metadata: authors: 0: author: Rana,Anshul
1: author: Khanna,Ashish
count: Egypt, Arab Republic of
docna: 0: docna: Learning from Power Sector Reform : The Case
            of the Arab Republic of Egypt
docty: Policy Research Working Paper
subtopic: Energy Policies & Economics,Energy Demand,Energy and Mining,Energy and Environment,Energy Sector Regulation,Oil Refining & Gas Industry,Renewable Energy,Rural and Renewable Energy
teratopic: Rural Development,Industry,Energy
abstracts: cdata!: The challenge of power sector reform in
            the Arab Republic of Egypt has long been dominated by
            extremely high subsidies, with prices set well below the
            costs of supply. These subsidies have taken a variety of
            forms: explicit subsidies in the government budget, implicit
            subsidies in the underpricing of fuel supply (particularly
            natural gas) to the power sector, accumulation of arrears
            from the sector, poorly-maintained physical capital, and
            cross-subsidies across customer classes. Egypt's social
            contract was linked to expanding energy access with good
            quality supply based on public financing and huge subsidies.
            Egypt has been able to achieve universal access with more or
            less reliable power over the entire period, except when
            chronic underinvestment in the sector caused blackouts in
            2011–14 at time of severe political uncertainty. The social
            compact came under pressure in 2014 when energy subsidies
            reached 6.8 percent of gross domestic product. Since then,
            the reform process has been revived based on new
            electricity, gas, and renewable energy laws; price and
            subsidy adjustments; structural reforms with a deliberately
            long time frame; and greater emphasis on the role of the
            private sector.
geo_reg_key: 517202,517191
repnme: repnme: Learning from Power Sector Reform : The
            Case of the Arab Republic of Egypt
display_title: Learning from Power Sector Reform :
            The Case of the Arab Republic of Egypt
listing_relative_url: /research/2020/02/31811960/learning-power-sector-reform-case-arab-republic-egypt
topicv3: Renewable Energy m1326170 525,Energy and Extractives m1326595 507,Power and Electricity Sector m1327094 515,Power Sector Reform m1503425 3937,Natural Gas m1583894 4712
publishtoextweb_dt: 2020-02-25T00:00:00Z
historic_topic: Rural Development,Industry,Energy
origu: Chief Economist Infrastructure (INFCE)
no_of_pages: 45
author_keys: 0: author_key: 1272539
1: author_key: 798403
model_extractions: Policy Research Working Paper 9162 Learning from Power Sector Reform The Case of the Arab Republic of Egypt _Anshul Rana Ashish Khanna_ Energy and Extractives Global Practice February 2020
Policy Research Working Paper 9162

# **Abstract**

The challenge of power sector reform in the Arab Republic of Egypt has long been dominated by extremely high subsidies, with prices set well below the costs of supply. These subsidies have taken a variety of forms: explicit subsidies in the government budget, implicit subsidies in the underpricing of fuel supply (particularly natural gas) to the power sector, accumulation of arrears from the sector, poorly-maintained physical capital, and cross-subsidies across customer classes. Egypt’s social contract was linked to expanding energy access with good quality supply based on public financing and huge subsidies. Egypt has been able to achieve universal access with more or less reliable power over the entire period, except when chronic underinvestment in the sector caused blackouts in 2011–14 at time of severe political uncertainty. The social compact came under pressure in 2014 when energy subsidies reached 6.8 percent of gross domestic product. Since then, the reform process has been revived based on new electricity, gas, and renewable energy laws; price and subsidy adjustments; structural reforms with a deliberately long time frame; and greater emphasis on the role of the private sector.

This paper is a product of the Energy and Extractives Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at arana1@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# Learning from Power Sector Reform: The Case of the Arab Republic of Egypt

Anshul Rana and Ashish Khanna<sup>1</sup> <u>Keywords: power sector reform, electric utility, power generation, energy access, state-owned enterprise,</u> regulation, electricity pricing.

<u>JEL Codes: L9; Q4</u>

> 1 This case study draws on contribution of colleagues and consultants including, among others, Jonathan Walters, Hafez el Salmawy, Marwa Mostafa Khalil and Macroconsulting S.A (Argentina).
# <u>Foreword</u>

“Rethinking Power Sector Reform” is a multiyear global initiative of the World Bank’s Energy & Extractives Global Practice that provides an updated assessment of power sector reform experiences across the developing world. The initiative aims to revisit and refresh thinking on power sector reform approaches, in the light of accumulated evidence about the performance of countries undertaking different types of reforms. The goal is to reignite the policy debate around reform approaches by articulating a new vision that incorporates lessons learned over the past 25 years. It also reflects on how recent technological trends and business models that are disrupting the sector may call for a new thinking on reform strategies.

Since the 1990s, a standard set of policy prescriptions for power sector reform has been widely used. These include vertical and horizontal unbundling of power utilities; private sector participation; creation of an independent regulator; achievement of cost recovery pricing; and the introduction of competition in power generation. While this package of reforms was, at least partially, adopted by several developing countries, momentum and uptake slowed considerably in the 2000s. There is a need to revise approaches in the light of 25 years of experience, evidence, and technological disruptions to provide practitioners with a flexible frame of reference that can help identify the types of reforms needed to improve the power sector in different country contexts.

Supported by the World Bank’s Energy Sector Management Assistance Program (ESMAP) and the Public – <u>Private Infrastructure Advisory Facility</u> (PPIAF), the initiative works with different partners and experts across the World Bank Group (WBG) and beyond to generate evidence, analysis and insights on key themes of interest to power sector reform practitioners and decision makers globally: cost recovery, utility governance and restructuring, power markets, regulation, and political economy. Findings and recommendations on each of these themes will be included in a forthcoming Flagship Report.

The initiative is strongly evidence-based, grounding its research in an in-depth exploration of the 25-year power sector reform journey of 15 World Bank Group client countries that represent a wide diversity of geographies, income levels, and approaches to reform. The selected countries are Colombia, the Dominican Republic, the Arab Republic of Egypt, India, Kenya, Morocco, Pakistan, Peru, the Philippines, Senegal, Tajikistan, Tanzania, Uganda, Ukraine, and Vietnam.

An important output of the project is a series of case studies – of which this is one – that provide a narrative of the reform dynamics in each country and evaluate the impact of reforms on key dimensions of sector performance including security of supply, operational efficiency, cost recovery and energy access. For a subset of countries that pursued deeper reforms – Colombia, India, Peru and the Philippines – the project also includes a series of free-standing case studies that evaluate the experience with wholesale power markets. The purpose of the case studies is to reflect upon the experiences of individual countries with a view to extracting lessons of broader interest to the global community. It is not the role of these papers to recommend any particular way forward for the countries in question.

These case studies, which constitute companions to the synthesis of the Flagship Report, are being published in the Policy Research Working Paper series of the World Bank. As such, the case studies represent the views of the authors alone and should not be attributed to the World Bank or to any other person or institution.

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# <u>Introduction</u>

The Egyptian power sector has been entirely under government control since the nationalization in 1962 with only a handful of IPPs developed later. For much of the period since nationalization, the sector has received both explicit and implicit subsidies, creating very little incentive for efficiency improvement in the sector. Reforms have been announced frequently but implemented only very partially and in short bursts (with long periods of relatively little reform between the bursts). This has not been very different from the pace of economic reform in the rest of the Egyptian economy.

Figure 1 presents the main reform events in the power sector since the 1970s grouped in the various elements of reforms- restructuring, regulation, private sector participation and competition. Overall, we see until very recent years the achievement of only a marginal role for private sector participation, a restructuring that has been more nominal than real (figure 2), some competition _for_ the market but none _in_ the market, a regulator that has developed considerable capacity to advise and monitor but with no independence over the critical issue of cost recovery, and cost recovery itself which has been a long way from full (even in financial terms, let alone in economic terms when the large implicit subsidies in natural gas prices as fuel to the power sector are accounted for).<sup>2</sup> The actual reform agenda today remains quite large (even though the implementation of reform has accelerated somewhat since 2014, particularly in catching up on cost recovery). It is also important to recognize that data for this study range from 1990-2015, to align with other countries as part of the study, and hence they do not capture the detailed impact of reforms undertaken since 2015. Wherever possible, the reform steps after 2015 have been mentioned to give an idea of the kinds of changes the sector is going through, but this study is primarily an attempt to understand the experience of power sector reforms in Egypt and draw lessons for the larger global community.

This paper sets outs to cover the Egyptian power sector reform story since the 1990s focusing on sector outcomes such as security of supply, access and affordability, utility performance, and sector regulation and tariff setting. The paper begins with a chronological account of the power sector reforms and the associated political economy. Then the paper considers the impact of the reform steps taken in the Egyptian power sector, by highlighting the sector performance over the years. Finally, the paper concludes by reflecting on the lessons learned from Egypt’s two decade long reform experience that can be relevant to policy makers globally.

> 2 Natural gas in Egypt has generally been priced to the power sector well below its opportunity cost.

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<!-- Start of picture text --> Figure 1: Egypt Power Sector Reform Timeline 3<br>Restructuring 1993 D istribution holding co. 2000 EEA corporatized and 2007-2012 Rural Electrification<br>moved from MOE to Ministry of becomes Egyptian Electricity Authority dismantled and its assets<br>1976 Egyptian Electric Authority 1983 Spinout of distribution Public Enterprises (MPE) Holding Company (EEHC). transferred to EEHC.<br>(EEA) established. companies from EEA. Business: generation (5),<br>Establishment distribution holding 1998 Re-annexation of the transmission (1), distribution (7) 2016-2019 3 years for restructuring of<br>1976 Rural Electrification co. under Ministry of Electricity distribution holding co. by MOE. 7 Egyptian Transmission Company<br>Authority established. (MOE) vertically integrated generation & 2004 1 extra generation company (EETC) to become Transmission System<br>dist. companies established under formed (6) Operator (TSO).<br>1978 EEA distribution business EEA.<br>unbundled. 7 distribution 2004 2 extra distribution 2016- EEHC to be restructured over 8<br>companies created within EEA. companies formed (9) years<br>Private Sector 1996 Sector opened to PSP for 2000 Signed first PPA for private<br>Participation BOOT owned BOOT plant in Sidi Krir. 2014 Sector opened to PSP for<br>1998 7 generation & dist. 2 steam power plant contracts also signed renewable energy (RE)<br>companies established for<br>potential privatization (up to 49%)<br>Competition 2015 Law 87 supports establishment of<br>competitive market over 8 years<br>Regulation & Tariffs 2001 Egypt Utility and Consumer 2014-2019 Tariff reform project<br>Protection Regulatory Agency targets the full lifting of subsidies<br>(Egypt ERA) started operations<br>2014 Law 203/2014 provides<br>2001-2005 Egypt ERA completed regulatory framework for RE projects<br>licensing system, cost of service,<br>procedures and performance 2015 Law 87 assures independence &<br>evaluation accountability of Egypt ERA<br>Legislation & Policy 1981 Law 189/1981 Corporate Law 1993 Law 203/1993 Distribution holding co. to MPE 2000 Law 164/2000 transformed 2014 Law 203/2014 to promote RE<br>EEA into holding company (EEHC)<br>1996 Sector Reform Review 2014 RE incentive package<br>1976 Law 12/1976 formed the EEA 1996 Law 100 /1996 allowed PSP entry for BOOT 339/2000 results in Egypt ERA 2000 Presidential Decree 2015 Law 87/2015, New Electricity Law<br>1976 Rural Electrification Authority Law 27/1976 formed the 1998 Law 18/1998 distrib. 2007 Law 13/2007 dismantles 2016 Issuance of executive regulations of Law 87/2015<br>companies move to EEA under Rural Electrification Authority<br>MOE<br>1970-1979 1980-1989 1990-1999 2000-2009 2010-2016<br>Start of multi-party 1977 1986-1991 Economic slowdown and external debt crisis 2000-2004 Economic Egyptian Revolution of 20112011 2012 2013 2014<br>political system reforms slowed Presidential elections of 2012<br>1975-1985 Start of political and economic reform 2005-2010 Change of Regime<br>& strong economic growth 1992-1999 Economic reforms took place Economic reforms resumed Presidential elections 2014<br><!-- End of picture text --> 3 In 2019, the Egyptian Constitution was amended to extend presidential terms (including of the current President, former Field Marshal Abdel Fattah Al-Sisi), give greater presidential control over the judiciary, and more deeply enshrine the role of the military in politics.

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Figure 2: Institutional structure of the power sector, 2015 <!-- Start of picture text --> Ministry of Electricity and<br>Electricity Utility and<br>Consumer Protection Renewable Energy (MERE)<br>Energy sector policy<br>Regulatory Agency<br>(Egypt ERA)<br>Sector regulation<br>Hydropower Nuclear Power New and Renewable<br>Projects Executive Plants Authority Energy Authority (NREA)<br>Authority (HPPEA) (NPPA) RE development<br>Hydro project development Nuclear Generation Co. development<br>Egyptian Electricity<br>Egyptian<br>Holding Company<br>Electricity<br>(EEHC) Transmission<br>Gen. & dist. holding co.<br>Company (EETC)<br>Regional Distribution Egyptian Generation Public<br>Companies (9) Companies (6) Transmission<br>Public Public<br>Distribution Generation<br>Independent<br>Power Producers<br>Private Operators<br><!-- End of picture text --> 5
# <u>Egypt’s Power Sector Reform Story</u>

The story of Egyptian economic reform over a long period of time has been one of short bursts of partial reform of a highly centralized, public sector-led economic model, followed by longer periods with relatively little reform, largely because of political economy challenges. The power sector has been no exception to that overall trend. Egypt has at times committed to a major role for private sector participation, the restructuring of the sector by full unbundling, the creation of a competitive market, the establishment of an independent regulator, and full cost recovery. However, as seen in figure 3, only a limited amount of these commitments have been met.

Figure 3: Egypt Power Sector Reforms<sup>4</sup> <!-- Start of picture text --> Regulator<br>operationalised<br><!-- End of picture text --> Source: Rethinking Power Sector Reform. PSP = private sector participation.

Currently there is a revived attempt at reform in the power sector, focusing primarily on the core issue of addressing the supply deficit, annual price and subsidy adjustment to reach the subsidy target of 0.5% of GDP, a partial reopening to private participation in generation (particularly in renewable energy), and a 4 In order to aggregate across the four dimensions of power sector reform considered in this study, a simple Power Sector Reform Index is constructed. The index gives each country a score on an interval of 0 to 100 on each dimension of power sector reform. The scores are based on giving equal weight to each step on each dimension of the reform continuum. The average of the four 0-100 scores is used to provide an overall summary of the extent of reform. Announced reforms are by no means always implemented, and Figure 3 disaggregates each of the four reform components into that which was implemented and that which was only “announced” but not implemented.

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gradualist approach to reform of sector structures to create a more efficient and competitive framework over the medium term. That phase of renewed reforms has been in place since 2014 and appears to have been sustained to date because of a combination of a top-down political process, and an appropriate sequencing and level of ambition in the reforms actually being attempted. Only time will tell if the current phase has overcome the past pattern of reform bursts being short. What follows is a description of the phases of power sector reform in Egypt.

# _1962-1996: Nationalization and institutional consolidation_

Electricity service began in Egypt in 1893 under private initiative. In 1962, the electricity companies were nationalized, and in 1964 the Ministry of Electricity was established. The nationalized companies were grouped into three public authorities, namely the generation authority, transmission and distribution authority, and authority for project execution. In 1965, these authorities were bundled into a vertically integrated entity, the Egyptian General Establishment for Electricity. In 1976, the Egyptian General Establishment for Electricity was replaced by the Egyptian Electricity Authority (EEA) by Law 12. According to Law 12, EEA could propose tariffs (following tariff guidelines approved by the Supreme Council for Electricity and a ministerial committee), which needed to be approved by the Cabinet of Ministers. At the same time, the Rural Electrification Authority was established to extend access to electricity service; as such access projects were completed, they were transferred to EEA.

In 1978, EEA created seven geographical distribution companies (owned by EEA), and in 1983 those companies were spun off into the General Authority for the Distribution of Electric Power. Initially, both EEA and the General Authority were under the Ministry of Electricity, but in 1993 the General Authority was moved to the Ministry of Public Enterprises (and became the Holding Company for the Distribution of Electric Power). The move to the Ministry of Public Enterprises was seen as a first step towards privatization, which did not subsequently take place.

Overall, during this period, two clear patterns emerged, which have dominated power sector reform in Egypt since. One is the very centralized government-led approach to tariff-setting, with political considerations being very important. The other pattern is that, in the absence of tariffs which would create clear incentives for efficiency in power sector entities, reforms of structures were generally more symbolic than real. Names of entities changed, as did their legal basis, but there is little evidence from this period of real change in their governance or behavior.

_1996-2003: Marginal opening to private participation in generation, and further institutional consolidation_ In 1996, Law 100 was adopted which allowed the private sector to generate electricity (under a “build, own, and operate” concession), and to sell the electricity to EEA under power purchase agreements. Three such IPPs were created, which were commissioned in 2002/2003. A further 10 IPPs were planned to be procured. This was perhaps the single most important structural reform in the power sector since nationalization in 1962.

However, the tariffs in those PPAs obviously reflected full recovery of costs, in the context of an overall power sector which was far from having such tariffs, and the IPP’s PPAs were denominated in US dollars to reflect the opportunity cost of capital and of internationally-tradeable fuel. Consequently, when the 7
overvalued currency sharply depreciated in 2003/2004, the local currency cost of the PPAs to a financially unhealthy sector was deemed to be excessive. The plan to procure more IPPs was therefore suspended, and procurement switched to public sector plants (albeit largely financed by foreign currency-denominated loans from development partners, so that the net effect of that switch on overall financial risk to the government and power sector is unclear).<sup>5</sup> More consolidation and rearrangement of institutions took place: in 1998, the distribution companies left the Ministry of Public Enterprises, and were moved back into EEA. They were then integrated with EEA’s generation companies to form seven geographical vertically-integrated companies under EEA (transmission was a separate company within EEA). Those seven companies were formed as joint-stock companies, allowing for the sale of 49 percent of the shares to be offered to the public (with approval from the Cabinet), but that sale did not actually happen.

In 2000, EEA was corporatized and renamed the Egyptian Electricity Holding Company (EEHC), and the seven vertically-integrated companies created in 1998 were transformed into five generation companies (in 2004 this became six generation companies), seven distribution companies (in 2004, this became nine), and one transmission company. EEHC’s affiliate generation and distribution companies were also formed as joint-stock companies (but no sale of their shares actually happened either). The transmission company was designated as the single buyer (and seller) of bulk electricity.

Also in 2000, the Egyptian Electric Utility and Consumer Protection Regulatory Agency (EgyptERA) was created by presidential decree, and commenced operations in 2001. By 2005, EgyptERA had completed its cost of service procedures, licensing system, and benchmarking and performance evaluation. EgyptERA essentially played an oversight and advisory role – tariff and subsidy decisions remained with the Cabinet of Ministers, given the political sensitivity of such decisions.

_2003-2014: Shift back to the public sector model and stalling of reform_ In this period, reforms effectively stalled. No further attempts at private participation were made. The sector’s investments were externally financed primarily by development partners and state-owned banks. Tariff and subsidy adjustment occurred in nominal terms, but tariff increases were eroded by inflation – in real terms, tariffs often declined year-on-year. Nominal tariff increases were not always announced, at least not with high profile, and were not necessarily even transparent on electricity bills. Arrears started to accumulate for supplies of natural gas to the power sector and reached US$6.8 billion by 2014, leading to gross underinvestment in the upstream gas sector. The resulting import of LNG eventually led to supply shortages (and the curtailment of gas exports, a significant source of foreign exchange for Egypt). In 2013/2014, there were widespread blackouts of up to 6 hours daily in the electricity sector,<sup>6</sup> which later led to gas sector reform to attract foreign direct investment, and undertake emergency power

> 5 Ongoing PPAs were however fully honored.

> 6 These blackouts became a significant source of popular discontent, contributing to the events which led up to the 2013 regime change, and making resolving them a very high priority for the new government.  This period also coincided with the discovery of the very large Zohr gas field, with its potential for providing Egypt with low-cost natural gas.

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procurement of about 2500 MW and large-scale public procurement of 14,400 MW of conventional power capacity backed by 2000 MW of private sector capacity in solar and wind.

However, some preparation for future reforms nonetheless took place in this period. This centered on preparing the legal framework for eventual competition and enhancement of the business environment in the electricity sector. The draft law was considered by EgyptERA over the 2005-2008 period, was subject to public consultation in 2010, and reviewed by Parliament in 2014.

Also in this period, Egypt was able to declare success in the campaign to create near-universal electricity access (achieving a commendable grid access rate of 99 percent). In consequence, the REA was dismantled (gradually over the 2007-2012 period) and its assets transferred to the respective distribution companies (and any further grid expansion became their responsibility).

# _2014-present: Renewed efforts at reform_

In 2014, a subtle but important shift took place in the Egyptian government’s approach to power sector reform. This shift had various interrelated aspects. Years of providing subsidized electricity and the consequent underinvestment in the power sector had manufactured a power crisis in the country. The public was facing major power outages while the government was tackling the massive fiscal burden of the subsidies in the sector.

The new government decided to change its approach to the sector and committed to a comprehensive power sector reform program as part of a larger macroeconomic reform planned in collaboration with the IMF and the World Bank. The reform steps include subsidy reform in the fuel and power sector bringing down energy subsidies from 6.8% of GDP in 2014 to 1.4% of GDP in 2019 even after accounting for almost 100% currency devaluation in 2016, institutionalizing an automatic fuel price indexation, initiating a longterm reorganization of the sector and attracting the private sector for investment in more sustainable forms of power supply.

Tackling the subsidies in the power sector is by far the most significant challenge in the sector. The government committed to bringing the tariffs in line with the costs of supply over a specific period of time. A key aspect was that electricity price and subsidy reform became much more public. Adjustments were publicly announced, in a quite high-profile way, with justifications being given to the public for price increases. This was a significant increase in transparency from previous practice and may have served to deepen the public consensus behind the necessity of reform (although the relatively authoritarian political context and controlled media make this difficult to ascertain). It should be noted that the government had a more proactive communications strategy about power sector reform than had been evident in Egypt hitherto.

Price increases were sharper than had previously been adopted and were more explicitly based on actually reflecting costs as costs changed, rather than accumulating financial deficits for the future. Price increases for fuel (particularly natural gas) became an important input into the electricity price adjustment process (instead of electricity’s problems just being shunted into the natural gas supply chain by underpricing gas as a fuel for electricity and accumulating payment arrears for it). Interestingly, in 2015, Egypt also announced the discovery of large natural gas fields in Zohr. The gas field started production in 2018- a significant development for the power sector in Egypt which is largely dependent on natural gas. Prior to 9
the development of Zohr and discovery of other gas fields, Egypt was a net importer of fossil fuels but declared itself to be self-sufficient in natural gas at the end of 2018, reducing the import bill significantly.

It is notable that Egypt’s social protection system was being reformed in parallel to energy price adjustment (indeed the energy subsidy reductions allowed government budget reallocations to social protection)– cash transfers to the poor and non-energy consumer subsidies were becoming better-targeted with almost 2.2 million households receiving conditional cash transfers in 2018 compared to zero in 2014, relieving the energy subsidy system of some of the political burden of protecting the poor. It is also worth noting that international fuel price decline for part of this period facilitated the move towards cost recovery in the power sector, and that the major currency devaluation of November 2016 caused a three-year extension of the program of electricity price increases in order to not magnify the impact of the increases in the cost of supply (caused by the devaluation<sup>7</sup> ) on the population and the economy. Indeed, in addition to being willing to slow the pace of electricity price increases in the face of shocks, the reform of underlying incentives was very gradualist. Electricity pricing did not move to an incentive-based form of regulation, or to a significantly greater public transparency about electricity company budgets (although there was more transparency about actual costs of service). Moreover, electricity price adjustments did not become any less politically-determined, although subsidy decisions became more transparent and explicit.<sup>8</sup> This is perhaps inevitable, particularly given the large size of financial and economic catch-up needed after years of power and gas price<sup>9</sup> adjustments being so modest.

Perhaps even more fundamentally, the sector avoided the past practice of restructuring in appearance only because lack of price adjustment made changes in structural incentives ineffective in their impact on efficiency. The new Electricity Law (adopted in July 2015) provided a three-year transition period for EETC to become a transmission system operator independent from generation and distribution (such that a competitive electricity market could later emerge on a level playing field), and provided EEHC an eight-year period to be restructured into potentially competing entities to play on that field.

In parallel, a law to encourage private sector investment in renewable energy was adopted, and with some necessary adjustments to enhance the business environment, began to attract significant private investment into the Egyptian power sector again. Solar capacity in Egypt was limited to mostly standalone applications in 2015 apart from one 10MW PV-diesel hybrid plant. However, the government introduced net metering and FiT schemes to encourage investment in the solar sector. While the net metering scheme had limited uptake given the low electricity tariffs, as the government moves to make tariffs more cost reflective, it is expected to become more popular. The FIT scheme was introduced in October 2014 with transmission and distribution companies committed to purchasing all power from available plants through 25 year PPAs. More than 40 utility scale PV projects with a total of 2000MW capacity were under

> 7 The devaluation increased the local currency cost of fuel payments and debt service.

> 8 In the new approach, the regulator’s methodology determines the cost of supply and hence the revenue requirement of the electricity companies; the resultant revenue is then paid partly by the consumer as a tariff and partly by the Ministry of Finance in the form of an explicit subsidy, as decided by the Cabinet of Ministers according to the tariff adjustment program.

9 Gas supply costs may increase sharply in the coming years as gas production moves into deeper water with new discoveries; this will be a challenge for the electricity price adjustment program.

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development by 2016 but the program was hit hard by the foreign exchange shortage of 2016.<sup>10</sup> By 2018 the FiT program was concluded with $2.5 billion in FDI and PPAs signed for about 1600MW of solar and 250 MW of wind power.

At the same time, large public investments in conventional power continued to take place (particularly the EPC deal for 14,4000 MW concluded with Siemens in 2015). In essence, Egypt turned to the private sector to access the experience and rapidly falling costs in renewable energy but has not yet followed that path for conventional energy. It remains to be seen whether this represents a permanent shift towards nowcheap disruptive technologies, or instead represents the power of vested interests in conventional energy to protect those interests. In a similar vein, a modernization program initiated in the Ministry of Petroleum and Natural Gas aimed to bring gas security has managed to eliminate gas imports and initiated gas exports after a gap of 7 years.

In short, the period since 2014 shows a genuinely new phase in Egyptian power sector reform, more ambitious and deliberately sequenced and coordinated than hitherto, but nonetheless the reforms are still to be deeply institutionalized and their sustainability to be assured. Much will depend on how conflicts between various interests play out, and how Egypt’s politics evolve. Table1 highlights the various policies and legislations implemented in the sector from 1976 to 2016.

Table 1: Egypt Power Sector Policy and Legislation, 1976-2016

|Policy, Master Plans, and Roadmaps|Legislation|
|---|---|
||Law 12/1976 Establishment of Egyptian Electricity Authority<br>Law 27/1976 Establishment of Nuclear Power Plants Authority|
||Law 189/1981 Corporate Law|
||Law 203/1993|
||Law 100/1996|
|1996 Sector Reform Review developed by|Law 18/1998|
|international consultant Merrill Lynch|Law 164/2000 Transformation of EEA into EEHC<br>Presidential Decree 339/2000 Establishment of EgyptERA|
||Law 13/2007 Dissolution of Rural Electrification Company|
||Law 203/2014 to Promote Renewable Energy Production|
|2005 First draft of new law developed with help of<br>international consultant (IRG, USA).<br>2005-2008 First draft discussed and enhanced|Law 87/2015 the New Electricity Law<br>Issuance of executive regulations of Law 87/2015|
|substantially through the board of EgyptERA over<br>several sessions extended over three years, ended<br>mid-2008.<br>2010 public consultation|Ministerial Decree 230/2016 the Executive Regulations of Electricity<br>Law|

> 10 Discussion on renewables based on <mark>Sakr, Dalia Abdelhamid Mahmoud; Huenteler, Joern Torsten; Matsuo, Tyeler Marissa; Khanna, Ashish. 2017.</mark> _<mark>Scaling up distributed solar in emerging markets : the case of the Arab Republic of Egypt (English)</mark>_ <mark>. Policy Research working paper; no. WPS 8103. Washington, D.C. : World Bank Group.</mark>

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2016 Integrated sustainable energy strategy for 2035.

# <u>Egypt’s Power Sector Performance</u>

The above sections summarized Egypt’s power sector reforms, and this section now looks at the effects of those reforms on sector performance and development. It considers how performance changed in a number of key areas: security of supply; access and affordability; efficiency and financial viability, and tariffs and cost recovery. It then evaluates how the institutional reforms have been responsible for that evolution of performance.

# _Security of Supply_

## _Performance_

Over the long period, electricity supply in Egypt has generally been secure. With occasional exceptions, perhaps most notably during the 2012-2013 period (a period of high political turbulence and contestation), supply has been provided throughout Egypt without significant load-shedding or major disruptions. This has been due to a considerable extent to the overall effectiveness of electricity sector planning and procurement (even if it has not been with full regard to the financial viability of the electricity sector to provide such continuity of supply and universal access to it, nor with full regard to the financial impact on the natural gas sector in its supply of fuel to the electricity sector). After the assumption of office by the Al-Sisi government, the public sector procurement of conventional power capacity, the procurement of private sector renewable energy capacity, and the resolution of pricing and payment issues impeding development of the upstream gas sector were all accelerated to prevent the recurrence of load-shedding that had exacerbated the political turbulence.

While the sector has been able to provide reliable power over the years, the dependence on natural gas has only grown over the years (figure 4). This was a big concern for the country, as non-cost reflective tariffs increased fiscal deficits at a time when Egypt was importing natural gas and oil. However, consequent discoveries of natural gas reserves since 2015 set the country on a path to becoming a net exporter of natural gas in 2019 and have diminished these concerns.

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Figure 4. Generation of power, by fuel (1990-2014) <!-- Start of picture text --> 200,000 0.70<br>180,000<br>0.60<br>160,000<br>140,000 0.50<br>120,000 0.40<br>100,000<br>0.30<br>80,000<br>60,000 0.20<br>40,000<br>0.10<br>20,000<br>0 0.00<br>Hydro Geothermal Other renewables<br>Coal Oil Gas<br>Biofuels and waste Nuclear Total final consumption<br>Fuel type concentration index<br>GWH<br><!-- End of picture text --> Source: IEA, 2015

# _Institutions_

In general, planning and procurement of generation and transmission in the Egyptian power sector are conducted by the Ministry of Energy, EEHC, and EETC, in close coordination and reasonably in advance of the new assets being needed by the power system. The power sector saw several new laws and policies put into place in 2015 and the country is transitioning to this new framework currently. Since 2000, generation planning was done by the EEHC and the transmission planning was done by EETC. Once the plans were submitted to and approved by the Ministry of Electricity and Renewable Energy, they were presented to the cabinet of the ministers for approval and allocation of the necessary financial resources for the execution of the plan. However, the new electricity law in 2015, Law 87, assigned the planning task to the EETC (functioning post 2015 as a TSO) jointly with the Ministry of Electricity and Renewable Energy, allowing for three transitional years. The plan will be more or less indicative, with an annual report for adequacy of generation issued by the EETC and reviewed by the regulatory agency- EgyptERA. The regulator will then report to the cabinet of ministers and make suggestions to overcome any challenge to the security of supply.

Most procurement has of course been conducted for public sector projects (with the exception of the brief burst of IPP procurement 20 years ago, and the recent rounds of renewable energy generation procurements), as EPC contracts on a competitive basis (usually with a high degree of transparency, particularly for projects with development partner financing). As of 2015, the procurement was carried out based on the five-year generation or transmission plans. The respective generation or transmission companies raise funds locally and globally (mostly through IFIs such as World Bank, EBRD, AfDB etc.). Once financing is in place, the project equipment, engineering and construction services are procured through 13
internationally competitive tenders in most cases. While procurement is usually carried out through competitive bidding, some large plants procured in the period 2010-2015 were through direct negotiations.

It is worth noting that part of the government resistance to procurement of private investment stemmed from the belief that reserve margins in the sector were not sufficient to tolerate the uncertainty about timing that is intrinsic to negotiating with the private sector – that can be seen as an inadequacy in the planning process (i.e. private sector procurements should have been initiated early enough). However, after initial teething troubles, this belief may have been overcome by the recent renewable energy procurements, which have successfully involved private investment.

Egypt scores relatively high when it comes to the procurement and planning index developed for the rethinking power sector reform project (table 2). The country scores higher than the international average for the various indicators used in the index.

Table 2: Benchmarking institutional arrangements for power sector planning, 2015<sup>11</sup>

||Egypt|India|Morocco|Pakistan|International<br>benchmark|
|---|---|---|---|---|---|
|Planning and Procurement|82%|78%|61%|63%|71%|
|Generation Planning|71%|57%|43%|29%|56%|
|Procurement of Generation|100%|95%|100%|100%|85%|
|Transmission Planning|75%|75%|50%|25%|74%|
|Transmission Procurement|83%|83%|50%|100%|68%|

Note: Scores based on index developed for the Rethinking Power Sector Reform Project.

Nonetheless two aspects can usefully be emphasized. First, sector institutions have not yet demonstrated that they can sustain their effectiveness in procurement of private investment over a long period of time. Secondly, and perhaps more importantly, they have not yet shown that they can procure the appropriate power system mix of flexible generation (and energy storage), variable renewable generation, and transmission, in a context of the rapidly falling costs of variable renewables, and growing penetration of those renewables. That is the big planning challenge now for Egypt.

# _Access and Affordability_

Egypt’s track record on access and affordability is quite good. In 1971, the Rural Electrification Authority (REA) was established to create universal access to grid electricity, without a strong regard for the actual cost of providing grid electricity service. By 2007, more than 99 percent of the Egyptian population had access to grid electricity, and in 2012 the REA was dissolved. The distribution companies took over the networks of connections the REA had created, and they assumed responsibility for further expansion as the number of households or commercial customers grew.

> 11 For the detailed planning and procurement index, see the annex.

14
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# _Institutions_

The story of Egypt’s utility restructuring is described in detail in the section on Egypts’s power sector reform strategy. In essence, in the long period through the 2014 Electricity Law’s adoption, much was done but little was achieved. Institutions were rearranged more than they were genuinely restructured. Incentives, performance, and behavior changed little.

The 2015 Electricity Law initiated a process of restructuring, with a long transition process. Eventually, sector companies will operate autonomously of the Ministry of Electricity and Renewable Energy and will be accountable to the regulator and to their owners for performance. More private participation is already happening in renewable energy and that may spread to conventional energy. The transmission company is being gradually made more autonomous in preparation for becoming an independent system operator within an eventually competitive wholesale electricity market. Of course, much of this depends on the sustainability of the gradual price and subsidy reform now underway.

Table 5. Utility restructuring index for Egypt and its comparators, 2015

||**Egypt**|**India, AP**|**India, Odisha**|**India, Raj**|**Morocco**|**Pakistan**|**International**<br>**benchmark**|
|---|---|---|---|---|---|---|---|
|**Utility Restructuring**|**31%**|**51%**|**62%**|**51%**|**0%**|**62%**|40%|
|_Vertical Unbundling_|0.40|0.80|0.80|0.80|0.00|0.80|55%|
|_Horizontal Unbundling_|0.22|0.22|0.44|0.22|0.00|0.44|24%|

Source: Rethinking power sector reforms, 2015 The commercial and operational efficiency of utilities may be a reflection of the corporate governance and management practices followed at the utility. To understand this relationship better, the corporate governance data for utilities in the rethinking power sector reform project were collected. The data reflect the practices followed in 2015. Given the structure of the power sector in 2015, all distribution companies follow exactly the same governance and management practices given their common ownership and nesting in a holding company. Thus, for this section we do not look at Cairo North and Alexandria separately.

Table 6: Utility governance of Alexandria and Cairo North with their comparators, 2015<sup>16</sup>

||Egypt|India,|Odisha|Indi|a,AP|Ind|ia,Raj|Pa|kistan|Morocco|International|
|---|---|---|---|---|---|---|---|---|---|---|---|
||EEHC(Discos)|WESCO|CESU|APSPDCL|APEPDCL|JVVNL|JDDVNL|LESCO|KE|ONEE|benchmark|
|**Overall Utility Governance**|**55%**|**68%**|**26%**|**52%**|**52%**|**63%**|**63%**|**52%**|**90%**|**53%**|63%|
|**Corporate Governance**|49%|86%|13%|47%|47%|67%|67%|56%|94%|35%|62%|
|_Accountability_|_42%_|_83%_|_25%_|_50%_|_50%_|_67%_|_67%_|_67%_|_100%_|_25%_|60%|
|_Autonomy (SOEs)_|_56%_|_89%_|_0%_|_44%_|_44%_|_67%_|_67%_|_44%_|_89%_|_44%_|63%|
|**Utility Management**|**61%**|**50%**|**40%**|**56%**|**56%**|**60%**|**60%**|**48%**|**86%**|**72%**|64%|
|_Financial Discipline_|_53%_|_43%_|_36%_|_53%_|_53%_|_64%_|_64%_|_50%_|_79%_|_64%_|59%|
|_Human Resource_|_71%_|_70%_|_40%_|_43%_|_43%_|_36%_|_36%_|_43%_|_86%_|_79%_|62%|
|_Information and Technology_|_60%_|_36%_|_43%_|_73%_|_73%_|_80%_|_79%_|_50%_|_93%_|_73%_|71%|

Note: Scores based on index developed for the Rethinking Power Sector Reform Project. For more details go to project website at http://www.esmap.org/rethinking_power_sector_reform

> 16 For the more detailed utility governance index, go to the annex.

19
The distribution companies in Egypt score poorly on accountability (42 percent) as compared to their counterparts in South Asia and North Africa studied in the rethinking project. Appointment of the Board as well as the CEO and the top management is not transparent and there is no audit committee of the board bringing the score down. The Board also struggles to be autonomous given the structure of the sector where all utilities report to the minister and several important decisions such as raising capital and appointing the CEO are taken only after approval from the ministry is obtained. Under these circumstances the Board is essentially appointed by the government, is not independent and lacks transparency in its functioning On financial discipline the discoms get closer to the international average (still below it) by following good practices such as having an internal auditing function, external auditing of financial accounts and requirement to meet financial performance targets (the requirement does not seem to be followed in practice though). Nonetheless, the discoms have not been able to get a credit rating, do not have the freedom to issue new bonds or equity and financial reporting does not meet international reporting standards.

The discoms have adopted a number of good human resource practices but their implementation remains an issue. Thus, we see that the discoms score higher than the international average on this particular indicator but most of these practices remain on paper and are not really implemented. The discoms claim to have a system of annual staff review in place and claim to have transparency in the hiring process- both claims that are not reflected on the ground.

The Egyptian discoms seem to be trailing in adoption of information and technology solutions for managing the system and dealing with the customers. The utilities do not have IT systems that support distribution management or help in incident resolution. The discoms also seem to lack any advanced metering infrastructure.

## <u>Summary</u>

Electricity sector restructuring can be divided into two phases, one of which was not really expected to have much impact on efficiency and financial viability (because it was not accompanied by adequate tariff and cost recovery regulation), and the more recent (post-2015) phase in which preparatory restructuring is being done in anticipation of the continuation of the current electricity tariff and subsidy reform program being sustained. Operational and commercial efficiency of the utilities suffers mainly because of nonpayment of dues from government entities forcing them to forego a substantial amount of their revenues. The utilities also lag behind in adopting and implementing best practices to improve their internal governance and management.

# _Tariffs & Cost Recovery_

## <u>Performance</u>

Throughout the period (1990-2015) not much effort was put into bringing end user tariffs to cost recovery level in the power sector and correspondingly in the natural gas sector too, as an important supplier of the fuel for the power sector. Large-scale subsidies in both the sectors have been central characteristics of the 20
energy policy in the country. However, from 2015 onwards momentum towards sustainable cost recovery reforms has been created.

In fact, tariffs have been very low in relation to costs over most of the period covered by this paper, with the exception of the years from 2015. As a result, the economy and society have enjoyed a massive subsidy flow over many years, supporting disposable incomes and employment, and postponing the need to painfully achieve international competitiveness. And in consequence, the power sector has been deprived of self-generated resources, so has needed very extensive propping up.

This policy combination is now starting to change in favor of actual cost recovery, and the relevant institutions may perhaps be adapting to make that changes at last. Time will tell, and much will depend on the political will and ability to ride out the adjustment process, and society’s will and ability to endure it.

It is very important to note in the data given below, that the most recent years are not reflected, although that is where the recent policy changes have been mostly happening, and the large effects on electricity of underpricing from and underpayment to the natural gas sector are not really captured either. But we do still get a sense of what the performance has been, albeit a partial one. In short, what we see is tariffs well below costs (even on a financial basis without accounting for the economic cost of underpricing natural gas), and a high degree of cross-subsidies between customer classes.

The analysis of cost recovery focuses on the data for the holding company- EEHC. The Quasi fiscal deficit (QFD) measures the revenue gap for a utility by measuring the difference between what an ideal utility with no underpricing, no under collection and technical losses within the 5 percent level would earn and what the real utility actually collects as revenues. The QFD can be divided into three main components: revenue gap attributable to under collections, underpricing, and excessive losses. For Egypt given the structure of the sector, it makes more sense to look at the accounts of the holding company – EEHC.

Complete data are available for only four years 2011-2014 to calculate the QFD (figure 8). There is clearly a trend of rising revenue gap for EEHC during this period with the absolute QFD rising from just over $3 billion in 2011 to over $6 billion by 2014. In terms of GDP the QFD rose alarmingly during this period from 1.3 percent to 2.2 percent of the GDP. Over 79 percent of the QFD is attributable to underpricing, a theme that comes up repeatedly during this study. Tariffs have been kept below costs pretty much the entirety of the time period from the 1970s to 2014.

21
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electricity services (and monitoring that performance), issuing licenses (and imposing penalties in case of licenses violations), reviewing utility investment plans, and setting rules and procedures to encourage renewable energy production and the efficiency of electricity use. Thus, the regulatory body seems to be responsible for a wide range of activities on par with what is generally considered a regulator’s mandate.

EgyptERA’s accountability is governed by an annual report to Government, which is then assessed, as well as some independent evaluations by MedReg, a regional organization of regulators of which EgyptERA is a member. There are legally established processes to allowing regulated entities to appeal decisions of EgyptERA (although this has never yet happened), and those decisions could also be subject to the judicial review of the State Council (under Article 10 of the State Council Law No. 47 of 1972). Transparency is served by the website publication of the annual report, as well as of EgyptERA’s decisions and regulator’s reports (cost of service report, performance evaluation and benchmarking report, indicators for electricity consumption by sector, etc.), and of licensing procedures. All these practices provide the regulator with a high accountability score, higher than the international average for the rethinking project (table 7).

As regards EgyptERA’s _autonomy_ , there are no formal provisions under which any government body can overturn EgyptERA’s decisions. The funding of EgyptERA is covered in effect by consumer levies (through the fees paid by the licensees) and can also legally be funded by government budget allocations (but never has been). Again the regulator scores much higher than the global average for the project.

Table 7: Formal regulatory governance in Egypt and comparators, 2015<sup>20</sup>

|**Indicators**|**Egypt**|**India, AP**|**India, Odisha **|**India, Raj**|**Morocco**|**Pakistan**|**International**<br>**benchmark**|
|---|---|---|---|---|---|---|---|
|**Regulatory Governance**|**77%**|**68%**|**68%**|**68%**|**NAP**|**72%**|**59%**|
|**Accountability**|**87%**|**91%**|**91%**|**91%**|**NAP**|**79%**|**83%**|
|_Regulatory Oversight_|_100%_|_100%_|_100%_|_100%_|_NAP_|_67%_|81%|
|_Legal Appeals_|_100%_|_100%_|_100%_|_100%_|_NAP_|_100%_|100%|
|_Transparency_|_62%_|_73%_|_73%_|_73%_|_NAP_|_70%_|67%|
|**Autonomy**|**89%**|**75%**|**75%**|**75%**|**NAP**|**92%**|**71%**|
|_Decision-Making Autonomy_|_86%_|_100%_|_100%_|_100%_|_NAP_|_92%_|79%|
|_Budgetary Autonomy_|_94%_|_50%_|_50%_|_50%_|_NAP_|_100%_|80%|
|_Leadership Autonomy_|_75%_|_50%_|_50%_|_50%_|_NAP_|_75%_|66%|
|_Managerial Autonomy_|_100%_|_100%_|_100%_|_100%_|_NAP_|_100%_|59%|

Tariff regulation is usually argued to be the most important function for a regulator in the power sector. EgyptERA scores right around the international benchmark for the rethinking project (table 8). The framework provides EgyptERA the authority to fix tariffs however in a sector where the ownership of the utilities lies with the ministry to which the regulator reports to as well, creates an inherent conflict. The government might want to keep tariffs lower than warranted for political reasons creating a problem for the utility finances. Article 41 of the Electricity Law provides that the Cabinet can decide that any tariff be different than one decided by EgyptERA, as long as the government pays the difference (i.e. subsidizes) between the tariffs to the licensees in question. Similar provisions have been made in Pakistan and Senegal, both countries with mostly state owned utilities like Egypt. Needless to say, the proper functioning of this

> 20 For more detail about the material in this table, see the Annex.

26
arrangement is dependent on the government paying its dues on time- something that has not happened in Senegal and Pakistan. How this will translate as we the new framework in implemented remains to be seen. As of the time of the writing of this paper, the government seems to be committed to raising tariffs and has done so every year since 2014.

On quality regulation, the new framework incorporates a number of established good practices such as requirements to meet quality standards (penalties for not meeting them), requirement for utilities to report technical data to the regulator on a periodic basis and making the reliability measurements public.

On market entry, also the regulator has been provided the requisite responsibility and power for providing permits to new entrants. However, EgyptERA is not legally required to approve all power sales contracts. Needless to say, given the state control of the sector, the regulator has not had a lot of scope to exercise its power in the past. However, with the country aiming to introduce significant solar generation through the IPP route, the regulator’s role will be important in the coming years.

Table 8: Formal regulatory substance in Egypt and comparators, 2015<sup>21</sup>

||**Egypt**|**India, AP**|**India, Odisha **|**India, Raj**|**Morocco**|**Pakistan**|**International**<br>**benchmark**|
|---|---|---|---|---|---|---|---|
|**Regulatory Substance**|**78%**|**76%**|**76%**|**79%**|**40%**|**83%**|**76%**|
|**Tariff Regulation**|**75%**|**75%**|**75%**|**75%**|**29%**|**83%**|**77%**|
|_Regulatory Frameworkfor Tariffs_|_100%_|_100%_|_100%_|_100%_|_33%_|_100%_|90%|
|_Determination of Tariffs_|_50%_|_50%_|_50%_|_50%_|_25%_|_67%_|64%|
|**Quality Regulation**|**83%**|**83%**|**83%**|**92%**|**33%**|**100%**|**75%**|
|_Quality of Service Standards_|_100%_|_100%_|_100%_|_100%_|_50%_|_100%_|82%|
|_Quality of Service Enforcement_|_67%_|_67%_|_67%_|_83%_|_17%_|_100%_|68%|
|**Market Entry Regulation**|**75%**|**71%**|**71%**|**71%**|**58%**|**67%**|**77%**|
|_Permitting New Entrants_|_100%_|_75%_|_75%_|_75%_|_50%_|_100%_|90%|
|_PPA Approvals_|_50%_|_67%_|_67%_|_67%_|_67%_|_33%_|57%|

Note: Scores based on index developed for the Rethinking Power Sector Reform Project. For more details go to project website at http://www.esmap.org/rethinking_power_sector_reform The new law governing the sector was incorporated in 2015 and all institutions are adjusting to the changes made under the law. At the time, when data was collected for the study, the new regulations and framework were being implemented and not enough time had passed to judge whether the new framework was actually being implemented in their true spirit. However, the perceived index gives us an opportunity to understand how regulation is being practiced in the sector as of 2015.

A very interesting picture emerges from the comparison of the de jure and perceived indices. The overall score on regulatory framework falls from 60 percent to 28 percent (table 9). On every indicatoraccountability, autonomy, tariffs, quality and market entry the regulator is seen to be not implementing all the practices that are part of the 2015 framework. The differences are extremely egregious in quality regulation and transparency practices. The regulator is unable to exercise its authority on tariff levels and

> 21For more detail about the material in this table, see the Annex.

27
in a completely state dominated sector its standing is precarious as compared to the utilities as all report to the same ministry.

Table 9: De jure vs De facto regulation

|**Indicators**|**De Jure**|**Perceived**|
|---|---|---|
|**Overall Regulation**|**60%**|**28%**|
|**Regulatory Governance**|77%|56%|
|**_Accountability_**|87%|77%|
|_Regulatory Oversight_|_100%_|100%|
|_Legal Appeals_|_100%_|100%|
|_Transparency_|_62%_|31%|
|**_Autonomy_**|89%|73%|
|_Decision-Making Autonomy_|_86%_|86%|
|_Budgetary Autonomy_|_94%_|94%|
|_Leadership Autonomy_|_75%_|63%|
|_Managerial Autonomy_|_100%_|50%|
|**Regulatory Substance**|78%|50%|
|**_Tariff Regulation_**|75%|67%|
|_Regulatory Framework for Tariffs_|_100%_|83%|
|_Determination of Tariffs_|_50%_|50%|
|**_Quality Regulation_**|83%|33%|
|_Quality of Service Standards_|_100%_|50%|
|_Quality of Service Enforcement_|_67%_|17%|
|**_Market Entry Regulation_**|75%|50%|
|_Permitting New Entrants_|_100%_|100%|
|_PPA Approvals_|_50%_|0%|

## <u>Summary</u>

Tariffs have been largely set well below costs, impacting the financial health of the utilities and the entire sector. The regulator is considered to have good technical expertise but has not been able to impose its will on a state controlled sector where decision, especially those related to tariffs, were taken by the Cabinet of Ministers under political considerations. The new regulatory framework adopted in 2015 incorporates almost all good practices found in comparable regulatory framework but its success will depend on how much control the government wants to cede to the regulator.

# _Conclusion_

The challenge of power sector reform in Egypt has long been dominated by extremely high subsidies, with prices being set well below the costs of supply. These subsidies have taken a variety of forms: explicit subsidies in the government budget; implicit subsidies in the underpricing of fuel supply (particularly natural gas) to the power sector; the accumulation of arrears from the sector (including to the stateowned banking sector and to gas suppliers/investors); the consumption of poorly-maintained physical capital; and cross-subsidies across customer classes. Egypt’s social contract was linked to expanding energy access with good quality supply (almost 24*7) on the basis of public financing and huge subsidy. Egypt has been able to achieve universal access with more or less reliable power over the entire period except very recently when chronic underinvestment in the sector caused blackouts in 2011-2014 at time of severe political uncertainty. The utilities have never been judged on their financial viability, which they have not been able to achieve, given the underpricing of electricity. The social compact came under 28
pressure in 2014 when energy subsidies reached 6.8% of GDP, being higher than education, health and social protection combined, with a 6,000 MW shortage leading to 6-hour daily power outage. Since 2014, the reform process has been revived based on new electricity, gas and renewable laws. This paved the way for price and subsidy adjustments, with almost 430% increase in fuel prices and about 350% cumulative increase in electricity prices over 2014-19. Structural reforms were also launched with a deliberately long time frame of up to 8 years. While the power sector value chain continues to be dominated by state-owned enterprises, a greater emphasis has been placed on the role of the private sector, with over US$22 billion of private investments since 2014 in renewable energy and oil and gas.

Egypt has supplied electricity to everyone, but the opportunity cost of doing so has been very large (and perhaps not fully known). Until recent years, power sector reforms have been quite limited (not differentiating the sector very much from the economy at large), because of the seemingly intractable politics of inducing adjustment by the economy and population in a political environment which was not deemed conducive to doing so. However, since 2015, that situation has changed, and Egypt has embarked on a power sector reform, in the context of a macroeconomic reform process. Time will tell whether the environment is sufficiently transformed for the process to be sustained.

Table 10: Summary evaluation of Egypt’s power sector reform efforts

||Performance|Institutions|
|---|---|---|
|Security of<br>Supply|For most of the period electricity supply<br>has been secure, although the cost of<br>achieving that was not always a major<br>consideration.<br>In the period from 2014 onwards, in the<br>face of significant blackouts leading up to<br>that, key measures included large-scale<br>public procurement of conventional<br>energy, scaling up of procurement of<br>renewable energy capacity from the<br>private sector, and some resolution of<br>financial imbalances and supply shortages<br>in the natural gas sector as a fuel for<br>electricity.|Planning and procurement institutions have<br>generally ensured security of supply, although<br>they have been at their most effective in<br>public sector projects. Most importantly,<br>those institutions have shown what they can<br>do in an era of stable technologies, but not at<br>all what they can do in the new era of<br>disruptive technology change.|
|Access &<br>Affordability|Access to grid electricity became near-<br>universal (but without much regard for the<br>cost). Electricity was largely affordable in<br>most of the period because of high subsidy<br>levels.|The Rural Electrification Authority succeeded<br>in achieving near-universal access and was<br>disbanded once its mission was accomplished.<br>The electricity distribution companies took<br>over the responsibility of keeping up with the<br>demand for new connections.|
|Efficiency &<br>Financial<br>Viability|Some restructuring reforms have been<br>undertaken to help achieve efficiency and<br>financial viability, but their impact could|Some restructuring of institutions has been<br>undertaken, but of a predictably limited<br>scope. The 2015 Electricity Law mandated a|

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||only be very limited in the absence of cost<br>recovery being allowed by Government<br>(and the regulator).|deeper institutional restructuring, to be<br>implemented over a long period of time. That<br>process is still underway.|
|---|---|---|
|Tariffs & Cost<br>Recovery|For most of the period, Government did<br>not enable cost recovery for political<br>reasons, but since 2014 tariffs have been<br>placed on a multi-year trajectory towards<br>cost recovery.|The regulator, EgyptERA, has built significant<br>technical capacity, but acts only as an adviser<br>with the Government making final tariff<br>decisions. Post 2015, the new law seeks a<br>larger role for the regulator but the ultimate<br>deciding authority on tariffs remains with the<br>Government.|

Egypt’s experience over the decades with power sector reforms offers the following main lessons.

First, tariff and subsidy reform can be socially and politically difficult and require prior improvement in power supply and service quality as an essential pre-requisite to build trust and credibility of subsidy reforms.

Second, once tariff and subsidy reforms are initiated after a very long period of underpricing, it is not advisable to rush the deeper structural reforms. Nevertheless, providing policy clarity through a mediumterm reform timetable announced upfront is helpful in reducing uncertainty.

Third, in a power system heavily based on domestically-produced natural gas, coordination between electricity and gas sector planning and reform timelines (opening of sector and coordinated fuel and power subsidy reforms) is critical. Equally, decisions about gas pricing and electricity pricing are closely related.

Fourth, it is critical to have policy clarity regarding which sub-sectors should be targeted for private sector investments (renewables and oil and gas in Egypt’s case) versus those that will be retained for public sector investments. This helps to ensure stakeholder alignment, generate interest from the private sector, and secure an efficient bidding process with timely commissioning of assets.

Fifth, strong political will combined with stable tenure of technocratic leadership makes it possible to take difficult sector reform decisions while seeing them through to efficient implementation, despite the absence of strong civil society dialogue.

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