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From Crisis to Abundance: Egypt’s Electricity Sector on the Right Track

Egypt’s energy sector has recently become an attractive investment in spite of the various difficulties it faced over the past years. In its publication, published earlier this year, Fitch Solution Group stated that the electricity sector is on the right track, as it generates now an exportable surplus. The publication expects an increase in power generation in Egypt reaching 265 terawatt hours in three years, up from 231.5 terawatt hours this year. This increase will generate a surplus, even with the increasing domestic demand reaching 234.9 terawatt hours by 2023. This growth in the electricity sector is mainly due to fossil fuel power plants. Gas and coal plants produce 85 percent of Egypt’s generated electricity. The increasing improvement in the sector’s performance now creates a completely different situation from that that existed six years ago. Egypt suffered the worst energy crisis in its modern history from 2009 to 2013.

A previous crisis

The electricity crisis surfaced during the end of the first decade and the beginning of the second decade of the 21st century, when power outage durations extended for long hours all over Egypt. The crisis appeared at a time of higher domestic demand due to overpopulation and the industrial sector developments. Egypt’s energy capabilities could not match these demands due to the mismanagement of the files of energy and natural gas production over a long period of time and the political tensions during the revolution. These elements led to not only stopping gas exports by 2012, but also the inability of the domestic production to meet the needs of the industrial sector and power generation. At the same time, the balance of payments crisis made it difficult to import alternative liquid fuels. This increased tensions among the Egyptian people, especially after the deterioration of basic services. At that time, the government did not have a clear solution to the problem, especially that by the end of 2013 the Egyptian power generation capacities reached 30,000 megawatts. That was inadequate for the Egyptian population, and it was more striking when one considered consumption in other countries: South Africa, 44,000 megawatts, population 48 million; South Korea, 80,000 megawatts, population 49 million.

Due to the deteriorating economy and the security and political instability, the Egyptian government was unable to pay the dues of exploration companies, whose discoveries could have helped overcome the crisis. As a result, these companies stopped their activities in Egypt. In addition, Egypt was unable to secure loans from international banks, which meant that it was unable to build new power plants. Consequently, inadequate power grids operated at full capacity to meet increasing demand, and regularly scheduled shutdowns for maintenance were cancelled. This led to decreased efficiencies, and reduced consumption periods.   

Emerging from the crisis

After the return of stability in the country by 2014, the new government seriously dealt with the problem and adopted both short- and long-term solutions. Accordingly, the gas flowing to cement and fertilizers factories was cut from 940 million cubic feet to 350 million cubic feet per day; and these amounts of gas were directed to power plants. This has decreased the shortage between production and demand to 1,800 megawatts. 

The new government started to restructure energy subsidization. Spending on energy subsidies was slashed by almost a third and there was a gradual increase of 30 to 55 percent in electricity prices, depending on the consumption category. Accordingly, fuel prices increased for industrial and domestic consumption. However, the government adopted such procedures to allow the sensible use of energy resources, decrease the budget deficit, and secure a better economic environment for infrastructure investments. 

The government was able to meet its needs and decrease the deficit in record time, due to the security and political stability in the country. In 2015, German industrial group Siemens signed an eight billion-euro-deal with Egypt to supply gas and wind power plants. The deal was described as the largest in the company’s history. The agreement included constructing three new gas plants, with each regarded as the largest gas-fired combined-cycle plant ever built and operated. Siemens said the installations, when completed, would add 16.4 gigawatts to Egypt’s national grid. 

Financed by the Egyptian Electricity Holding Company, Orascom Construction constructed in consortium with Siemens two combined-cycle plants with a total generation capacity of 9.6 gigawatts, and its combined share of the contracts was 1.6 billion euros. The also included 12 wind farms in the Gulf of Suez and West Nile areas, comprising about 600 wind turbines and an installed capacity of two gigawatts. Siemens also built a rotor blade manufacturing facility that provided training and employment for up to 1,000 people by 2017. This deal and other reforms in the electricity sector were a part of Egypt’s huge reform program; and in spite of their large cost, they were able to end the power outage problem. 

Investment in renewable energy

Along with investments in fossil fuel power plants, the government increased the share of renewable energy in electricity production. Since 2014, Egypt has issued a set of new laws, such as the new tariff law related to pricing and purchasing renewable energy, whose purpose is to encourage investors to invest in the market. The future plan of the government is to increase the share of renewable energy to 20 percent of the total energy resources by 2022. These procedures succeeded in investment promotion and providing the required finances to build a number of renewable energy projects. Among these is the biggest solar photovoltaic park in the world, Benban solar park, which is a power complex of 32 solar power plants in Aswan. The project was funded by the World Bank at a total cost of $4 billion.

Another project is the wind power plant project in the Jabal Al-Zeit area near Hurghada. The project was launched in 2015, with a capacity of 580 megawatts, 300 wind turbines, and a total cost of $670.64 million. In addition, Orascom constructed the Ras Ghareb wind farm, with a capacity of 500 megawatts. Other projects include the ACWA Power Kom Ombo 200-megawatt solar energy plant, and the $325 million Lekela 250-megawatt wind energy project. In the beginning of 2019, the total amount of generated renewable energy reached 5,800 megawatts, and it is expected to increase to 6000 megawatts in 2020, which is only 11 percent of the 55,000 megawatts generated annually in Egypt. The large increase during the past few years placed Egypt in the first position in the field of renewable energy production in the Middle East. However, this percentage is still not in line with the 20 percent targeted in 2022, and the 42 percent aimed for in 2035. 

Electricity connection projects

With the realization of the surplus in the balance of supply and demand for electricity, the Ministry of Electricity and Renewable Energy announced that Egypt has a strategy for connecting electricity with neighbouring countries and a number of countries in the world. The ministry aims at turning Egypt into a hub for connecting electricity between Arab and African countries and the world, and a hub for renewable energy. The Egyptian government signed a number of contracts for electricity connection projects, and there are more contracts in the pipeline.

Saudi Arabia, Sudan, Jordan and Libya are on top of the list; and Africa and Europe will follow. This year, contracts were signed with Saudi Arabia. In April 2020, electricity connection was established with Sudan, with 240 megawatts according to the needs of Sudan in the current period. The networks were implemented to pump 500 megawatts in the future. The Sudanese side has technical problems in the network and Egypt has offered to provide its services in that regard. On 19 July 2020, the Minister of Electricity and Renewable Energy revealed a plan to link all of Africa with each other in the power linkage, noting that the world after about 20 years will be in a unified electricity network.

Outlook for the electricity sector

Egypt has not yet completed all reforms in energy resources management policies. It is also unable to increase the share of renewable energy for the stated goal of 2020. Moreover, it relies mainly on fossil energy resources. Despite all of these factors, Egypt’s future sounds promising to a great extent, especially when compared to the country’s conditions six years ago. The present constitutes an encouraging climate and a more welcoming economic environment for investors.

The aforementioned Fitch Solution Group publication has also expected renewable energy sources to be the fastest growing sector until 2028, with capacity increasing by more than 8,500 megawatts, at an average annual growth rate of 22.1 percent between 2019 and 2028. This is because of the abundance of solar and wind powers and the decreased cost of equipment, which will lead to producing electricity at competitive prices compared to fossil fuels. In this case, there will be an increase in private sector investments, which the publication saw as necessary for developing the energy sector. 

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