility were first set out in 2009, and the following year 10 companies were prequalified to bid for the BOO contract.

But there was no further progress on the estimated $2.2bn scheme until February 2013, when the Electricity and Energy Ministry announced it was planning to hold a meeting with the EEHC and representatives from the prequalified companies. The scheme suffered a further setback in December 2013 when the ministry delayed until March the January 2014 deadline for submission of bids. The election of President Abdul Fattah al-Sisi in May is showing promise of a greater degree of economic stability, but it is likely to take time for foreign companies – and banks – to fully engage.

The South Helwan project has fared better – but it will still not be delivered within the five-year plan timeframe. In June, a Japanese consortium of Mitsubishi Heavy Industries and Toyota Tsusho Corporation was awarded the contract to supply three sets of 650MW steam turbines and generators for the plant. Construction is due to begin in mid-2016, with the first units to be commissioned from early 2018. Most other projects in the five-year plan are still further behind.

Alternative energy

Spurred on by the reversal in recent years of Egypt’s fortunes as a gas producer and mindful of the need to explore all available power generation options, the government is also focused on developing alternative energy. Egypt already has one of the most developed renewable energy sectors in the Middle East, with more than 3,500MW of installed capacity.

The majority of Egypt’s renewable energy is currently from hydroelectricity, but the expansion of hydroelectric capacity is constrained by the physical limits on tapping the flow of the River Nile. In the years to come, it will be wind – and to a lesser extent solar – power that will account for most incremental output from renewables.

The government plans to bring onstream more than 7,000MW in wind power generation by 2020. The new capacity will be split between 2,375MW in engineering, procurement and construction contracts tendered by the New & Renewable Energy Agency (NREA) and 4,825MW in independent power projects (IPPs) tendered by the EETC. NREA invited bids in August for a turnkey design, manufacturing and construction contract for a 120MW windfarm at the Gulf of Zayt.

Al-Sisi’s government has introduced incentives to stimulate private investment in renewable power generation. The cabinet has approved a feed-in tariff to guarantee that electricity from renewable sources will be bought at a remunerative price, in addition to providing land for new projects in return for 2 per cent of generated power.

Nuclear power

In his inauguration speech on 9 June, Al-Sisi also made the development of nuclear power a strategy priority for the country. The El-Dabaa nuclear power station, first proposed in the 1980s and revived in 2007, has been on hold since President Mubarak’s removal from power in early 2011. Mubarak’s government had planned the 1,600MW facility as the first of four nuclear power plants, and appointed Australia’s WorleyParsons in 2009 to consult on the programme for 10 years.

Al-Sisi is determined to get Egypt’s nuclear programme back on track, although even if financing challenges can be overcome it is likely to be at least 2020 before a new plant can be commissioned. Also on the agenda is a 3,000MW power link between Egypt and Saudi Arabia, for which the two countries signed a memorandum of understanding in June 2013. Construction tenders were due to be issued in the first quarter, although they are now unlikely to be issued before the end of the year.

For all its options, the expeditious construction of conventional gas and steam powered plants remains a top priority for the Egyptian government. It will hope that its bold move to cut subsidies and its efforts to delineate a clearer path for the development of power infrastructure in the country will encourage the return of private investment to the sector.

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