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MENA Renewable Energy Zeal Spreads to Egypt

Marc Norman and Richard Keenan, Chadbourne & Parke, on Egypt's ambitious programme to procure 12GW of renewable energy by 2020

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Egypt, Renewable energy, ANALYSIS

By Marc Norman and Richard Keenan, Chadbourne & Parke

2014 saw Egypt launch an ambitious program to procure 12,000 megawatts (MW) of renewable energy capacity by 2020 – the largest renewable energy target in the Middle East and North Africa (MENA) region, after Saudi Arabia. Any seasoned Middle Eastern renewable energy stakeholder would be forgiven for treating target announcements with some scepticism. However, recent developments suggest there is cause for excitement.

On 20 October 2014, the Egyptian government issued a request for qualification to participate in the initial procurement round of its freshly issued feed-in tariff program for renewable energy.

Soon after the passing of the 26 November 2014 deadline to submit qualification requests, reports suggested that the Egyptian Electricity Transmission Company (EETC), Egypt’s renewable energy procurement arm, had received 177 submissions. And so, as the year-end approached market participants wondered how long EETC would take to process submissions and announce results.

However, Egypt surprised market participants by releasing in the first week of January 2015 its shortlist of 110 qualified applicants for 13 small-to-medium scale solar photovoltaic facilities (i.e. up to 20MW), 69 large-scale solar photovoltaic facilities (20-50MW) and 28 wind facilities ranging from 20 to 50MW.

Although certain known market participants are likely dissimulated behind special-purpose vehicles, many of the usual suspects are included in the shortlist. A number of companies bid for more than one renewable energy source or solar photovoltaic facility size.

Some renewable energy developers are also rumoured to be negotiating independent deals directly with the government -most probably for larger scale projects given the 50 megawatt cap on facilities procured under the feed-in tariff program.

In 2014, Jordan and Dubai were the major hotspots of the MENA region’s renewable energy industry. In 2015, all eyes are decidedly set on Egypt.

The Socio-Political Imperative - Addressing Power Blackouts
For many years, Egypt has faced a major challenge in providing sufficient electrical energy to its citizens. Power blackouts, a daily occurrence for many Egyptians, stand out as one of the most explosive socio-political issues in the Arab world’s most populous country.

They were a key factor in deepening discontent with President Mohamed Morsi’s administration, who faced mass protests before Abdel Fattah al-Sisi, then army chief, ousted him in 2013.

In early September 2014, the country experienced one of its most severe blackouts in decades. The outages knocked TV stations off the air and halted parts of the Cairo subway - a major embarrassment for a governmentthat sought to provide stability after protracted turmoil.

As officials struggled to address the public outcry, president Abdel Fattah el-Sisi addressed the country in a candid television address saying that power blackouts were the result of years of underinvestment.

Tackling blackouts stands as a key government priority; however, there is no immediate solution, he said. The President claimed that the country needed to add 12,000MW to its grid over the next five years at a capital cost of around $12bn.

Beyond the desperate need to increase power generation capacity, the country also faces a challenge to diversify its energy sources.

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Pressing Need to Diversify Energy Sources
Oil and natural gas currently contribute to 95% of the total energy resources needed to generate electricity in Egypt. However, according to the Egyptian energy strategy for 2030 together with its update until 2035, Egypt is expected to become a net importer of oil and natural gas between 2030 and 2040.

As the cash-strapped country strives to meet other pressing challenges such as water treatment and education needs, reducing dependence on oil and natural gas via energy source diversification is viewed as critical.

Egyptian authorities see the procurement of solar photovoltaic and wind facilities as an effective way to rapidly deploy additional power generation capacity - conventional facilities take considerably more time to bring online -and to attain their diversification goal.

Feed-in Tariff Program
Egypt’s feed-in tariff program was approved by the Cabinet of Ministers on 17 September 2014 - weeks after the occurrence of the major blackouts. The deployment of the program is phasedout into so-called regulatory periods. The first regulatory period runs from 2015 to 2017.

During the first regulatory period, Egypt aims to procure 4,300MW of solar photovoltaic and wind capacity (the explicit references to photovoltaic technology imply that solar thermal technologies are currently excluded from the feed-in tariff program).

On the solar side, the plan is to procure 300MW of small-scale facilities (i.e. below 500 kW) and 2,000MW of medium-scale facilities (i.e. between 500 kW and 20MW) and large-scale facilities (i.e. between 20MW and 50MW). The wind target is 2,000MW with project sizes ranging from 20MW to 50MW.

Under current plans, it was announced that during each regulatory period a request for qualification is issued every three months - allowing one month for clarification requests, another for qualification submissions and another for the issuance of results.

A second request for qualifications should therefore be issued around 20 February 2015; although no official date has been announced yet. We do not expect the second round to take place soon, as the government received in the first round significantly more requests for qualifications than it originally expected.

There is no need for a developer that qualified under the first request for qualification to submit a qualification application under a subsequent request for qualification that is included in the same regulatory period - unless the developer’s status changes.

The EETC or distribution companies (depending on project sizes) are committed to purchase the electricity produced from renewable energy facilities via power purchase agreements lasting 25 years for photovoltaic facilities and 20 years for wind facilities at the last prices announced by the Cabinet of Ministers.

The Egyptian government has the right to reassess the tariff either when the regulatory period lapses or when the capacity target for the regulatory period has been met, whichever is earlier. The reassessed tariff would only apply to new contracts; tariffs under existing contracts remain fixed for the power purchase agreement term.

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Regional Perspective on Egypt’s Feed-in Tariff
To put Egypt’s feed-in tariff values into perspective, the Jordanian feed-in tariff stoodat approximately $17 cents for solar photovoltaic facilities and $12 cents for wind facilities - more generous than the Egyptian regime.

Jordan was the first country in the MENA region to implement a feed-in tariff. The incentive scheme is viewed by many as the most important factor in kick-starting Jordan’s renewable energy program – which arguably became a regional template. Jordan is the first country in the MENA region to have successfully banked both wind and solar projects on an independent power producer basis.

However, the Jordanian feed-in tariff had limited application. It applied only to the first round of renewable energy procurements. This included 12 solar photovoltaic projects ranging from 10 to 20MW (excluding one project of around 50MW) and one 117MW wind project.Also, all solar photovoltaic projects procured under Jordan’s first renewable energy procurement round were subject to an electricity production cap.

However, as Jordan moved on to its second procurement round it dispensed with the feed-in tariff model, opting instead for the position at law - a ceiling tariff model. This model prohibits developers from bidding over a certain tariff and incentivises bidders to tender the lowest possible tariff. The ceiling tariff is currently set at $14 cents for solar photovoltaic facilities and $11 cents for wind facilities - very close to where Egypt has set its tariff.

In late 2014, Dubai Electricity & Water Authority (DEWA), tendered a 100MW solar PV independent power project – the largest privately financed solar PV project to be tendered in the region.

On 15 January, DEWA announced the appointment of ACWA Power as preferred bidder and said that it had accepted the Saudi developer’s alternative bid to provide a facility with a capacity of 200MW with a startling tariff of $5.84869 cents per kWh over 25 years - the lowest tariff ever witnessed for a privately-financed solar photovoltaic project.

It will be interesting to see if this project sets a regional pricing benchmark - or is viewed by the market as an extraordinary result driven by intense competition and economies of scale that would not be achievable on smaller-scale projects.

Time will tell how Egypt fine-tunes its renewable energy procurement policy. In the meantime, as Egypt gets back on its feet after several years of unrest, investors from all over the world are flocking to get a foothold in what is fast becoming a renewable energy hotspot.

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