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Towards a Sustainable Power Sector in Egypt

byDr. Hafez A. El-Salmawy

Managing DirectorEgyptian Electric Utility and Customer Protection

Regulatory Agency

EgyptEraContents

Background on the Institutional Setup of the Energy Sector in Egypt

Egyptian Electric Utility and Consumer Protection Regulatory Agency

Status and Development of the Power Sector Up to 20/20

Highlights on Reforms Taking Place in Some Areas till 20/20

Other Areas of Interest Conclusions

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Historical Development of The Power Sector

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Institutional Structure of the Energy Sector in Egypt

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Institutional Structure of the Energy Sector in Egypt (Contd.)

RegulatoryEgyptERA

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Egyptian Electric Utility and Consumer Protection Regulatory Agency

Objectives: Regulates and supervises all electricity activities including:

generation, transmission, distribution and supply. Ensures availability of supply to all forms of usage at the

most equitable prices and considers environmental issues Ensures fair competition, transparency and

nondiscrimination Protect Consumers within a scope of a balanced relation

with the service providers

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EgyptEraStatus of The Power Sector

Evolution of Fuel Consumption

Evolution of the Installed Capacity Mix

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Evolution of Electricity Consumption Breakdown By Sector

2001/2002 2011/2012

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Expected Evolution of Peak Load Till 2035

Technical Assistance to Reform the Energy Sector “TARES”, EU supported Project

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Energy Mix in the Power Sector Based on Least Cost Scenario

Technical Assistance to Reform the Energy Sector “TARES”, EU supported Project

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Expected Contribution of Re in the Supply Mix based on Different Scenarios

Technical Assistance to Reform the Energy Sector “TARES”, EU supported Project

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Power Plant Installed Capacity based on Minimum Fuel Scenario

Technical Assistance to Reform the Energy Sector “TARES”, EU supported Project

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Status and Challenges of Power Sector in Egypt

Egypt has successfully managed to secure electricity supply to 99.03% of its population

The electrical peak demand increased by an average of 7% over the last decade, it increased by more than 12% in the year 2007/2008 and 10.3% in the year 2011/2012.

The peak demand has reached 27700 MW in August 2014. To meet the increase in demand an average annual expansion in

generation and transmission as well as distribution of 2500 MW is needed over the next 20 years.

The potential for adding more hydro-generation is limited. In 2011/2012 Installed renewable sources (mainly wind) has reached

545 MW and 140 MW Solar/Thermal (20 MW Solar) representing less than 2% of the installed capacity and generated energy from these sources represents only 1% of the electrical energy generated.

Electricity purchased from self generation and cogeneration units in industry in 2011/2012 represents only 0.07% of the total electrical energy generated.

In 2012/2013 subsidy has reached EGP 28 Billion

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Highlights on Reforms Taking Place in Some Areas Up to 20/20

Tariff ReformDevelopment of Renewable Energy.Market development

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Historical Evolution of Tariff Reform

During the period

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Bases for Tariff Reform Program

EgyptERA has developed the cost of service for all activities including generation, transmission and distribution over the last seven years

Over this period this report has been enhance with the support of several international consultant.

A draft proposal for the tariff reform has been developed in 2012.

An advanced study was developed in 2014 for tariff reform

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ELECTRICITY SUBSIDY AS PER 2011/2012

Sector Operation Customer Service

Fuel* Total

EHV (267) 0.0 192.2 (74.8)

HV 24.4 0.0 307.7 332.1

MV > 500kW (219.5) 0.443 2846.2 2627.1

Others 751.9 67.8 1985.4 2805.1

Residential 11324.1 1236.4 6676.2 19236.7

Commercial (189.9) 138.4 447.7 396.2

Public Lighting (423.4) 1.79 770.2 348.5

Total 11667.1 1448.9 13683.5 26799.5

Million L.E.

In addition customer services causes an additional subsidy of 1.5 Bil EGP

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Component of the tariff reform study

The reform plan included:Assessment of the financial indicators of the electricity

companies.Assessment of the current tariff structure and its values

base on the cost of service study.Criteria fro tariff reformAffordability study for residential sectorProposed new tariff structure and values over five year

programEffect of fuel prices on tariff reform programCommunication plan for tariff reform

EgyptEraCriteria Considered Tariff Reform Program

•Elimination of sub – classification per each supply voltage as well as cross subsidy (i.e. energy intensive, glass and ceramics, industrial, others, special customers,…etc.)•All customers other than Residential customers and special cases should pay their economical cost in 3 years•Tariff to these customers shall address the impact of the customer on the system, therefore the tariff will include capacity charge, energy charge, supply charge and TOU components.•Utility consumers such as transportation, irrigation and and water treatment during an interim phase will benefit from fuel subsidy offered by the government.•As economical prices is achieved tariff will be amended base on changes in cost of supply as well as incentive regulation scheme

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Criteria For Tariff Reform Program(CONTD.)

For residential sector the target is to reduce the number of blocks into four blocks including blocks for; Poor, low income , break even block, block at the system marginal cost ( i.e. cost of renewable)

The subsidized blocks will be size based on the first and second poverty lines which are 25% and up to 40% respectively. of the total population (according to the frequency distribution this will be in the order of 100 kWh and 200 kWh per month)

The subsidized block will benefit from the fuel subsidy offered by the government.

The other two blocks will not benefit from the subsidized block . Program evolution will be tuned according to the affordability

assessment

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Base on the developed study the Cabinet has approved a five years plan for tariff reform to be completed in 2018/2019 by which subsidy will be fully lifted.

The plan was announced in the first of July 2014 and published in the official gazette.

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Development of Re

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Impact of Fuel Prices on Electricity Generation Cost

Fuel is currently supplied to the power sector at different PricesLocal gas supply 3 US$/MMBTU (Currently represent around 70%)Local Heavy Fuel 8.7 US$/MMBTU (Currently represents around 30%)Imported gas N.A. (expected range between 12-17 US$/MMBTU) (will be around 10% as the current deficit)

Fuel Cost US$/MMBTU Cost of kWh (pt/kWh) ($c/kWh)*

Cost of Fuel per kWh (pt/kWh) ($c/kWh)*

3 35.2 4.92 21.9 3.06

6 49.8 6.96 36.5 5.1

9 65.2 9.11 51.9 7.25

12 82.5 11.53 69.3 9.96

15 99.9 13.97 86.8 12.14

* 1 US$ =7.15 L.E

EgyptEraFeasibility of RE in Egypt

Almost one third of Electricity generated in Egypt uses fuel at a cost equal and above 9 US$.MMBTU This is equivalent to 50 TWh/ year

10-15% of this has as fuel cost above 12 US$/MMBTU, this is not less than 15 TWh/year

The equivalent cost per kWh is 9.11 $c which has a fuel cost of 7.25 $/kWh, this may go up to 11.5 $c/kWh and 9.96 $/kWh for fuel cost at 12 US$/MMBTU.

Considering Re source where cost of wind energy varied between 7-11 $c/kWh and solar energy which can varies fro 11-18 $/kWh there will be potential for RE to be applied for at least 30% of electricity generated in Egypt in 2014. This will be much higher in the future.

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Policies For

RE

Supplementary Polices

Main Polices

Quantitative Polices

Pricing Polices

Feed in Tariff

Added Premium

Quota )RPS(

Green Certificates

Competitive Bids

FinancialTaxes and Customs

IncentivesContractual

Power Purchase

Agreements

TPA with Privilege in Dispatching

Related to Production

Related to Consumption

Soft Loans

Governmental Purchases

INTERNATIONAL POLICIES TO SUPPORT RE

Net Metering

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CRITERIA FOR SELECTING SUPPORTING POLICY

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Legal Framework: Defines policies and responsibilities

Regulatory Framework: Details the parties commitments and technical and contractual requirements

Tariff Framework: Defines both tariff structure and values

Contractual Framework: Provides standard templates for contracts

Supplementary Framework: Contains supporting mechanisms including; resource assessment, technology transfer, soft finance funds,…etc

EgyptEraLEGAL FRAMEWORK

This include: Public land Allocation; land allocation and usufruct rights Mechanisms for building RE plants: Statuary, Competitive

Bidding, FiT and merchant as well as define targets. Grid responsibility for priority of dispatch and take or pay

commitment Customer responsibilities; Quota and its criteria Customer incentives: Swapping with NG, tax credits and

custom duties incentives

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Framework for Re Development Mechanisms

Framework for Re Development Mechanisms

Merchant Re PlantsMerchant Re PlantsPower Purchase

AgreementPower Purchase

Agreement

New& Renewable Energy Authority (NERA)

New& Renewable Energy Authority (NERA)Competitive BiddingCompetitive BiddingFeed in TariffFeed in Tariff

EgyptEraREGULATORY FRAMEWORK

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TRADABLE GUARANTEE OF ORIGIN CERTIFICATES (TGOC)

In this approach unbundling is carried out between electricity generation for a production device and its attribute as renewable.

Electricity generation will be traded as just electricity, yet its renewable attribute will be traded through TGOC.

The owner of the GOC is the owner renewable attribute. This system is similar to the Clean Development

Mechanism (CDM), however the TGOC should express the premium cost for renewable energy above the cost of generating electricity from conventional sources

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EgyptEraTARIFF FRAMEWORK (FIT)

This include: Tariff structure,; tariff adjustment with technology,

site conditions and capacity Value of tariff which depends on; financial terms,

investments cost, competitiveness with other markets, consumers affordability.

Payment terms

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DIFFERENTIATION

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FIT

Years

Ref site(worst site)

FIT

Years

Best site

5 15

Project life time Ref site(average site)

5 15French ModelFrench Model

German ModelGerman Model

DESIGN APPROACHES OF FIT FOR WIND ENERGY

EgyptEraCONTRACTUAL FRAMEWORK

This include the following contracts Land Use Agreement (between the plant and the land owner) Interconnection contract ( between the plant and the grid) Third Party Access (in case if the transmitter is not the off

taker) (between the plant and the grid “commercial contract”) Commercial contract “Power Purchase Agreement” (between

the plant (supplier) and offtaker) In case of biomass plants feed stock supply agreement

(between the feed stock supplier and the plant) Implementation Agreement (cross linked Agreement between

All Parties involved in the project (plant, transmitter, land owner and purchaser)

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This include: Resources assessment (Re Atlases) Soft funds for local manufacturers and technology

transfer programs. Target land developments and infrastructure State guarantee when it is needed

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Market Reform

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PHYSICAL FLOW OF POWER

Large customers Connected to theTransmission network

Customers

Imports

Exports

Egyptian Electricity

Transmission Company EETC Traders3 BOOTS

Distributors9 Distribution Companies

PublicGenerator

6 Gencompanies

MONEY FLOW

EgyptEraELECTRICITY MARKET REFORM

Main Objectives•maintain electricity system reliability under conditions of high growth increase of demand, thus facilitating significant generation and network capacity additions to the system in order to meet the needs;•gradual enhancement of procedures and functions promoting competition within electricity market in a way that creates a fair and attractive investment environment for new comers in electricity generation and trading.

EgyptEraMARKET STRUCTURE

EgyptEra WHY MARKET SEGMENTATION?

Need to maintain favorable economic conditions, which may not comply with cost reflectiveness, for parts of the consumption due to social and economic policies

Have also to protect fair competition conditions and real market operation for all eligible customers

Create project viability conditions for private investors, who take decisions under long-term horizon and pure techno-economic criteria

Re-organize institutions and functions within the existing system, capable to operate efficiently

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THE CONTRACTUAL RELATIONSHIP IN A COMPETITIVE

MARKET

EgyptEraTRANSITION PERIOD TO PHASE 1

Legal IssuesPromulgation of new Electricity Law and by-lawsAdoption of Supply CodeAdoption of Market Rules and updated Network Codes

Regulatory IssuesTariff reform of regulated market and relevant tariff calculationCalculation of transmission and distribution tariffsSet Ancillary Services rules, tariff methodology and tariffs Set the balancing service tariff methodologyRegulation of WPT defining its specific role especially during the transition periodFormulation and signing of last resort contractPreparation and signing of contracts for ancillary servicesSet the criteria for selecting the Competitive Market Generators

EgyptEraTRANSITION PERIOD TO PHASE 1

Restructuring of electric utilitiesEstablishment of the WPTAccounting and Functional unbundling of the EETCAccounting and Functional unbundling of the Generation CompaniesCapacity building of the personnel of the TSO/MO and the Competitive Market GeneratorsAccounting and Functional restructuring of Distribution Companies

Broader Market ActionsStudy for eligible customers and candidate eligible customers demandAnnouncement of procedures for licensing of Suppliers, new GeneratorsModernization of meters to be remotely metered for all Eligible Customers

EgyptEraTRANSITION PERIOD IMPLEMENTATION

ROADMAP

EgyptEraOTHER AREAS OF INTEREST

Fuel to Electricity: Repowering Cogeneration and Distributed generation Fuel supply contracts, allocation and pricing

Upgrade of the Metering System Smart meters program Third party meter service provider

DSM/EE Interactive DSM Support EE Transparency

Electricity Observatory, Customer notification, Billing, Customer Charter,…Etc

Protection Against Cyber Attracts

EgyptEraCONCLUSIONS

The power sector in Egypt Faces several challenges Reforms are taking place in different areas to

liberalize the market, attract private investment, develop Re market and Tariff reform

Other area of interest include improve fuel to power efficiency as well as coordination, smart meter program, DSM/EE, Improve transparency and improve system security

Although the challenge is huge the potential is substantial

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