Electricity and Renewable Energy Regulations in Egypt


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Introduction

In July 2015, a new law for electricity has been issued (Law no. 87 of 2015) to regulate all electricity activities with the aim of replacing the current single buyer model and establishing a fully competitive electricity market where electricity generation, transmission and distribution activities are fully unbundled (the "Electricity Law").

In the meantime, Law No. 203/2014 was enacted for the Encouragement of the Production of Electricity from Renewable Energy Recourses (the "Renewable Energy Law"). The Law established several schemes for the private development of renewable energy projects as will be explained below.

The Egyptian Constitution included a special provision to get optimum benefits from renewable energy, promote its investments, and encourage scientific research in this sector.

The government has also introduced several incentives to renewable energy private developers and commercial producers. Incentives include, among others, announcing the feed-in tariff, guaranteeing access to the grids, allowing long term power purchase agreements, providing for priority of dispatch, allocating land needed for the projects at discounted price as well as the net metering scheme.

New Electricity Law 87/2015

The new Electricity Law has restructured the electricity sector in an attempt to make it more competitive. It ended up the single buyer for electricity and allowed private generation companies to sell their production to end users.

The Electricity Law created two electricity markets. The first is the competitive market where eligible consumers are allowed to freely choose their electricity suppliers based on bilateral direct agreements and negotiated electricity prices. The second is the regulated market where ineligible consumers will pay a regulated tariff and will purchase electricity from the distribution companies who will be supplied by a public trader.

The Electric Utility and Consumer Protection Regulatory Agency (“EgyptERA”) is restructured to be an independent institutional champion responsible for supervising, developing and coordinating between electricity producers, transmitters, distributors and end users. It has become the electricity regulator in terms of licensing, designing and approving tariffs, providing a separate dispute resolution mechanism, and developing a competitive market design and structure. It is also responsible for ensuring a reliable long term supply of electricity with reasonable prices and preserved environment.

The targeted competitive electricity market has not yet been implemented. The Ministry of Electricity and Renewable Energy (MOEE) shall, in cooperation with EgyptERA and the concerned entities, develop a study for the development of the electricity market to be transferred gradually to a fair competitive market.

In the meantime, EgyptERA shall also prepare a report called ‘the Competitive Electricity Market Design Document" which shall include the following:

  1. All the phases for opening the market for competition;
  2. The required procedures for implementing each phase and the expected period of each one;
  3. The investment costs required for each phase;
  4. The standards required for moving from one phase to another;
  5. EgyptERA role in controlling and evaluating the performance of the market to guarantee the fair competition.

The Law allowed third party access to the grids, and separated the government-owned and operated Egyptian Electricity Transmission Company (“EETC”) into an independent transmission system operator ("TSO").

The abovementioned report should be approved by EgyptERA' board of directors. Then, it shall be submitted to the Cabinet for its approval and for setting and announcing the starting date of the competitive market.

Licensing Requirements

An investor wishing to produce, distribute or sell electricity must obtain a license from EgyptERA, and must establish an SPV in the form of a joint stock company.

Despite there is currently no minimum capital requirement for renewable energy companies, EgyptERA (as the regulator) can however issue regulation requiring a minimum capital as a precondition for licensing electricity projects as it previously did for the FIT projects when requiring a minimum capital of EGP 15 million.

Under the Egyptian law, there are no prior approvals or licenses required in order to incorporate a renewable company. These licenses and approvals (when applicable) are rather obtained by the developer after the incorporation of the company in order to be able to establish the renewable project and start its operation. A renewable company refers to the company working in the production, distribution of selling of electricity from renewable energy.

Below is a summary of the main licenses and approvals required, up to date, for establishing a renewable project in Egypt. This is without prejudice to EgyptERA' powers under Article 6 of the Electricity Law to issue new licensing requirements or limitations for renewables projects at any time.

a. Environmental Approval

According to the Egyptian Environment Law, a prior environmental approval on the establishment of the project is required to be issued by the Egyptian Environmental Affairs Agency affiliated to the Minister of Environment. This approval is issued based on an environmental impact assessment study to be prepared by the investor on the project and submitted to the Agency to this effect.

b. Temporary Permit

According to Article 13 of the Electricity Law, an investor wishing to produce, distribute or sell electricity must obtain a license from EgyptERA to this effect. However, prior to the issuance of such license, a temporary permit need to be obtained from EgyptERA to allow the investor to start the construction of the project. Such temporary permit is issued for a period of one year to be renewed for similar periods upon the request of the licensee and subject to EgyptERA approval.

c. Permanent Generation License

In order for the company to carry out any of the electricity activities (i.e. the production, distribution or sale of electricity), it should obtain a permanent license from EgyptERA to this effect.

This permanent license is issued for a maximum period of 25 years. It may be renewed for a similar period or part thereof. EgyptERA shall annually examine the continued fulfillment of the license’s requirements and issue an annual certificate to the licensee confirming the validity of such license.

The abovementioned licenses and the temporary permits shall be published in the Egyptian Gazette and in a daily wide spread newspaper on the licensee' expenses.

d. Building Permit

According to the Building Law, a building permit needs to be obtained from the competent municipality in which the power plant will be located. This building permit will be required before starting the construction works of the plant such as the surrounding fence or any other buildings.

Exemption from Licensing Requirements

Producers of electricity for their own use may be exempted from the requirement to obtain the licenses and permits, provided that the following conditions are met:

  1. The plant should be owned by the entity which will benefit from the generated electricity (i.e. the owner of the facility shall be the consumer of the generated power).
  2. The facility should not be connected with the transmission or distribution grid with a capacity more than 500KW.
  3. The facility shall not be contracted with other entity for the supply of electricity from its plant to them.

The applicant for the abovementioned exemption should submit an application to this effect to EgyptERA to check the fulfillment of the above-mentioned requirements; EgyptERA shall have the right to visit the site for this purpose.

Licensing Fees

Below are the current applicable fees determined by EgyptERA as of the 1st of July 2019:

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Electricity Production and Transmission

According to Article (1) of the Electricity Law, companies licensed to produce electricity are permitted to sell their production either to EETC, the authorized distributors or to the end customers. Licensees are under a duty to provide their services to customers without discrimination.

EETC is mandated to allow investors to sell electricity directly to consumers using its transmission network and the distribution grids subject to access fee (wheeling charge) via network connection contracts.

Moreover, a licensed distributor is obliged to allow investors to access its distribution network on a non-discriminatory basis, within the network technical capabilities and subject to specific tariff to be approved by EgyptERA.

Below are the wheeling charges determined by EgyptERA, as of August 2019, for producers to use the national transmission grid to transmit the generated electricity to the consumers.

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EETC shall monopolize the transmission and operation of electricity countrywide, and will be the TSO of the power system in Egypt. EETC is mandated to ensure long-term ability of the transmission system to meet the demand on electricity and to keep the system secure, reliable and efficient. For example, it is authorized to:

  • Operate, manage and maintain the ultra-high and high voltage (UHV & HV) transmission system.
  • Develop and execute ultra-high and high voltage (UHV & HV) transmission projects.
  • Manage the electricity demand in the regulated market by purchasing electricity from authorized producers.
  • Allow third parties to use its transmission network on a non-discriminatory basis to fulfill the electricity needs of customers and distributors.
  • Executing interconnection projects with neighboring countries.

EETC can implement its projects either in its own or in partnership with the private sector.

Private electricity distributors are allowed to develop and implement electricity distribution projects on medium and low voltage (MV & LV), and to operate and maintain the distribution network in the licensed geographical area. They are allowed to sell MV & LV electricity to ineligible users in consideration for a tariff to be approved by EgyptERA. In case the Cabinet announced a tariff less than that approved by ERA, the Government shall pay the difference between them to the licensed distributers.

Renewable Energy Law 203/2014

The energy sector in Egypt witnessed key changes including gradual lifting of government subsidies on traditional fuels and introduction of a number of legislative reforms as well as incentives and favorable policies to promote and develop renewable energy projects.

In order to encourage the private sector to produce electricity from renewable energy sources, Egypt has issued the new Renewable Energy Law no. 203 of 2014.

Article two of the Renewable Energy Law adopted several development schemes for the private development of renewable energy projects, including competitive bids, feed-in tariff, and independent power production through third party access.

Competitive Bids

Under this scheme, the New and Renewable Energy Authority (“NREA”) shall issue tenders to private-sector companies to install renewable energy power stations via EPC contracts. Such stations shall be operated by NREA. Produced electricity shall be sold to EETC at a price to be suggested by EgyptERA and approved by the Cabinet.

In September 2015, the Ministry of Electricity and Renewable Energy has issued special public procurement regulations. The regulations apply on all NREA procurement activities such as purchase and contracting transactions, services and supply work including maintenance and installation, consultancy and technical works as well as real estate licensing and leasing. The regulations allow NREA to sell the electricity produced by its stations either to the EETC according to prices determined by EgyptERA and approved by the Cabinet or to the end users directly to fulfill their needs.

BOO Projects

The second scheme allows EETC to issue tenders to private-sector companies to build, own, and operate (BOO) renewable energy power stations and sell the generated electricity to EETC at the terms and prices agreed between the EETC and the investor.

Feed in Tariff (FiT)

Private sector investors are allowed to build, own and operate renewable energy power stations and sell the generated electricity to EETC or to licensed distribution companies via power purchase agreements (“PPA”) in consideration for a pre-announced feed in tariff (“FiT”).

The period of a PPA will not exceed 25 years for solar energy projects and 20 years of wind energy projects.

In 2014, the Egyptian Government launched the feed-in tariff program (“FIT Program”) to generate 4.3GW electricity from renewable energy, 2,300MW from solar and 2,000MW from wind. The FIT Program was divided into two regulatory rounds:

  1. Round 1 announced by the Cabinet Decree No. 1947 of 2014. This Decree has announced the applicable tariffs for the electricity generated from solar and wind projects, to be applicable for a period of 2 years on PPAs concluded after the issuance of this Decree until 27 October 2016 (i.e. the financial closure date of Round 1 and its ending date).
  2. Round 2 announced by the Cabinet Decree no. 2532 of 2016. This Decree has announced new tariffs to be applicable as of 28 October 2016 for a period of one year for solar projects, and one year and half for wind projects. During such periods, the developers are required to reach their financial closure.

The applicable tariff in Round 2 for solar projects – with capacity of more than 20MW and up to 50MW – is USD 8.40 cents/kWh compared to USD 14.34 cents/kWh for Round 1.

The tariff for wind projects – with operation hours ranging from 2,500 to 5,000 or more – is reduced to 4-7.96 USD cents/kWh compared to 4.6-11.48 cents/kWh in Round 1.

Eligible developers are required to establish a project company (SPV) in the form of a joints stock company (JSC) with a minimum capital of EGP 15 million.

A standard form template for the PPA has announced by the government with the review of international financial institutions and the State Counsel.

Restrictions on acquiring FiT Projects

Despite there is no general constraint on acquiring renewable assets in Egypt, FIT projects are particularly subject to certain constraints on its acquisition for a period of 2 years following the commercial operation date ("COD") of the project.

According to EgyptERA Rules for FIT Companies, the major shareholder is required to maintain a shareholding percentage in the project company not less than 25% until the lapse of 2 years after the COD. The investor is also obliged to notify EgyptERA of any amendment in the shareholders' structure of the FIT company.

Other restrictions and constraints could be also found under the PPA concluded between the renewable company and the Government. For example, the PPA for Benban FIT projects in Upper Egypt contained a requirement to obtain the prior written consent of the power purchaser on the transfer of the project’s ownership or any change of control. However, these restrictions are only applicable during a period of 2 years after the COD. It also provided for specific conditions that should be met by the transferee in order to be approved, such as to be solvent and reputable and has a sufficient level of financial, managerial and technical capacity to deliver the project. The PPA however allows the disposal of shares to a wholly owned subsidiary of shareholder for the purposes of undertaking company reorganization, without prejudice to the abovementioned requirements.

In addition to the above, there are certain disclosure requirements to EgyptERA in relation to change of ownership or the assignment of the renewable projects' licenses. For instance, according to Article 17 of the Electricity Law, the licensee is obliged to notify EgyptERA with any change in the ownership or control of the licensed assets. Moreover, the licensee may not assign its license or permit to any third party except after obtaining the prior written approval of EgyptERA.

Independent Power Producer

Under this scheme renewable energy independent power producers (“IPP”) are allowed to conclude bilateral purchase agreements with eligible consumers. EETC and distribution companies are mandated to allow investors to sell electricity directly to consumers using their grids subject to grid access fee (wheeling charge) via network connection contracts.

Private renewable electricity producers are provided with guaranteed access to the transmission and distribution grids under clear, transparent, and non-discriminatory basis. Costs of interconnection with the grids will be borne by the producer. EETC and the distribution companies are committed to buy the electricity generated from renewable energy or pay for it (take or pay) in case it is unable to transmit the produced energy.

IPP model is not currently applicable in Egypt, however, such model should be implemented during the gradual opening of the electricity market in Egypt to be a competitive once in accordance with the Electricity Law' provisions.

Further Incentives and Reforms

The Egyptian government is introducing some further incentives to electricity projects including the following:

1. Investment Incentives

In light of the Government's continuing support to the electricity and energy sector in general and to the renewable projects in particular, the new Investment Law no. 72 of 2017 (“Investment Law”) has offers certain investment incentives and tax reductions to this sector.

The Executive Regulations of the Investment Law issued by virtue of the Prime Ministerial Decree no. 2310 for 2017 ("Executive Regulations") determines the electricity and energy sector as covering the designing, construction, production, management, operation and maintenance of electricity and power plants whatever their sources or distributions and sales networks.

Incentives given to electricity or renewables projects are divided into three types, (a) general, (b) special, and (c) additional, as explained below.

A) General Incentives: include, among others, the following:

  1. Application of a unified flat customs duty rate of 2% on all machines and equipment needed for establishing the electricity or renewable project.
  2. Exemption from the registration fees of the land of the project.
  3. Registration of the constitutional documents of a company, loan agreements and pledge contracts are exempted from stamp duty tax and notary public fees for a period of 5 years from the registration date of the company in the commercial register.

B) Special Incentives: are in the form of a deduction from the net taxable profits as following:

1.(50%) discount from the project investment costs for Zone A

'Zone A' covers the geographical locations that are in most need for development (underdeveloped locations). The Executive Regulations determines ‘Zone A’ as covering the Suez Canal Special Economic Zone, the Golden Triangle Special Economic Zone and other areas that are in most need for development (underdeveloped locations) as decided by the Prime Minister.

According to the Prime Ministerial Decree no. 7 of 2020, further geographical locations has been added to ‘Zone A’. These locations are (South of Giza governorate, governorates affiliated to the Suez Canal which are Port Said, Ismailia, Suez (east of the canal); border governorates, including the Red Sea governorate from south Safaga; and upper Egypt’ governorates).

2. (30%) discount from the project investment costs for Zone B

‘Zone B’ covers all geographical areas other than those of Zone A, for projects working in specific activities, including renewable energy projects and projects relating to the production and distribution of electricity as determined by the Prime Minister.

The abovementioned 30% and 50% incentive will be calculated from the investment cost of the project, and in all cases the incentive may not exceed 80% of the paid-up capital of the project until the start of its operation.

The incentive amount will be deducted from the net taxable profit of the project. The deduction can be accrued for a maximum duration of 7 years as of the operation date of the project.

According to Article 12 of the Investment Law, in order to benefit from this tax deduction system, the following conditions should be met:

  1. Establishing a new company within 3 years from the effective date of the Executive Regulation. Such duration has been extended for further 3 years by virtue of the Cabinet Decree 22/2020 to be ended on 28 October 2023.
  2. Not to use the assets of any existing company or liquidate an existing company for the purpose of establishing a new company to benefit from the tax reduction system.
  3. Keeping regular and accurate books.

C) Additional Incentives: are further non-tax incentives which can be granted to renewables and electricity projects upon a decision from the Cabinet. These additional incentives are including the following:

  • Government to bear all or share part of the cost of attaching utilities to the land allocated to the project after its operation.
  • Government to share part of the cost of the technical training of the employees.
  • Allocating lands free of charge for specific strategic projects.
2. VAT Exemption for Electricity Activities

According to the new Value Added Tax Law no. 67 of 2016 (“VAT Law”), the production, transmission, selling or distribution of electricity is exempted from VAT.

3. VAT Reduction for Imported Equipment

All machines and equipment needed to establish power plants are subject to a reduced VAT rate of 5% (instead of the regular rate of 14%) whether they are imported (in whole or in part) or locally procured. The Minister of Finance has also issued the Decree no. 106 of 2017 to regulate how the reduced VAT rate of 5% will apply on machines and equipment, instead of the regular rate of 14%.

4. Net Metering Scheme

Net Metering is a system which encourages the exchange and use of electricity generated from solar energy to allow the customer to save on the electricity bill of his home or facility. This system allows customers to establish solar plants within their premises to meet all or part of their needs from electricity and feed any surplus into the national grid with the option to claim it back in the following months when needed.

On 28 April 2020, EgyptERA issued new rules for net metering, by virtue of the Decree no. 2 of 2020 (“Decree”), in an attempt to regulate and control the use of this vital renewable energy system.

These new rules put a maximum aggregate capacity of installing solar plants across the country not exceeding 300 MW, excluding 75 MW which have been already licensed by EgyptERA at the issuance date of the Decree. Whereas, the remaining 225 MW, which are available under the net metering system, are divided into the following:

  1. 125 MW for capacity less or equal to 500 KW.
  2. 100 MW for capacity more than 500 KW and up to 20 MW.

The Decree also provides for other requirements and conditions relating to the solar plant, including its location and capacity. It also includes other requirements relating to the eligibility of customers.

5. Gradual Lifting of Electricity Subsidies

In 2014, the Egyptian Government announced a gradual liberalization of the electricity prices over a five-year period with the aim to fully remove electricity subsidies by the end of the fiscal year 2018-2019. Such reform plan was adopted by virtue of the Prime Ministerial Decree 1257/2014.

After the free-floating of exchange rates in November 2016, the Government decided to extend the duration of such liberalization plan for further 3 years to be completed in the fiscal year 2021-2022.

However, due to the global outbreak of COVID-19 in 2020 and its economic impact, the Government has decided to extend again the determined period for the full liberalization of electricity prices for further 3 years to be completely achieved in the fiscal year 2024/2025.

6. Setting Electricity Prices until 2025

In light of the Government Plan to completely liberalize the electricity prices by the end of fiscal year 2024/2025, the Ministry of Electricity and Renewable Energy has issued in June 2020 the Decree No. 100/2020 determining new electricity prices for the next 5 years ending on 2024-2025.

The Decree has also fixed the electricity prices per KWh on the ultra-high, high and medium voltage for a period of 5 years according to the electricity prices determined for the fiscal year 2020/2021. Such determination aims to provide more transparency and predictability for the investors regarding the electricity prices in Egypt.

Sovereign Guarantee of Off-taker payments

The Egyptian government represented by the Ministry of Finance (MoF) is authorized by virtue of Law 14/2013 to guarantee all financial obligations of the Egyptian Electricity Holding Company and its affiliated companies under all projects they implement in partnership with the private sector. This means that the MoF will guarantee the obligations of EETC as the government off-taker under the power purchase agreements (PPA) concluded with electricity producers.

However, since the issuance of the Electricity Law in 2015, EETC becomes independent from EEHC and no longer one of its affiliated companies. This change has resulted in current legal uncertainty regarding the continuance guarantee of the MoF to EETC obligations as a governmental off-taker under the PPAs pursuant to Law 14/2013.

Waste-to-Energy Tariff

The Egyptian Cabinet has approved the Waste-to-Energy tariff at EGP 1.4/Kwh. The approval was issued in December 2019 by virtue of Decree no. 41 of 2019 (the "Decree"). Such tariff shall be paid in EGP according to an equation determined in the annex attached to the Decree. Such equation is connected with USD exchange rate. Such tariff shall be applicable until reaching the maximum contractual capacity of 300 MW. Thereafter, the Cabinet will reconsider such tariff.

The PPA shall be entered into between the developer and the Governorate in which the plant shall be located for a period of 25 years, and such Governorate shall be responsible for:

  1. paying the tariff to the developer and then it will re-collect it as following: ₋ EGP 1.03/KWh: to be collected from the electricity distribution companies (to which the electricity will be supplied); and ₋ EGP 0.37/KWh: to be collected from the Hygiene Fund affiliated to the Governorate.
  2. the allocation of the land to the developer by way of usufruct for a period equal to the duration of the PPA, after obtaining the approval of the Minister of Local Administration.
  3. the supply of waste to the developer’s plant free of charge.

For more information about this topic, please contact Dr. Fatma Salah or Heba Elkady

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Posted in Articles on Jan 18, 2021