The Government of Egypt has said that it must invest US$12 billion in the electricity sector over the next five years in order to meet that country’s urgent electricity demands — and renewable energy will be a key component.
Building on this, Egypt grabbed the attention of the renewable power community in the Middle East in late-2014 when it launched a feed-in tariff (FiT) scheme for both solar and wind renewable energy projects. Egypt plans up to 2,300 MW of solar and up to 2,000 MW of wind generation in the first regulatory period. This will include 2,000 MW of larger solar PV projects ranging from 500 kW up to 50 MW, 300 MW of solar PV projects below 500 kW, and 2,000 MW of wind project capacity.
The first regulatory period will end when these targets are met, or after two years, whichever is sooner. The first round of prequalified developers have already been named. However, details have been a little harder to ascertain. Prequalified developers and potential lenders have been locked in discussions with Egypt’s Egyptian Electric Utility and Consumer Protection Regulatory Agency (EgyptERA) and agencies under the Ministry of Electricity and Energy such as the New and Renewable Energy Authority and the Egyptian Electricity Transmission Company (EETC). Many of these discussions have been bilateral and behind closed doors. This process of ongoing discussion has led to a degree of uncertainty as to what will be the requirements.
However, concrete details have begun to emerge in two major areas of uncertainty: clarity on share transfer restrictions applicable to consortia who were prequalified in the initial round for either wind or solar projects and therefore the ability for prequalified bidders to participate in multiple projects; and the release of draft project documents. Both of these are important to developers seeking to make sense of their potential investment, and lenders — especially commercial lenders — deciding whether to back projects.
In the first week of April, EgyptERA issued its long-awaited guidelines on special purpose vehicle incorporation and project participation. Unlike some more restrictive early leaked drafts, the guidelines permit a prequalified developer to hold equity sufficient to build up to 100 MW per substation and in each of the solar and wind programs. It is understood that there will be four separate solar project substations and five separate wind project substations. Therefore, a single qualified developer could theoretically hold up to 400 MW worth of solar projects and up to 500 MW of wind projects in the program. These may be attractive numbers to developers and lenders who were concerned that the projects might otherwise be too small. Each project (whether wind or solar) is capped at a capacity of no more than 50 MW.
Other restrictions also bring clarity. Each prequalified consortium is required to hold at least 51 percent of the equity of the project for which they were prequalified for at least two years following commercial operations. Within that consortium, the lead member is required to hold at least 25 percent of the equity of the project for at least two years following commercial operations. The remaining 49 percent can be held by other investors, including investors who individually hold a greater percentage than the lead developer. If another investor within the 49 percent is another qualified investor, that qualified investor will be subject to the 100 MW per program, per substation location cap.
The way the guidelines work will require developers seeking to maximise their participation in the program to act quickly. If not, a developer could be caught by some practical constraints. First will be the willingness of other prequalified developers to partner up. The rules generally do not allow projects to be sold or transferred entirely, so developers will need to enter into more complex joint venture negotiations.
The second constraint is the availability of enough land allocated at a given substation locality. Developers could find themselves in the unhappy situation of hammering out a deal to share a project only to find out that one of them is barred because of a land location that puts them in the position of having more than 100 MW of a given technology at that substation location. With so many prequalified bidders clamoring for the same allocations, this could be a practical obstacle.
Therefore, the race is on for developers looking to maximize their participation in the Egypt renewable FiT to partner up and to obtain land allocations.
Just as critically, the EETC has released discussion drafts of the major project documents — the power purchase agreement, usufruct agreement (which will govern the access to government land, since most if not all of the projects are expected to be built on government land), network connection contract, a cost sharing deed and the PPA direct deed.
Developers have been instructed to provide all comments by April 28. It is widely expected that this will be the only opportunity for developers and lenders to comment on these critical documents. Given the importance of this process and the fact that the documents were issued slightly later than originally announced, some developers anticipate that the announced dates for the workshops and the deadline may be adjusted. However, no adjustment has been made to date.
Egypt therefore appears to be moving forward with this programme with a great deal of seriousness. Developers and lenders will need to be equally serious — and move very quickly — if they wish to take full advantage of this opportunity.
Clint Steyn and Rob Harker, both partners, and Simon Stevens, senior counsel, are located in the Dubai office of Bracewell & Giuliani LLP. Mr. Steyn focuses his practice on international energy projects, with a particular emphasis on independent power projects in the Middle East and Africa. Mr. Stevens represents developers and lenders in renewable and conventional energy and infrastructure projects, including projects proposed through competitive bid tenders. Mr. Harker focuses his practice on large-scale power (including renewables), petrochemical and refinery projects in the Middle East and North Africa, most notably in the UAE, the Kingdom of Saudi Arabia, Oman and Qatar.
Lead image: Egypt map. Credit: Shutterstock.