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Developments regarding private sector participation in power sector - International Law Office

International Law Office

Energy & Natural Resources - Egypt

Developments regarding private sector participation in power sector

March 21 2011


The electricity sector in Egypt was nationalised in the 1960s and since then has remained largely under state control. However, in recent years the sector has been subject to restructuring and reform in line with national economy liberalisation processes and reforms. In particular, major changes to structure and regulation have occurred since 2000, when the Egyptian Electricity Authority was restructured into the Egyptian Electricity Holding Company. In 2007 the transmission, generation and distribution of electricity functions were separated into different affiliated companies wholly owned by the Egyptian Electricity Holding Company, thereby forming five thermal and one hydroelectricity generation companies, nine electricity distribution companies and one transmission company.

The electricity power system is organised as a single buyer form. The Egyptian Electricity Transmission Company is the only company licensed for extra-high voltage and high voltage electricity transmission. The Egyptian Electricity Transmission Company purchases electricity from the six generation companies, the three existing independent power projects and the existing wind farm and sells it to the nine distribution companies, as well as to 81 consumers directly connected to extra-high voltage and high voltage networks. This exercise is seen as a step towards the establishment of a fully liberal electricity market. The intention is that each entity will become economically sustainable in its own right as subsidies in the energy sector are reduced and the structure leaves the door open to future privatisation.

As indicated above, Egypt already has a strong track record of private sector participation in the power sector, having successfully tendered three independent power projects in the late 1990s. These were all structured on a build-own-operate-transfer (BOOT) basis and financed through international project financings. Availability payments are made in US dollars. The first BOOT project to be implemented in Egypt was a gas-fired steam power plant with two 325 megawatt (MW) generating units located at Sidi Krir. The plant began commercial operation in late 2001. There are also two other BOOT power projects for two gas-fired plants located near the cities of Suez and Port Said. Both plants began commercial operation in 2003. However, there have been no further independent power projects since this time due to the devaluation of the Egyptian pound following decisions to introduce first a crawling peg system in 2001, and then in 2003 a free float. Previously, the Egyptian pound had been pegged to the US dollar and the net effect of these changes was a 50% devaluation in the value of the Egyptian pound against the US dollar. This naturally made the independent power projects very expensive for the country and all subsequent power plants have been implemented on a traditional procurement basis, usually with the use of soft loans or donor funds. Nonetheless, the government stuck to the financial terms agreed for the independent power projects, despite the cost impact.

The government has recently reassessed its policy on private sector participation and announced that the power generation plan for 2012 to 2017 will include three BOO/BOOT generation power plants to be implemented in Dairut, Aiaat and Safaga. Principally, this is in recognition of the fact that the government will be unable to keep pace with demand forecasts without the use of private finance and is under increased pressure following a series of power outages over the summer. A new electricity law is also expected to be promulgated in the near future, which aims to establish a competitive electricity market that encourages private sector involvement in the generation and distribution of electricity. The government is known to like the model used for independent power projects in Abu Dhabi, and it is possible that a similar scheme may be utilised in the future in Egypt.

On January 28 2010 the Ministry of Electricity and Energy, through the Egyptian Electricity Transmission Company, launched an invitation for prequalification to experienced developers to submit their prequalification to design, finance, construct and operate a combined cycle power plant project in Dairut, Beheira Governorate. The Dairut power project is the first independent power project to be launched for a decade and consists of implementing 2x750MW combined cycle units capable of firing both natural gas and light oil. Developers may propose a 3x750MW plant at the same plant site.

The power generated from this project will be bought by the Egyptian Electricity Transmission Company under a 20-year power purchase agreement that will be signed between the project company and the Egyptian Electricity Transmission Company. The agreement includes a penalty provision covering, among other things, failure to operate the plant before 2013. The project company will purchase the natural gas required for the operation of the plant from the Egyptian Natural Gas Holding Company by virtue of a fuel supply agreement to be entered into between the two parties for a duration consistent with the duration of the power purchase agreement. The project site will be leased to the project company by virtue of a usufruct agreement to be concluded with the Egyptian Electricity Transmission Company for a duration consistent with the duration of the power purchase agreement. The project documents will closely follow those used for Sidi Krir and, as with the existing independent power projects in Egypt, it is expected that a sovereign guarantee to secure the payment obligations of the Egyptian Electricity Transmission Company will be provided by a competent government authority. This is currently under internal consideration.

In May 2010 10 bidders out of the 19 that responded to the invitation for prequalification were prequalified. The prequalified bidders include Sumitomo Corporation (Japan), Consortium of ACWA power (Saudi Arabia) and Hassan Allam sons (Egypt), Marubeni Corp (Japan), Mitsui & Co (Japan), Powertek (Malaysia), Tenaga Nasional (Malaysia), EDF International (France) and GDF-Suez (France).

A request for proposal was expected to be issued in March 2011, but is subject to delay following recent events in Egypt. A gas feasibility study is also ongoing and will be completed before the issuance of documents to bidders.

The announcement of the Dairut project means that Egypt is entering into a new era for private sector participation in the sector. It is hoped that the promulgation of the long-awaited new electricity law will push forward the implementation of future independent power projects and enlarge the market appetite for such projects.

For further information on this topic please contact Tim Armsby or Arig Ali at Trowers & Hamlins by telephone (+202 73 57 332), fax (+202 73 57 314) or email (tarmsby@trowers.com or aali@trowers.com).


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