Paving the way for MSP Activity 1.1.1: Benchmarking of existing practice against EU norms

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1 Paving the way for MSP Activity 1.1.1: Benchmarking of existing practice against EU norms - Country Report Egypt - The Contents of this publication are the sole responsibility of the Consortium MVVdecon/ENEA/RTE-I/Sonelgaz/Terna and can in no way be taken to reflect the views of the European Union I- Description of the Egypt electric power sector The electricity services started in Egypt in the late 1900s. On December 3, 1892, the government of Egypt licensed Lebon Gas company to carry out a five years period experiment to generate and distribute electricity in parts of Cairo city; in 1897 the government granted the company a 50 years concession to distribute electricity in Cairo city; additional concessions followed. In the early 1960s the electricity services were nationalized (the Public Egyptian Cooperation for Electricity, which then was transformed into the Egyptian Electricity Authority); while in the late 1990s activities started to attract private sector again into the market (IPPs, BOOT...etc.), in an attempt to liberate (commercialize) the electricity market. The historical developments of the electricity power sector in Egypt are shown in figure 1. The current electricity market in Egypt is mainly composed of government owned utilities (six generation, one transmission and nine distribution), three Build Own Operate and Transfer (BOOT) projects and a limited number of small isolated and/or semi connected Independent Service Providers (ISP) (around 14 generation and 22 distribution up to year 2010), either generation or distribution; Figure 2. 1

2 Private Nationalization MOEE Evolution of the Egyptian Electricity Sector 7 Discos Busi. Sec. Regulatory Law EEHC Unbundling PECE EEA Law 100 BOOT Law 18 Discos in Elec. Sec. Current Regulatory Figure 1: Evolution of the Egyptian Electricity Sector Figure 2: Current Electricity Market in Egypt (started in 2001) In this first phase of liberalization, ISP are either generating electricity and selling at the medium and low voltage levels, or buying bulk electric energy and distributing that. It is also possible for ISP to sell electricity directly to any type of customers at 2

3 any voltage level, but this is not exercised at the Extra High Voltage (EHV) and High Voltage (HV) levels, mainly due to price competition with government owned utilities. A. The present regulatory framework 1. Laws and regulations governing the electric power sector A large number of legislations (laws, royal, presidential, prime minister and ministerial decrees) governed the electricity market in Egypt since the late 1900s. The recent millstones and effectively prevailing legislations (fully/partially related to the electricity activities) are shown in the following table Recent millstones and effectively prevailing legislations in Egypt as related to the electricity service activities Year 1992 Legislation issues addressed 8 distribution companies transferred to the Ministry of Public Enterprises for corporatization From Cabinet of ministers 1996 Provision allowing for IPPs in generation issued Law Establishment of electricity regulator issued (was not implemented). Presidential decree 1997/ Investment incentives and guarantees offered by government for private sector developments, further tax incentives offered in distribution companies transferred to EEA, then re-bundled with generation units, forming seven state monopolies, plan aborted to offer shares on Egyptian Stock Exchange Three Power Purchase Agreements (PPA) were signed with InterGen and EDF to build 3 power generating plants and to operate under a BOOT scheme. The Egyptian Electricity Authority (EEA) corporatized and re-organized as the Egyptian Electricity Holding Company (EEHC) Readdressing the conditions and financing of IPPs and BOOT projects in Egypt, especially as related to foreign exchange rates (devaluation of the Egyptian currency) A second presidential decree for the establishment of the regulatory body for electricity was issued, it was staffed by the year 2002 Vertical and horizontal unbundling of generation, transmission and distribution took place under the umbrella of the EEHC In September of 2004, an annual tariff increase of about five percent on average was approved by the cabinet of ministers for the following five years. Up till October 2006, three increasing steps took place, and it is anticipated to Law 8, Law 162 Cabinet of ministers Law 164 Cabinet of ministers Presidential decree # Cabinet of ministres 3

4 continue. A number of tariff changes were issued targeting mainly the energy intensive industries PM decree From 2004 till 2010, the implementation of the licensing mechanism of the electricity regulatory took place; this was an important issue in order to start facilitating the regulatory activity to follow up on the performance of the different electric utilities and to set the basis for introducing private sector utilities into the new formed electricity market in Egypt. The three existing IPPs (BOOT) projects were also licensed and it was referred to that their PPAs set the rules for their performance in the market as their existence preceded the establishment of the regulatory agency. This licensing partly facilitated the selling of these three BOOT projects to new owners (Power techa company from Malaysia). No new bids were issued by the government or any of the government owned utilities or the regulatory agency, this was partly due to the success of the MoEE to attract low cost finance for new generation projects. Currently 1500 MW expandable to 2250 MW is under consideration through a BOO scheme. As regard to the Arab gas pipeline, Egypt is fully committed to its obligations, yet recently and due to partly the limited findings of new gas resources, the government of Egypt is limiting its supply to new energy intensive projects, that in a way might affect the potential of new IPPs. Due to this limitation, new large energy intensive industrial projects are looking at other electricity resources among which is the potential of establishing new coal fired power generating stations or resorting to RE projects. 2. Government authorities and institutions controlling the electric power sector Three main entities mainly control the current electric power sector in Egypt, these are: i. The Ministry of Electricity and Energy (MoEE), formed in The responsibility of the ministry is to oversee all the electricity service activities in the country. Due to the different administrative and corporate changes which took place within the Egyptian electricity sector, a very high degree of cooperation and coordination is in place between the MoEE and EEHC. The MoEE (as entity representing the government) and in cooperation with other ministries such as the ministry for international cooperation and the ministry of investment work jointly to attract finance through soft loans for new generation projects. ii. The Egyptian Electric Utility and Consumer Protection Regulatory Agency (EEUCPRA), formed in 1997, and reformed in When established this was the new comer to electricity market. The mandate of the regulatory agency is to regulate, supervise, and control all matters related to 4

5 the electric power activities, whether in generation, transmission, distribution, or consumption, in a way that ensures availability and continuity of supply so as to satisfy the demand for the various aspects of usage at the most equitable prices, taking into consideration environmental protection, the interests of the electric power consumers as well as the interest of the producers transmitters and distributors.the agency aims also at preparing for lawful competition in the field of electricity generation, transmission, and distribution, and avoiding any monopolization within the Electric Utility. Since the agency started in 2000, it licensed all government owned utilities, the three BOOT projects and over 22 ISP. The agency follows the performance of these utilities through a bench marking scheme for both their financial and technical performance. For potential new IPPs, EEUCPRA will be fully involved in their introduction to the market through the licensing mechanism. Potential new IPPs and existing Independent Service Providers (ISP) do have the right to issue bids to fulfil their obligations to the market; this would be done in coordination with EEUCPRA according to the licensing mechanism. For the existing BOOT projects, their PPAs are the prevailing legal tools in controlling their performance, yet EEUCPRA follow their performance to help in establishing a proper benchmarking scheme for the electricity market in Egypt. iii. The Egyptian Electricity Holding Company (EEHC), formed in 2000; formally known as the Egyptian Electricity Authority (EEA). EEHC inherited the role of EEA and other earlier entities responsible for the electricity sector in Egypt. EEHC carries on a dominant active role in the planning as well as overlooking the execution and operation of the government owned electric utilities (affiliated companies - six generation, one transmission and nine distribution). At present, the Egyptian Electric Transmission Company (EETC) operated under a single buyer model, as it purchase bulk power from all generation entities (government owned, three BOOT, government wind farms and four industrial plants). EETC (single buyer) in turn sells bulk power to distribution companies and to HV and EHV customers. EEHC sets and controls the purchase and selling prices of electricity among the government owned utilities. This single buyer market does not allow free competition among incumbent generation companies. However, this is an intermediate step towards the establishment of an actual liberal electricity market. Current laws in-force and other legislations (licensing through EEUCPRA) do not prohibit any other entity from participation in bulk power trade or even using the transmission network for wheeling electricity. According to the three existing PPAs for the three BOOT project, the Egyptian Electricity Authority (EEA) was the sole off-taker, after the unbundling took place EEHC replaced EEA in its obligations and these obligations were transferred to the Egyptian Transmission Electricity company (one of EEHC 5

6 affiliated utilities) as the entity responsible for the execution of the PPAs jointly with the three BOOT projects. 3. The legislations and/or the role of PPA off-taker in reforming Electric Power Sector The current 3 BOOT projects (SidiKrir, EdF Suez and Port Said) helped in the late 1990s to serve the need for electricity in the Egyptian electricity market. Back then it was relatively difficult to find proper finance for the needed generation expansion plan to meet the growing electricity demand. These 3 BOOT projects and its associated Power Purchase Agreements (PPAs) helped in partly indicating the market value for electricity at the generation level, for the Egyptian national market for electricity taking into consideration the long term fuel agreement associated with these projects and the pass through terms in the PPAs for any additional financial burdens after the signature of the PPAs. The first IPP facilities (SidiKrir, Port Said and Suez) were built by InterGen with Edison and the second and third were built by EdF, for a total of 2048 MW. In spite of the Egyptian currency devaluation in the early 2000s, the financial terms of the PPAs were not renegotiated. It is not likely that any additional new BOOT would follow the same format for the first three ones. New BOOT projects, if conducted with government owned utilities, would likely address issues like source of hard currency finance, level of national involvement (manufacturers, contractors, etc.), energy payment as a ratio national and foreign costs currency. The first bid, for the SidiKrir project at the north coast, west of Alexandria city, was organized in 1996 and awarded two years later in The tender was issued and concluded for a 20 year BOOT gas-fired steam generator, of MW. The contract stipulated project financing, rather than balance sheet financing, and the plant must be prepared to deliver electric energy if asked to do 70% capacity. Fuel cost (i.e. natural gas as main fuel and fuel oil as back-up), based on a formula stated in the PPA, was to be passed through fully, although not directly (first paid by the BOOT project, then claimed from EEHC/EETC). All EEHC payments were to be made in US dollars and are backed by a guarantee from the Central Bank of Egypt. Egypt did get what has been characterized as the lowest electricity prices for developing countries IPPs at US$ per kwh from InterGen and Edison, the project developers for the first IPP. This low tariff is partly attributable to the low gas price. 6

7 Other significant features of the project include the large amount of local debt, although in dollar denominated terms. Port Said and Suez, Egypt s second and third IPPs, were achieved along virtually the same lines, but somewhat faster, with the same set of conditions extended by the government. Tenders were comparable for two plants at approximately 683 MW each, which were awarded to EdF in The main differences between the two sets of projects (i.e. Sidi Krir on the one hand and Port Said and Suez on the other) apply to the financing arrangements. All three BOOT projects are not affected by end user tariffs or any form of subsidy offered to the government owned electricity utilities or end users. According to their PPAs, the current three BOOTS (SidiKrir, Port Said and Suez) projects only deal financially with EEHC (or actually with the Egyptian Electricity Transmission Company EETC). They are not affected by any change of law conditions after the start of the PPA in 1998, or any additional financial burdens (such as fuel price change, change in taxes, custom duties etc.). Hence any financial burdens due to the change which took place in fuel prices were taken care by the EETC. The actual implementation mechanism is that the new fuel price is paid by the BOOT project and then they claim the difference from EETC after that. So far, up till today, EETC was able to fulfil all its financial commitments toward the three BOOT projects, and there no sign that they will not continue to keep their commitment. The government sovereignty guarantee is in the form that the central bank of Egypt makes sure that EETC have in its accounts the monthly amount due available in the required currency. These payments are usually made on a fixed date during the first week of each month. The government represented by its EETC takes the burden of the low end user tariffs (set by the cabinet of ministers), this burden currently, effectively, goes into the financial books of EETC, but it is strongly argued between the ministries of electricity and finance that this burden should go directly to the government financial statements and budget, as long as EETC is financially a stand-alone entity and do not get any financial input from the government since 2001, when they were formed. All these arguments do not in any way affect the execution of the current effective three PPAs. It is the government commitment, on one hand to keep the healthy execution of the PPAs and on the other hand to keep the electricity affordable to end users. 4. The legislations and/or regulation which affect foreign private investment Two main legislations affect foreign private investment in the electricity market, the first of which is the 1997 Investment Law # 8 followed by its amendment Law # 162 for year Both laws allowed service and commodity providers to set prices for their own products, which reflects that market forces will prevail, which is quite 7

8 important to control the prices for electricity and it reflects a free market vision, also these laws provided developers with tax exemption (for the first five years), currency conversion, full repatriation of profits as well as protection against nationalization and expropriation. So far the implementation of these laws did not face problems. The establishment of both EEUCPRA and the Agency for Protection Against Monopolistic Actions, through presidential decrees helped to provide a paved the way for the possible existence of new electricity service providers, either national or international. It should be noted that for new possible IPPs, the possibility of having a PPAs with the government owned utilities seems, currently, a bit remote. The current real market segments which the possible new IPPs would be targeting are either: End users subject to electricity tariffs higher than the cost of service of these IPPs. These end users would likely be industrial users fed at the medium and low voltage levels, commercial users (also either fed at the medium or low voltage levels). These groups of customers will grow gradually as the end user tariffs (set by the cabinet of ministers) keeps on increasing, the recent tariff change took place in July End users which the current government owned utilities or the current ISP are not able to supply or decline to supply, either due to the limited availability of electricity or due to geographical limitations,...etc (additional explanation on that is provided in the conclusion section). Currently there are around 30 industrial plants (estimated average demand of about 25 MW each), which applied for industrial activity approval, these approvals are on hold due to the limited energy resources (electricity and NG). An IPP would be a real saviour in such a case. B. The Present status of Egypt's Electric Power Sector reform 1. The outline and present status of the Electric Power Sector reform in place including the engagement of foreign private investment through bidding An unfinished policy, legal and regulatory agenda- Although reforms generally slowed down in Egypt since 2000, there have been a number of first stage reforms within the electricity sector: The sector has been unbundled under a state-owned holding-company model. The generation, transmission and distribution retailing segments have been functionally separated within the EEHC with 6 regionally-based generation companies, a transmission company and 9 distribution companies. A sector regulator, the Egyptian Electric Utilities and Consumer Protection Authority (EEUCPRA), was established in 2000, although its role at this stage is limited, particularly in advising on or setting prices. 8

9 An internal power pool was established in 2002 to replace the previous dispatch processes. Under the pool, the generators provide their cost (as if they were bids for dispatch, which are scheduled on the basis of these bids). However, the bids are based on costs, and there is an ex-post adjustment to prices that limits the incentives provided. There has been significant investment in improved metering at the generation, transmission and sub-transmission levels. While these are positive steps, and provide an important foundation for further sector development, the potential benefits of these reforms have yet to be realized. The sector policy remains somewhat unclear, and the legal and regulatory framework unfinished. In the late 1990 the GoE introduced private sector participation in the sector through three IPPs. The view then was that the sector should increasingly be financed by the private sector. However, with the devaluation of the Egyptian pound, the cost of the power purchased - which is fixed in US dollars - started to exceed the average retail price for electricity, thus bringing losses to the sector. The GoE recently engaged in a dialogue with the EU, through the Euro-Mediterranean Partnership, on integration into a regional electricity market. Such integration will require far reaching reforms of the Egyptian power sector, in order to establish fully liberalized electricity markets (in principle by 2010). Some assistance on how to achieve this was provided through the MEDA Program (financial and technical measures to accompany the reform of economic and social structures in the framework of the Euro-Mediterranean partnership). A follow up activity on this is being currently provided also under Euro- Mediterranean Partnership through the MEDREG project. Nevertheless, significant work remains on the detailed steps required to meet the liberalization objective, as well as government policy on how to finance sector investments in the longer term, including the respective roles of the public and private sectors. On the latter, although the GoE remains open to private sector participation, the pressure on the financial status of the sector due to the overall low retail tariffs has led to the GoE opting for public sector financing for the time being. Clearly, tariffs subsidy reform would need to accompany any large-scale re-engagement with private participation. As mentioned earlier, reform of the social safety net is a key priority of the GoE. As for the legal and regulatory framework, new legislation is being prepared that will provide the basis for the future regulation and operation of the electricity sector consistent with the EUMEDA agreement on the conditions for a regional electricity market. The Ministry of Energy and Electricity aims to present this law to Parliament shortly after its reformation. The regulatory agency has wide range of functions, including issuing licenses and monitoring advising on prices, but it is still very much developing its resources and capabilities, some of which will become better defined only when there is clarity on how the sector will evolve. 9

10 In summary, the Government of Egypt (GoE) started a restructuring process for the electricity sector since the early 1990s. One of its main features was a vertical and horizontal unbundling activity resulting, at that time, in 16 utilities operating under the private sector law (law # 159), under the umbrella of Egyptian Electricity Holding Company (EEHC). This meant that the electricity sector is not supported anymore form the government budget and it has to be self sustained, which they did manage till now. Furthermore the Electricity sector is in a phase where possible discussions may take place with the government to revoke debts (partly or fully) due to the government prior to the commitment for the unbundling process in a similar way as they did with the water sector. Another possible scheme which is also under consideration by the GoE is to get the Investment Bank of Egypt (IBE), source of the GoE funding to the electricity sector, to participate with the amount of debts as part of the sector equity. 2. Privatization trends of power sector entities and role of regulator in IPPs Privatization would be reached through the liberalization of the electricity market. This would be achieved by paving the way for private sector utilities to get into the market, hence the market share will gradually change and both the government owned utilities and private sector ones will co-exist forming a free market for electricity, operating under the same market rules. A number of steps are already completed and some others are planned to achieve liberalization and to eliminate the natural monopoly situation by the government owned utilities. The first two steps were to end the sole responsibility of the government owned utilizes to provide electricity and to start a regulatory agency, based on these actions a number of small size ISP came into the market as was shown in figure 2. The following step will be actively exercising the right to wheel electricity through networks, through wheeling contracts; and stimulate activating bilateral power purchase agreements between suppliers and end users (the current legislations does not prohibit that and current licenses rules allows that), figures 3 and 4 shows the possible anticipated two step market reform when bilateral agreements will be exercised and its use expand, it is assumed that these agreements will start between IPP generators or possibly joint venture IPP and EHV and HV users (steps 2 and 3). The process to have an Independent Transmission operator or System operator is in the design phase by the leading personnel from the EEHC and the regulatory agency. This would eventually lead to dissolving the EEHC responsibilities into possibly the ministry of electricity and energy and getting the regulatory agency into a more active role of overlooking the electricity market. The time span, for these changes is not yet clear but a five to seven years target looks possible. 10

11 MOEE/EEHC NG ISP IPP expansion Generation Co.(s) Trans Co(s) Dis Co(s) MV & LV Customers Gov. PP BOOT(s) UHV Customers HV Customers MV Customers Exports & Imports Private Distributor LV customers ISP Target Market Proposed phase two Figure 3 step two towards market liberalization Ministry of Electricity and Energy IPP expansion MOEE/EEHC RE: Gov PP & IPP.. Generation Co.(s) Trans. TSOco. Dis Co(s) MV & LV Customers BOOT(s) UHV Customers HV Customers MV Customers Exports & Imports Independent Merchant Transmission & Distribution ISP(s) EEUCPRA Target market proposed phase three Figure 4 step three towards market liberalization 11

12 3. Financial viability of electric power sector and the impact of outstanding debt owned by power off taker (especially that arising from sovereign guaranteed IPP projects) The financial viability of the electric power sector is improving due to the gradual increase in end user tariffs, and possibly the elimination of the fuel debt and moving that to the government budget, this is not quite clear yet. With respect to the three BOOT projects, the government owned transmission utility is up to its commitment, and it pays the three BOOT projects on time. It is worth to mention that three BOOT projects are actually competing among them self, to set the market benchmarks from both the technical and financial point of views. A number of leading government owned new power generating stations get into the competition especially on the technical levels. C. The latest prospect of power supply and demand: Up till the 1970s the government of Egypt s policies and strategies for the electricity power infrastructure, focused on providing electricity to all end users (residential, industrial, etc.); when and wherever it is needed (electricity for every one). During the 1980s efficiency concepts were added and started to be emphasized both at the supply and end user levels (maximizing the utilization of all resources). In the 1990s and until now; and in addition to aforementioned strategy goals, promotion of interconnections with neighbouring countries, development of renewable energies, environment protection and quality of supply were highly focused on and addressed. Demand side management has recently gained importance in order to limit the need for capacity expansions. A number of demonstration projects were conducted since the early 1990s; they were funded by international donors such as the USAID, GEF etc. Industrial as well as residential peak demand shifting is engorged by mainly electric distribution utilizes. Furthermore the use of efficient equipment as CFLs is also highly promoted and a facilitating distribution plan for these lamps is being executed by a number of the electric distribution utilities. It is also proposed in the new law for the electricity activities, that energy efficiency should be clearly addressed and incentives should be offered to end users as well as utilities adopting DSM programs. Results of a number of studies to adopt time of use tariffs is being considered by the government owned utilities, currently one is applied to energy intensive industries. 12

13 1. The present balance of power supply and demand Power demand over time Based on the annual statistics of the electricity sector in Egypt both a demand and energy annual increase of about 7% over the last ten years was registered, yet for the last year this rate was close to 10%. The peak demand reached MW during the fiscal year The total installed capacity reached MW in April Peak demand evolution in registered MW and Installed Capacity of Power Plants 13

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15 Installed Capacity Development by Type of Generation (MW) 2. Power supply (including IPP projects) broken down by fuel type The total installed thermal and hydro generation capacity exceeded MW by mid 2010 (including the 3 BOOT projects of a capacity of MW each). Close to 87% of the generation capacity is owned by six government owned utilities, and the remaining almost 13% are owned by three BOOT projects. The three BOOT projects only sell electricity to the government owned single transmission utility; based on that these BOOT projects are considered semi government. In addition to the current available thermal and hydro power generating stations there are 545 MW wind farms currently operating. 3. The geographical and seasonal supply-demand gap Egypt has about 8% margin between the peak demand and the installed capacity. The peak demand in Egypt takes place during July/August, where all the capacity is available including the hydro. The hydro power is limited during January/February, but the same time the peak load is not as high as the one in summer it is around 17,000 MW. 15

16 4. Electricity generation - Electricity generation from fossil fuels Electricity generation In Egypt is dominated by fossil fuels, which represented about 86.7% of total electricity generation in 2009 (EEHC, 2009). This is mainly NG which accounted for 78.4% of the total electricity generation in Future plans for installed capacity increase are mainly focused on steam power produced by natural gas. The additional capacity of NG -driven power plants to be installed by 2027 is expected to reach 41,300 MW (presentation of the EEHC chairman, 2008 at the WB). Hydropower will most likely have a lower percentage share. - Electricity Generation from Wind The actual effect of wind generation started to appear when the wind parks in Hurghada were connected to the national grid during the late 1990's. Throughout this period, electricity generation increased by a very fast rate, resulting in growth from 368 GWh in 2003 to 1133 GWh in Electricity Generation from Solar Energy The Concentrated Solar Power (CSP) systems can be used either to generate electricity, or to produce steam for industrial or water desalination applications. Egypt has excellent potential for solar energy using CSP technologies. It is ranked 4th for CSP potential in the Mediterranean region (DLR, 2005). Egypt's solar energygeneration economic potential Is the highest In North Africa, with good human resource potential and infrastructure generation potential. This high potential has been untapped so far. Despite scattered CSP projects in Egypt. A hybrid solar power plant is currently being erected in Kuraymat which is partially funded by donors. The contribution of CSP is rather limited. as it integrates CSP as a source of power (20MW) with conventional fossil fuel (140 MW) in a thermal combined cycle electricity generation technology. The solar generation of 34 GWh represents only 3.6% of the total energy generated by the plant. Nevertheless. it could be a learning experience and a starting point for the take off of CSP electricity generation plants to tap into the huge pool of solar resources in Egypt. There are no clear plans for expanding CSP; only currently there a feasibility study which is being conducted for a 100 MW CSP plant in south of Egypt in addition to two 20 MW PV plants. 5. Electricity Grid and Distribution - Transmission The Egyptian unified transmission grid covers all regions In Egypt; It has been owned and operated since 2001 by the government-owned Egyptian Electricity Transmission Company (EETC). Although independent commercial transmission networks are not virtually prohibited by any current legislation, the EETC is a 16

17 government monopoly regulated through its owner, the EEHC and the electricity regulator - Distribution The distribution networks are owned and operated by nine companies, all working under the Egyptian Electricity Holding Company (EEHC) umbrella. These companies are distributed according to a geographical base. and their zones do not overlap. The total number of customers served by the network was 25.7 million customers in 2009/2010, which is around 99.5% of the Egyptian population (EEHC, 2009/2010).The distribution of electrical energy in Egypt takes place at different voltage levels: starting from the EHV level for some of the heavy industries, to the low voltage level for residential and commercial customers. The distribution networks have been expanding at a very fast rate In order to cope with the Increasing demand of electrical energy. In the medium-voltage distribution network length was 113,399 km, and the low-voltage distribution network length was km; in 2009, the lengths of both networks were km and km respectively (EEHC, 2009/2010). Electricity rates are subject to a less direct subsidy than fossil fuel products, as they are indirectly subsidized through the provision of NG and fuel. The adopted electricity tariff in Egypt depends on block rates (residential and commercial), in which the cost of electricity increases as the consumptions increases. This results in increased average cost per kwh as total consumption increases. Moreover, different users are subjected to different pricing schemes. the design/formation of these tariffs does have demand side management aspects inherent in them, d. Principal issues for existing IPP projects in Egypt The operation of the current existing IPPs follows either a) the rules set by the PPAs for the three BOOT projects, b) the rules set by the regulatory agency in accordance to the ;incensing documents issued to the IPPs. As mentioned earlier, current IPPs other than the existing three BOOT projects are small in size. These IPPs are sometimes referred to as independent service providers (ISPs). For investors coming to the existing BOOT projects, they will follow the current prevailing PPAs for these projects, which proved to be minimal risk projects (based on the benchmarking scheme adopted by the regulatory agency). Potential new IPPs in Egypt, would be considered in a way pioneers, as they are coming to a growing market, a market which was for about fifty years a captive one (government utilities are the sole supplier of electricity) and is gradually trying to move from this condition to a competitive from. Having said that, being pioneers new potential IPPs will be privileged as they will likely contribute effectively is the process of setting the market rules of the new emerging electricity market in Egypt. This will also inherently include a number of challenges that new IPPs will have to deal with and work on, some of these challenges normally do not exists in a developed market. 17

18 It should be quite clear that the current legislation does not in any way prohibit the existence of any new IPP; as a matter of fact the current market needs that. The market need is partly due to that the government owned NG and electricity utilities who have lately limited its acceptance to supply new large intensive energy industries with either NG or electricity. This rationalization was due to the possible limited fossil fuel reserves status in Egypt. This in a way opens the market for new IPPs to step in and work on providing electricity to these potential customers. Yet the fuel issue will be a serious one and needs to be addressed, by potential new IPPs, they likely need to follow one of the following schemes: Negotiate with the government owned utilities or primarily with the ministry of petroleum, getting a long term fuel supply agreement which takes into consideration market values of fuel (partly or fully). The current natural gas price in Egypt for all industrial activities, including electric power plants, is 1.25 US$/1000 CF. For government owned electric generation utilities it is about.67 US$/1000CF and this number is being seriously negotiated between the Ministries of electricity and petroleum. The three BOOT projects in Egypt (2047 MW in total capacity pay the 1.25 US$ value, the EETC pays the difference between the 1.25 and 0.67 back to the BOOT plants). Imports of fuel, that can be addressed in relatively in an attractive way as Egypt is being the path of a large amounts of fuel from the Gulf area to Europe and the USA (by tankers or pipes). Furthermore, when considering imports of fuel, coal would be considered, taking into care the related environment aspects. It is worth to mention that, such a case is currently being seriously considered by a potential 500 MW industry in Egypt. Furthermore a number of issues have to be considered by new potential IPPs which are different from the existing three BOOT projects (Sidi Krir 3 & 4, Sues Gulf and Port Said East), these are: The government owned utilities will not be committed to purchase electricity from these IPPs. This can be considered in the future if the government owned utilities are offered a purchase price which is competitive with its own cost of service, or if they are in deficit of electricity and they can not meet the growing demand according to their own expansion plan. The new potential IPPs will market it self and find its own customers, in the immediate future these customers may include large energy intensive industries, private sector electricity distributors (Independent Service Providers ISP). The negotiation of an electricity wheeling contract with the government owned transmission utility. The negotiation of back up electricity supply with other utilities, likely that will be with government owned utilities in the beginning. 18

19 In conclusion there are a number of challenges for potential new IPPs, yet it is quite possible to overcome these challenges in an emerging electricity market like the one in Egypt, especially when the existing legislations support new investors in the country. According to the benchmarking scheme adopted by the Egyptian Electricity Regulatory and Consumer Protection Regulatory Agency, to assess the financial performance of the three BOOT projects, it is found that they are doing quite fine based on the financial indicators that they are being benchmarked against. These financial indicators include a large number, among which (key performance indicators): return on investment (asset), return on equity, net profit margin, gross profit margin, asset turn over, inventory turn over, account receivable turn over interest coverage ratio, total dept to total equity ratio The Sidi Krir comes in the lead so fare w.r.t. the financial indicators. With respect to the technical key indicators Sidi Krir competes with EdF and some new government owned generating stations. The key technical indicators include: Average Run Time (Hrs), Starting Reliability (%), Gross Capacity Factor (%), Gross Output Factor (%), Service Factor (%), Availability Factor (%), Forced Outage Rate (%), Scheduled Outage Factor (%), Forced Outage Factor (%), Load Factor (%), Self Consumption (%), Fuel Consumption Rate (gm/kwh), Utilization Factor (%). e. Subsidies from the government to the power sector and its future prospects The current subsidies are only inherent in the end user tariffs set by the cabinet of ministers for the government owned utilities. Efforts are being conducted to reduce theses subsides and to properly direct them to the needy, but this will take some time. While these subsidies do not have any negative effect on the current existing three IPPs (operating under a BOOT scheme, through their PPAs), those subsidies presents a certain level of challenge for the new possible IPPs. Different forms of subsidies do exist, one group is on the level of input costs to government owned utilities and the second group is on the level of end user tariffs. 1. Subsidies on the level of input costs: The fuel subsidy, where the price of fuel (mainly natural gas) to all generation utilities, IPP and government owned ones, is currently set at 1.25 US$/1000 cubic feet, delivery price and in accordance to the end user activity classification (eg. Industrial, residential etc), without setting a minimum volume. Natural gas is found in Egypt by exploration companies, part of the production is considered as Egypt's share and the rest is considered the explorer share in return to his 19

20 investment and exploration effort. Up till the late 1990's, Egypt share was sufficient for its local needs including the electricity generation (the electricity sector represents the main user of natural gas around 65% of the production). Beyond the late 1990's Egypt had to buy from the exploration companies its share at the market value to fulfil the local market needs as well as the export commitments Egypt got into for mainly financial needs of the government. Based on this complex situation, the 1.25 US$/1000 CF is highly debated specially from the ministry of petroleum to consider this price as a subsidized price based on comparing that with a higher opportunity exporting price. An example of this higher opportunity exporting price is the one for the Arab pipe gas line as it is set according to market rules and mechanisms. The government owned utilities only pays around 0.67 US$/1000 CF, and the difference is so far considered as a debt which the government owned utilities needs to pay later; but this is strongly argued by the ministry of electricity, that the difference should not be paid as it will negatively affect the financial situation of the government owned utilities, especially when the government sets the end user tariff, so the government budget should take care of the difference in the fuel price. This difference between 1.25 and 0.67 US$/1000 CF, is effectively a subsidy being offered by the government, in a way, to its own electric generation utilities. This subsidy is a real challenge to new possible IPPs, if they want to compete with the government owned utilities for all types of customers. On the other hand, if new highly energy intensive industrial users are not granted electricity form the government owned utilities, this will be considered the market for the new IPPs. This market is characterized by its relatively limited number of large customers (demand and energy consumption levels). This situation of the limited number of energy intensive customers would be considered a relative positive issue for new IPPs, as they will not have a scale issue which might be a problem for a new entry to the market. Another form of subsidy, or actually a price distortion, is the current implementation of the power pool scheme being exercised by the government owned utilities. This scheme is based upon a single buyer model, where only the transmission utility (EETC) purchases electricity from all government owned utilities (sister companies - EEHC affiliated companies) as well as the BOOT in accordance to their PPAs, then the transmission company sells electricity to all government owned distribution utilities (a second set of sister companies - EEHC affiliated companies). A financial model is used to calculate the purchasing and selling prices for all government owned utilities generation and distributions utilities respectively and in accordance to the real costs of the different utilities (the price for purchasing electricity form the BOOT projects does alter). This financial model (referred to as the charges model) is further used to adjust the purchase and selling prices in order to guarantee equal positive percentage returns for all the sister government owned utilities (EEHC affiliated companies), or at least a positive percentage return. This exercise sends a distorted market signal and is a real obstacle to a free electricity market. Recent changes (increase in end user tariffs) will gradually eliminate the need to use the adjustment section of the charges model. 20

21 2. Subsidies on the level of end user tariffs Two types of cross subsidies do exist on the end user level: one is from one customer class to another customer class or classes the second is within one customer class where a group of customers will be subsiding another group of customers II- Support schemes to promote the use of energy from renewable resources in electricity. Hydropower in Egypt has been the dominant renewable energy resource, but Its current potential Is fully utilized. As a result of the continued growth of the energy supply, its stable absolute size is dwindling as a share of Egypt's total energy supply. Hydropower has hit a natural constraint, which cannot be addressed through policy interventions or further investments. Egypt is competitive in other renewable energy resources because of its natural endowments; Infrastructure, human resources and proximity to potential export markets. For example, Egypt is the best positioned in the Mediterranean basin to exploit solar resources (DLR, 2005). However, exploitation of these resources falls behind the full potential and performance of other countries. Egypt enjoys excellent wind energy potential. There are ambitious plans for the expansion of wind energy, and the costs are attractive compared to solar energy. Energy subsidies are prohibiting the normal development of the Industry, which should be expanding Its supply, maximizing efficiency, Improving quality and Investing In appropriate R&D. Despite this, plans are proceeding for tenders that will expand wind energy generation in Egypt. Moreover, there are market rumors that CSP might follow suit. Additionally, the "Unified Electricity Law," currently in draft form. is establishing a framework that will be more conducive to the expansion of renewable resources. 1- Targets and strategy of renewable energy Egypt s power sector is estimated to have a peak demand of around MW in year 2020 and MW in year The corresponding installed capacity according to the MoEE/EEHC expansion plan are 46 and 70 thousands MW, respectively. The current capacity expansion needs are in the range of MW annually. It is becoming more difficult for the government/moee to secure funds 21

22 for these projects. Most of the government generation projects so far secured funds through soft loans, which might not be the case in the future. Strategy of Egypt sets out objectives and targets and defines the combinations of policy instruments that are expected to achieve the targets. The Supreme Council of Energy in February 2008 approved a plan to satisfy 20% of the generated electricity from renewable energy by 2020, including a 12% contribution from wind energy. This figure translates into about 7200 MW of gridconnected wind farms and 8% contribution from other sources, mainly hydro and solar energy. New electricity law under ratification has adopted three mechanisms for power generation from renewable sources (Grid-connected wind farms) these mechanisms are: Plants built by NAREA (2 200MW) Plants built through Competitive bidding (2 500MW) Plants built through the Feed-in Tariff (2 500MW) 2- Regulation The main legal elements in a policy to promote renewable technologies are a clear targeted strategy or road map, a specialised agency to implement public activities and a support system specifically aimed at allocating the extra costs of the technology. Aside from law number 102 for year 1986, which establishes the New and renewable Energy Authority, there is no renewable energy law for Egypt as such, but there are some important provisions of the draft electricity law that will determine how the next phase of renewable development proceeds. The Law sets out the procedures for the construction of grid-connected renewable generators and the compensation of EETC for purchase of power at higher prices than alternatives. Article 45 of the Law sets out the process for the procurement of electricity generation plants using renewable energies. It provides for several options combining a competitive bidding system and a feed-in tariff. Under the competitive bidding system NREA (New and Renewable Energy Agency) may call for tenders for the construction and operation of plant to sell electric power to the Egyptian Electricity Transmission Company at a rate proposed by the regulatory Agency and approved by the cabinet. Alternatively EETC, in coordinate with NREA can call for public tenders to build, own and operate plant under which arrangement the successful tenderer will agree a power purchase agreement with EETC. It is intended, but not specified in the Law, that the domestic content will be a part of the criteria for selection. It is also foreseen that investors may of their own volition build plant and sell to EETC on the basis of a standard PPA of a take-or-pay character valid for 15 years, approved and announced by the Cabinet. Article (46) requires the holders of licences for transmission and distribution licenses to connect renewable 22

23 generators to its own network and to cover the corresponding investment needed for strengthening their networks. Articles provide for a fund, to be named the "Fund for Development of Power Generation from Renewable Energies", established by and affiliated to the cabinet of ministers. The purpose of the Fund is to compensate EETC for the purchase of electric power from the renewable generators. The Fund will be financed mainly from allocations of the public budget of the State. The Fund's statutes and governance are to be set by Decree. Targets are set by the Supreme Council of Energy in view of: Demand Growth, Supply growth, and feasibility of alternative energies. Currently all technologies are being investigated through a number of ways among which demo projects. The state represented by the ministry of electricity and energy has to fulfil the obligation. 3- Financial support Many financial incentives have been used in different countries to promote renewable energy. Support can either be offered to investment or to operation. Investment support for renewable is general delivered through the same type of instruments that are used to support investment in energy efficiency, e.g. capital grants, tax exemptions, soft loans and loan guarantees. In the case of grid connected renewable it is possible also to offer support to operation either by allowing the electricity to be sold at inflated tariffs or by obliging certain parties to purchase specified volumes. These instruments are to some extent exclusive and are discussed together in the next section. Existing wind projects in Egypt were financed with grants and low cost loans. Funds and technical assistance were provided through mutual governmental agreements by Denmark (180 MW); Germany (160 MW); Spain (85 MW) and Japan (120 MW). Meanwhile, several new wind farm projects are in various phases of preparation in cooperation with development partners. NREA is qualifying the following wind farm projects as CDM projects: Zafarana 120 MW wind power plant project in cooperation with Japan. Zafarana 120MW wind power plant project in cooperation with Denmark. Zafarana 80MW wind power plant project in cooperation with Germany. Zafarana 85 MW wind power plant Project in cooperation with Spain. Gulf of El-Zayt 220 MW wind power plant Project in cooperation with Japan. Gulf of El-Zayt 200 MW wind power plant Project in cooperation with Germany, EC and EIB. Within this context, the 120 MW wind farm project in cooperation with Japan was the first project registered in the field of wind power. The project was registered in We note also that, NREA works as a facilitator and a supporting body for the private 23