Tackling fiscal, gas and electricity challenges is central to resolving Egypt’s energy crisis
The Egyptian president Abdel Fattah El Sisi wants government employees to replace the lightbulbs in every house in Egypt to help solve the country’s energy crisis.
But even with low-energy bulbs, Egyptians can expect another sweltering summer of power cuts. They face three interlocking energy crises – an electricity crisis, a gas crisis and a fiscal crisis.
The gas problem is the combination of fast-growing demand, spurred by subsidies, with underinvestment in new gas production and inadequate prices to producers dating back to the Mubarak era.
The electricity crisis is also driven by rampant demand, which grew almost 5 per cent last year, and would have been even higher had it not been for widespread power cuts.
The fiscal crisis is mostly driven by the state’s enormous subsidy burden. This has partly been eased by increases to gas, electricity and fuel prices, but petrol and diesel prices in particular remain well below world market levels. In turn, the state oil company’s debts mean that it cannot reimburse international oil and gas companies for their costs, causing them to cut investment.
Egypt is doing some of the right things. Prices are rising for domestic gas production, as in the recent deal with BP and Germany’s RWE to develop the large West Nile Delta Project. Shell and Apache have begun drilling for shale gas in the Western Desert, although this needs to be handled carefully in view of public concerns for the environment.
Liquefied natural gas imports have finally begun after inexcusable procrastination, with Egypt helped by sharp falls in the price of the fuel. Two more import terminals are planned and large users are to be able to procure their gas directly.
Gas supplies from Cyprus are being discussed, and would not raise the political hackles that a deal with Israel would. Instead, Israeli gas could be chilled for re-export from Egypt’s idle LNG export plants.
LNG, chemical, fertilizer and cement plants need reliable gas feedstock. They have been cut off to preserve supplies to power plants, placating domestic consumers at the cost of damaging the economy and raising unemployment.
For electricity, the sound and fury of the Egypt Economic Development Conference apparently had some significance, with Siemens closing a massive deal to supply gas turbines and wind power. Nearly 5 gigawatts of renewable energy, including solar power, are on the drawing board, compared to current total generating capacity of 31GW. Another 13GW will be needed by 2019. Besides a sunny climate, Egypt enjoys strong and predictable winds down the Red Sea coast.
A preliminary deal with Ethiopia over the waters of the Nile could include electricity supply from its massive Grand Ethiopian Renaissance Dam, if it can find a way across Sudan.
The falling price of renewable energy helps, but to pay for these plans, Egypt needs to bring more private capital into the electricity sector, and to raise prices to cover costs. Meanwhile, the proposed nuclear programme looks like a fantasy.
A rationing scheme is being introduced for petrol and diesel, but the proposed allowances are so high that most motorists will pay the subsidised rate. Lower oil prices have helped Egypt, but petrol prices, about half those of US levels, will need to go up again.
Such reforms will raise accusations of “neoliberal” policies designed to benefit corporate interests and foreign capital. But the woeful performance of the state energy sector does not leave much choice. The challenge is to secure universal energy access at affordable prices for the poor, without cutting off productive sectors of the economy or continuing the impossible fiscal burden on the government.
The lights should finally come back on in Egypt, but its energy officials still have to stumble through the darkness of severe political polarisation, insecurity, hidebound bureaucracy and crony capitalism.
Robin Mills is head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis.
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Published: June 14, 2015 04:00 AM