By James Chester Sites on the west coast of the Gulf of Suez are projected to generate the largest portion of Egypt’s renewabe energy. Close Up Marginal Investment This country is home to millions of Sudanese migrants, a community that experts believe has the potential to stoke economic development — if someone would let it By James Chester By James Chester Diversification of energy resources will reduce reliance on polluting thermal power plants. By James Chester Energy-intensive industries will be the first to enter the competitive electricity market.

By James Chester

The politics of power, literally speaking, is a complicated game. Forced to balance the needs of a population that cannot survive without subsidized energy, and at the same time facing the need to diversify energy sources, the government finds itself in a quandary. How to secure reliable power sources for the coming decades, while maintaining growth and conserving valuable oil and gas reserves?

Renewable energy could be part of the solution. The target, set by the Supreme Council for Energy, is to have 20% of electricity generated from renewable sources (predominantly wind and hydroelectric power) by 2020. Although wind only accounts for 1.5% of electricity generated, Egypt already has more wind energy capacity (310 megawatts (MW) out of a total capacity of 23,000 MW from all sources) than anywhere else in the Middle East and Africa. Hydroelectric power provides up to 12% of electricity, and as a sun-belt country, the potential to generate solar energy is huge. Added to that, the political will finally exists to make green energy viable.

The problem with the current system lies in the use of subsidies. Dr Hafez El Salmawy, managing director of the Egyptian Electric Utility and Consumer Protection Regulatory Agency, explains. “The current condition that the government provides [oil and gas] at subsidized cost provides some guarantees for the [electricity generation] company, so it’s an ‘upstream subsidy,’ a subsidy which goes primarily to the supplier, providing the supplier will produce cheaper electricity: [This] creates a kind of distortion in the market.”

The distortion occurs because the transmission company, which buys from generators and then redistributes power to distribution companies, will want to buy electricity at the lowest rate. But while gas and oil as fuels can be subsidized, reserves will not last forever and a new system needs to be devised to exploit Egypt’s enviable renewable resources. The biggest challenge, says sustainable development energy consultant Dr Adel Beshara, is that “the electricity sector needs to diversify [] to use all possible energy generation resources.”

To allow renewable energy to compete with thermal power sources, a new Electricity Act aims to eliminate subsidies at the source.

“The act is saying that the sector should operate on an economical basis and it should provide a basis for market operation of electricity,” says El Salmawy, “so we [will] have an electricity market that is based on [a bilateral transaction] between supplier and consumer.” The act, according to the Regulatory Agency director, “requests what you can call an ‘objective subsidy’ or a ‘downstream subsidy,’ which means that subsidy will not go to suppliers — [it] should go directly to the consumers.”

If the law is passed in this parliamentary session, ending June 2009, the Regulatory Agency aims to start the competitive market for electricity in January 2011, claims El Salmawy (see box “The Competitive Electricity Market” page 87).

So apart from breaking down barriers to competition between thermal and renewable resources, what can be done to actively encourage development of natural power sources?

Initial funding is the first challenge. According to a report “Energy Efficiency and Renewable Energy: Egypt — A National Study” by Beshara and energy consultant Rafik Georgey, it costs between 1.3 and 1.5 million euros per megawatt installed capacity to set up a wind farm. This figure is subject to continuous change due to oil price fluctuations affecting manufacturing costs, and is accurate as of March 2007.

The Electricity Ministry’s New and Renewable Energy Authority (NREA), which owns and operates all current renewable facilities, cannot pay for the building of wind farms without favorable loans from developed countries. Funding for a series of wind farms already running or under construction at Zafarana in Red Sea governorate has been provided by the Spanish government, German development bank KfW, Japanese development bank JBIC and Danish development bank Danida.

The incentive for the developed country to invest is “carbon credits.” Egypt, a signatory to the Kyoto Protocol since 2005, has no obligation to reduce its greenhouse gas emissions under the protocol. However, countries that have emissions targets (known as Annex 1 countries) can pay for clean development projects in Egypt (and other developing countries) and buy the right to pollute in the form of carbon credits. The condition under the treaty is that a project would not have taken place without funding from an Annex 1 country, and that the project (in this case, the wind farm) reduces potential greenhouse gas emissions. In this case, with the government unable to fund wind energy itself, a gas power plant would have been built in place of the wind farm.

If NREA’s target of installing 7,210 MW capacity of wind farms is met by 2020, this will reduce annual greenhouse gas emissions by 17 megatons of carbon dioxide equivalent (greenhouse gases are measured according to their damaging effect compared to CO2), says the report. The planned capacity for wind would cover the whole country’s residential electricity use (37% of the total) if installed now.

The Electricity Act aims to introduce mechanisms that will make producing renewable energy more profitable and reduce the reliance on carbon credits. When the law is fully implemented, NREA will not own and operate any more renewable power plants. It is not yet clear whether the authority will then relinquish ownership of existing plants.

The act will use power purchase agreements, where the transmission company agrees to purchase electricity from the operator for a set number of years, to guarantee investments in renewables. “The second mechanism is the feed in tariff. [The Regulatory Agency] will issue, after consulting with the Cabinet, [] an incentive tariff for any developer who would like to build a renewable energy plant, says El Salmawy. “The grid will be committed to purchase from this source on a take or pay contract all of this capacity with this incentive tariff or feed in tariff.”

In 1970, the contribution of renewables to power generation stood at 70%, almost completely due to hydro-generated electricity from the Aswan High Dam. This number has consistently dwindled over the years as the country’s demand for electricity across all sectors rocketed, with hydroelectricity now accounting for around 12%.

Primary energy production, which includes fuel for transport and industry, as well as electricity generation, depends on oil and gas for 94% of its output, and while demand has grown at 4.8% per year over the last 25 years, production has only increased by 2.8% per year. The need for renewed attention to alternative energy seems obvious.

While experts agree that there is very little capacity left in hydroelectric power now that barrages exist along the length of the Nile, the western coast of the Gulf of Suez has enough wind power and available space to host wind farms of up to 20,000 MW. While the share of hydropower in the 20%-by-2020 renewables target dwindles to 8%, wind will pick up almost all the remaining capacity.

The wind turbines currently installed in Zafarana and Hurghada have a capacity of 305 MW and 5 MW, respectively. However, tenders are now being offered for a series of wind farms with 2,500 MW capacity on the Red Sea coast. The venture will create the first renewable facility (excluding hydropower) not owned and run by the NREA, and will benefit from the favorable conditions set up by the forthcoming Electricity Act.

One of the companies set to exploit the growing market for wind generated electricity is El-Sewedy Cables, which set up El-Sewedy Wind Energy Group (SWEG) in July 2008.

Faisal Eissa, business unit manager for SWEG, explains the company’s first step is to manufacture wind turbines in Egypt. “The second step, since you have the manufacturing facilities and you can control your own needs and demand, [is to] go on and start developing wind farms as well. So we are interested in both activities.”

“Know-how and access to technology is one of the main problems that you face,” says Eissa. “Choice of partners was key. Worldwide the wind industry is a very competitive industry. It’s not only that you can rely on being a big player at home, otherwise you will never grow.” To obtain the technical expertise lacking in this country, SWEG purchased 30% of Spanish company M Torres Olvega’s wind arm for 40 million (LE 297 million), has entered a partnership with German wind tower manufacturer SIEG (Schaaf Industries Corporation) and is in negotiations with another German partner.

The group, which plans to develop other renewable technologies and will employ 1,500 people at its three factories, covers a very large potential market in the Middle East and Africa. It expects to finalize contracts for Egyptian projects “in the first quarter of 2009.” The Electricity Act, says Eissa, was “definitely” a reason to invest in the dynamic sector.

“It is very well known that wind in particular is king of the renewable energies. Why? Because it is a technology driven industry; we have seen a lot of technological developments bring the cost of generation down so now it’s now a very attractive source of generating electricity. Of course, it’s a clean energy that does not pollute the environment and it contributes to the economic and social development of any country,” says Eissa.

Solar energy is taking a while to catch on, and because of the difficulty of maintaining a constant output, the solar plants planned in Egypt are combined-cycle gas/solar power stations. The first gas/solar plant, with 150 MW capacity and situated in Koreymat, is due to begin operation in 2010 and will generate only 6.6% of its output from the sun, according to Beshara and Georgey’s report. Two 300 MW combined cycle plants are planned which will have higher solar ‘fractions.’

The high initial cost of electricity-generating photovoltaic (PV) solar panels means that they are out of the reach of most Egyptians as a small-scale power source. However, the feed-in tariff resulting from the new Electricity Act will make it possible for individuals to feed surplus electricity from PV cells into the grid. In countries where the infrastructure is in place, people can make money from selling solar energy to the network.

However, in terms of renewable energy, some of the most interesting technologies are the simplest. Solar panels that heat water, although still pricey, are more of a possibility. There are four major domestic companies manufacturing solar panels and tanks that are installed on rooftops to heat water, according to El Salmawy. The sector was initially stimulated by a ministerial decree in 1987 that all buildings in new settlements should be fitted with solar heaters. However, sales stalled in the early ‘90s due to low build quality of the units. The decree was ignored and total sales stood at around 200,000 units in 2007.

Manufacturers like the Egyptian Solar Energy Systems Company, which makes around 2,000 systems a year, are still in business though. Dr Samir Ayad, a partner in the company, explains why the sector is failing to reach its potential. “[We do not sell to] many private homes. The initial cost is large and people are really looking at their feet, they are not looking at the future.” A 180-liter solar heater, enough to serve a small family, costs up to LE 5,500.

Ayad is nevertheless enthusiastic about the potential for solar energy in Egypt. “Anybody who is installing solar hot water systems [feels] as if he is [making] a new discovery of petroleum or a new discovery of gas [] if you add them up it will make some difference. Let’s save the electricity for something we cannot avoid using electricity [for].”

The majority of the company’s clients are hotels, resorts and developers of new cities. The advantage of solar heaters does not lie only in the cost reductions — in some remote areas there is no gas supply, meaning that standalone renewable technology is more convenient.

There are two steps that can be taken to stimulate more widespread use of the heaters, says Ayad. “The first line is to have financing to [cover] the initial cost. The second one, to have good design and after-sales service [] for example I have some customers in Upper Egypt having one collector for three apartments. That’s not enough.” Education of the public is a key factor. Emad El Din Adly, Egyptian national coordinator of the Global Environmental Fund, a partnership between governmental, non-governmental and private sector organizations in 178 countries, agrees. “Number one is awareness. You need to tell the people [] I am talking about everyone, including policymakers [] the importance of renewable energies and why we need them.”

Dr Sabry Abdel-Mottaleb, who is developing self-cleaning solar panels at Ain Shams University, feels strongly about the need for renewable energy as a development solution, not only providing new employment but also allowing the population to spread out to previously undeveloped areas and alleviating pressure on the Nile as a water source. “We need solar energy for water desalination. It’s a must, not an option [] there is no other way to desalinate seawater,” he claims. “We cannot ensure diesel supply [to remote areas, so] we need unattended solar systems.”

Egypt and a number of other countries in North Africa are not only capable of generating enough electricity using PV cells to supply all their domestic needs, but many claim, enough for the world.

While it is difficult to imagine the world’s energy companies embracing energy from one source, the Egyptian government does recognize the potential to export electricity.

“We are looking forward to integration with the Mediterranean countries to be an exporting country. We have endless resources of solar energy and [] we target to interconnect, actually establishing a super high voltage DC connection [from the south Mediterranean to Europe] but we don’t want to wait for this,” says El Salmawy. A lot depends on the transmission company’s capacity and Egypt’s relations with its Nile basin neighbors. If capacity can be increased then Egypt can position itself as an energy transit country, claims El Salmawy, as well as exporting to its neighbors and Europe: “I am fully optimistic for renewable energy but we need to come up with the proper mechanism and be liberal in thinking, dynamic, more open for new ideas.”

While Egypt only contributes 0.57% of greenhouse gas emissions worldwide, low-lying areas of the country are likely to be affected severely by sea-level rises caused by global warming. Up to now, clean energy has just not been cheap enough. Now, however, there is no excuse for not investing in renewables. The small companies and research centers that have invested so much time and money in solar, wind and other alternative energy technologies are finally getting some financial reward for their work. Unlike countries in the region like Saudi Arabia and Libya that rely heavily on massive fossil fuel reserves, Egypt’s comparatively small reserves provide incentive to find energy from other sources.

Despite its benefits, green technology has been a sector that required a certain belief in the future of the industry. “To continue you have to struggle, you have to strive. Certainly, not always do you have a profitable project and if you have a losing project you stop,” says Ayad of Egyptian Solar Energy Systems Company. “If you believe in solar energy you will continue and I think that’s our case. We believe in solar. And that’s why we continue.”

Problems do still exist, particularly, as Beshara says, because of a lack of reliable information on production and consumption that makes it difficult to plan future policy. Whatever the difficulties though, providing the new Electricity Act does all it says it will, the business of power generation is going to get much greener and alternative energy is about to become a lot more lucrative.

The Competitive Electricity Market

T he electricity market will be liberalized (i.e. subsidies will be removed) in phases, according to the proposed new law. The first phase, from 2011 to 2014, will include the 100 biggest consumers, which use 20% of the country’s electricity. By 2017, medium-sized industries (those using over 500 kilowatts and accounting for 10% of total use) will also be in the competitive market. The third phase will include all consumers outside the residential sector (22% of the market). The fourth will bring in all remaining users.

“By the year 2020,” says El Salmawy, “all customers will be in the competitive market. But until you have this transitional plan, you will have two markets operating hand in hand — the competitive market and the regulated market. The competitive market will be based on bilateral contracts between the supplier and the consumer. The regulated market will operate on a tariff that will be issued by [the Regulatory] Agency and it will be based on an economical cost. But if the Cabinet of ministers decides other prices [] the government will pay the difference.”

Through the use of downstream subsidies for users rather than suppliers, growth can be stimulated in certain areas of the country by allowing some consumers to pay less for their energy. “The customers who need the subsidy will get the subsidy,” says El Salmawy, “but the business [of generating and distributing energy] will operate on economic conditions. So this is a kind of separation between the business of electricity and the subsidies.” bt