How will the government freeze on electricity prices for industries affect the renewable energy sector?
 
 
Courtesy: shutterstock.com
 

Earlier this month, the Ministry of Electricity and Renewable Energy moved to freeze electricity prices for the industrial sector for the next five years,  a decision that is expected to severely harm the renewable energy sector in Egypt.

In a June 9 press conference, Electricity Minister Mohamed Shaker announced that the decision was taken to boost the production of the industrial sector after the slowdown that resulted from the COVID-19 pandemic. However, the decision came as a shock for private companies that work on new and renewable energy, which were already suffering before COVID-19 due to several government decisions that hindered their activities. The freeze on electricity prices is an additional impediment to an industry that many hoped would take a big step forward in the next two decades. 

In order to fully unpack how the Electricity Ministry’s decision affects renewable energy companies and future investments, Mada Masr spoke to investors and experts in the field.

The government decision 

There are three main elements to the ministry’s decision to restructure electricity prices. First, the ministry has extended the period before it will lift subsidies by an additional three years, to mid-2025. Second, the ministry has placed a freeze on electricity prices for the next five years for extra-high voltage, high voltage, and medium voltage activities, which will immunize the industrial sector from subsidy cuts. And finally, the government will subsidize electricity for the industrial sector by 10 piasters per kilowatt/hour throughout the five years. 

We can see how this plays out by using the prices announced for the next five years, which were published by the ministry, and looking at a simple example of a chocolate factory that uses medium-voltage electricity. 

Let us say that the factory consumes 2,000 kilowatts per hour for power. If the factory works eight hours a day for 30 days, then its electricity consumption will come in at 480,000 kWh per month. Therefore, the energy cost for the factory at the LE1.05 per kWh subsidized rate will come in at LE 504,000 per month (this calculation excludes other fixed electricity costs, but we will do without these for the purpose of simplification).

The ministry’s decision is a guarantee to investors that the electricity costs will remain the same for a period of five years and an assurance to business owners that subsidy cuts will not affect them. The government will protect the sector from any possible fluctuations in currency or fuel prices, which would have had a direct effect on electricity prices. 

This all sounds beneficial for the industrial sector, but what about the electric power industry itself? In Egypt, the main producer of electricity is the government, which produces 90 percent of electrical power through the Egyptian Electricity Holding Company. But during the past few years, private companies began entering the renewable energy sector in Egypt, which produces about 10 percent of the total energy output. About two-thirds of that 10 percent come from dams along the Nile, which means that solar and wind account for less than 3 percent of total energy production, according to a report by the International Renewable Energy Agency.

But the government’s plan is for the new and renewable energy sector to produce 42 percent of its total energy production by 2035. This sector is growing rapidly, and its production has doubled over the past decade, which encouraged many small companies to enter the market to provide electricity from renewable energy for individuals and companies. But how will those companies be affected by the new decision? 

Unable to compete

The decision places renewable energy companies in a tough position, as a fixed cost for electricity means that they will not be able to increase prices to keep up with the annual inflation of production costs. As Ahmed Zahran, head of one of the fastest-growing solar energy companies in Egypt, Karam Solar, explains to Mada Masr, this will result in the accumulation of losses throughout the freeze period.  

If we assume that the average annual inflation is 10 percent throughout the freeze period, renewable energy companies will be unable to impose a 50 percent on current prices that would be necessary to keep pace with the rising costs of supplies, wages and rents going up every year, Zahran explains.

Nadia Karawia*, a consultant for new and renewable energy companies, tells Mada Masr that there are two types of contracts for the companies she works with. The first stipulates that customers be supplied with electricity at a lower rate than the government price. In this case, the long-term feasibility company’s projects will be cast into doubt, as the expectation that subsidies would be lifted completely in mid-2022 thereby allowing room for prices to increase annually has dissolved. Now it is likely that many of these companies will accrue losses in the coming period, or at the very least not generate any profit, since profit margins in the renewable energy sector are already narrow. This also means that future investments in these companies will be affected. 

The second type of contract includes a fixed price that is agreed upon throughout the contractual period, that is, a price that is not pegged to government prices. But Karawia believes that those contracts will prove problematic for energy companies because clients will realize that they are buying electricity at a price much greater than government prices, which might prompt them to cancel the contracts or push to renegotiate their terms. 

Karawia affirms that the decision will inevitably lead to the closure of many companies, and she believes that only the largest companies will weather this period without major losses. She acknowledges, however, that the decision is logical for a government that has a large surplus of electricity that it wants to sell. 

A solution for electricity surplus 

Zahran and Karawia see the new decision as the government’s solution for Egypt’s large electricity surplus, which was accrued after the government signed a contract with Siemens in 2015 to build three power stations with a total capacity of 14.4 gigawatts. 

By the end of 2019, the nominal capacity for electricity production in Egypt sat at 56 gigawatts, with a surplus of about 25 gigawatts — meaning that Egypt’s used 31 gigawatts, or just 55 percent of the available capacity. 

Although he acknowledged the need to support the industrial sector and reduce costs for companies after the COVID-19 crisis, Zahran cannot ignore the large power surplus. He understands that selling this electricity must be the government’s priority, especially as it needs to pay off the investment costs in the power stations. Karawia shares the same opinion. 

Karawia, who is in close contact with many new and renewable energy companies, says that a few months before the COVID-19 pandemic hit Egypt, the government was stalling the issuance of licenses for private solar energy projects. According to her, there was talk that the government wanted to limit the expansion of these projects because it was pressuring solar companies to reduce their activities. 

Karawia asserts that certain authorities in the Electricity Ministry resented the entry of some solar energy companies into sectors that the government had traditionally provided electricity to, including companies that consume high amounts of electricity. 

Karawia says companies like Egypt Aluminum and Vodafone have both issued bids for electricity from renewable resources. Because of the government’s electricity surplus, there was political pressure on solar energy companies to “tone it down,” she says, and ultimately that pressure developed into a decision to put a cap on how much electricity solar energy companies in Egypt can provide. 

Three weeks ago, the Electricity Ministry imposed restrictions on solar energy companies, which included a maximum threshold for the total capacity of solar energy projects with a net metering mechanism (the mechanism that encouraged many companies to enter the sector) of 300 megawatts across the country. The government also set 25 megawatts as the maximum total capacity for all projects in each company, in addition to other conditions. Zahran believes that all of these decisions will cause serious harm to the sector. 

For Zahran and Karawia, while some aspects of these decisions are relevant, especially when it comes to maintaining the continuity of the electrical grid — as solar energy is intermittent and can affect the grid if it exceeds a certain limit — the government is mainly trying to reduce competition so that it can sell its surplus electricity, which they both believe resulted from the miscalculated and inflated increase in electricity production after the government’s deal with Siemens.  

“The government wants to transition its energy portfolio into new and renewable energy, but the decisions it takes prevent the producers of this energy from functioning. So what do you want from them?” asks Zahran. “When you take decisions that debilitate the private sector, how can you ask it to confidently participate in the future?” 

Karawia also sees this as the primary dilemma produced by the latest decisions. After repeated assurances from the ministry that the subsidies will be lifted in 2022, how can investors in the sector trust the government again?

Karawia states that renewable energy, especially solar energy, had started to form a market in Egypt.  Many engineers, technicians and workers were trained in the Benban solar park, which is the largest solar energy project in Egypt and had been established by the government. Financiers in the private sector had started to be enthusiastic about these projects, but last week’s decision has prompted business owners and financiers to rethink the feasibility of such projects. “Banks that provide funds are afraid,” Karawia says. “You must reassure them and reassure investors if you want them to continue investing.”

*Pseudonym

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Osman El Sharnoubi 
 
 

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