Policy adjustments to support renewables growth in Egypt despite excess generation

Sourced from Fitch Solutions

• Rising electricity prices and the imposition of limitations on private-use solar capacity will enhance the scope for investment in new renewables capacity in Egypt over our forecast period to 2029.

• Efforts to maintain electricity demand amid price hikes will assist in reducing oversupplies and maintaining growth in the sector.

• The relatively rapid pace of growth in capacity will have a negative impact on the efficiency of Egypt’s thermal power plants, artificially depressing capacity factors in order to balance out supply and demand.

We expect higher consumer electricity prices and the restriction of unregistered solar electricity supply feeding into the grid will support ongoing growth in Egypt’s non-hydropower renewables sector over our 10-year forecast period. In June 2020, Egypt’s Ministry of Electricity and Renewable Energy announced electricity price hikes between 17% and 30% contingent on the volume of consumption according to the country’s volumertically tiered tariff structure. This follows shortly after the Egyptian Electricity Utility and Consumer Protection regulatory Agency (EgyptERA) announced amendments to the country’s solar net metering scheme and implemented a cap on private-use solar capacity to inhibit unregistered electricity supply feeding into the grid.

While we note that the overall average electricity price increase of 19.1% will serve to increase profitability for all power producers, we expect that the still-falling cost of solar and wind power projects will place renewables at an economic advantage over other generation types, supporting our bullish outlook on the sector. Added to that, we note that the strengthening of its net metering scheme and a cap on private-use solar capacity will prevent any significant spill-over generation feeding into the grid from unlicensed private solar power producers, reinforcing the market from any unforeseen oversupplies moving forward. As such, we expect that the government will successfully achieve its goals to both reign in government spending and attract greater private sector investment in renewables. With these factors in mind, we project renewables will remain the country’s primary driver of power sector growth throughout our forecast period to 2029, making up over 85% of all new capacity coming online over the next decade.

We expect the government’s moves to support power demand amid price hikes will assist in reigning in surplus generation and maintaining growth in the sector. In conjunction with the announcement of electricity price hikes in mid-2020, the Minister of Electricity, Mohamed Shaker, also announced a three year suspension of the ministry’s deadline to eliminate subsidies for consumer electricity from 2022 to 2025. Shaker went on to highlight the reduction in subsidy limitations from 1000 kW to 650 kW; a move which we expect will allow Egypt to achieve its goal of reducing overall subsidies while limiting the impact of higher prices to small-medium residential consumers. We believe that this will allow the market to maintain growth in electricity consumption over the years to come, thereby creating sufficient scope for new capacity investment and supporting continued growth in its non-hydropower renewables sector.

We expect that the relatively rapid pace of renewables capacity growth will have a negative impact on the efficiency of Egypt’s thermal power plants, artificially depressing capacity factors in order to balance out supply and demand. The chart below highlights Egypt’s annual average capacity factors by generation type, calculated as a measure of actual generation as a percentage of total potential generating capacity. The chart illustrates our view that the country’s thermal power plants will continue to underperform their potential compared to the levels recorded in the past 10-year period, recovering slowly with rising demand and minimal new thermal capacity coming online over the next decade. While the majority of Egypt’s existing thermal power plants are owned and operated by majority state-owned enterprises such as the Egyptian Electricity Holding Company (EEHC), private sector participation in the sub-sector has risen markedly in recent years. In order to avoid the erosion of private investor sentiment in the market, we expect state-owned thermal power plants will suffer disproportionately weaker efficiency over the coming years, underperforming to a somewhat larger degree than those owned and operated by foreign investors and weakening government profit margins in the thermal power sector.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 (‘FSG’). FSG is an affiliate of Fitch Ratings Inc. (‘Fitch Ratings’). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. The original article can be accessed by clicking here