Before 2014, renewable energy project development was very limited in Egypt. In September 2014, the government launched an ambitious incentives programme for the generation of 4.3GW of solar and wind energy projects. The feed-in tariff (FIT) programme is considered the real breakthrough for renewables development in the country. The target for the first regulatory period (2015 to 2017) of the programme was 2GW of wind (20–50MW), 2GW of utility-scale solar photovoltaic (PV) (0.5–50MW), and 300MW of small-scale PV (less than 500kW). Of 178 solar bids, 67 consortia qualified with a total capacity of 2,880MW, and the utility-scale PV tender was oversubscribed by a factor of two, but of the 48 consortia bidding for wind projects, only 27 qualified, amounting to 1,670MW,2 and not all projects reached completion.
On 21 December 2014, Egypt published the Renewable Energy Law,3 identifying four main mechanisms to reach its renewable energy targets:
- state-owned projects with competitive bidding for engineering, procurement and construction (EPC) contracts;
- competitive bidding for build-own-operate (BOO) contracts;
- feed-in tariffs; and
- a merchant scheme according to which independent power producers can enter into bilateral contracts to sell power directly to consumers using the national grid against wheeling and grid-access charges payable to the grid operator.4
A number of renewables developments went ahead; then, on 8 July 2015, the new Electricity Law5 was published, followed on 23 May 2016 by its Executive Regulations issued by Decree of the Minister of Electricity and Renewable Energy,6 which encouraged energy efficiency and the generation of electricity from renewable sources, as well as provided for the complete independence of the activities of generation, distribution and transmission of electricity in order to reach a liberalised and competitive electricity market.
ii THE YEAR IN REVIEW
The three years between Q4 2014 and Q4 2017 have completely transformed the renewable energy scene in Egypt. Two Prime Ministerial Decrees, Nos. 1947/2014 (published on 27 October 2014) and 2532/2016 (published on 29 September 2016) established the offtake tariffs applicable to the first and second regulatory periods of the Egyptian solar and wind feed-in tariff programme respectively (later referred to as 'Round 1' and 'Round 2' of the FIT programme). Large-capacity solar projects (between 20MW and 50MW) were paid a tariff of US$14.34 cents/kWh, reduced to US$8.40 cents/kWh by the Round 2 decree, while wind projects of the same capacity were paid a tariff between US$4.60 cents/kWh and US$11.48 cents/kWh, reduced to between US$4.00 cents/kWh and US$7.96 cents/kWh by the Round 2 decree depending on the maximum operating hours of the wind plant. The equally split 4GW of utility-scale solar and wind projects attracted a lot of interest from international developers and investors, while the 300MW of distributed solar projects (of less than 500kW capacity) have seen limited uptake.
Round 1 of the FIT programme ran into a roadblock when projects failed to achieve financial closure in the summer of 20167 due to a foreign exchange shortage in Egypt and an arbitration arrangement considered unfavourable by a number of development finance institutions (DFIs) providing the main portion of the senior debt to Round 1 projects. Only two solar project companies had managed to execute a power purchase agreement (PPA) with the Egyptian Electricity Transmission Company (EETC) as offtaker with a total capacity of 100MW out of the 136 solar and wind qualified consortia. However, following the devaluation of the Egyptian pound on 3 November 2016, and after the government had addressed the issue related to the seat of arbitration in the programme's principal project agreements, 30 project companies have successfully signed PPAs with EETC, raising the capacity to be installed in the Benban Solar Park (Aswan, South of Egypt) to 1,465MW with a total investment cost of about US$2 billion, out of the Park's maximum capacity of 1,750MW distributed over 45 plots of land with a total surface area of about 37 square kilometres.8
The success of the Benban solar projects was echoed by the 250MW Gulf of Suez wind project developed by a consortium of French, Japanese and Egyptian sponsors reaching financial closure in December 2017 (and increasing its maximum capacity by an additional 500MW), and two more wind projects developed by British and Italian consortia following suit expecting to reach financial closure soon.
The government is also planning the development of a first-of-its-kind pumped storage hydro power plant in Africa and the Middle East: the Ataqa Hydro Power Plant is expected to have a capacity of 2,400MW, to cost US$2.6 billion and to be completed in 2024.9
iii THE POLICY AND REGULATORY FRAMEWORK
i The policy background
Renewable energy policies and incentives are established at the national level by the government, typically through the Cabinet of Ministers. The government has a target for 20 per cent of electricity consumption to be generated from clean energy sources by 2022 and 37 per cent by 2035, according to the Energy Strategy approved in 2016. Of the 2022 goal, 12 per cent is set to come from wind energy, with the remainder coming from small hydro and solar projects.10
The new Investment Law,11 published on 31 May 2017, grants a special investment incentive to projects generating renewable energy or depending on it, consisting of a deduction of 30 per cent of the net taxable profits for the first seven years of the life of the project, subject to certain conditions such as the incentive value not exceeding 80 per cent of the paid-in capital until the start of the project's operations and the project company being established within three years from the date of entry into force of the Executive Regulations issued by Prime Ministerial Decree No. 2310/2017 (i.e., from 29 October 2017). The Investment Law also creates a 2 per cent unified rate of customs duties for all equipment and machinery necessary for the establishment of the project (down from 5 per cent). Land may be allocated free of charge if the project company's activity is deemed of strategic interest; otherwise, 2 per cent of the production is generally payable yearly for land lease (based on the Renewable Energy Law).
In 2013, Egypt introduced a net-metering scheme to promote distributed solar. The scheme allows small-scale renewable energy projects in the residential and industrial and commercial sectors (with a maximum capacity recently increased from 5MW to 20MW) to feed electricity into the low voltage grid. It does not specify a limit on installed capacity, meaning that customers can connect a system that produces more electricity than they consume; however, systems are limited to the low voltage level, typically around 380 volts. Under the scheme, solar PV generation is credited against the user's bill for consumption from the grid using a calculation method that credits surplus electricity only in consumers' highest tariff bracket (adopted to maximise bill savings).12
In addition to the utility-scale solar projects, the FIT programme had also proposed tariffs for distributed PV ranging from E£0.848/kWh for residential systems below 10kW up to EG£0.973/kWh for systems between 200kW and 500kW. These tariffs were lower than those for utility-scale projects because the government envisioned that distributed solar investors would have access to concessional finance in local currency, as the Ministry of Finance had proposed a financing programme under which investors could receive concessional loans at 4 per cent interest for installations below 10kW and 8 per cent for installations below 500kW. However, this concessional finance programme was never implemented, but Egyptian SMEs are now (since January 2016) eligible for loans at a 5 per cent interest rate. As such, the new tariffs proposed in the FIT Round 2 decree were higher for distributed solar at 1.0288 Egyptian pounds/kWh up to 1.0858 Egyptian pounds/kWh for systems below 500kW (with increases between 4.8 and 28.6 per cent).13
The merchant or independent power producer model provided for in the Renewable Energy Law also allows private offtakers to enter into agreements with private power generation companies to secure the purchase of electricity from renewable energy sources. However, in practice, the use of such model is still in its early stages, and is typically appealing for energy-intensive industries, especially in the cement sector, and for some oil and gas companies in line with their mandates and renewables targets under the Paris Agreement (within the United Nations Framework Convention on Climate Change).
The electricity price hikes introduced by Decree of the Minister of Electricity and Renewable Energy14 (applicable as of 1 July 2018 until 2019) are expected to increase the demand for renewable energy generation projects, particularly in the commercial and industrial segments. It remains to be seen how this will impact the renewable energy generation schemes proposed by the Renewables Law.15
ii The regulatory framework
Egypt mainly had a single buyer electricity market, with the Egyptian Electricity Holding Company (EEHC) being the main player and owner of the transmission system and almost all of the distribution assets. Under this model, the EETC, a state-owned company (previously an EEHC subsidiary), purchases electricity from all public and private generation companies, and sells it to nine main distribution companies and other private electricity distribution companies. It also directly sells electricity to a number of consumers connected to the extra-high voltage and high voltage networks. EETC is also responsible for power exchanges with neighbouring countries over the present interconnections.
The New and Renewable Energy Authority (NREA), established in 1986, is the arm of the Egyptian Ministry of Electricity and Renewable Energy (MOERE) tasked with developing renewable energy programmes in Egypt on a commercial scale, as well as implementing related energy conservation programmes.
The Egyptian Electric Utility and Consumer Protection Regulatory Agency (EgyptERA), established in 2000, is the independent legal entity that grants licences for the generation, transmission and distribution of electricity, and that is responsible for overseeing compliance with the existing rules and regulations in the electricity sector.
Egypt aims at gradually replacing the current model with a competitive market, based on bilateral contracts, together with spot, balancing and ancillary services markets. The Electricity Law lays the ground for this transformation, with EETC separating from EEHC and becoming independent from all electricity companies and electric utility parties, and establishing third-party access to its network, as well as allowing for the reorganisation of EgyptERA, granting it the right to approve different electricity tariffs. In addition, the Renewable Energy Law provides for different schemes for the development of renewables projects so as to enable the government to reduce Egypt's dependence on fossil fuels and reach its target of renewables in the energy mix.
The Renewable Energy Law defines 'renewable energy resources' as 'natural sources of energy, which are non-depletable, and which may be used to produce electricity'.
Egypt is a party to both the United Nations Framework Convention on Climate Change (UNFCCC), and the Kyoto Protocol by virtue of their ratification on 5 March 1995 and 12 December 2005 respectively.16 The Kyoto Protocol binds its state parties included in Annex I (Annex I Parties) to reducing their greenhouse gas emissions to certain targets over the course of periods known as 'commitment periods'.17 The first commitment period under the Protocol started in 2008 and ended in 2012, and the second commitment poeriod will end on 31 December 2020.18
Since Egypt is not an Annex I Party, it is not bound by specific emission targets. It is, however, involved in the Protocol's Clean Development Mechanism (CDM), as outlined in Article 12 of the Kyoto Protocol,19 which allows states with emission-reduction (or emission-limitation) commitments to implement an emission reduction project in a developing state, which in turn can 'earn saleable certified emission reduction (CER) credits, each equivalent to one tonne of CO2 . . . [These credits] can be traded and sold, and used by industrialised countries to a meet a part of their emission reduction targets under the Kyoto Protocol”.20 As such, the CDM allows emission-reduction projects in developing countries to earn one CER credit for each tonne of CO2.
The implementation of the CDM in each member state is conducted under the auspices of a designated national authority (DNA), whose work is overseen by the CDM Executive Board. The CDM Executive Board constitutes the point of contact for CDM project participants for the registration of projects and the issuance of CERs. The Board supervises the CDM under the authority and guidance of the Conference of the Parties, the ultimate decision-making body of the Convention. The role of the CDM Executive Board includes, but is not limited to: (1) developing procedures for the CDM; (2) approving new methodologies; (3) accrediting designated operations entities; (4) registering projects (in accordance with specific procedures); and (5) issuing CER credits earned through CDM projects in accordance with specific procedures.
The Egyptian DNA is subordinate to the Egyptian Environmental Affairs Agency (EEAA) and consists of two bodies: (1) an executive body, the Egyptian Council for CDM (EC-CDM), which comprises representatives of certain ministries, including, but not limited to, the Ministry of Investment and International Cooperation and the Ministry of Petroleum, as well as having a technical division; and (2) the Egyptian Bureau for CDM (EB-CDM), which comprises experts providing technical recommendations to the EC-CDM. Both the EC-CDM and the EB-CDM play a role in deciding on the issuance of CER credits.
The board of EgyptERA is ultimately responsible for ratifying the rules, conditions and processes related to the issuance and trading of all renewable energy certificates.
In addition to the Egyptian Transmission Grid Code, and the Egyptian Distribution Network Code, a Solar Energy Grid Connection Code and a Wind Farm Grid Connection Code set the special requirements for the connection of solar and wind farms to the medium, high and extra-high voltage distribution and transmission systems, as the case may be.
The Electricity Law requires projects set up for the generation, distribution or sale of electricity to be developed through Egyptian joint-stock companies. Such companies must seek a preliminary and then a final power generation licence from EgyptERA in order to be allowed to carry out their activities.
The Companies Law21 requires a minimum of three founders to incorporate a joint-stock company, and capital of at least 250,000 Egyptian pounds. Incorporation itself, followed by commercial and tax registration, could be completed in as little as one week; however, the compilation of the documents required for incorporation typically takes longer, between one to two months on average.
Following incorporation, and in anticipation of the commencement of generation, which is the most commonly sought licence by private investors, the project company must identify a plot of land for the project, and have a pre-feasibility study carried out, as well as submit an application to EgyptERA to obtain an interim power generation licence for the project. This is typically issued within a maximum of 60 days for a period of one year, with a possibility of renewal. Then, upon completion of the full feasibility study, the project submits to EgyptERA an application for a permanent power generation licence, issued within a maximum of 60 days, which is renewable on a yearly basis.
Egypt is one of the most significant corridors for bird migration in the world, used by millions of birds during migration seasons. More than 470 bird species have been recorded in the country; the majority are non-breeding seasonal visitors, and about 150 species are breeding residents found year-round. Egypt also has a population of 19 globally threatened species and 34 sites declared as important bird areas.22 Wind projects established in Egypt must therefore carry out full technical and bird migration studies covering all seasons of the year before being granted a power generation licence.
Both solar and wind projects must also consider cultural and mineral resources and obtain avian and military clearances before being set up. Public land offered to investors for the development of renewables projects is typically fully permitted, which facilitates the process of obtaining power generation licences, hence the high demand for such land, especially for utility-scale projects where senior lenders are particularly keen about the environmental attributes of the projects.
iv RENEWABLE ENERGY PROJECT DEVELOPMENT
i Project finance transaction structures
For a long time, companies operating under the MOERE umbrella dominated the Egyptian electricity market. Private companies are now entering this market, mainly through BOO projects that are particularly seen in the wind field, or the FIT programme, which has positively impacted a renewables market that was rather stagnant, and created an influx of foreign direct investment opportunities in renewables projects that is unprecedented in the Egyptian electricity market. Large foreign utilities, energy providers, EPC companies, operating and maintenance service providers, DFIs and more generally international finance institutions (IFIs), as well as foreign and local commercial banks, have had Egypt on their radar for the past four years as a country with large investment potential in renewables.
Most utility-scale renewable energy projects in the country are funded mainly through non-recourse project finance and a smaller equity portion (in the range of 75:25 or 80:20). Loans are typically sourced from IFIs and DFIs, such as the International Finance Corporation, European Bank for Reconstruction and Development, European Investment Bank, Japan Bank for International Cooperation, Japan International Cooperation Agency or the African Development Bank for 12 up to 18-year tenures. Where EETC is the offtaker, senior lenders now generally require a sovereign guarantee from the Ministry of Finance or Central Bank of Egypt for payments by the transmission company to the seller, as well as a seat of arbitration outside Egypt for the PPA. They also require double-layered security for projects to ensure full protection in the case of default against lengthy enforcement procedures in Egypt, which may require public authorities' interference or court orders in certain instances.
The construction of renewables projects is typically undertaken as lump-sum turnkey projects, with the design and procurement largely carried out by highly specialised companies located outside Egypt, and the installation and civil works, in addition to limited scope procurement, by local contractors and sub-contractors. Construction is largely financed by IFIs for private sector projects, or through grants from international donors for NREA projects. A very limited portion of the funding and part of the bonding is sourced from local commercial banks, given that most of the project components are sourced from outside Egypt in foreign currency, and local banks are legally required to lend in foreign currency only where the projects' profits are generated in foreign currency (while most of the utility-scale projects in which EETC is the offtaker are paid in local currency, in the equivalent of the tariff priced in US$).
ii Distributed and residential renewable energy
In January 2013, EgyptERA adopted a net-metering policy by virtue of Circular No. 1/2013, which allows small-scale renewable energy projects to feed in electricity to the national grid. Generated surplus electricity is discounted from the balance through the net-metering process.
Rooftop and small-scale solar power generation was also promoted by the government, with the FIT programme dedicating 300MW of its fixed tariffs to projects of a capacity not exceeding 500kW. All produced electricity is fed into the national grid operated by EETC.
Off-grid solar power plants are encouraged by EETC, but are not widely spread. Most off-grid projects rely on photovoltaic technology, and hence lack the required stability and continuity of operation throughout the day. Battery storage systems are not yet commonly used in Egypt, but their use is expected to increase following the lifting of the subsidies of fuel and electricity tariffs by the government.
As fuel and electricity were largely subsidised by the government, residential solar projects were not financially appealing, and the lack of solid regulatory support for such projects has since gone unnoticed. Following the lifting of subsidies, it is expected that such privately owned projects would become more common.
iii Non-project finance development
Regarding renewable energy projects that have been developed using non-project finance structures, there is no reliable publicly available data in this respect.
v RENEWABLE ENERGY MANUFACTURING
Through a joint venture between EEHC and a Chinese company, Egypt manufactures mainly high-voltage electric equipment and switchgear, such as gas-insulated switchgear for 66kV up to 220kV power transformers, power capacitors and lighting arresters. Again through a joint venture with another Chinese manufacturer, EEHC contributes to a factory for the production of multiple types of low-voltage switchgears that are tailor-made to meet local demand. A large Egyptian manufacturing group dominates the local cables market and owns several manufacturing facilities in the region as well.
Most recently, in May 2018, Egypt's Ministry of Military Production signed a memorandum of understanding with a large Chinese group to build a solar panel facility at a cost of up to US$2 billion. The facility is expected to manufacture panels capable of producing 5GW annually.
Based on Minister of Finance Decree No. 106/2017, the applicable value-added tax on imported machinery and equipment used in the production and provision of services if considered a single production line is 5 per cent, instead of the standard rate of 14 per cent. It is applicable to solar and wind plant equipment even when shipped in different consignments.
vi CONCLUSIONS AND OUTLOOK
The government has a long-term plan of diversification of the energy mix and reduction of dependence on fossil fuels, which pre-dates the large Zohr gas discovery offshore from Egypt.
Although the FIT programme generated a lot of interest in the market for large-scale projects, the development of distributed solar remains almost inexistent. The potential of renewables development in the commercial and industrial segments also remains largely untapped. The framework for the setting up of commercially viable waste-to-energy projects also remains in gestation, as it requires close coordination between MOERE and the Ministry of Environment, as well as a solution to the lack of an efficient waste collection system. Low pricing is also an issue, particularly given that payment will take place in Egyptian pounds without pegging to the US dollar. In November 2015, the government approved FITs for refuse-derived fuel and electricity generated from solid waste at a preliminary price of 0.92Egyptian pounds/kWh. It was also reported to have agreed to issue grants to governorates to help subsidise recycling efforts that feed into the programme, and facilitate land concessions on a usufruct basis for companies seeking to develop waste-to-energy power plants.
In sum, Egypt has the basic legislation in place to encourage the development of renewable energy projects, and has experienced great success with the FIT programme in the form of the one-stop shop created within EETC to govern and liaise all regulatory aspects related to projects: the Central Unit for Feed-In Tariffs. However, smaller-scale projects and developments in the commercial and industrial sectors, which mainly have to deal with distribution companies on the lower voltage networks, do not enjoy the same benefits. There is also a lack of clarity with respect to the licensing process for such projects, and a lack of support in relation to the permitting of the land required for the establishment of the projects, as well as a lack of detailed information regarding potential opportunities of investment in renewables in general, which could largely be facilitated by the government if it wishes to boost renewables development in the coming years, especially in view of the natural uptake that will result from hikes in the electricity price, applicable as of July 2018.
1 Donia El-Mazghouny is a partner at Shahid Law Firm.
3 Renewable Energy Law No. 203/2014.
5 New Electricity Law No. 87/2015.
6 Decree of the Minister of Electricity and Renewable Energy No. 230/2016.
7 Sakr, Dalia Abdelhamid Mahmoud; Huenteler, Joern Torsten; Matsuo, Tyeler Marissa; Khanna, Ashish. 2017. Scaling up distributed solar in emerging markets: the case of the Arab Republic of Egypt (English). Policy research working paper; No. WPS 8103. Washington, DC: World Bank Group. http://documents.worldbank.org/curated/en/815911497878875622/Scaling-up-distributed-solar-in-emerging-markets-the-
8 'Benban Solar Park', EEHC News Magazine, Issue No. 4, May 2018, pp 14–15.
9 'Project Spotlight: 2,400-MW Ataqa pumped storage in Egypt', HydroWorld.com, 7 February 2018, available at https://www.hydroworld.com/articles/2018/02/project-spotlight-2-400-mw-ataqa-pumped-
11 New Investment Law No. 72/2017.
12 Sakr, Dalia Abdelhamid Mahmoud et al., 'Scaling up distributed solar in emerging markets: the case of the Arab Republic of Egypt', 2017.
14 Decree of the Minister of Electricity and Renewable Energy No. 157/2018 of 4 June 2018.
15 Renewables Law No. 203/2014.
16 Egypt approved the Convention by Presidential Decree No. 386/1994 and ratified the Convention by virtue of the Minister of Foreign Affairs Decree No. 4/1994. Later, the Kyoto Protocol was ratified by Presidential Decree No. 227/2003.
17 Annex I Parties are parties to the Convention who, in accordance with Articles 3 and 4 of the Kyoto Protocol, undertake to, individually or jointly, reduce their overall emissions of greenhouse gases by at least 5 per cent below 1990 levels in commitment period 2008 to 2012 and by 18 per cent below 1990 levels in commitment period 2013 to 2020. [Article 3 of the Kyoto Protocol (http://unfccc.int/resource/docs/convkp/kpeng.pdf) and Doha Amendment to Kyoto Protocol, dated 8 December 2012 (http://unfccc.int/files/kyoto_protocol/application/pdf/kp_doha_amendment_english.pdf)].
18 The Kyoto Protocol dated 11 December 1997 (http://unfccc.int/kyoto_protocol/items/2830.php), and the Doha Amendment to the Kyoto Protocol dated 8 December 2012 (http://unfccc.int/files/kyoto_protocol/application/pdf/kp_doha_amendment_english.pdf).
19 In accordance with Article 12 of the Kyoto Protocol, the purpose of the CDM 'is to assist Parties not included in Annex I in achieving sustainable development and in contributing to the ultimate objective of the Convention, and to assist Parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments under Article 3'.
20 United Nations Framework Convention on Climate Change, Clean Development Mechanism (http://unfccc.int/kyoto_protocol/mechanisms/clean_development_mechanism/items/2718.php) and United Nations Framework Convention on Climate Change, Clean Development Mechanism; 'What is the CDM?' (http://cdm.unfccc.int/about/index.html).
21 Companies Law No. 159/1981.
22 Ibrahim WAL, 2011, 'An overview of bird migration studies in Egypt', Ring 33, 1–2: 55–75.