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Challenges Ahead

Egypt's renewable energy dream faces a number of hurdles before it can become reality

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Vahid Fotuhi, Founder & President of the Middle East Solar Industry Association (MESIA)  and Head of Origination at Access Power MEA.
Vahid Fotuhi, Founder & President of the Middle East Solar Industry Association (MESIA) and Head of Origination at Access Power MEA.

By Vahid Fotuhi, president of the Middle East Solar Industry Association (MESIA)

Egypt's renewable energy dream faces a number of hurdles before it can become reality

Today, the hottest solar market in the Middle East and North Africa (MENA) region is Egypt. In the next two years, the Sisi government plans to award $3bn in large-scale solar projects as it tackles the double-edged sword of rising electricity demand and aging infrastructure. By 2020, this figure is expected to balloon to $20bn.

The response from the industry has been understandably positive. During the recent Expressions of Interest launched by Egypt’s Ministry of Electricity and Renewable Energy, nearly 200 companies from around the world stepped forward with renewable energy proposals.

These companies committed to investing billions of dollars as part of the government’s Feed-in-Tariff (FIT) program. During the MESIA Trade Mission to Cairo in late April 2015 seven companies committed to investing $500mn in the next two years.

Upon closer investigation of the FIT program there are two concerns that emerge with regards to the government’s ability to implement its target of 2,000MW in solar power projects in the next two years. The first issue is the grid. The transmission and sub-stations infrastructure needed to evacuate the planned solar power generation does not currently exist.

So even if investors could commit to having the first solar power plants ready in the next 10-12 months they would not be able to feed that power into the national grid. The contracts for the additional infrastructure have been tendered and bids are currently under review by the Egyptian Electricity and Transmission Company (EETC).

This review process is expected to take 2-3 months, with the ensuing construction period taking an additional 8-10 months. This means that there will be no large-scale solar plants installed before September 2016.

The second issue is related to convertibility. In the past, the Egyptian central bank had over $30bn in US dollar reserves. But following the 2011 revolution and the subsequent drop in tourism revenues, US dollar reserves have dropped sharply and today stand at roughly $20bn.

These reserves would have been far lower had it not been for the help from Saudi Arabia, Kuwait and UAE which together injected $6bn during the recent Sharm El Sheikh Economic Conference to help stabilize Egypt’s currency.

The tariff in the FIT program has been set in US dollars but will be paid in Egyptian pounds. The foreign investors would then need to convert those pounds into dollar and repatriate them back to their home country. But the local banks simply do not have sufficient US dollar reserves to satisfy a program of this scale. Each year, this 2,000MW solar program will generate revenues of roughly $600mn for the investors.

The government will guarantee conversion of 15% of the tariff at a fixed rate of 7.15 pounds to the dollar. The remaining 85% would be converted into dollars at the prevailing market rate (as of May 17th, the Egyptian pound was trading at 7.625 to the dollar).

Several of the leading banks have already indicated that they would only be able to commit to short-term commitment on converting Egyptian pounds to dollars and none of them would be able to convert the total amount of US dollars required by this program.

There is however light at the end of the tunnel. For one, it’s clear that there is at least 1-year before any projects come online due to the grid expansion process. This will buy Sisi some time to shore up US dollar reserves.

The additional reserves are expected to come mainly from two sources. First, as Egypt’s security situation improves so will the tourism sector. Second, the government is getting ready to commission the new Suez Canal waterway on 5 August 2015.

No solar program is perfect. In the case of Egypt, the weaknesses are now evident. Luckily, President Sisi has made it clear that addressing the country’s chronic power shortages is one of his top priorities.

Meanwhile, international investors have shown in the past that they are very good at coming up with creative financing solutions to overcome obstacles, including convertibility. By working together, they will find a solution, thus shedding light on one of our region’s brightest solar markets.

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