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Expanding the grid
Date: 2/26/2015
Issue No.1235, 26 February, 2015      25-02-2015 11:42AM ET

Expanding the grid

A new piece of legislation will put the electricity sector on track for a major overhaul, writes Niveen Wahish

Expanding the grid

Last week the cabinet approved a new law allowing the private sector to produce, distribute and transmit electricity directly to consumers.

Some private-sector companies currently perform these activities, but on a limited scale. The government-owned Egyptian Electricity Holding Company (EEHC) controls about 90 per cent of electricity generation, 100 per cent of transmission and over 99 per cent of distribution. The new draft law will see private and public companies competing for customers.

The law aims to encourage competition and much-needed investments to meet the growing demand for electricity.

Liberalisation of the sector began back in 2000, but was never seen through, according to Hafez Al-Salmawi, managing director of the Egyptian Electric Utility and Consumer Protection Regulatory Agency (Egyptera). He said that an early draft of the law was prepared in 2008 but was never given priority.

According to Al-Salmawi, the new law combines four existing laws, unifying legislation governing the electricity sector. It aims to create a competitive market that will allow for the delivery of a more efficient service.

The law strengthens the role of Egyptera as a regulatory authority, expanding it to include the setting of tariffs. It also contains provisions on the protection of electricity-related establishments.

The law also spells out the role of the Ministry of Electricity as being crucial to ensure the generation of sufficient supplies of electricity and make contingency plans in case of emergency.

But the privatisation of such a key service has raised fears regarding pricing and delivery. Al-Salmawi says that the law strengthens the role of Egyptera by enabling it to keep a close eye on prices, making sure that companies do not overcharge for their services. But there are concerns regarding the millions of customers who currently pay a subsidised rate rather than the full price.

Al-Salmawi says the new law creates a mechanism that allows for a more efficient allocation of the subsidies, ensuring that they go to the neediest consumers. Twenty-five per cent of the current 30 million users pay subsidised rates, he says, costing the government around LE9 billion annually until 2018-2019.

The transition to a fully competitive market will take around five years, Al-Salmawi says. During that time the government will offer guarantees to the private sector to encourage it to enter the market.

“These will be temporary measures until a track record for the market is created, after which no guarantees will be needed,” he says. There will also be two markets: one in which prices are competitive and the other in which they are set by the state. “With time, the competitive market will take over,” Al-Salmawi says.

This will guarantee consumers reasonable prices, he adds, referring to the example of the mobile-telephone providers that at first charged hefty sums for lines and per-minute communication, only for lines later to be given out for free and charges to be among the lowest in the world.

The private sector will not be allowed to construct electricity grids where ones already exist, but it will be allowed to establish grids in areas that do not have the service. However, Al-Salmawi says that private sector companies will have the right to use any grid in exchange for a fee to be paid to the owner. There will also be a public-service obligation to deliver services to certain regions, even if it is not profitable to do so.

According to Tarek Allouba, a financial consultant, the importance of the new draft law lies in its incentives for the foreign private sector to get involved in building power stations in Egypt.

Power stations built by the private sector in recent years were constructed on a build-own-operate-transfer (BOOT) basis, whereby they are returned to the government after a specified period of time. The government also has a commitment to the companies to buy their output for this period of time.

The aim of the new law is to relieve pressure on the government budget, since the government is no longer capable of putting down the investments needed for the sector.

To meet increases in demand, an estimated average annual expansion in generation and transmission capacity of 3,000 MW is needed over the next 20 years, according to a recent study, which adds that public investment will not be enough to cover all the additional capacity.

Latest Ministry of Finance figures show the country’s budget deficit as a percentage of GDP reaching 5.7 per cent in the first half of fiscal year 2014-2015, up from 4.5 per cent the same time last year. The target budget deficit for 2014-2015 is 10 per cent.

Allouba stresses that the government must continue to have a say in how electricity is priced. And the main grid extending from the north to the south of the country should continue to be owned by the government, he says.

Economist Amirah Al-Haddad considers the new law to be very important for Egypt’s economic future. “It will mark a new era by ending over 40 years of state monopoly over the sector,” she says.

However, she is not optimistic about the extent to which it will attract investment, given the “red tape and excessive capital controls, as well as the excessive regulation of various sorts.”

Nonetheless, Al-Haddad says that the application of the law could improve both the quality and reach of the service. It will increase penetration and access, she says.

The ability of the government to provide services in all areas has often been constrained “on account of a lack of resources, inefficiency and sometimes corruption,” she adds.

Al-Haddad says that tariffs will initially increase to cost-recovery levels because they have been kept low, but will then decrease in the medium term because of efficiency improvements and increased competition. “Patience is a virtue,” she says.

She also wants to see the removal of subsidies. “There is too much meddling with markets by creating additional distortions,” she says, adding that the subsidies are poorly designed.

In Egypt, the first bracket with the lowest tariff is for electricity consumption up to 50 kw/h, whereas elsewhere in the world this applies to consumers of up to 25 kw/h, which means that the largest subsidy goes to people who are not the poorest of the poor.

“Helping the poor should be done through an efficient, non-distortionary tax system and an equally efficient distributive system, rather than through the failing system of subsidies,” she says.

However, an article by the Egyptian Initiative for Personal Rights, an NGO, says that, according to the 2004 Household Income, Expenditure and Consumption Survey by the Central Agency for Public Mobilisation and Statistics (CAPMAS), the poorest quintile of the population consumes an average of 195 kw/h per month, while the second-poorest quintile consumes 210 kw/h per month.

What would guarantee the efficiency of the privatised services, Al-Haddad says, is a regulatory framework that ensures proper competition at the bidding stage and no collusion between potential or current suppliers.

She calls for the Egyptian Competition Authority to work with the sector’s regulator and the Consumer Protection Authority. “The latter, together with the regulator, should respond in a timely manner to customers’ complaints, flagging the revoking of the licence if need be,” she says, highlighting that it is important not only to check on service delivery but also on the safety of the provided services.

“Safety is another serious issue that should not be overlooked when preparing for the liberalisation of the sector,” she says.

In the summer of 2014, the government announced that electricity prices for all users — industrial, commercial and household — would be increased over the coming five years.

To encourage renewable energy production, the government, last September, released the feed-in tariffs at which it will buy electricity generated by the private sector through renewable sources.

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