Egypt tackles utility gap

12 January 2015

Following years of underinvestment and with demand increasing across the country, the government is launching a series of new projects and is looking to engage the private sector

During the summer of 2014, Egypt once again experienced rolling power cuts, and these are set to continue until at least 2018, according to the country’s Electricity Minister Mohammed Shaker.
The newly installed president, Abdul Fattah al-Sisi, has promised massive investment in the power industry, which has suffered from years of neglect. Various options are being explored to boost capacity, including conventional and private power projects, renewable energy schemes, and even a nuclear power programme.

The water and wastewater sectors are also set to benefit from increased spending as the government seeks to meet the needs of a population that numbered 82 million in 2013. If Egypt maintains its current population growth rate of 1.6 per cent a year, investment in the utility sectors will need to be huge and sustained.

Sustained investment

Mohamed Elsherif, CEO of the local Logic Management Consulting, estimates that about $70bn will have to be invested in the power sector by 2022 to plug the generation shortfall, which reached 6GW during peak usage in 2014.

Although Egypt has installed capacity of more than 30GW, poor maintenance and gas shortages meant that in 2013, the country could not meet peak demand of 27GW. With consumption growth above 5 per cent a year, Egypt will have to add 30,000MW of capacity generation by 2030 to meet demand.

Given the current state of government finances, Cairo will struggle to fund such heavy investment alone, and is looking to the private sector. But winning back the confidence of investors will take time and effort.
In a bid to slow the rate of demand growth, electricity subsidy reforms were announced by Shaker in July 2014, and these will be phased in gradually over five years. Low-cost electricity has encouraged wasteful consumption, as people had little need to rationalise usage. Households have been the fastest-growing sector for electricity consumption and already represent more than 50 per cent of the market.

If the price rises are implemented as announced, they should free up £E51bn ($7bn) for investment and help balance the books of the Energy Ministry and its power firms, while preparing the sector for private investment.

Gas shortage

The resources freed up can also be used to solve gas shortages, which have been a major contributor to power cuts, despite Egypt being a gas exporter. Delays in payments to foreign companies operating gas fields have led to a lack of exploration and development of resources. A repayment schedule was agreed in late 2014, and new investment is expected to follow.

Despite the fuel issues, the majority of capacity under development in Egypt is gas-powered, which will add to the 60 per cent of gas consumption already taken up by electricity generation and will cut deeper into exports. The largest conventional project under execution is the 2,250MW North Giza combined-cycle plant, which will cost just over $1bn to build, and is scheduled to come online by the end of 2015.

The $1.4bn South Helwan steam thermal facility, with a capacity of 1,950MW, is not expected to be completed until the end of 2018. In the interim, Egypt will rely on smaller schemes, such as the conversion of the Shabab and West Damietta power plants to more efficient combined-cycle configuration, to increase capacity. An independent power project (IPP) is also planned to be built at Dairut, but is more than a year behind schedule. Build-own-operate (BOO) bids are due on 10 March for the 1,500-2,500MW combined-cycle plant.

In an effort to overcome the gas supply problem, Cairo has signed memorandums of understanding with the local Orascom Construction Industries, Abu Dhabi’s International Petroleum Investment Company, and UAE-based Al-Nowais Investments for two direct proposal coal-fired power plants, which together could produce more than 3,000MW.

Nuclear plant

The proposed 1,600MW first phase of the El-Dabaa nuclear complex will also help reduce the country’s reliance on gas, but the scheme has long languished on the drawing board. The $6bn project was originally conceived in the 1980s, before being shelved in 1986 following the Chernobyl disaster. It was revived in 2007, as Egypt began to face up to its generation problems, with Australia’s WorleyParsons brought in as consultant. Political instability between 2011 and 2013 set back the project, but Al-Sisi named it a priority in his inaugural presidential address in June 2014. Since then, civil works have begun at the site, but a main contract tender has yet to be issued. Nuclear schemes typically take longer to develop than conventional or renewable energy projects, so completion cannot be expected until the mid-2020s.

Nuclear power would reduce Cairo’s reliance on fossil fuels, but is inefficient at ramping up to meet peak demand periods. For this, Egypt is currently using open-cycle gas or oil plants, but some of this will shift to renewables as ambitious programmes get under way. There is already a significant renewables sector in the country, and this is set for major growth in the years ahead.

Egypt has a long history of using hydropower along the Nile River, producing 13,121 gigawatt hours of power in 2012-13. The Ministry of Water Resources & Irrigation (MWRI) is currently building a new dam and hydropower plant at Assuit, with a capacity of 32MW.

Renewables leader

The country is also a leader in the region for wind energy, and has perfect weather conditions along its Red Sea coast and the Gulf of Suez. While wind power capacity building stalled at 548MW in 2011, due to political instability, the Gabal el-Zeit wind farm is due to come online soon and several other projects are making gradual progress with tendering, including the 250MW Gulf of Suez wind farm, on which main contract bids are due on 15 March.

Renewables have been given new impetus in Egypt following the establishment of a feed-in tariff in September 2014. This was followed by the announcement of a 4,300MW direct proposal renewables programme. Some 109 proposals have been prequalified for projects up to 50MW, with 2,000MW allocated to wind, and the remaining 2,300MW to photovoltaic (PV) solar projects. Land allocation will begin this month followed by contract negotiations.

Despite the completion of solar irradiation surveying in Egypt in 1991, the country has been slow to capitalise on the potential for solar power, with irradiation levels reaching 3,200 kilowatt hours a square metre a year in the south. There is currently only 72MW of installed capacity, of which 62MW is part of the Kureimat integrated solar combined-cycle (ISCC) power plant, completed in 2011. This could soon change as a tender on the 200MW PV solar Kom Ombo plant is expected in 2015.

Nonetheless, Egypt is looking increasingly likely to miss its 2020 target of 7,200MW of wind power capacity and 1,800MW of solar, due to repeated delays.

Key fact

Egypt will have to add 30,000MW of capacity generation by 2030 to meet demand

Source: MEED

Water schemes

The focus in the water sector, meanwhile, is moving towards privately funded projects for large schemes. The 6 million cubic-metre-a-day (cm/d) Abu Ruwash wastewater plant was tendered on a BOO basis in 2014. Bids were submitted in late December and a contract award is scheduled for March.

Feasibility studies for the Helwan treatment plant, expected to have a capacity of 250,000 cm/d, will be completed in early 2015. Two other wastewater plants are in the BOO pipeline, while smaller schemes in rural areas will still be tendered on an engineering, procurement and construction (EPC) basis.

The water supply situation is less urgent as the Nile River provides much of Egypt’s requirements - about 55.5 billion cubic metres a year (cm/y), according to the MWRI - but supply is vulnerable to climatic factors. Some 85 per cent of this water is used on agricultural land, which will increasingly use recycled water, with the domestic sector the next biggest consumer.

Water distribution networks reach 97 per cent of the country’s urban areas, while coverage in rural areas is about 70 per cent. However, water demand in Egypt, currently about 79.5 billion cm/y, is forecast to increase by 20 per cent by 2020, which will result in declining quality.

On the water-scarce Red Sea coast, several BOO desalination plants are planned, including a 250,000-cm/d facility, a 40,000-cm/d plant in Hurghada and a 20,000-cm/d facility in Sharm el-Sheikh, which are in the feasibility study phase and could move into tendering by the end of 2015.

It is also estimated Egypt will have to invest £E100bn to expand the wastewater sector, especially in rural areas, where only 6 per cent of the population is connected to the sewerage system, compared with 50 per cent in urban areas. Current public investment of £E3bn-£E4bn a year is less than one quarter of what is required.

Financing all these utility projects will be a challenge without the support of the private sector. The 2010 public-private partnership (PPP) law and other ongoing reforms are intended to open up the market, smoothing bureaucratic processes and providing the right safeguards for investors. Cairo is looking to attract $415bn in foreign direct investment this way.

PPP reform

The reforms will streamline PPP frameworks, according to Atter Ezzat Hannoura, director of the country’s PPP Central Unit. Under the new model, contract details will be prepared and negotiated before signing, while bridge loans will allow work to start even before financing is put in place. However, public authorities will be tested by the volume of projects required, and delays are expected.

Banks and developers, both regional and international, see Egypt as an attractive market, and are looking to expand their portfolios there. But the high interest in recent projects will only translate into funding if the proper frameworks and guarantees are seen to be in place.

“There are six key laws in the pipeline, modifying investment, labour and industry laws,” says Karim Refaat, CEO of the local N Gage Consulting. “I don’t have a single doubt about the quality and viability of the projects prepared. But there is work to be done on the regulatory framework; we need to hear more details.”

Egypt is set to become one of the biggest utility markets in the region in 2015, as it attempts to compensate for years of underinvestment and project delays. The biggest questions are over the capacity of public authorities to manage multiple large projects simultaneously and whether the latest round of reforms will repair investor confidence and help attract much-needed foreign investment.

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