POWERING GROWTH: PROPOSED ELECTRICITY LAW SEEKS TO

UNCLAS CAIRO 000650 SENSITIVE SIPDIS ENERGY FOR ERICKSON, EEB FOR SULLIVAN, NEA/ELA FOR ALLEN E.O. 12958: N/A TAGS: ENRG ECON PGOV EINV EG SUBJECT: POWERING GROWTH: PROPOSED ELECTRICITY LAW SEEKS TO LIBERALIZE ELECTRICITY GENERATION AND DISTRIBUTION ¶1. (SBU) Key Points: -- The Ministry of Electricity and Energy (MOEE) is preparing a law that would open electricity generation and distribution to the private sector. -- According to industry contacts, the draft law would facilitate investment in new distribution networks to expand the national grid, and would allow private generation companies to sell directly to residential and industrial consumers, rather than to the MOEE. -- Electricity consumption was up 13 percent in 2008. ¶2. (SBU) COMMENT: This is Egypt's second attempt to attract investment to the power generation sector. In 1997, an investment law promoting independent power producers (IPP) provided a number of incentives and resulted in three generation facilities, built by InterGen with Edison and EdF, respectively, for a total of 2 GW. However, the power purchase agreements were denominated in U.S. dollars, and the Ministry of Electricity and Energy (MOEE) abandoned the IPP program when the currency was devalued, sharply driving up the cost of generating power. The Ministry of Investment and MOEE withdrew the incentives program for IPPs in order to limit Egypt's exposure to foreign exchange risk. While the Egyptian pound is currently stable, the GOE continues to have a reputation for changing the rules of the game without warning. Investors will likely remain skeptical of the proposed new IPP framework, absent sovereign guarantees to respect and uphold the letter and spirit of the law. END COMMENT. ¶2. (SBU) MOEE sources told the press on April 1 that the ministry is preparing a draft law to liberalize power generation and distribution, controlled at present by the Egyptian Electricity Holding Company (EEHC),a division of MOEE. Dr. Asem El Gawhary, manager of PGESCO, one of the largest energy services companies in Egypt (a joint venture between Bechtel and MOEE),confirmed that MOEE will submit a bill to restructure and liberalize the electricity sector to the State Council for review in the coming months. The proposed law would permit private companies to build and operate power plants, add to the national distribution network, and sell directly to industrial and residential consumers by 2012. El Gawhary said that EEHC will continue to control prices for residential and small business customers, but intends to allow prices for industrial consumers to be set by the market. ¶3. (SBU) According to industry analysts, Egypt's current installed capacity is 23 gigawatts (GW) and it faces a deficit of at least 2 GW. MOEE Undersecretary Mohamed Mousa Omran told us that the ministry has committed to develop plants generating an additional 10.45 GW by 2012, and intends to develop an additional 11 GW between 2012-2017 to deal with skyrocketing demand for electricity. He admitted that MOEE has had to institute rolling brownouts in rural areas at peak load hours, in order to ensure uninterrupted power to Cairo and industrial cities in the Delta. El Gawhary said that EEHC has only secured financing to build an additional 7.5 GW worth of capacity, and speculated that it has to liberalize the industry in order to secure investment to meet increased demand. El Gawhary and industry analysts at the Egyptian Center for Economic Studies state that electricity consumption increased 13 percent in 2008. -------------- -------------- COMPETING INTERESTS: ATTRACTING INVESTMENT VS. REDUCING ENERGY SUBSIDIES -------------- -------------- ¶4. (SBU) Over sixty percent of Egypt's electricity is generated from domestically produced natural gas. Contacts in the American Chamber of Commerce in Cairo's energy committee told us that MOEE provides natural gas at a concessionary rate of $1.25 per MMBTU to companies already generating electricity for EEHC, and to attract investment in several new manufacturing zones. El Gawhary said that the Ministry of Petroleum wants to eliminate MOEE's right to offer concessionary pricing to new customers, and price gas at $3 per MMBTU. (Note: Gas traded at $3.55 per MMBTU on the NYMEX on April 13. End note.) SCOBEY