I am pleased to cross post the following article with my friends at The Tahrir Institute for Middle East Policy. Allison McManus’ timely post on the problems in Egypt’s energy sector and coal is an excellent follow-up to my recent Contingency Planning Memorandum on the potential for a solvency crisis in that country. I hope readers find it interesting and useful.
In the sweltering heat of Cairo’s Maadi suburb, American inventor and engineer Frank Shuman broke ground on his Number One Sun Engine in June 1913. This, the world’s first solar-thermal power station, operated simply, but efficiently, to provide energy for desert irrigation.
A year after breaking ground on the Maadi plant, Shuman wrote in Scientific American, “One thing I feel sure of…is that the human race must finally utilize direct sun power or revert to barbarism.” Shuman’s statement was a very early warning to a threat imminent threat to Egypt today. One hundred years later, on April 2, 2014, Egypt’s cabinet approved the use of coal as an energy source for cement factories. This decision came after extensive debates among the ministries and the managers of the cement factories; these discussions have been ongoing over the past year, but they heated up after Minister of Industry Mounir Fakhry Abdel-Nour preliminarily announced on Monday, March 10 that cement companies were to be allowed to use coal to continue production. Local and international NGOs engaged in a concerted effort to steer the decision away from the use of coal, and many (including the Egyptian Initiative for Personal Rights, the Egyptian Center for Economic and Social Rights, Greenpeace, and the Arab Youth Climate Movement, among others) signed a letter condemning any move toward the use of coal as a source of energy.
To be clear, the short-term future looks bleak: it appears that the government is preparing for continued black-outs and energy rationing as a strategy to allay pressure on a strapped natural gas grid. Gaber El-Desouki, chairman of the Egyptian Electricity Holding Company, and Khaled Abdel-Badie, of the Egyptian Natural Gas Holding Company, offered reassurances that measures were being undertaken to assure natural gas security. These statements are at odds with developments over the past few months: Egypt failed to secure a needed regasification terminal in February, and recent indicators suggest that the earliest it would be prepared to receive such imports would be July or August.
The urgency of current demands on energy underscores one of the greatest problems Egypt faces—the lack of broad-based economic development. Such development, which even casual observers recognize is of critical concern in Egypt, cannot occur without the energy that is needed to power such growth. It follows that sustainable economic development cannot occur without a sustainable means of managing energy needs. Additionally, Egypt’s growing population, particularly in urban areas, has contributed to increased pressure on power grids—since 2000, energy consumption has increased at a rate of 5% overall, and 9% for natural gas.
Fortunately, addressing one of these issues may have beneficial effect on the others—sustainable energy investments should encourage a more productive economy, which should lead to better lives for Egyptians.
In a recent conference on the future of energy in Egypt, Anhar Hegazy, head of energy efficiency in Egypt’s state-run Information and Decision Support Center, explained the necessary measures to combat the current crisis. Hegazy noted that “in order to address the issue, the government should work on reforming energy subsidies, enhancing renewable energy usage and increasing the energy efficiency among different sectors.” Developing a cohesive, sustainable and actionable energy program would pay dividends not only by reducing a budget deficit that is heavily affected by fuel subsidies but also by improving Egypt’s living conditions more generally.
For similar reasons, Dr. Hani el Nokraschy, chairman of the board of advisors for the DESERTEC, a non-profit organization that supports research and policies to harness the solar energy and create international energy grids, believes that Egypt has only two real options: nuclear energy or renewable energies. While nuclear energy may appear attractive given lower initial investments involved, solar and wind energy provide a much more cost-effective option over the long term. These renewable options have also attracted significant buy-in from external partners.
El Nokraschy’s opinion reflects that of Hegazy: to move forward, the aforementioned cohesive, sustainable, and actionable plan will require a return to Shuman’s ideal: the development of solar (and wind) energy production throughout the country.
Luckily, Egypt is rich is both resources. Data presented at the 2006 Middle East-North Africa Renewable Energy Conference in Cairo, which projected needs as far as 2050, indicates that Concentrating Solar Power (CSP) generating stations have the potential to fully replace fuel-fired stations. CSP stations, which use technology extremely similar to that of Shuman’s Number One Sun Engine, may have initial costs higher than those of other renewable energy options, though willing investors certainly exist.
Construction recently began in Morocco to build what is expected to be the world’s largest solar energy plant outside the city of Ouarzazate; this project received significant investments from European and Gulf partners. Germany in particular has designated specific funds for the development of renewable energy sources as a part of its Energy Concept program. This program includes earmarked funds for investment in renewable energy projects; as part of the same program, Germany aims to source 60% of its energy consumption from renewable energy by 2050. In the long-term, this energy could be supplied by North Africa, and DESERTEC has contributed to forward thinking plans for an energy supply network spanning across the Mediterranean. Funds initially pegged for development in Egypt were redirected to Morocco after 2011, but they may now be available again as Morocco’s larger solar energy plans have come under legal fire (several plants were set for development on disputed land in the Western Sahara, where Morocco does not hold internationally recognized sovereignty).
Of course, if a CSP-based power grid offers a medium- and long-term solution to Egypt’s energy crisis, the problems of subsidies and institutional dysfunction remain. In early February 2014, a 10-15% increase in estimated annual cost of the petroleum subsidies was announced, amounting to a total cost of some 140 billion EGP1 ($20 billion). Around 80% of Egypt’s total subsidy bill comes from fuel subsidies (which together account for 20% of Egypt’s total budget), and 66% of fuel subsidies go to natural gas. Clearly, a reimagining of fuel subsidies is necessary; however, Prime Minister Ibrahim Mahlab declared on state TV that there would be no cuts to the subsidy program.
Both the plan for the use of coal and the current, unwieldy subsidy structure translate to perverse incentives that will only encourage the continuation of inefficient energy use. The current approach, which fosters reliance on dirty and expensive energy sources, is leading to crippling budget deficits, providing a disincentive for development in high-employment industries, and contributing to Egypt’s already deplorable air pollution. The decision to allow coal-generate power also directly undermines the pioneering successes of existing programs that seek to encourage sustainable energy alternatives in the private sector (like the Egyptian Pollution Abatement Programs, which offer financial incentives for implementing environmentally-friendly measures). In addition, the approval of the use of coal completely ignores the legitimate calls of civil society groups for cleaner energy development, as previously indicated.
Despite the need for an approach to energy that encourages the development of renewables, such projects seem to be, at the moment, beyond the institutional capacity or political will of the current government. Displaying a degree of institutional incoherence, Minister of the Environment Laila Iskander, stating that an efficient energy mix would take into account renewable energy sources., denied reports that the use of coal would be approved on the same day that Abdel-Nour issued his statement indicating that the use of coal would be authorized. Iskander’s Ministry of the Environment has demonstrated both the understanding and the initiative required to address Egypt’s energy crisis—representing perhaps the most encouraging ministerial development with regard to energy since 2011. However, the announcements, completely at odds with regard to an energy vision, reveal the degree of dysfunction in communication between ministries.
Conflicting initiatives severely compromise any positive work that is being done to develop a sustainable energy solution. What is required now is a coordinated program with buy-in across the Egyptian government (and from relevant international partners). A cohesive medium- and long-term vision must feature both better management of public resources and improved incentives for more efficient private management. While a simple solution to shore up energy costs may be the operative proposal for this summer, it would be wise to heed Shuman’s warning, from a century ago. Indeed, it may be the only option for the sustainable economic development Egypt so desperately needs. While this summer may sometimes be dark in Egypt, hope still remains for a bright future.
This article was originally published here on the Tahrir Institute for Middle East Policy’s website on April 4, 2014.