How can Egypt’s solar energy sector reach its full potential?

With unusual and devastating weather events taking place around the world thanks to climate change, the shift towards renewable energy and way from carbon-emitting fossil fuels has become more urgent than ever.

Egypt no doubt has massive potential for generating most, if not all its energy needs from renewable sources, especially with solar. It makes sense for Egypt’s economy was to entirely rely on the sun to power it. Especially so that we are living in times when moving to zero carbon emissions has become an economic and environmental necessity.

Egypt is annually exposed to between 1,920 and 2,600 kWh/m2 of solar radiation which lasts for around 10 hours a day on average. According to some studies, these levels have the energy potential of 74 billion MWh per year. According to the state-owned Egyptian Electricity Holding Company’s (EEHC) annual reports, this is around 390 times the amount of electricity that was produced in 2017. Last year, the International Renewable Energy Agency claimed that Egypt could potentially generate 53% of electricity from renewable sources.

However, the renewable energy sector in Egypt could arguably be in better shape, despite efforts by both the government and the private sector to invest and improve the infrastructure needed to boost it. Egypt depends on imports of solar technologies due to the lack of a local manufacturing industry, which discourages investors because of the need to borrow foreign currencies at high costs. This is despite the country having an abundance of the materials required for building photovoltaic (PV) solar systems (one of the most versatile solar energy technologies), including glass and steel.

The EEHC’s annual reports from the last decade show that the average annual growth rate of the country’s electricity generating capacity is around 5.2%, with demand growing at an average of 4.6% per year.

Solar energy was only introduced into Egypt’s electricity generation in 2010. It peaked in 2016/2017, generating 580 GWh, 0.31% of the total amount of electricity produced nationally.

There have been a couple of attempts in recent years to boost investment in the country’s renewable energy sector. In 2014, Egypt implemented a feed-in tariff (FiT) policy to attract investment, and a second round was launched in 2016.

FiTs are policies designed to attract investment and boost production of renewable energy generating facilities with the guarantee of access to national power grids. Typically, this entails discovering renewable energy sources and building the necessary capacities to extract them. It also includes providing long-term contracts to producers, usually in the range of 15 to 20 years. Most importantly, they guarantee that producers only pay for the costs of producing renewable energy, such as raw materials, resources, and operating costs. This is meant to shield producers from the risks that may come up in renewable energy production over the long run.

According to a policy paper published in August by Alternative Policy Solutions (APS), a public policy research project at the American University in Cairo, studies have shown that these FiTs haven’t been successful at attracting the desired investment.

One of paper’s researchers, Hebatullah Korashi, told Business Forward “studies measuring profitability analysis under both schemes reported that the offered rates were deemed low for project profitability, even though the second round of FiTs offered significantly higher rates for residential and small-scale projects.  Moreover, […] the tariff rates offered were quite comparable to the levelized cost of electricity. Therefore, from an investors’ perspective, FiT scheme did not promise high profits.”

A third round wasn’t renewed without explanation from the Egyptian government, however suspected reasons were the devaluation of the Egyptian pound in November 2016 (which made it riskier for investors to borrow US dollars) and lower tariff rates for utility-scale projects, which made investors doubtful of their profitability.

“It became harder for investors to borrow to finance their projects. Moreover, seeing that the FiT rates have become observably lower for utility scale projects, this created doubt that large scale investments would be feasible,” Korashi said.

APS’s policy paper, titled “Financing Residential Solar Energy Usage Through Taxing Polluting Industries”, proposes a carbon tax to be levied on energy-intensive industries that emit high levels of carbon. The effects of such a tax would be twofold. First, the government would use the revenue generated to finance the country’s solar energy sector. This could include building local manufacturing capacity to achieve self-sufficiency, making the adoption and expansion of solar energy production across the country easier and cheaper. Second, it would reduce the financial burden of energy subsidies to these polluting industries, freeing up the state’s fiscal space for investing in solar energy.

The latter is considered to be especially important due to the social and environmental costs that spill over from these industries. According to an example in a study cited in the paper, these costs are estimated to be $2.8 to $3.9 billion annually as a result of the environmental effects of coal use in the cement industry, which accounts for 65% of greenhouse gas emissions.

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