Egypt’s plans to link its power network with Saudi Arabia are the latest in a growing network of electricity grids in the Middle East. But a regional power shortage and the question of how to price the sale of power mean there is a long way to go before full integration can be achieved.

A connection with Egypt is a realistic possibility eventually, but we are not there yet

John Sfakianakis, Banque Saudi Fransi

In August 2010, soaring temperatures put such a strain on Egypt’s electricity grid that the daily celebrations to break the Ramadan fast were subject to frequent blackouts. Such was the discontent at the situation that on 19 August protesting crowds blocked the main road southwest of Cairo connecting Egypt’s north and south.

An emergency plan was quickly introduced to bring on stream a raft of new power capacity, including a 375MW power station in Nubria province, a 120MW gas/solar hybrid plant at Kuraymat, south of Cairo, and a 175MW increase in output from the Aswan Dam hydroelectric plant.

Electricity demand challenges

But the challenge of providing for rapidly rising electricity demand is likely to remain a problem for Egypt for years to come. According to the country’s main power utility, the Egyptian Electricity Holding Company, over the next five years 11,110MW of additional capacity will need to be added for a projected cost of $120bn.

The government is working on a series of schemes to plug the gap. In April, Energy Minister Hassan Younis said the government had allocated $1.7bn to build 24 new power facilities, with total output of 2,680MW. The units will be located in Damietta, El-Shabab and on the Cairo-Alexandria Desert Road.

Increasing emphasis is also being placed on alternative energy. In 2007, the government outlined a plan to increase the contribution of renewable energy to 20 per cent of total power capacity by 2020. A 200MW wind farm scheme on the Gulf of Suez has already been launched by the state-owned Egyptian Electricity Transmission Company and is due to come on stream in 2013. Plans are also being developed for a $4bn nuclear power plant, with capacity of 4,000MW, which is scheduled to begin operations in 2025.

Aware that it needs to explore every possible avenue to address the power problems, the government is now pursuing a scheme to set up a 3,000MW power exchange with Saudi Arabia. The project is designed to take advantage of the timing of peak demand in the two countries, with Egypt exporting electricity during the afternoon and Saudi Arabia returning the favour in the evening. “It would make sense in light of Egypt’s power shortage,” says Angus Blair of Cairo-based Beltone Financial. “If there is a way for it to buy some power, it could help them get out of a bit of a fix.”

The project will involve laying 1,300 kilometres of power lines, including 450 kilometres in Egypt, costing $1.5bn. A feasibilty study has been carried out and a tentative deadline for completion has been set for 2013. Given the strain on government finances caused by the economic slowdown from the political events of 2011, it is an ambitious undertaking.

Power interconnection moves

The linking up of power networks in the Middle East is nothing new. In North Africa, bilateral interconnectors facilitate the exchange of power between the Maghreb countries, while an eight-country interconnection project enables trading of electricity between Libya, Egypt, Jordan, Palestine, Syria, Lebanon, Turkey and Iraq.

Egypt and Jordan have recently stated their desire to increase the capacity of their existing interconnector from 450MW to 1,000MW in order to improve the stability of the exchange between the two power grids. The network was set up in 1998, and in the following decade almost 5,000 GWh of electricity passed between the two countries.

The most impressive of the region’s interconnection projects is the GCC grid. The $1.6bn first phase of the project, connecting Saudi Arabia, Kuwait, Bahrain and Qatar, began operating in July 2009. In April, the UAE has been connected to the northern part of the GCC network. The next phase is to connect Oman to the network.

“In April 2011, we managed to connect the UAE to the other states,” says Hassan al-Assad of the GCC Interconnection Authority (GCCIA), the body responsible for the grid’s development. “There is also a connection between the UAE and Oman, but it has not been energised yet, and needs to be reinforced.”

The ongoing integration of Saudi Arabia’s own regional networks would mean that a power link between the kingdom and Egypt could effectively add another state to the six-member network. “Saudi Arabia is currently connecting its regional power systems,” says Al-Assad. “Once that’s done, a connection between Egypt to Saudi Arabia would mean that it would also be connected to the grid.”

Jordan, which has severe power shortages of its own to contend with, is also looking at several alternative energy strategies, including sourcing oil and gas from Iraq, or itself joining the GCC grid through a connection to Saudi Arabia. In recent weeks, the GCC council announced that it welcomed a long-standing application from Amman to join the GCC. The country has strong support from Saudi Arabia and Bahrain for greater integration with the six-state organisation.

Power integration advantages

Increasing the degree of integration between the region’s power networks offers a number of advantages. “The interconnection of power networks enables efficiency gains, greater competition between providers and the possibility of balancing shortfalls in certain areas,” says Eckart Woertz, a specialist on the Gulf at Princeton University in the US.

“Greater interconnection makes economic sense,” says Richard Metcalf of UK law firm Norton Rose, an adviser to the GCCIA. “You don’t need every state building spare capacity into their networks.”

But there are pitfalls too. “You have to ensure the provision of power is stable,” says Woertz. “A grid has to have a certain amount of power – not too much and not too little. If you have a shutdown in one part of the grid then much larger areas would potentially be affected.”

The challenge of preventing outages is particularly serious for a region in which almost every nation is short of power. The shortage is a double-edged sword for regional integration.

It has proved an incentive for greater Gulf integration, which has worked well in enabling the GCC members to help each other out in an emergency. But it may also mean that there is reluctance within the group to allow other countries with a power deficit to join the grid.

“A lot of these countries are just barely meeting their basic power demands,” says John Sfakianakis, chief economist at Riyadh-based Banque Saudi Fransi. “In the summer, Saudi Arabia doesn’t have any power left to export. We’re not in a position where there is a surplus in the region.”

“The idea of the grid is to meet the basic needs of the GCC,” says Mustafa Alani at the Gulf Research Centre in the UAE. “Even in the GCC, there are still two-three years of possible shortages ahead. I don’t think they have the spare capacity to meet demand from other countries in the region.”

The logic of greater integration also implies that a pricing mechanism will eventually be needed to govern the buying and purchase of electricity. To date, the GCC grid has been used only to meet emergencies in markets threatened by blackouts. A system is now being introduced to enable bilateral deals on energy trades between members of the grid system, but a unified pricing mechanism is still a longer way from being realised. “The ability to establish a common trading platform will take time to develop,” says Metcalf.

“There are huge differences between the individual markets. The UAE is quite advanced in terms of deregulation, whereas Kuwait still hasn’t had its first IPP.”

Sfakianakis agrees: “I think trading will come, but it will take a little bit of time. There is still the view that energy is produced to meet the needs of a specific country.”

Until the GCC’s own power shortages can be addressed, any further expansion of the grid is likely to be based on political considerations rather than economic ones. “Yemen is in desperate need for power and it is next door to Saudi Arabia and Oman, but it is not a question of need, it is a question of politics,” says Alani.

According to analysts, Jordan’s close political ties with Saudi Arabia and the GCC’s recent warming to the idea of the country’s integration into the organisation’s political framework make it a strong candidate for closer co-operation on the provision of power.

“The whole idea of Saudi Arabia’s King Abdullah is to support links between Jordan and the GCC,” says Alani. Sfakianakis agrees: “I wouldn’t be surprised if plans for Jordan to join the GCC grid move forward in the next year.”

Complexities involved with power project

As for Egypt, the combination of the practical complexities of integration with the country’s financial problems could mean that the link with Saudi Arabia takes a little longer to come to fruition. If anything is to give momentum to the proposal then it is likely to be Riyadh’s fear that a new Islamic regime in the North African state might make it more susceptible to influence from Iran. The kingdom has announced the provision of a $4bn support package to help Egypt through the tough times ahead.

But even this may not be enough to prevent continued delays to a project for which the issuing of tenders has already been postponed several times. “A connection with Egypt is a realistic possibility eventually, but we are not there yet,” says Sfakianakis. “We are talking about a huge investment and I’m not sure that’s possible in the current environment. I don’t see it happening in the next five years.”