Senior Legal Counsel, Siemens Technologies S.A.E
Egypt is the largest non-OPEC oil producer and the second largest gas producer in Africa. However, as the country relies on oil and gas as the main resources to meet its energy demands, these sectors are enormously stretched. In 2013, Egypt’s energy capacity was 27GW and its consumption reached 24GW. By 2030, the demand for energy production is expected to increase by a further 30GW, due to the country’s growing population, economic and industrial development.
Over a decade ago, the Egyptian government sought to develop its energy sector by adopting state owned/state operated models. This aimed to increase the contribution of private entities in the sector through BOT, BOOT and PPP legal structures. However, this strategy was insufficient to overcome the energy demands, which had reached crisis point, especially after the political instability caused by the 2011 revolution and its negative impact on the development of multiple sectors.
Starting in late 2014, the government started to focus once again on the development of the energy sector by announcing a new strategy which included (i) energy governance reform, aiming to diversify energy sources by encouraging private sector participation; (ii) energy efficiency improvement; and (iii) economic restructure.
A PARTIAL LIBERALIZATION OF THE ENERGY INDUSTRY – LEGAL AND REGULATORY REFORM
New Electricity Law
The new Electricity law no. 87 of the year 2015 and its Executive Regulations, issued in May 2016, aim to progressively liberalize the energy market by minimizing the role of the government in securing energy provision and increasing private sector investments, attempting to create a genuinely competitive energy market. The idea was that this reform would eventually allow Egypt to extend its grid to neighboring countries and export excess electricity.
In order to realize these ambitious goals, the Electricity law introduced a restructuring plan that would apply to relevant governmental entities, adopting new pricing and licensing mechanisms, and streamlined many previous regulations that had governed the energy sector up to that point.
New Market Structure
The Electricity law has created two energy markets: a competitive market and a regulatory one.
- In the competitive market, qualified consumers are free to choose their suppliers, negotiate electricity prices and sign bilateral agreements directly with generation companies or the newly established authorized suppliers.
- The regulatory market, on the other hand, is where unqualified consumers are obliged to purchase electricity from distribution companies or authorized suppliers with a fixed tariff via standard agreements already approved by the Egyptian Electric Utility and Consumer Protection Regulatory Agency (EERA).
It is still unclear, even after the issuance of the new law’s Executive Regulations, what exactly the mechanisms that should be used to implement the competitive market concept are. What is the criteria that must be fulfilled by consumers in order to be able to enter the competitive market? How will the new model of authorized suppliers be applied?
Permits and Licensing
The Electricity law has introduced a licensing system that may be similar to the one adopted for the FIT scheme. Any investor planning to produce, distribute or sell electricity in Egypt is required to obtain a license from the EERA (valid for 25 years) and establish an SPV in the form of a joint stock company. The investor will be provided with a temporary permit which allows the implementation of all primary work necessary for the project.
EERA and EETC Restructuring
The Electricity law has provided both the EERA and the Egyptian Electricity Transmission Company (EETC) with greater independence and a more active role.
The EERA acquired a regulatory role: setting out the rules for pricing, licensing and determining the conditions for the admission of qualified consumers into the competitive market. It became concerned with dispute resolution related to energy activities.
Furthermore, any change in the ownership of a licensed energy entity must now be approved by the EERA. However, it is not clear whether the EERA’s control in this regard will be limited to the direct transfer of shares within the licensed entity or whether it will extend to any change of control in the ultimate shareholders of said entity.
Under the Electricity law, the EETC enjoys a monopoly over the transmission and operation of energy activities and is responsible for setting out the relevant regulations to be approved by the EERA. The EETC is authorized to implement its projects by itself or through third parties. Further, it becomes responsible for securing the long-term energy supply in the market by (i) purchasing electricity from licensed entities to meet the demand for electricity, and (ii) preparing an annual report reflecting all the changes and needs within the energy market, for assessment purposes.
The Electricity law is definitely a step forward in the development of the electricity sector. However, the implementation of a few subjects regulated under this strategy still requires further clarification. The dispute settlement of conflicts raised within the energy market, the sovereign guarantees mechanism and its limitation in the event of energy capacity shortages are examples of such issues, which require clarification.
New Renewable Energy Law:
The aim of the new Renewable Energy law no. 203 of the year 2014, issued in December 2014, (the Renewable Energy law) is to encourage the private sector to produce electricity from renewable energy sources through one of the following schemes:
The New and Renewable Energy Authority (NREA) shall issue tenders to private sector companies to build renewable energy power stations via EPC contracts. The installed stations shall be owned by the NREA and the electricity produced shall be sold to the EETC at a regulated price determined by the EERA and ratified by the Cabinet of Ministers.
The EETC shall issue tenders to private sector companies to build, own, operate, and transfer renewable energy power stations. Electricity generated shall also be sold to the EETC at the price agreed between the EETC and the investor.
Independent Power Production
Under this scheme, independent power producers are entitled to directly sell electricity from renewable energy sources to consumers by entering into bilateral purchase agreements. The EETC and distribution companies are obliged to allow investors to use their grids (subject to a grid access fee) while implementing said agreements. In the event that the EETC and the distribution companies are incapable of transmitting the electricity generated by the investors, they will be required to buy said electricity or pay for it.
Feed-in Tariff System
Private sector companies are entitled to build, own, operate and transfer renewable energy power stations and sell the electricity produced to the EETC or licensed distribution companies through power purchase agreements (PPA) under a fixed electricity price. The PPA’s duration shall not exceed 25 years for solar energy projects and 20 years for wind energy ones.
The first round of the feed-in tariff (FIT) scheme was first introduced in October 2014 by decree no. 1947 of the year 2014, aiming to produce 4.3GW of both solar and wind energy projects. However, the outcome of this round of the FIT program was very poor due to the ambiguity of the government’s position on several topics. The main issues were related to (i) the government’s refusal to have offshore arbitration for resolving relevant disputes, which led to the rejection of international financial institutions funding the FIT projects; and (ii) the government’s requirement that 85% of solar energy projects and 70% of wind energy projects should be funded through foreign financing. This made it considerably more difficult for investors to secure the required financing and meet the financial closure deadline set by the government in October 2016.
In an attempt to avoid the problems encountered in the first round, the government issued the second round of the FIT program in September 2016 by decree no. 2532 of the year 2016. In this round a reduced tariff was introduced, the offshore arbitration issue was supposedly resolved and the percentage of foreign financing required was decreased. It is still unclear how successful this round will be, especially given that the investors’ confidence was affected by the experience of the first round.
Draft of the New Gas Law:
Similar to the strategy adopted when passing the Electricity law and the Renewable Energy law, the government is currently waiting for Parliament’s ratification of the draft for the Gas Market Activities Regulation law (the Draft), which aims to gradually liberalize the gas market by allowing the private sector to participate in the transmission and distribution of gas.
The Draft will create a competitive market alongside the regulatory one, in which qualified consumers will be entitled to choose their gas supplier and to freely agree on prices and quantities. EGAS and EGPC will no longer be the sole owners of gas transmission and distribution activities.
GENERAL CHALLENGES AND RECOMMENDATIONS
There is no doubt that the regulatory reform adopted lately by the government is the right step to take in overcoming the shortage in the energy sector, by gradually ending the state monopoly and welcoming private sector participation. However, there is still uncertainty and ambiguity about the implementation of the above policies.
This is mainly related to the legislative, contractual and institutional frameworks that still need development by issuing the missing Executive Regulations, amending the as-yet undetermined aspects of the existing ones and updating the administrative contracts signed between the government and the private sector to reflect the new policies adopted in the energy industry.
Moreover, one of the challenges that the regulator has to address is how to overcome the economic instability caused by the recent Egyptian pound devaluation, which will financially affect all the investment expected in the industry.
As the subsidies system for energy products contributes heavily to the budget deficit, the government still has a long process to undertake, restructuring the framework of the subsidies to decrease budget imbalances.
Egypt is among the most energy intensive economies in the world, which will hinder the development that aims to decrease the current energy deficiency. To avoid this, the government needs to continue improving energy efficiency by developing regulatory and institutional frameworks, raising awareness and setting sector priorities.