Mohammed Shaker, an energy executive who was appointed electricity minister at end-February, has told Egyptians that they are going to have to put up with power cuts for some time. The fact that Egypt is facing such a crisis has been brought home by the frequent cuts in electricity supplies over the winter, a season of relatively low power demand. Mr Shaker has said that this summer?s power cuts could last as long as six hours at a time, depending on the availability of fuel, and that there is unlikely to be any major improvement until 2018.

The strains on the power sector have been building for several years, and there have been regular power cuts during the summer months since 2010. There are several interlinked reasons for the crisis. These include:

electricity consumption rising by about 8% a year on average over the past five years, while capacity additions have lagged behind;natural gas production declining by more than 10% over the past two years;delays in the completion of power station projects and lack of progress in tenders for new plants; andaccumulation of deficits in state power utilities as a result of heavy subsidies provided to residential consumers, who account for almost half of total demand.

The winter power cuts have come at a time when the peak daily load has rarely exceeded 22,000 mw (it was 22,650 mw on April 14th, according to the Egyptian Electricity Holding Company, or EEHC). During the height of the summer, the peak load is likely to be more than 30,000 mw. Mr Shaker has said that the grid?s maximum capacity is now only about 28,000 mw, and that its efficiency is impaired during periods of high temperature.

Kuwait lends a hand

The shortage of capacity is only part of the problem. Egypt?s thermal power stations need at least 100m cu metres/day of natural gas and more than 20,000 tonnes/day of diesel or fuel oil in order to function at a reasonable level of capacity. Owing to the shortfall in natural gas production, the EEHC?s daily allocation of gas is now only 70m cu metres, an electricity sector consultant told The Economist Intelligence Unit. The government is seeking to compensate for the gas shortfall through increasing the use of diesel in dual-fired plants. The Kuwait Petroleum Corporation (KPC) announced in early April that it had agreed to increase its supplies of crude oil to 85,000 barrels/day (b/d), from 65,000 b/d, and of diesel to 1.5m tonnes/year (t/y), from 860,000 t/y. The Kuwaiti supplies will continue until end-2016, Ibrahim al-Mudhaf, KPC?s marketing director, was quoted as saying by the official Kuwait News Agency. Although Egypt will ostensibly be charged market rates, the supplies are likely to be financed by Kuwaiti government loans.

The EEHC?s most recent comprehensive data cover the period up to end-June 2012. These show that thermal power stations accounted for 88% of total installed capacity of 29,074 mw, and that natural gas accounted for 84% of total thermal power generation of 129.4bn kwh. Meanwhile, annual consumption of natural gas for power generation was about 28bn cu metres in fiscal year 2011/12 (July-June), equivalent to 76m cu metres/d and accounting for about half of Egypt?s total natural gas production during that period.

The additional Kuwaiti fuel supplies will provide some respite over the next few months, but this is unlikely to be enough to avoid power cuts. Mr Shaker has said that a 10% fuel shortfall would result in daily outages of about three hours during the summer, and that this could extend to six hours if the fuel shortfall reaches 20%. The government has argued that the grid?s capacity will be increased by end-June with the start-up of steam generator units at the Giza North and Benha power stations, whose construction has recently been completed. Giza North has four 250-mw gas turbines and two 250-mw steam turbines that will run on heat recovered from the gas turbine cycle; Benha has two gas turbines and one steam turbine, and has total capacity of 750 mw.

Too little downstream activity

However, since the main contracts for Giza North and Benha were awarded in September 2011 (to a partnership of GE of the US and SEPCO III of China), there has been a marked slowdown in power station project activity. The two largest schemes under way are a 1,950-mw plant at Helwan, south of Cairo, and a 500-mw combined cycle conversion at the Al Shebab power station, in the eastern Delta, financed, respectively, by the World Bank and the European Investment Bank. Both are still in the tendering phases. The EEHC has also revived two major projects to be carried out by private investors: the 2,250-mw Dairout combined cycle plant in the Delta; and a 250-mw wind farm in the Gulf of Suez. These two schemes were originally put out to tender in 2010, and bidders have been invited to present fresh offers at the end of May.

By the time the first of these new plants come on stream in 2017 and 2018, Egypt?s natural gas production should be starting to recover. The offshore West Nile Delta project being undertaken by BP of the UK is planned to produce about 10bn cu metres/year of gas, which would boost Egypt?s total capacity by 20-25%. The Ministry of Petroleum announced in mid-April that the first gas from West Nile Delta will come onshore at the Idku facility, operated by BG Group, also of the UK, in 2017 at a rate of 4.5bn cu metres/y, pending the completion of BP?s permanent onshore facility at nearby Motabas. Neither company has yet confirmed this arrangement. The ministry has also indicated that it is in advanced negotiations about the import of liquefied natural gas (LNG) via a floating storage and gasification unit to be installed at Ain Sokhna, near the southern entrance of the Suez Canal.

Rush for coal?

Another element in the government?s strategy for tackling its energy crisis is a proposal to import coal. Initially this would be as a replacement for natural gas in cement production, but there has also been discussion of using coal for power generation. The environment minister, Leila Iskander, has indicated that she is not yet satisfied that adequate safeguards are being put in place to prevent pollution arising from the transport and use of coal. The cabinet agreed in principle at the start of April to allow the use of coal in cement plants, but this was supposed to be subject to further environmental impact assessments. The cabinet also agreed to encourage use of biomass in cement plants, and to stiffen penalties for violating environmental regulations.

However, although such measures may ameliorate to an extent the shortages in specific industries, they will clearly be insufficient to fully fill the energy gap. With this in mind, Mr Shaker has made regular appearances on television in recent weeks in an effort to explain the nature of Egypt?s energy crisis and the measures being taken to address it. Yet, with shortages only set to worsen during the hot summer months, the government and the likely next president, Abdel Fattah el-Sisi, will be fearful of a popular backlash as temperatures begin to rise.

Source: Economist Intelligence Unit


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