Efforts to boost Egypt’s solar market have created a massive pipeline of work and attracted virtually every kind of PV ecosystem player — except private investors.
Private-sector financiers remain skittish about Egypt’s potential despite the country hosting an award-winning solar complex that is set to become the largest in the world.
The Benban complex, near Aswan, this year bagged a Project Finance International Global Multilateral of the Year award after 29 projects, representing almost 1.5 gigawatts of capacity, received at least $1.8 billion in public financing.
Benban’s backers are a who’s who of international and development finance bodies, including the International Finance Corporation, the African Development Bank, the Asian Infrastructure Investment Bank, the Arab Bank of Bahrain, CDC Group, the Europe Arab Bank and others.
In total, sixteen development banks have provided debt, two other institutions have come through with equity and the World Bank’s Multilateral Investment Guarantee Agency has coughed up $210 million worth of political risk insurance to fund the complex.
The international funding effort has helped push Benban’s average overnight system costs below $900 per kilowatt, said Benjamin Attia, global solar markets analyst with GTM Research, while at the same time giving developers revenues that are not bad for the Middle East.
Benban projects are due to get $78 per megawatt-hour under a 25-year power-purchase agreement fixed as part of the second round of Egypt’s feed-in tariff (FiT) program. Unsurprisingly, there is plenty of interest from PV developers.
“So far, there are 25 project developers and sponsors from all over the world in negotiations and planning to build at Benban,” Attia said.
Egyptian PV Project Pipeline
Source: GTM Research
“The average project size is only 58 megawatts, as the procurement structure of the park allows many of the region’s established developers to be involved without oversized risk.”
At the same time, Egypt’s economy, now the second-largest in Africa, after Nigeria, is on a roll.
Under a three-year economic reform program giving Egypt access to an International Monetary Fund (IMF) Extended Fund Facility, the country has introduced changes expected to boost gross domestic product (GDP) to 4.8 percent this financial year, from 3.5 percent in 2016-2017.
“Egypt’s reform program is yielding encouraging results,” said David Lipton, first deputy managing director and acting chair of the IMF's executive board, in a statement last December.
“The economy is showing welcome signs of stabilization, with GDP growth recovering, inflation moderating, fiscal consolidation remaining on track and international reserves reaching their highest level since 2011.”
All of this prompts the question: what has scared off private financiers and forced public money to step in to such a great extent at Benban? Part of the answer is most likely to be found in missteps made by the government in the first round of its FiT program.
In 2014, the Egyptian government announced plans to increase the share of renewables in the power mix from 2.1 percent to 20 percent by 2022 and 37 percent by 2035, potentially opening up a major opportunity for renewable energy investors.
But investors were alarmed when the Egyptian Minister of Electricity proposed that disputes for the first round of the FiT program should be tackled through the Cairo International Arbitration Centre.
And an even greater source of unease was the exchange rate: the Egyptian pound fell off a cliff when currency restrictions were lifted in 2016. That same year, Daily News Egypt reported that nineteen companies had abandoned plans to build projects in the country.
Egyptian PV Developers
Source: GTM Research
The list included a large number of local developers as well as international players such as Enel Green Power. Perhaps spooked by the exodus, the Minister of Electricity introduced significant changes in the second round of the FiT program, unveiled in 2016.
The government tried to allay foreign exchange fears by announcing that, for the second round of the FiT, 30 percent of the PV tariff would be based on a fixed rate of EGP 8.88 per dollar. The remainder is pegged to the dollar at the rate applicable at the time of payment.
Lawmakers also tweaked the arbitration arrangements, even if the revised plan still did not convince financiers, according to a February 2017 report by accounting firm KPMG.
“The Minister said that a compromise has been reached, in which arbitration will be governed by the rules of the Cairo Regional Centre for International Commercial Arbitration while the seat of the arbitration itself can take place offshore,” it noted.
“Investors have welcomed the move but remain uncertain about the practical implications of the requirement,” according to KPMG.
The upshot is that private money will likely be observing developments at Benban with interest before committing to major investments in Egypt.
“Egypt, and its more than 2-gigawatt utility-scale project pipeline, is one of the Middle East and Africa's largest and most promising markets,” said Attia.
But, he added, “despite the pipeline and strong support from risk-hungry development finance, developers do face significant political and market-based risks by building at Benban.”