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The Renewable Energy Investment Dilemma in Egypt

In 2014, the Egyptian government reformed the energy sector legal framework through the New Electricity Law and the newly adopted feed-in-tariff (FiT) program, where the Egyptian government encourages renewable energy production of a total 4.3 gigawatts by the private sector and selling electricity to the government. This government initiative was to cover for the electricity shortage using solar and wind energy.

The feed-in-tariff law provided different rates per kilowatt depending on the amount of annual electricity production. Unexpectedly, the government inverted the pricing pyramid, whereby the higher the annual production, the higher the purchasing price per kilowatt. This rendered small-scale domestic production unfeasible. However, the US $0.13 per kilowatt-hour for 500 kilowatts to 20 megawatts and US $0.14 per kilowatt-hour for 20 megawatts to 50 megawatts annual capacities attracted foreign investors to participate in the feed-in-tariff program. The government’s plans included a 1.8 gigawatt solar park in Benban, Upper Egypt, to be developed and operated under the FiT program.

Everything seemed to have been going in the right direction until the recent requirement of the Ministry of Electricity that investors should procure 70% of the projects finance from foreign financing institutions and 30% from local banks. This seemed contradictory to the Ministry’s requirement that disputes over power-purchase agreements shall be resolved by resorting to local arbitration and not international arbitration. The recourse to local arbitration as opposed to international arbitration seemed to be a deal breaker to the foreign financing institutions, which include the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD).

Foreign banks reconsidered financing renewable energy projects as a result of the newly imposed local arbitration clause. In addition, the Ministry seemed to be in a dilemma regarding payment terms, where there is an inclination that rates would be discounted and paid in Egyptian-pound equivalent of US Dollars, in contradiction with the rates set in the FiT law. The reduction of rates and recourse to local arbitration was seen as an escape route from the unrealistic FiT rates. Both the reduction and recourse to local arbitration impacted the feasibility of investment in renewable energy in Egypt. These several apparent contradictions of the government’s announcements, in turn, led to the reconsideration of investing in renewable energy in Egypt, whether by the investors or financing institutions. The end result was that several investors elected to opt out of the FiT program in Egypt.

The most recent standing is that the Egyptian government called for prequalification for phase 2 of the FiT program. Only prequalified investors under phase 1 who were able to complete the financial close are eligible for prequalification for phase 2. These restrictive criteria show the government’s inclination to limit the number of prequalified investors for phase 2. The government also reduced the rates to US $7.8 cents per Kwh for 0.5-20MW annual production capacity and US $8.4 cents per Kwh for 20-50MW annual production capacity. Payment terms were changed in terms of currency, where all payments will be in Egyptian-pound equivalent. The government tied 30% of payment to the current EGP 8.9 per US $1 and the other 70% would be according to the exchange rate at the payment date. The government also agreed to the recourse to international arbitration seat but the venue remains in Egypt.

The persistent confusion caused by the contradictory announcements of the Ministry of Electricity would ultimately lead to the collapse of the FiT program in Egypt. Investors are still questioning the possibility of a second round of rates reduction, especially with Dubai’s lowest world record of US $2.99 cents per Kwh. However, hope still rises from independent power production, where producers can sell off-grid electricity directly to consumers, whether to residential, agricultural or industrial consumers. This would still contribute to reducing the consistent electricity shortage, in addition to saving tons of annual carbon dioxide emissions and fossil fuel consumption. Egypt’s all-year sunrise is an asset that should be put to the best use, given the endless unoccupied lands east and west of the Nile River.

This piece is for informational purposes only. It does not represent the opinion of Hegazy & Partners, nor is it a substitute for legal advice.

Muhammad El Haggan