Meeting ambitious energy targets

23 December 2015

HSBC hosted a round table to discuss the issues facing the regional power sector, particularly the Egyptian market

One of the key challenges that will face governments in the Middle East and North Africa in the coming years is meeting the growing power requirements. Demand for electricity is increasing at a rapid rate as countries throughout the region experience significant population and industrial growth.

MEED estimates that an additional 143.2GW will be required by 2020 to meet the demand, an increase of about 50 per cent on the current installed capacity of 285,350MW.

The task of meeting this ambitious target has been made even more challenging as a result of the reduced oil price, which is not likely to rise significantly in 2016.

On 8 December, experts from the power, financial and legal sectors gathered for an HSBC round table in Cairo to discuss the most important issues and challenges facing the regional, and in particular the Egyptian, power sectors in 2016 and beyond.

With oil prices expected to remain subdued in 2016, a move towards energy diversification and private financing will form key trends of the Middle East and North Africa’s power market.

Renewables goal

At the heart of many of the regional utilities’ power capacity-building programmes is renewable energy. From the largest planned single-phase photovoltaic (PV) solar project planned in Dubai to the ambitious 4,300MW feed-in-tariff (FIT) programme in Egypt, governments are looking to diversify their power generation feedstock to reduce reliance on hydrocarbons and boost energy security.

Decisions should not be taken in the short-term… it can be an advantage to diversify at the procurers’ pace

Mario Salameh, HSBC Mena

While questions have been raised about prospects for renewable energy following the slump in the oil price, attendees at the round table were positive about the prospects for clean energy.

“Decisions should not be taken in the short-term,” said Mario Salameh, head of project finance for HSBC, Mena.

“The oil price will maybe not stay at $40 or $50 a barrel forever, and it can be an advantage to diversify at the procurers’ pace and terms when they are not in a $100-a-barrel environment.”

In addition, the falling price of renewable technology has made the resource more cost-competitive with conventional hydrocarbon-burning facilities.

Mohamed Ghannam: Partner at Helmy, Hamza & Partners (second from right)

Mohamed Ghannam: Partner at Helmy, Hamza & Partners (second from right)

“With power projects you need to look at two things: the capex [capital expenditure] and opex [operational expenditure],” said Khaled el-Degwy, concessions director at the local Orascom Construction.

“The capex for renewable projects is not much different today from gas-fired projects, with the price of PV solar and wind power technology having come down significantly. And the feedstock does not cost anything.”

The falling price of producing renewable energy was illustrated in 2015, when Dubai achieved a world-record low tariff for its 200MW PV solar scheme, 4.85 cents a kilowatt hour, and Egypt’s New & Renewable Energy Authority received a record wind-tariff bid for its planned 250MW wind independent power project in the Gulf of Suez.

Salameh says the burgeoning renewables market is one that lenders are keen to support.

“The renewable industry is becoming more attractive to lenders, due to the business viability of underlying projects. Over the last few years, there has been a major reduction in cost, making renewables projects more competitive and bankable on their own, without or with limited subsidies.”

[Egypt’s] Energy Ministry recently said renewables projects will go ahead irrespective of the oil price

Mohamed Ghannam, Helmy, Hamza & Partners

Mohamed Ghannam, partner at Helmy, Hamza & Partners, was keen to stress that while cost is obviously important, implementing renewable energy projects is part of a wider goal, with Egypt a good example.

“In Egypt, we are talking about energy mix and energy security,” said Ghannam. “To change this due to a fall in oil prices or other reasons would be a huge mistake. The Energy Ministry recently said renewables projects will go ahead irrespective of the oil price.”

Atter Hannoura, director of the Egyptian Ministry of Finance’s PPP Central Unit, affirmed Cairo’s resolve to push ahead with renewable energy on a large scale.

“The plan is [for renewables] to reach 20 per cent of overall capacity by 2025,” said Hannoura. “It is a very ambitious and big challenge, but hopefully we can succeed.”

Currency concerns

With Egypt having outlined plans for a $70bn power investment programme at the Egypt Economic Development Conference in March 2015, the private sector will be required to play a part in financing the ambitious plans to procure an additional 54GW of power generation by 2022.

Exchange: A key risk facing the financing of Egypt’s projects pipeline is foreign currency rates

Exchange: A key risk facing the financing of Egypt’s projects pipeline is foreign currency rates

One of the key challenges facing the financing of Egypt’s power, and indeed wider projects, pipeline is concern over the foreign exchange (forex) rate of the Egyptian pound and shortage of available foreign currency.

With rates for electricity Egyptian-pound denominated, particular concerns have been raised about the FIT programme.

“Foreign exchange risk is a major challenge, not only for investors but for lenders,” said Salameh. “Even if the proposed tariff is fully indexed to the US dollar, investors and lenders are concerned about the availability of dollars in Egypt for both dividend distribution and debt repayment.”

Scarce dollars

Hannoura said that while the government was in discussions on how to deal with the forex risk for renewable energy projects, a lack of foreign currency could pose a significant problem.

“The private sector faces challenges. Actually, for solar and renewables projects the forex risk will not be such a big challenge, as the government is working on plans to mitigate it. But the [scarce] availability of dollars is a major risk,” said Hannoura. “Hopefully there will be more dollars available to make currency for such [power] projects, as 70-80 per cent [of power assets] will be privately owned.”

Even if we get local currency, we need foreign equipment; we need dollars during the construction period

Khaled el-Degwy, Orascom Construction

While the dearth of dollars will affect all sectors of Egypt’s planned development programme, it will particularly be felt in the power sector, which relies heavily on foreign technology.

“As a developer, if I have an index payment then I am better financing in dollar loans, as it is cheaper than financing in Egyptian pounds as the rates offset devaluation of [Egyptian] currency,” said El-Degwy.

“There is also the concern of dollar availability during the construction process. Even if we get local currency, we need foreign equipment such as turbines. So we need dollars during the construction period.”

Marwa Emmam: Vice-president of energy and engineered risks at AIG

Marwa Emmam: Vice-president of energy and engineered risks at AIG

According to Marwa Emmam, vice-president of energy and engineered risks from US-based insurance firm AIG, the currency issue is having an impact on Egypt’s projects insurance market, causing problems for clients and insurers.

”The main challenge that most investors a are facing is the finance of their project and the availability of US dollars, as most investors want to insure their projects in dollars (relying on imported materials),” she said. ”The principle of indemnity is that the premium payment and any loss settlement are to be made in the same currency, so when it is difficult for investors to pay premiums in dollars it willl be difficult for the insurance companies to repay claims in US dollars.”

Helmy Ghazi, head of banking for HSBC in Egypt, said the reduced oil price will also exacerbate the issue, putting a squeeze on local and regional liquidity.

The appetite is there for feed-in-tariff; there are still a lot of companies interested”

Saleh Kamel, Zaki Hashem & Partners

“The low oil price is putting constraints on liquidity for US dollar funding,” says Ghazi. “[The success of Egypt’s investment programme] all boils down to liquidity and currency issue in the country.”

Despite the challenges facing companies that are seeking to participate in the private power sector, the high level of interest in the FIT programme has shown that Egypt’s power market is still a focal point of interest for regional and international investors and developers.

“The appetite is there for FIT; there are still a lot of companies interested,” said Saleh Kamel, senior associate at local law firm Zaki Hashem & Partners.

“About 60 or 70 companies are working on the programme, trying to meet all of the requirements and getting financing.”

Multilateral support

Orascom’s El-Degwy says the commitment of multilateral lending institutions is key to the success of the FIT programme.

“Some of the developers have approached commercial banks, but it is mainly the multilaterals that have been approached; their support is important.”

Preparing for privatisation: The New Electricity Law will create an independent regulator

Preparing for privatisation: The New Electricity Law will create an independent regulator

In addition to pushing forward with a large pipeline of projects, adequate regulation and legislation of the electricity market is regarded as imperative if Egypt is to facilitate the investment required in its power sector to meet its ambitious targets.

As part of efforts to facilitate greater private sector investment in its power sector, in July 2015 Egypt’s government issued the New Electricity Law. “The idea is to liberalise and open the market, creating the legal structure for

different players to use state assets, and set out the licensing regime and what needs to be done,” said Ghannam. “It is preparing for privatisation.”

He added, “The creation of an independent regulator – separate from the Electricity Ministry – is embedded in the new law.

“This is important; the regulator will play a key role in setting tariffs and encouraging the private sector.”

Significant pipeline

While it is clear that Egypt’s power sector faces a number of challenges, the attendees at the round table were in unanimous agreement that the market will offer opportunities for all business sectors involved in financing and building power infrastructure.

Egypt is worth the [currency] risks. There are a lot of opportunities, and we will continue our interest”

Aziz Saltik, Enka

“There is a major opportunity for the investment sector; these projects are needed after a long period of underinvestment,” says Salameh. “The advantage of Egypt is that it has a long history of project finance, a strong business and project development culture, an understanding of risk allocation between government and the private sector, and experienced project finance lawyers and bankers.

“The potential pipeline of projects is significant; you can’t ignore Egypt.”

Aziz Saltik, project manager for Turkish contractor Enka, agreed with this sentiment, saying, “Egypt is worth the [currency] risks. There are a lot of opportunities, and we will continue our interest.”

Round table participants

Amr Aldeeb, general manager, Xervon Egypt

Sherif Baky, business development manager, Kharifi National

Khaled el-Degwy, concessions director, Orascom Construction

Marwa Emmam, vice-president of energy and engineered risks, AIG

Ahmed Gasser, senior sales manager, GE

Mohamed Ghannam, partner, Helmy, Hamza & Partners

Helmy Ghazi, head of banking, HSBC Bank Egypt

Atter Hannoura, director, PPP Central Unit, Ministry of Finance

Sameh Kamal, senior associate, Zaki Hashem & Partners

Andrew Roscoe, power and water editor, MEED

Farid Saber, managing director, AIG

Mario Salameh, head of project finance, HSBC Mena

Aziz Saltik, project manager, Enka

Richard Thompson, editorial director, MEED (moderator)





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