Egypt requires investment of around US$ 43 billion over the next four years to meet rising electricity demand, according to a new report by the Arab Petroleum Investment Corporation (Apicorp).
As the most populous country in the MENA region, Egypt is home to more than 90 million people. As a result, it will need to raise its power capacity by 20 gigawatts (GW) to supply the electricity required by its growing economy and to create opportunities for the burgeoning private sector.
“Egypt’s estimated capacity of 34 GW is not sufficient to meet this rising demand, and power outages are frequent – especially in summer months – when people can experience blackouts more than three times a day,” Apicorp noted.
“The country has ambitious plans to invest and increase its capacity in the medium term. Our estimates suggest that Egypt will need to invest US$ 28 billion in power generation and a further US$ 15 billion in transmission and distribution (T&D).”
Egypt’s power sector is seen as a key plank of the authorities’ efforts to revive the economy and help boost the private sector, which have been stifled by chronic energy shortages. In 2014, the country saw demand peak at 27,000 megawatts (MW), as much as 20% above capacity.
“Although the industrial sector accounts for no more than 30% of power use, the difficulties across the energy sector have had a sizeable impact on a range of industries,” according to Oxford Business Group.
The authorities are seeking private and international investment to expand its energy capacity, and have already secured commitments and investments from around 70 companies to build 4.3 GW of wind and solar capacity by 2020.
In fact, Egypt is expected to surpass South Africa as Africa’s largest electricity market, according to the International Finance Corporation (IFC).
“Attracting investment – both foreign and domestic – is a priority for Egypt’s government. Despite pro-business reforms, the investment climate remains challenging,” IFC said.
In addition, the Egyptian government is also tapping its existing gas field development, encouraging new exploration of natural gas. It had already started awarding concessions for unconventional oil and gas over the past few years.
UK oil and gas company BP Plc. is spending billions of dollars to produce natural gas from West Nile Delta upstream developments, while Orascom and Siemens are jointly building three 4.8 GW combined-cycle gas power plants, which are expected to be among the largest in the world.
The North African country also aims to reduce energy subsidies to 7.3% of GDP in 2017, from 12.1% in fiscal year 2014/15, according to Business Monitor International.
“It intends to continue a long process of subsidy reform, aiming at eliminating all but those that target the most needed poor sectors,” according to Brussels-based Energy Charter Secretariat. “Egypt's decision to reduce subsidies on the country's heaviest users of fuel is a positive development for fiscal sustainability, bodes well for the government's commitment to economic reform, and will, most likely, result in further closing of the budget deficit.”
In the short-term, the government has also secured liquefied natural gas imports to meet rising demand.
Egypt is working through a number of challenges to be able to finance its power projects. Currency devaluations, debt servicing and infrastructure investments in virtually every aspect of the economy means the government will require financial support to realise its ambitious goal of expanding power capacity.
Apicorp believes Egypt should choose the independent power project (IPP) route to meet its target. The country saw three IPPs in the early 2000s, generating around 2 GW of power at a cost of 2.5 cents per kilowatt hour, and there were plans to build at least 12 more. But devaluation issues at the time and economic volatility meant the projects were shelved.
However, the government is now becoming increasingly aware of the importance of IPPs in the energy sector, said Apicorp, which noted that the model is cost-effective and does not require government funding.
“IPP projects are quicker to execute. With at least 20 GW of capacity that needs to be added in the next five years, projects must be implemented swiftly,” Apicorp said. “IPPs provide governments with the flexibility to identify projects and capacity needs, while leaving developers to execute. This is especially important in Egypt where project delays due to financial and technical issues are frequent.”
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