Egypt committed to coal

25 May 2015

Cairo is determined to move ahead with coal-fired power generation. But it remains to be seen whether it can earn the confidence of financiers

Egypt’s decision in 2014 to approve the use of coal for power generation for the first time provides a clear illustration of the difficulty the country is facing in securing energy to run its power stations.

The move followed the energy ministry’s announcement that it would begin importing liquefied natural gas (LNG) to help deal with the growing energy crisis.

Cairo’s strategy to diversify fuel resources for electricity generation was laid out at the Egypt Economic Development Conference (EEDC) held in Sharm el-Sheikh in March, where a range of alternative options from solar and wind to nuclear power were discussed.

However, the constant theme throughout the discussions was Egypt’s newfound commitment to coal, with agreements and memorandums of understanding (MOUs) signed for about 19GW of coal-fired power plants.

Growing demand

Cairo’s decision to use coal to fire power stations is based on two factors: rampant demand growth and a slowdown in natural gas production.

Electricity consumption is rising, driven by a population growing by more than 2 per cent a year, with about 50 per cent aged below 25. The young and expanding population, combined with a growing middle class, is straining electricity resources as the need for new homes continues to grow. Power demand is increasing at a rate of 6 per cent a year but investment in the sector has failed to keep up.

You can source coal from almost every continent in the world. Also, reserves are proven for 200-300 years

Sacha Parneix, Thermal Power

In addition to a lack of investment in new projects, the age and inefficiency of existing generation facilities have made the power crisis more acute. As a result, Egypt has suffered from power shortages since 2009, and the first winter blackouts were recorded during 2014. A reported supply shortfall of up to 5,300MW at peak periods shows the size of the challenge facing the government.

Key fact

Egypt has an estimated power supply shortfall of up to 5,300MW at peak periods

Source: MEED

The Electricity & Energy Ministry estimates that 54GW of additional capacity will be required by 2022 to solve the current crisis and to meet future demand, requiring a total investment of $70bn. A sizeable amount of this will be invested in the coal programme, with the ministry planning to develop 12.5GW of coal-fired power generation by 2022.

Egypt is one of several countries in the Middle East and North Africa moving ahead with the use of coal for power generation. While some may have reservations due to the potential environmental impact, those in the power market say coal can offer advantages.

“Utilities want to diversify away from one single fuel – which is gas – either because of the limitation in the amount available, or because they want to stay away from price volatility, and have the possibility to leverage other fuels for power generation,” says Sacha Parneix, sales director for the Middle East and Turkey in the thermal power division of France’s Alstom.

“They may want to avoid a price hike as happened on the gas side a few years ago. It adds flexibility for the utility – we see this pattern worldwide.

“The advantage of coal is the flexibility of sourcing. Contrary to gas, where you have to have either a pipeline or physical connection, or LNG terminals, which are quite expensive to build, you can source coal from almost every continent in the world. Also, reserves are proven for 200-300 years.

“It means if there is a political or economic hurdle in the region you are exporting from, you can source from another region.”

Price drop

Due to many countries in Europe and the US turning away from coal for power generation in recent years and the wide array of source markets, the price of coal has dropped significantly. In addition, the cost of developing coal power plants is very competitive.

The recent submission of bids for Dubai’s Hassyan coal-fired independent power project (IPP) provides a good example of how the fuel can be used to build a cheaper large-scale power plant compared with an equivalent gas facility.

A consortium led by Saudi Arabia’s Acwa Power and China’s Harbin submitted the lowest tariff price of 5.177 cents a kilowatt hour (kWh) for the 1,200MW project, and also submitted an alternative offer for a 1,800MW facility with an even lower levelised cost tariff of 4.998 cents a kWh.

In November 2011, Dubai Electricity & Water Authority (Dewa) received bids for its first planned IPP at the Hassyan site, which was later cancelled on the eve of selecting a preferred bidder. For the gas-fired 1,500MW IPP, the lowest tariff price of AED0.1906 (5.190 cents) was submitted by a consortium led by Japan’s Marubeni Corporation. This was marginally higher than Acwa Power’s bid for the 1,200MW plant, but significantly higher than its lower price for the 1,800MW facility.

Expensive renewables

Coal power is also cheaper than renewable energy, which will play an increasing role in Egypt’s power sector.

“Renewables is still more expensive than thermal power technology, and there is the problem of grid stability,” says Parneix. “If the sun or wind disappears, then supply is gone, but the demand remains. So countries embarking on energy diversification programmes are keen to ensure they have technologies on their grid to secure supply at any time.”

Renewables is still more expensive than thermal power technology, and there is the problem of grid stability

Sacha Parneix, Thermal Power

Chinese companies are gearing up to play a major part in Egypt’s ambitious coal programme. Some of the Asian country’s largest power contractors have signed agreements to develop more than 9GW of coal power plants in the coming years. Parneix says this is to be expected due to the contractors’ track record of rapidly completing large-scale power programmes. “It is not surprising; the Chinese have great experience in developing coal-fired power plants,” he says. “China was, at one point, building 100GW every single year.”

The largest MOUs signed with Chinese companies were for Shanghai Electric and Dongfang to build coal power plants with capacities of 4.6GW and 2GW respectively, with the construction costs set to total almost $10bn.

Parneix says that rather than fear Chinese dominance in an emerging coal market in the Middle East, international technology providers can forge successful partnerships to develop large-scale plants. “We have high efficiency and ultra-clean technologies, and we are used to teaming up with Chinese companies to bring capabilities and desired performance to what the client wants at a very competitive price,” he says.

While coal offers a cost-effective answer to Egypt’s electricity crisis, there are several senior officials, including previous environment minister Laila Iskandar, who remain staunchly opposed to its use. In May 2014, a lawsuit was filed against several bodies over plans to use coal to run cement plants and generate electricity in power plants.

However, Parneix is keen to point out that coal is not the dirty fuel it once was and, if used with the right technology, can significantly cut emissions.

“The emissions that we talk about harming the population living around the [coal] plant, such as sulphates and nitrates, are now prevented with the new technologies,” he says. “This is the technology that will be implemented in the Dubai coal project; it will stop all those pollutants ending up in the air.

Securing financing

As with all areas of Egypt’s planned power investments, the success of the coal programme will depend on securing financing. The Electricity & Energy Ministry estimates that $25bn-worth of private investment will be required in the next seven years to fund the electricity programme.

While the proposed financing models for the planned coal schemes announced at the EEDC have not been made public, MEED understands there will be a mix of standard IPPs and engineering, procurement and construction (EPC)-plus-financing schemes, where the contractor will finance the construction of the plant and then transfer the facility to the utility to operate and maintain.

Typically, on top of EPC-plus contracts, there will be a request for the contractor to operate the plant for a warranty period. Parneix says this is important.

“[The warranty period] is important as it will allow the training of Egyptians to operate this kind of plant,” he says. “This gives a little comfort, as Egypt currently has no experience in operating and maintaining these types of plants.”

While contractors and developers are keen to participate in the country’s vast power programme, its success or failure will ultimately come down to whether Cairo can earn the confidence and support of regional and international banks.

“The key requirement for Egypt’s planned projects – not just in the power sector but across the board – is getting support from international lenders,” says a project financier at a large regional bank. “There is a lot of attraction to the Egyptian market, but there is still a lot that needs to be done. Appropriate [sovereign] guarantees are required, but also effective structures and legislation to facilitate investment with confidence.”

Orascom and Ipic join forces for coal-fired IPP

At the Egypt Economic Development Conference in Sharm el-Sheikh in March, Egypt’s Orascom Construction and Abu Dhabi-based International Petroleum Investment Company (Ipic) signed a contract to develop a 3,000MW coal-fired IPP, following on from a memorandum of understanding signed in November 2014.

The investment cost of the first two phases is expected to reach $3bn.

The project will be financed through a mix of debt and sponsor equity. The debt will be sourced from local, GCC and international financial institutions, as well as export credit agencies. The Orascom/Ipic consortium has received letters of interest from banks to underwrite the debt portion of up to $1.95bn of the total $3bn development cost. National Bank of Abu Dhabi (Nbad) will be the project’s co-financial adviser and will also be part of the consortium financing the scheme.

The initial mandated lead arrangers, underwriters and book-runners include Arab African International Bank, Arab Bank, Banque Misr, Commercial International Bank, Nbad, National Bank of Egypt and QNB Alahli.

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