April 01, 2015
After
years of doing little to rectify Egypt’s energy and electricity troubles, the
government has finally moved to pursue sustainability. Energy demand, fueled by
government subsidies, had for years outpaced domestic production. This has led
to a large subsidy bill, electricity production that falls far short of demand,
strained relationships with foreign energy companies, and a growing dependence
on more expensive foreign sources of oil and gas. But the Egyptian government,
under President Abdel Fattah El-Sisi, has begun to take substantive measures to
address these issues. This includes subsidy reform and a renewed focus on
alternative sources of energy, such as renewables like solar and wind.
To
develop future energy projects the government is relying heavily on the private
sector and has laid out new laws and regulations to accommodate private
investment, in particular for foreign firms. Egypt’s efforts to attract
multinationals culminated earlier this month with the much-heralded Economic Development Conference that
attracted billions of dollars in investment—with the bulk of it directed toward
energy and electricity projects.
Egypt’s
energy sector has long been on an unsustainable trajectory. Oil and gas
consumption grew
36 percent and 62 percent, respectively, over a ten-year period ending in 2013,
a trend that is not expected to lessen for the foreseeable future. This
spiraling demand is in part fueled by heavy government subsidies on petroleum
products and electricity, which in turn has led to a ballooning subsidy bill
that has crippled the government’s fiscal position and the overall economy.
Last year, the energy subsidy bill amounted
to EGP 126 billion, or 22 percent of the budget and 7 percent of GDP, double
where it stood just prior to the 2011 revolution and up more than 100-fold from
twenty years ago.
Rising
subsidy-fueled energy demand has also coincided with diminishing hydrocarbon
reserves and production rates. This dynamic has forced the government to begin
redirecting international oil and gas companies’ share of fuel intended for
export to the domestic market. Not only has this drained foreign currency
reserves—which have dropped by over $20
billion since the end of 2010 and are now below the critical IMF threshold
of financing three months of imports—but doing so has also strained
relationships with oil and gas companies and curtailed much-needed investment
in the sector. Of particular concern was Egypt’s arrears to oil and gas
companies that totaled roughly $7 billion before the government had paid down a
significant portion to reach $3.1
billion, where it currently stands.
By
the time President Sisi was inaugurated last year, petroleum investments were
down over 60 percent from the year prior, subsidies had reached record levels,
and alternative sources of energy were still on the backburner. The economy at
this point could no longer bear the burden of the current state of the energy
sector.
Central
to all of Egypt’s recent energy and power reforms are efforts that cater to
private business and to attracting foreign investment. The government, which
has long monopolized the transmission and selling of electricity, can no longer
afford to finance the power needs of the country. According to information
posted on Egypt’s Economic Development Conference website, Egypt needs to
increase capacity by 5.2
gigawatts annually through 2022 to meet demand which, in total, more than
doubles current capacity. But doing so would require $35 billion, or $5 billion
in annual investment for the next seven years. The amount required is roughly
$20 billion more than Egypt’s current foreign currency holdings. What this all
adds up to is Egypt needs the financing power of the private sector if it wants
to keep its lights on.
In
an effort to pave the way for securing foreign investment in the lead up to the
economic conference, Egypt implemented a number of pro-business initiatives.
This included a feed-in
tariff system for renewable energy, which allows power producers to sell
electricity generated from renewables back to the national grid, in addition to
a new
investment law that received cabinet approval in mid-March, which provides
foreign investors additional protection from legal disputes and cuts through
bureaucratic red tape, among other incentives. The government also implemented
fiscal policies that will benefit foreign investment in energy, including
subsidy reforms such as an across-the-board price increase for fuel and
electricity this past July.
The
government’s measures to reform and develop the power and energy sectors
culminated with the Egypt’s Economic Development Conference that attracted
billions of dollars in private investment, the bulk of which was directed
toward electricity. This included massive commitments from international
conglomerates like Siemens and GE,
both of which are taking a leading role in Egypt’s future power generation.
Siemens alone is committing
over $10 billion to develop the electricity sector. All told, Egypt signed a reported $22
billion in memorandums of understanding for power generation, with another
$21.5 billion in oil and gas projects agreed on.
While
reforms to attract private sector investment have been necessary to repair the
current state of energy and power transmission in Egypt, measures to curtail
the effects of increasing fuel and electricity prices on the poorest and most
vulnerable parts of the population seem to have taken a back seat for the time
being. However, the government will likely utilize the smart
card system currently being implemented for fuel distribution to combat
black market exploitation and smuggling. This offers a potential mechanism to
allow the government to direct subsidized fuel to those most in need, similar
to the system
currently in place for bread subsidy distribution. No such mechanism has
been put in place for electricity consumption.
The
recent drop in crude oil prices will offer inflationary relief for the time
being, but steep price increases in natural gas, which accounts for the bulk of
electricity generation in Egypt, will keep power prices elevated. Fuel and
electricity prices rose across-the-board this past July, with the most popular
car fuel increasing 78 percent, marking the first step in the government’s
energy subsidy reform. But Egypt still has a long way to go before prices reach
market rates. According to the latest numbers from the Egyptian General
Petroleum Corporation, which manages the country’s oil interests, domestic
revenues from energy account for just 57 percent of their cost, or a roughly LE
23 billion shortfall. Adding to this burden is the expected increase in price
for both domestically produced and imported natural gas. Over the past year,
for example, foreign companies in Egypt have managed to secure more competitive
prices than the government pays for natural gas, which now range from $4-$6
per million British thermal units (Btu), up from $2.50-$3. Import prices
are expected to be even higher. Egypt recently
secured the necessary facility to begin importing liquefied natural gas
(LNG). These shipments are estimated to cost anywhere between $9 and $12 per
million Btu. These inflationary pressures from natural gas prices will extend
beyond just electricity to other industries and sectors that depend on natural
gas as a key input, including fertilizer and petrochemicals, as well as taxis
in Egypt that use natural gas for fuel.
Egypt’s
economic conference was the launching point of a development strategy heavily
reliant on the private sector and foreign investment. Since the conference,
many Egypt experts have criticized the new plan due to its seemingly sole
dependence on massive foreign investment and infrastructure projects to prop up
the economy—a plan reminiscent of Mubarak’s liberal market policies that
enriched a handful but had minimal benefit for the masses. Though partly valid,
these criticisms do not apply to Egypt’s current initiatives in developing the
country’s power infrastructure. Egypt has little choice other than to turn to
private investment to further develop the electricity infrastructure and end
the regular power outages taking place in the country. With billions in
additional investment needed, opening up the transmission of electricity to
private business allows the government to keep Egypt’s lights on while not
draining the country’s coffers. This is coupled with private sector initiatives
to develop power generation from renewable energy such as wind and solar and
other alternative sources like coal and nuclear, which is necessary to
diversify away from diminishing oil and gas resources. The government, however,
still needs to counterbalance this pro-business agenda with measures to protect
the country’s poorest and most vulnerable from the inevitable rise of energy
and electricity prices.
This article is reprinted with permission from Sada. It
can be accessed online at: http://carnegieendowment.org/sada/2015/03/31/keeping-egypt-s-lights-on/i59a
Alfred Jasins and Brendan
Meighan are economic researchers at the American Chamber of Commerce in Egypt.