Addendum 2-SURE Egypt Energy Assessment.pdf

This publication was produced for review by the United States Agency for International Development. It was prepared by the

Scaling Up Renewable Energy II program (Tetra Tech ES, Inc., prime contractor).

SCALING UP RENEWABLE ENERGY

(SURE)

EGYPT ENERGY SECTOR ASSESSMENT

April 16, 2023

SCALING UP RENEWABLE ENERGY

(SURE)

EGYPT ENERGY SECTOR ASSESSMENT

Prepared for:

Energy and Infrastructure Office United States Agency for International Development 1300 Pennsylvania Avenue NW, Washington DC 20523

Prepared by:

Tetra Tech ES, Inc.

1320 North Courthouse Road, Suite 600 Arlington, VA 22201 www.tetratech.com

USAID Contract No. 7200AA19D00029/7200AA20F00013

DISCLAIMER: The views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

TABLE OF CONTENTS

EXECUTIVE SUMMARY 1

1. INTRODUCTION 3

1.1. CLIMATE CHANGE AND A FOSSIL FUEL–DOMINATED ECONOMY 4

1.2. EGYPT’S VISION 5

1.2.1. HISTORICAL IMPORTANCE OF NATURAL GAS 5

1.2.2. IMPLICATIONS OF THE CURRENT MACROECONOMIC SITUATION IN EGYPT 6

1.3. ELEMENTS FOR ACHIEVING EGYPT’S ENERGY VISION 7

1.3.1. RENEWABLE ENERGY INVESTMENT AND DEVELOPMENT 7

1.3.2. HYDROGEN 8

1.3.3. CROSS-BORDER ELECTRICITY TRADE 8

1.3.4. DESALINATION 8

1.3.5. ENERGY EFFICIENCY 8

2. THE POWER SECTOR AS AN ENABLER OF DECARBONIZATION AND

ECONOMIC PROSPERITY 9

2.1. EGYPT’S POWER SECTOR IS KEY TO DECARBONIZATION 9

2.2. SECTOR REFORM AND DECARBONIZATION 10

2.3. COST RECOVERY AND DECARBONIZATION 12

3. ASSESSMENT OF THE N-EP AND GAPS FOR INTERVENTION 14

3.1. N-EP IMPLEMENTATION PLANS 16

3.1.1. ROLE OF THE EBRD 16

3.1.2. RENEWABLE ENERGY PROJECTS IDENTIFIED UNDER THE N-EP 16

3.1.3. ROLE OF AUCTIONS IN PROCURING N-EP CAPACITY 17

3.1.4. ROLE OF RENEWABLE ENERGY ZONES 17

3.1.5. PLAN FOR N-EP INSTITUTIONAL TRANSITION 17

3.1.6. PLANS FOR DECOMMISSIONING THE 5 GW OF GAS PLANTS 19

3.1.7. ROLE OF HYDROGEN 19

3.2. FUNDING AND ECONOMIC FEASIBILITY 21

3.2.1. SOURCES AND USES OF FUNDING OF THE N-EP 21

3.2.2. N-EP FUNDING ASSESSMENT AND GAPS 24

3.2.3. FEASIBILITY OF FUNDING UNDER CURRENT ECONOMIC CONDITIONS 25

4. OPPORTUNITIES FOR USAID PROGRAMMING 26

4.1. N-EP AND LARGE-SCALE RENEWABLES 26

4.2. ENABLERS OF EGYPT’S POWER SECTOR TRANSITION 28

4.2.1. REGULATORY REFORMS AND MARKETS 29

4.2.2. PLANNING FOR RENEWABLE ENERGY INTEGRATION 31

4.2.3. PERFORMANCE OF DISTRIBUTION COMPANIES 32

4.2.4. PRIVATE SECTOR FOR LARGE RENEWABLE ENERGY 33

4.2.5. HYDROGEN 34

4.2.6. COOPERATION WITH THE UAE AND SAUDI ARABIA 34

4.3. DRIVE FURTHER DECARBONIZATION THROUGH DECENTRALIZED ADVANCED

ENERGY TECHNOLOGIES 35

4.3.1. SUSTAINABLE END-USE ENERGY EFFICIENCY PROGRAMS 35

4.3.2. DISTRIBUTED RENEWABLE ENERGY 38

4.3.3. ELECTRIC MOBILITY 40

4.4. CROSS-CUTTING ACTIVITIES TO ADVANCE USAID/EGYPT’S CDCS 41

4.4.1. REPORTING OF ENERGY PERFORMANCE INFORMATION 41

4.4.2. GENDER EQUALITY AND SOCIAL INCLUSION 42

4.4.3. ENVIRONMENTAL PRACTICES 43

4.4.4. CIRCULAR ECONOMY PRINCIPLES 44

5. CONCLUSION AND NEXT STEPS 45

ANNEX I – INTERVIEWEES 47

ANNEX II – INDICATIVE PROJECTS IN THE N-EP 47

ANNEX III – PLANTS IDENTIFIED FOR DECOMMISSIONING 48

ANNEX IV – INTERNATIONAL BENCHMARKS FROM EUROPEAN AND U.S. GRID

MODERNIZATION PROGRAMS 49

ACRONYMS

CAPEX Capital Expenditure

CC Combined Cycle

CDCS Country Development Cooperation Strategy

COEE USAID Center of Excellence for Energy

COP United Nations Climate Change Conference

EBRD European Bank for Reconstruction and Development

EEHC Egyptian Electricity Holding Company

EETC Egyptian Electricity Transmission Company

EU European Union

FIT Feed-In Tariff

GOE Government of Egypt

GW Gigawatt

IFI International Financial Institution

ISO Independent System Operator kWh Kilowatt-Hour

LNG Liquefied Natural Gas

MoERE Ministry of Electricity and Renewable Energy

MOU Memorandum of Understanding

MW Megawatt

MWh Megawatt-Hour

NCCS National Climate Change Strategy

NEEAP National Energy Efficiency Action Plan

N-EP NWFE Energy Pillar

NGO Nongovernmental Organization

NREL National Renewable Energy Laboratory

NWFE Nexus of Water, Food, and Energy

PV Photovoltaic

SURE Scaling Up Renewable Energy

TWh Terawatt-Hour

UAE United Arab Emirates

USAID U.S. Agency for International Development

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EXECUTIVE SUMMARY

This U.S. Agency for International Development (USAID) Egypt Energy Assessment reviews dynamics and current conditions in Egypt’s energy sector to identify areas where a potential new USAID/Egypt energy activity can support the goals of the Government of Egypt (GOE) and broader public and private energy sector development objectives. It gives special focus to the government’s Nexus of Water, Food, and Energy (NWFE) program and the related Energy Wealth Initiative, which seek to achieve Egypt’s Energy Strategy target of 42 percent of electricity produced by renewables by 2035.1

While the assessment focuses on large-scale renewables under the NWFE-Energy Pillar (N-EP) and the Energy Wealth Initiative, the assessment team also examined needs and opportunities for broader sectoral performance improvement and decarbonization, as well as interventions to promote equity and social inclusion and to create sustainable economic opportunities for more people.

Key findings and takeaways for USAID

The 28 gigawatts (GW) of wind power under memoranda of understanding (MOUs) with Saudi, Emirati, Norwegian, and Egyptian developers as part of the Energy Wealth Initiative and the 10 GW of solar power to be developed under the N-EP represent a large and credible decarbonization opportunity for Egypt. These two pools of prospective renewable power have the potential to mitigate over 25 percent of Egypt’s current carbon dioxide (CO2) emissions.2 The plans have significant GOE backing, private sector involvement, and the support of development finance institutions, donors, and Gulf-ally investors.

Furthermore, large-scale renewable electricity is a precondition to decarbonization through the electrification and powering of other sectors, including hydrogen, transport, industry, and buildings.

• Introducing this amount of renewables will require an extensive expansion and modernization program for Egypt’s electricity grid, paired with greater system flexibility to cope with variable solar and wind integration. Supporting the N-EP and the broader Energy Wealth Initiative to scale up centralized renewable energy represents USAID’s largest opportunity to promote decarbonization in Egypt. To engage in this space, USAID will need to navigate a crowded donor landscape and rely on GOE counterparts’ capacity to better define and coordinate donor efforts through a nascent donor-government steering committee led by the European Bank for Reconstruction and Development (EBRD).

Egypt has embarked on a path of liberalizing its power sector and transitioning from a historically state-run system to one that is more conducive to private sector participation. Furthermore, sector performance issues such as incomplete cost recovery and subsidies could create difficulties for Egypt’s ability to execute its plan and make the investments that will be necessary for high penetration of renewables. Egypt’s current economic situation has caused international finance institutions (IFIs) and Gulf-ally lenders to apply renewed advocacy for the GOE to adopt more competitive market practices.

1 This target has also been approved by the Supreme Energy Council, chaired by the prime minister.

2 There are over 28 GW and possibly over 38 GW of signed MOUs, plus additional projects announced under NWFE, but the exact total that is being developed is not firmly determined. Masdar estimates that its 10 GW of wind will represent a 9 percent reduction of total Egyptian CO2 emissions. The team assumes that ACWA Power’s 10 GW of wind will result in a similar reduction. The 10 GW under the N-EP might represent another 7 percent, as it includes only solar. The assessment also assumes that this energy will replace thermal generation.

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If this creates momentum around efforts like the introduction of an electricity market and facilitates the participation of the private sector, it can assist Egypt’s energy transition efforts.

• Advancing key aspects of Egypt’s ongoing power sector reform and improving performance would support Egypt’s ability to achieve its aspirations for the development of large-scale renewable energy.

Decarbonization opportunities exist with respect to the adoption of distributed renewable energy and energy efficiency. Overall, increased energy efficiency could deliver benefits to the GOE—from decreasing outlays from the Ministry of Petroleum and the Ministry of Finance to load management—but there is room for additional alignment and coordination among agencies. Furthermore, distributed renewable energy can contribute to the 42 percent target by 2035 and the goals of decarbonization, equity, inclusion, and job creation. It can also improve customer involvement in the energy sector.

• Though these immediate decarbonization impacts may be more modest than that of large-scale renewable energy in the current environment, they could provide USAID with additional avenues for expanding its pool of potential counterparts, working with the private sector, and engaging women and youth.

The team identified cross-cutting constraints to advance development objectives including limited public reporting of sector performance, the 21 percent participation rate of women in the power sector,3 and potential needs related to environmental practices that are important to developing energy infrastructure at scale.

• USAID could support the GOE to improve public reporting, social inclusion, and the environmental sustainability of the sector.

3 Chemonics Egypt and Palladium, funded by EBRD and Green Climate Fund, Why Gender Inclusion Matters?, 2023, no further publication reference is cited on the document.

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1. INTRODUCTION

This energy sector assessment reviews dynamics and current conditions in Egypt’s energy sector to identify areas where a potential new USAID/Egypt energy activity can support GOE goals and broader public and private energy sector development objectives.

The assessment is structured as follows:

● Section 2 lays out key drivers of the energy transition, including climate change threats, the GOE’s vision for the energy transition as a means to achieve sustainable economic growth, and key aspects of achieving these ambitions. It covers historic dynamics that could hold back this transition as well as reinforcers of the GOE’s vision.

● Section 3 makes a case for the electricity sector as the most important enabler of decarbonization for Egypt and a key part of advancing Egypt’s energy sector reform and cost-recovery efforts to achieve a more efficient and high-performing sector.

● Section 4 assesses the implementation components of the N-EP, its funding and economic viability, and key risks and enablers needed for the program to succeed. Its objective is to develop recommendations on USAID support.

● Section 5 identifies high-impact areas and interventions that could support Egypt’s energy transition and suggests possible interventions for USAID to validate with the GOE.

● Section 6 concludes and provides possible next steps for program design.

2. DRIVERS OF THE ENERGY TRANSITION IN EGYPT

Egypt is at a pivotal time in the development of its energy sector. Faced with existential threats caused by climate change, Egypt has laid ambitious plans for scaling up renewable energy and reducing dependence on fossil fuels. At the same time, the low cost of renewables and recent highs in global gas prices make the energy transition seem economically attractive in light of low domestic gas prices and the inefficient use of gas in power generation and industry.

However, in realizing this transition, Egypt will have to balance the need for reliable and available energy against the desire to mobilize needed investment in a sector that is still dominated by state-run entities.

Changes in Egypt’s power sector will be key to its ability to realize its climate goals and the energy transition. All net-zero pathways include three fundamental energy sector components:

1) decarbonization of electricity and other fuels, 2) efficient use of energy resources, and

3) electrification of energy end uses powered by clean energy.4

4 Joeri Rogelj et al, “Mitigation Pathways Compatible with 1.5°C in the Context of Sustainable Development,” in Global Warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty, 2018, https://www.ipcc.ch/site/assets/uploads/sites/2/2019/02/SR15_Chapter2_Low_Res.pdf https://www.ipcc.ch/site/assets/uploads/sites/2/2019/02/SR15_Chapter2_Low_Res.pdf

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2.1. CLIMATE CHANGE AND A FOSSIL FUEL–DOMINATED ECONOMY

In 2018, Egypt emitted 320 million tons (Mt) of CO2 equivalent (CO2e),5 ranking 25th globally in terms of energy-related CO2 emissions, with a 0.75 percent share of global emissions and 2.5 tons of CO2e emissions per capita.6 This places Egypt among the top seven USAID partner countries in terms of total emissions and among the top 25 for emission intensity.7

Natural gas and oil have long comprised the vast majority of energy consumed in Egypt. As seen in the figure below, notable additions of wind and solar have only been made in recent years and still contribute just 2 percent to Egypt’s energy consumption.

Figure 1. Energy consumption by source, Egypt8

Source: Our World in Data based on BP Statistical Review of World Energy

On the climate front, Egyptian authorities recognize that they face challenges related to energy and water and that these are interdependent. These challenges include the following:

● Egypt is experiencing high evaporation rates, crop transpiration, and soil aridity, all of which will accelerate with higher temperatures and more heat waves. These climate change effects will in turn elevate water requirements for human consumption and agriculture.9

● Agricultural production will decrease due to increasing temperatures and water supply constraints. The output of various staple foods (wheat, maize, sugar cane, milk, etc.) may be reduced by between 10 to 25 percent by 2060.10

5 CO2 equivalent emissions is a measure used to compare the emissions from various greenhouse gases on the basis of their global-warming potential by converting amounts of other gases (e.g., methane, hydrofluorocarbons, and black carbon) to the equivalent amount of CO2 with the same global-warming potential.

6 Climate Watch, Data Explorer, 2023, https://www.climatewatchdata.org/data-explorer/historical-emissions?historical-emissions-data-sources=climate-watch&historical-emissions-gases=all-ghg&historical-emissions-regions=All%20Selected&historical-emissions-sectors=total-including-lucf%2Ctotal-i 7 International Energy Agency (IEA), CO2 Emissions from Fuel Combustion, https://www.iea.org/data-and-statistics/data-sets CO2 emissions from fuel combustion 8 Primary energy consumption is measured in terawatt-hours (TWh). Here, an inefficiency factor (the substitution method) has been applied for fossil fuels, meaning the shares by energy source give a better approximation of final energy consumption.

9 World Bank, Egypt Country Climate and Development Report, 2022, https://www.worldbank.org/en/country/egypt/publication/egypt-country-and-climate-development-report 10 Ibid.

https://www.worldbank.org/en/country/egypt/publication/egypt-country-and-climate-development-report

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● Water flows in the Nile River are decreasing due to Ethiopia’s filling a large dam in the headwaters, climate change, and salination in the Nile Delta. This is causing Egyptian authorities to experiment with large-scale desalination to augment fresh water supply.

● With rising temperatures, population growth, urbanization and land reclamation projects, growing incomes, and industrial development, energy demand (such as for cooling) will increase.11

2.2. EGYPT’S VISION

Emerging from an economic crisis in 2013–2014, Egypt set out a vision to transform its energy sector as a pillar to achieve economic stability and growth and to meet its sustainable development objectives.12 Egypt, historically an exporter of gas, became a net importer in 2015, reached double-digit unemployment rates, saw foreign exchange reserves fall from over $35 billion to $17 billion in three years,13 and experienced widespread load shedding. As a result, Egypt set out to make the following changes:

● Increase the role of the private sector

● Reform Egypt’s legislative framework to improve the investment climate

● Continue energy sector restructuring

● Improve the efficiency of energy subsidies

● Maximize the efficient use of traditional and renewable energy resources

● Transform Egypt’s power and hydrogen sectors to become a regional pivot (or hub).

The GOE also made public international commitments at the 2022 United Nations Climate Change Conference (COP27) to use its extensive wind and solar resources and to become a major global hydrogen and hydrogen derivatives exporter.

2.2.1. HISTORICAL IMPORTANCE OF NATURAL GAS

Egypt is the third-largest producer of natural gas in Africa, and the oil and gas industry is by far Egypt’s largest, representing approximately 24 percent of gross domestic product in Fiscal Year 2019–2020.14 Historically, Egypt has been a net exporter of natural gas, which has contributed significantly to its foreign exchange, while domestic prices have been subsidized (a common wealth-sharing measure among fossil fuel–producing nations). In the mid-2010s, a number of crises motivated reforms to reduce

11 Ibid.

12 Ministry of Finance of the Arab Republic of Egypt, “About,” accessed April 2023, https://mof.gov.eg/en/About/5fbd28790f63030007fec9bb/5fe3763a7bfc600007cbce92 13 Mohsin Khan, The Turnaround of the Egyptian Economy in 2014, 2014, https://www.atlanticcouncil.org/blogs/menasource/the-turnaround-of-the-egyptian-economy-in-2014/ 14 U.S. International Trade Administration, “Oil and Gas Equipment,” Egypt – Country Commercial Guide, 2022, https://www.trade.gov/country-commercial-guides/egypt-oil-and-gas-equipment https://mof.gov.eg/en/About/5fbd28790f63030007fec9bb/5fe3763a7bfc600007cbce92 https://www.atlanticcouncil.org/blogs/menasource/the-turnaround-of-the-egyptian-economy-in-2014/ https://www.atlanticcouncil.org/blogs/menasource/the-turnaround-of-the-egyptian-economy-in-2014/ https://www.trade.gov/country-commercial-guides/egypt-oil-and-gas-equipment

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subsidies, increase private sector participation, and for the first time, look to native wind and solar resources as low-cost sources of energy.

In 2003–2014, high electricity subsidies led to the accumulation of arrears15 for natural gas supplied for power generation, which in turn led to underinvestment in the upstream gas sector and dwindling gas reserves at a time when domestic demand for energy was growing rapidly.16 These factors contributed to a crisis in the power sector in 2013–2014, when widespread load shedding lasted up to six hours per day and became a source of social discontent.17 Fiscal and economic crises also mounted during this period, with fossil fuel subsidies reaching one-fifth of the total budget, exceeding combined expenditures in health, education, and social protection.18 This left the GOE limited fiscal space to respond to an unemployment rate rising above 13 percent.19

This period led to a number of significant developments that have implications for Egypt’s energy transition. First, in 2014–2015 Egypt was able to reduce energy subsidies for the first time in decades (though prices were kept below those of much of the world).20

Second, in response to the power-sector crisis, Egypt made large emergency investments in new generation capacity, including 2 GW of private sector–supplied solar and wind. The assessment team speculates that this initial success in securing renewable energy generation at favorable prices has helped solidify the GOE’s commitment to its plans to massively scale centralized renewables (to be discussed extensively in section 4). Global prices for renewable energy continue to be very competitive, with Egyptian solar photovoltaic (PV) power cheaper than any other source of new bulk generation in 2021.21

Finally, though Egypt briefly became an importer of liquefied natural gas (LNG) in 2015, policy measures incentivized gas exploration among the private sector, leading to the discovery of new gas fields (the Zohr field, the West Nile Delta field, the Greater Nooros and Atoll fields) and again providing sufficient gas to export.22 In 2022, Egypt exported approximately 8 billion tons of LNG, worth approximately $8 billion.23 Maximizing profits from exports rather than subsidizing local power generation is a powerful motivator for Egypt’s energy transition.

2.2.2. IMPLICATIONS OF THE CURRENT MACROECONOMIC SITUATION IN EGYPT

Since March 2022, Egypt’s economy has faced challenges related to the depreciating Egyptian pound, rising inflation, decreasing availability of foreign exchange, and deteriorating economic conditions for the poor. At the end of 2022, the International Monetary Fund and Egypt agreed to a $3 billion financing

15 Debt eventually reached $6.8 billion by 2014.

16 Anshul Rana and Ashish Khanna, Learning from Power Sector Reform, The Case of the Arab Republic of Egypt, 2020, https://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-9162 17 Ibid.

18 Ibid.

19 World Resources Institute, Egypt: Transitioning Away from Subsidizing Fossil Fuels, 2021, https://www.wri.org/update/egypt-transitioning-away-subsidizing-fossil-fuels 20 Ibid.

21 BloombergNEF, “Climatescope: Egypt,” https://www.global-climatescope.org/markets/eg/ 22 Mostefa Ouki, Egypt – A Return to a Balanced Gas Market?, 2018, https://a9w7k6q9.stackpathcdn.com/wpcms/wp-content/uploads/2018/06/Egypt-a-return-to-a-balanced-gas-market-NG-131.pdf 23 Charles Kennedy, “Egypt’s Natural Gas Exports Surge,” OilPrice.com, January 12, 2023, https://oilprice.com/Latest-Energy- News/World-News/Egypts-Natural-Gas-Exports-Surge.html https://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-9162 https://www.wri.org/update/egypt-transitioning-away-subsidizing-fossil-fuels https://www.wri.org/update/egypt-transitioning-away-subsidizing-fossil-fuels https://www.global-climatescope.org/markets/eg/ https://a9w7k6q9.stackpathcdn.com/wpcms/wp-content/uploads/2018/06/Egypt-a-return-to-a-balanced-gas-market-NG-131.pdf https://a9w7k6q9.stackpathcdn.com/wpcms/wp-content/uploads/2018/06/Egypt-a-return-to-a-balanced-gas-market-NG-131.pdf https://oilprice.com/Latest-Energy-News/World-News/Egypts-Natural-Gas-Exports-Surge.html https://oilprice.com/Latest-Energy-News/World-News/Egypts-Natural-Gas-Exports-Surge.html

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package with conditions including floating the exchange rate, slowing large public infrastructure projects, and divesting public enterprise.

Advocacy for reform has intensified in statements issued by traditional Gulf allies. For example, at the World Governance Summit in Dubai in February 2023, the Saudi Minister of Finance stated, “We used to give direct grants and deposits without strings attached, and we are changing that.” In Davos, he added that they need to “see reforms.”

These statements are encouraging the GOE to reduce subsidies and protections for Egyptian businesses, increase private sector participation in the energy sector, and liberalize the power sector, as discussed in the following section.

2.3. ELEMENTS FOR ACHIEVING EGYPT’S ENERGY VISION

2.3.1. RENEWABLE ENERGY INVESTMENT AND DEVELOPMENT

Building on the dual drivers of climate change and the favorable economics of renewables, Egypt has laid plans to massively scale up renewable energy. On November 15, 2022, the Minister of Petroleum and Mineral Resources stated that Egypt’s strategy to accelerate the transition to renewable energy includes reaching 42 percent renewables by 2035. This was originally stated in the GOE Integrated Sustainable Energy Strategy issued in November 2015, updated in August 2017, and approved by the Supreme Energy Council.

The most significant piece of this strategy are two program elements—the NWFE Energy Pillar (N- EP) and the Energy Wealth Initiative—that could add 38 GW of new centralized renewable energy capacity.24 These efforts have secured financial commitments from the EBRD, the European Union (EU), USAID, Saudi Arabia (ACWA Power), and the United Arab Emirates (UAE) (Masdar), among others.

● NWFE Energy Pillar (N-EP). Egypt’s National Climate Change Strategy (NCCS) for 2050 contains projects bundled around three main pillars—water, food, and energy. Energy projects under the NCCS are referred to as the NWFE Program: Energy Pillar, or N-EP. With the support of EBRD, this effort supports the installation of 10 GW of new renewable energy capacity and the retirement of 5 GW of inefficient gas plants.

● Energy Wealth Initiative. The GOE launched this initiative at COP27, accelerating the implementation of the May 2022 NCCS. It also aims to facilitate investments to support the N- EP and build an additional 28 GW of renewable energy through MOUs signed between the GOE, Masdar, ACWA-Power, Scatec, and Orascom at COP27.

Egypt has also been supporting the scale-up of distributed renewable energy and generation projects for self-consumption at industrial or commercial sites. For example, the government has issued policy measures such as net metering to compensate these consumers for excess power, making investment more attractive.25 The GOE appears to envision a transition from a fully centralized system to a more

24 There could be some project overlaps between the 28 GW and 10 GW because 6 GW of NWFE have not been defined yet.

For example, it is possible that ACWA Power will count the commissioned 1.1 GW wind farm towards its 10 GW MOU.

Furthermore, the MOUs have been announced but not firmly determined yet, and the GOE has not publicly reconciled this.

25 The GOE issued around ten circulars for this purpose from February 2013 through January 2023.

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decentralized one, with a bulk electricity system coexisting with distributed renewable resources.26 Tripling the desalination capacity (section 2.3.3) and meeting the needs of other industrial loads will likely entail increasing distributed capacity and reinforce these efforts.

2.3.2. HYDROGEN

Hydrogen is a component of the N-EP and Egypt’s broader energy strategy (section 4.1.7). One-third of the 10 GW in the N-EP is planned as direct contracts for hydrogen production. Beyond the N-EP, efforts to develop an Egyptian hydrogen export industry are moving forward, with investment commitments signed and some facilities built. Egypt has competitive advantages in supplying green hydrogen to the world market. Alternatives beyond decarbonizing the electric grid will push Egypt to use hydrogen to decarbonize other sectors. The country will focus on using hydrogen to decarbonize steel manufacturing and using green hydrogen in the domestic industrial and residential sectors.

2.3.3. CROSS-BORDER ELECTRICITY TRADE

Egypt seeks to expand its cross-border electricity trade from current levels (1.4 terawatt-hours, or TWh, exported in 2020–2021, out of a total of 205 TWh produced) and develop a unified national grid to transform Egypt into a regional and global hub for energy exchange between the Arab countries, Africa, and Europe.27 Additionally, Egypt is planning construction of new high-voltage interconnections including a 3 GW Egyptian/Saudi interconnection, a 2 GW Egyptian/Cypriot/Greek interconnection, an Egyptian/Gulf interconnection, and a 3 GW Egyptian/Greek interconnection. Most of the resulting increase in electricity demand, if not all, will be met with renewable energy, combined with the planned

4.8 GW El Dabaa Nuclear Power Plant.

2.3.4. DESALINATION

Authorities in water-scarce Egypt aim to more than quadruple the country’s desalination capacity over the next five years. Through the Sovereign Wealth Fund, the government plans to award 21 water desalination plants worth $3 billion that will draw on cheap renewable energy, guarantee purchase of water, and subsidize the cost to consumers.28

2.3.5. ENERGY EFFICIENCY

The GOE recognizes the importance of energy efficiency in its path to decarbonization. The 2015 Electricity Law, Vision 2030, and the National Energy Efficiency Action Plan 2018–2022 (NEEAP II) all set a vision for improving the efficiency of energy use. The NEEAP II aims to implement the Electricity Law’s energy efficiency articles and its executive regulations, issued in 2016. In line with the Supreme Council of Energy, it also aims to empower energy efficiency units in various economic sectors throughout the government.

26 2015 National Energy Strategy.

27 Egyptian Electricity Holding Company (EEHC), Annual Report 2020/2021, http://www.moee.gov.eg/english_new/EEHC_Rep/REP2021-2022en.pdf 28 Aidan Lewis, “Egypt to build 21 desalination plants in phase 1 or scheme – sovereign fund,” Reuters, December 1, 2022, https://www.reuters.com/markets/commodities/egypt-build-21-desalination-plants-phase-1-scheme-sovereign-fund-2022-12-01/ http://www.moee.gov.eg/english_new/EEHC_Rep/REP2021-2022en.pdf https://www.reuters.com/markets/commodities/egypt-build-21-desalination-plants-phase-1-scheme-sovereign-fund-2022-12-01/

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3. THE POWER SECTOR AS AN ENABLER OF

DECARBONIZATION AND ECONOMIC PROSPERITY

The power sector is key to Egypt’s goal of decarbonization. As noted above, low-carbon pathways require a transition to clean electricity, the efficient use of energy resources, and the electrification of end uses such as cooling, transportation, and industrial processes. The GOE recognizes that improving the performance of the power sector and its constituent institutions is vital to its decarbonization efforts as well as its economic and development ambitions. It is likely that the GOE will need to balance objectives related to providing low-cost, reliable power to all Egyptians, a goal that has historically implied a range of subsidies, and a need to incentivize investments in renewable energy and energy efficiency. Successful execution of plans to scale up renewables will depend on the operational capacity of the sector to adapt to the technical demands of managing large amounts of intermittent resources and the financial capacity to make the necessary investments in grid modernization (section 4).

Furthermore, key legal and regulatory aspects of Egypt’s ongoing power sector reform process can facilitate the integration of variable renewables and help achieve lower-cost outcomes.

3.1. EGYPT’S POWER SECTOR IS KEY TO DECARBONIZATION

Egypt’s electrical power generation sector is responsible for the largest share of emissions (40 percent).29 Egypt’s generation is primarily fossil fuel–based, with steam and combined-cycle gas plants representing over 80 percent of its installed generation.

Figure 2. Share of electricity production by source, Egypt

Source: Our World in Data based on BP Statistical Review of World Energy & Ember

Furthermore, the efficiency of many plants in the current gas fleet is low. Two-thirds of the fleet operate in the 20–45 percent range.30 The use of some older, inefficient gas plants is still required to serve load in congested areas at times of peak demand; this reflects the need to expedite improvement plans to strengthen the transmission network. While no significant retirements of older gas plants have been made, the GOE plans to retire 5 GW of this inefficient plant capacity.

29 Lamiaa Abdallah and Tarek El-Shennawy, “Evaluation of CO2 emission from Egypt’s future power plants,” Euro-Mediterranean Journal for Environmental Integration, 2020, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7502305/ 30 EEHC, Annual Report 2020/2021.

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7502305/

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The rest of the economy lags in energy efficiency as well. Egyptian industrial processes, equipment, and consumer appliances are 20 percent more energy-intensive than international benchmarks; while the GOE has not set specific national energy efficiency targets, studies indicate that there is a potential to reduce 23 percent of energy consumption through energy efficiency.31

Despite current oversupply, new generation capacity will still be needed. In recent years, Egyptian electricity demand has grown strongly, with a combined annual growth rate of 3.5 percent between 2015 and 2021. If the country maintains this rate of growth, electricity demand has been projected to reach circa 350 TWh by 2035, a significant growth from the 205 TWh demanded in 2020–2021.

Furthermore, these forecasts do not take into account loads that could drive demand much higher:

green hydrogen, water desalination, electricity exports, and the potential scaling of electric vehicles. A new least-cost generation and transmission master plan (latest published scenarios date from 2017) will need to reconcile these various sources of demand, plant retirements, the entry into operation of an estimated 38 GW of renewable energy, and the investment requirements to maintain a reliable operation of the system.

3.2. SECTOR REFORM AND DECARBONIZATION

Since the 1990s, the international community has pushed a fairly standard set of sector reform measures: unbundling of vertically integrated national monopoly electric utilities; private sector participation in generation and distribution; implementation of power markets to introduce competition, and establishment of an autonomous regulator to set and oversee the rules of the sector and market.

These reforms are often carried out to attract private capital and reduce the government’s fiscal burden, creating a more efficient sector.

Despite the uneven results of reform efforts around the world,32 power sector reform can be conducive to decarbonization efforts. The scale-up of renewable generation and the electrification of end uses require massive investments in grid modernization and innovation, which the public sector may find challenging to finance. At the same time, competitive markets can drive low prices for renewable energy generation and enable the efficient provision of flexibility resources such as ancillary services.

In recent years, Egypt has undertaken a number of reform measures which, if sustained, may have positive impacts on the sector and support decarbonization efforts. However, by themselves, these measures are not likely to result in the desired scale-up of renewable energy generation, and additional policy measures are needed. Key regulatory changes that will be needed include the following (see section 5.2.1):

● Comprehensive transmission access and pricing arrangements

● Mechanisms for ensuring visibility, control, and procurement of flexibility and balancing resources

● Regulations on curtailment, forecasting, and voltage and frequency control

31 Amal Khashab, Lessons Learned: Reasons of Egypt’s Energy Efficiency Poor Performance, 2020, https://energycentral.com/c/ee/lessons-learned-reasons-egypt%E2%80%99s-energy-efficiency-poor-performance 32 Robert Bacon, Taking Stock of the Impact of Power Utility Reform in Developing Countries: A Literature Review, 2018, https://openknowledge.worldbank.org/server/api/core/bitstreams/99315b74-b641-5c99-b910-567d869566e0/content https://energycentral.com/c/ee/lessons-learned-reasons-egypt%E2%80%99s-energy-efficiency-poor-performance https://openknowledge.worldbank.org/server/api/core/bitstreams/99315b74-b641-5c99-b910-567d869566e0/content

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● Regulations and markets to allow trading in clean energy.

These elements can help facilitate the participation of the private sector, ensure efficient integration of variable renewables, and provide the require balancing and flexibility services in a cost-effective manner.

The Egyptian power sector is in a process of liberalization

The Egyptian electricity market has historically operated on a vertically integrated basis, with the government responsible for everything from generation to distribution. Though reforms have been discussed since the 1970s, they have been implemented in short bursts with long pauses in between, resulting in limited private sector participation until recently.33 As a result of the power crisis in 2014 described above, reform measures have been adopted to liberalize the sector and increase private sector participation, though many policy measures have a long timeline for implementation and are still only partially enacted.

In July 2015, a new law for electricity was issued (the Electricity Law, Law No. 87 of 2015) to regulate all electricity activities with the aim of unbundling state-owned electricity entities and replacing the single-buyer model. The Egyptian Electricity Holding Company (EEHC), previously named the Electricity Authority, owns most power generation and distribution companies in Egypt. Until recently, one of these was the joint-stock Egyptian Electricity Transmission Company (EETC). As a result of the Electricity Law, EETC became independent from any electricity company or entity engaged in the field of electricity production, transmission, network operation, distribution, and sale. It is now a state-owned company unaffiliated with EEHC, though it still works in close coordination with EEHC.

33 Rana and Khanna, 2020.

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Figure 3. Egypt’s sector overview34

Source: Based on BNEF country profile.

The regulator, EgyptERA, began operating in 2001 through a presidential decree to perform regulatory functions such as managing licensing, operating dispute resolution mechanisms, and ensuring just relations between service providers and end users. The 2015 Electricity Law codifies these functions at a higher legislative level, clarifies that EgyptERA is responsible for designing and approving tariff schemes, and specifies that the Minister of Electricity and Renewable Energy chairs EgyptERA’s board of directors, among others.

The Electricity Law also mandates the establishment of a competitive electricity market, though with a long timeframe: eight years to move from a single-buyer model to a regime in which power is traded between generators and eligible consumers.35 However, the competitive electricity market has not yet been implemented, and the time period for implementation was recently extended by the Cabinet for two years (through 2025) and may be extended by decree for another two years.36

Moves toward transparent, competitive wholesale electricity markets would provide critical support to scaling up renewables in Egypt.

3.3. COST RECOVERY AND DECARBONIZATION

Unlike many state-run power sectors in the developing world, Egypt has largely been able to provide universal affordable, reliable power. It reached universal access in the early 2000s, and power has

34 For a complete list of all sector actors and legal framework, refer to Mariam Fahmy and Nada Hussein, “Electricity regulation in Egypt: overview,” Thomson Reuters Practical Law, 2020, https://uk.practicallaw.thomsonreuters.com/w-028-8626 35 Now traded between generators and EETC through power purchase agreements.

36 Fahmy and Hussein, 2020.

https://uk.practicallaw.thomsonreuters.com/w-028-8626

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generally been reliable and of sufficient quality to power commercial and industrial growth. Egypt’s historical policy decision was to use the power sector as a part of its social compact, subsidizing tariffs as well as inputs, and absorbing large numbers of people in public employment. However, this came with opportunity costs and likely suboptimal outcomes with respect to efficiency, innovation, and modernization.37

As described above, the energy crisis in 2014 demonstrated the need for improved efficiency and cost recovery in the sector, generating some political will for sector reforms. However, Egypt’s decarbonization goals bring with them new reasons to improve sector financial performance and continue liberalizing the power sector. Subsidy reductions can spur uptake of renewables and end-use energy efficiency measures, while increased revenues would facilitate the large investments in transmission and distribution infrastructure needed to incorporate renewables.

Cost recovery is difficult to determine for the purposes of this assessment. This reflects the various subsidies and other price adjustments that are used in the electricity sector. Estimates of 55 percent, 80 percent, and 100 percent cost recovery were provided to the assessment team in various meetings.

Since 2015, momentum toward cost reflectivity in tariffs has largely been sustained, with significant rate increases occurring on a regular basis.38 A number of subsidies remain, including:

● Direct subsidy provided from the Ministry of Finance, with tariffs planned to reach full cost reflectivity by 2025,39 though recently rates have been frozen.40

● Cross-subsidies across customer classes, with heavy consumers paying higher tariffs than light consumers and with commercial and industrial consumers paying more than residential consumers.

● Reduced electricity rates from the transmission company to distribution companies with larger shares of customers in lower rate classes, such as residential consumers.

Additionally, as noted above, gas is provided to generators at a rate far below prices on international spot markets, creating an opportunity cost. Gas prices also likely vary per plant. A recently published decree by the Prime Minister stated that the fuel cost to state-owned generation is only $3 per million British thermal units (mBTU). Others cite $3.5 per mBTU.

Distribution company losses also appear to be significant—between 18 and 22 percent, based on data in EEHC’s Annual Report 2020/2021.41 This is compared to approximately 7 percent total aggregate

37 World Bank, Rethinking Power Sector Reforms in the Developing World, 2019.

38 Breisinger et al. calculate that electricity tariffs increased by 26 percent in 2014, 17.3 percent in 2015, 30 percent in 2016, and 40 percent in 2017.

39 Mohamed Farag, “Electricity prices still subsidised, increases included in restructuring plan until 2025: Electricity Minister,” Daily news Egypt, April 25, 2022, https://dailynewsegypt.com/2022/04/25/electricity-prices-still-subsidised-increases-included-in-restructuring-plan-until-2025-electricity-minister/ 40 Recently, due to the financial crisis, Egypt’s leadership has intervened to block or slow electricity rate increases that were required under national regulations. In June 2022, rate increases were postponed by presidential directive for six months, resulting in a cost to the state of approximately EGP 10 billion ($534 million). As of February 13, 2023, the GOE was considering a proposal to reset electricity prices every three to six months.

41 This is based on data on electricity purchased and electricity sold by EETC. However, the 22.5 percent should be taken as a very rough estimate, because the term “electricity sold” is not defined in the report.

https://dailynewsegypt.com/2022/04/25/electricity-prices-still-subsidised-increases-included-in-restructuring-plan-until-2025-electricity-minister/ https://dailynewsegypt.com/2022/04/25/electricity-prices-still-subsidised-increases-included-in-restructuring-plan-until-2025-electricity-minister/

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technical and commercial losses considered to be healthy for the region.42 However, the World Bank’s Learning from Power Sector Reform analysis claims that distribution companies have historically performed quite well when it comes to collecting bills from private citizens, and losses are instead driven by an inability to collect from public institutions.43

The assessment team was unable to confirm current conditions with similar disaggregated loss data;

however, it seems that distribution companies are taking measures within their control to reduce commercial losses. For instance, Egypt has an extensive pre-paid meter program, with 11.7 million pre-paid meters installed as of September 2021 and another two million planned to be installed in 2022 as of the writing of EEHC’s latest annual report.44

Implications for Egypt’s clean energy transition

These factors have significant implications for Egypt’s clean energy transition. As noted above, the opportunity cost of supplying natural gas to inefficient plants at rates below international markets provides a powerful incentive to reduce the consumption of gas in the power sector, while continuing subsidies also provide an overall impetus to reduce costs of generation. These likely combine to be one of the GOE’s primary motivations for scaling up renewable energy.

However, because electricity tariffs are reported to exclude capital outlays for new generation, transmission, and distribution assets, Egypt depends heavily on donors and foreign investors for these funds (donors for grid investments and Gulf investors for wind and solar). Scaling up grid-scale renewables requires massive investments in grid expansion and modernization, which will be a challenge to procure if expected to come from state sources.

Subsidies disincentivize consumer investments in energy efficiency and distributed renewables. Although when taken as a whole, the financial benefit in terms of reducing domestic gas consumption and electricity subsidy outlays may be large, only higher rate classes may see a return on energy efficiency investments. Furthermore, distribution companies may see this as a short-term threat to their financial performance if energy efficiency measures cannibalize customers that cross-subsidize the lower rate-classes and may not appreciate the potential for reducing investments needed for capacity expansion. A program that supports a realignment of incentives, taking into account the factors described above, could be useful for scaling energy efficiency measures substantially.

4. ASSESSMENT OF THE N-EP AND GAPS FOR INTERVENTION

This section assesses the implementation components of the N-EP, its funding and economic viability, and key risks and enablers needed for the program to succeed. The objective is to develop recommendations on USAID direct and enabling support.

The government is pursuing two program elements (the N-EP and the Energy Wealth Initiative) that could add 38 GW of new renewable energy capacity. While the initial objective was to evaluate N-EP gaps and opportunities to provide USAID support, these initiatives should be considered both individually and as a whole, as they will require major changes in the way Egypt’s power system works

42 Rana and Khanna, 2020.

43 Ibid.

44 EEHC, Annual Report 2020/2021.

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and significant additional investments in the power grid and flexibility to manage such large amounts of wind and solar generation.

NWFE Energy Pillar (N-EP). Egypt’s NCCS for 2050 contains projects bundled around three main pillars—water, food, and energy. Energy projects under the NCCS are referred to as the NWFE Program: Energy Pillar, or N-EP. Under the N-EP, the EBRD has offered to help coordinate and mobilize financing for 10 GW of new renewable energy. The N-EP also includes the decommissioning of 5 GW of older thermal plants.

The energy pillar is one of nine projects under the larger NWFE program, which will work through various procurement approaches and will be open to local and international project developers and investors.45 This initiative is supported by the $480 million public investment pillar of the N-EP, which will pay to close inefficient fossil fuel–based plants and invest in grid strengthening and energy storage to facilitate the absorption of renewable energy.

The N-EP includes a $20 million package for institutional support for Egyptian authorities to develop and implement a just transition plan to support affected workers, a support scheme for local businesses to develop production of green technologies and services, and a program of technical and commercial support for the absorption of renewable energy and program implementation.

A statement from the EU, GOE, and EBRD states, “NWFE’s energy pillar will contribute to achieving Egypt’s objectives of ‘installing additional renewable energy capacities to reach electric power contribution target of 42 percent by 2035’ and ‘improve the energy efficiency of electricity by the maintenance, upgrade and replacement programmes for obsolete power plants.’ ”46

Energy Wealth Initiative. This initiative was launched by the Egyptian government at the COP27 climate change summit, accelerating the implementation of the May 2022 NCCS. It aims to facilitate investments to support the installation of the 10 GW under the N-EP. At COP27, the European Commission committed to contribute up to €35 million ($36 million) in support of the Energy Wealth Initiative through a grant to the EBRD under the EU Economic and Investment Plan for the Southern Neighbourhood. It also aims to facilitate investments to support the N-EP and build an additional 28 GW of renewable energy through MOUs signed between the GOE, Masdar, ACWA-Power, Scatec, and Orascom at COP27.

The Energy Wealth Initiative is being implemented in part via…