Egypt - how promising an investment opportunity?

The wind market in Egypt has spent a couple of years on the launch pad. But changes to feed-in-tariffs have the potential to undermine investor confidence before it has even taken off.

Egypt has a power problem. The North African nation operates dangerously close to it maximum production capacity, which leads to frequent blackouts during the summer months.

For Egypt, this is not simply about meeting existing electricity needs. Consumption is rising 6% a year and a failure to meet this need risks sparking social unrest. It is an issue that urgently needs addressing. This was the driving force behind the 2014 announcement that Egypt would undertake a tendering process for a system of FITs to promote the construction of wind farms.

In the first round, the government has so far allocated more than 1.6GW of a planned 2GW new capacity, and seen significant interest from international banks, developers and manufacturers.

However, concern is now building among investors.

Central to the recent anxiety is a government announcement in May that international arbitration would not be available for disputes over wind projects in the country, meaning that all disputes would have to be heard locally. This is problematic for investors given that the Egyptian political and legal systems are always in a state of flux. It gives little confidence that a government that is sympathetic to wind energy today will be so tomorrow, and makes investment look risky.

And we are already starting to see the effects. It has made already difficult access to capital even harder. Furthermore, there are rumours circulating that elements within the Egyptian government feel the rates offered in the first FIT round were too generous.

Some even fear that the government may move to scrap the first round in favour of setting lower tariffs for round two — though how many firms would bid for FITs in such an uncertain situation is anyone’s guess. But legal experts in the region have said investors should not panic yet.

Legislative changes, along with regional instability, were always going to be one of the largest risks facing investment in Egyptian wind. However, the country still needs to install more power generation, and that is not going away.

Some estimates suggest that Egypt will need to bring on an extra 30GW of capacity by 2030 in order to meet demand, and that at some point in the 2030s the country will become a net importer of oil and gas. The government needs this to work.

On that basis we think interest in Egypt as a wind investment opportunity is set to continue.

Siemens, Engie and EDF have won agreements to develop renewables in the country and Vestas is in talks with the Egyptian government for a 2.2GW wind investment. As investment flows into Egypt the regulatory framework will likely become clearer.

A law is reportedly in the pipeline that will see Egypt move control of transmission networks towards a more open and deregulated framework where the government plays a less direct role.

Egypt remains one of the most promising opportunities for wind investment in the Middle East and North Africa, but the government will need to tread carefully to ensure that it remains an attractive prospect for investment.

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