by Richard Keenan and Marc Norman, in Dubai, and Ahmed El Sharkawy, Mohamed Nabil and Ahmad Farghal, with the Sharkawy & Sarhan law firm in Cairo

Egypt recently released a shortlist of 110 qualified applicants for solar photovoltaic and wind projects for the first regulatory period of its new feed-in tariff scheme.

The first regulatory period runs from 2015 to 2017. During this time, the Egyptian government aims to procure 4,300 megawatts of renewable energy capacity, including 2,000 megawatts of medium-to-large-scale solar photovoltaic facilities and 2,000 megawatts of wind facilities.

The 110 qualified applications include 13 small-to-medium-scale solar photovoltaic facilities (i.e., up to 20 megawatts), 69 large-scale solar photovoltaic facilities (i.e., from 20 megawatts to 50 megawatts) and 28 wind facilities ranging from 20 megawatts to 50 megawatts.

Although certain known market participants are likely dissimulated behind special-purpose vehicles, many of the usual suspects are included in the shortlist.

A number of companies bid for more than one renewable energy source or solar photovoltaic facility size. Some renewable energy developers are also rumored to be negotiating independent deals directly with the government — most probably for larger-scale projects given the 50-megawatt cap on facilities procured under the feed-in tariff program.

The aggregate capacity of the large-scale solar projects that the 69 qualified bidding consortia have applied to develop under the feed-in tariff scheme exceeds the government’s target of 2,000 megawatts by around 50%. This means that a certain number of qualified bidding consortia will miss out, at least for the first regulatory period.

The aggregate capacity of the wind projects that the 28 qualified bidding consortia have applied to develop falls below the government’s target of 2,000 megawatts. This means that a further request for qualification for wind projects will be issued by the government during the first regulatory period.

The priority for all qualified bidders — and particularly for solar project bidders — must now be to position themselves to join the top of the queue for site allocation and thereby project award. The extent to which project award will ultimately come down to speed of company incorporation and grid connection downpayment remains to be seen; other technical and project viability criteria will surely play a role. However, one thing that has become very clear is that it is in the interest of all qualified bidders to organize themselves as quickly as possible to make sure that they are at the top of the queue and do not end up on a waiting list.

We understand that the government will provide 36 plots of land to qualified bidders for large-scale solar projects on a first-come, first-served basis.

Qualified bidders who are not allocated one of these sites will also be free to source their own sites. However, sites provided by the government have the advantage of being fully permitted. Developers who source their own land will have to provide to the government evidence of ownership or satisfactory usufruct rights.

How do qualified bidders position themselves to be eligible for a government-allocated site?

There are two requirements that must be satisfied as soon as possible. First, the applicant must establish a special-purpose vehicle for the project. Second, the applicant must make a downpayment to cover grid connection costs. In early February, qualified bidders were officially notified of the downpayment amount.

Establishment of SPE

Qualified bidders should incorporate an Egyptian company under the investment law number 8 of 1997. Qualified bidders may choose between incorporating a limited liability company or a joint stock company.

Incorporation in Egypt takes one week from the date of completion of all the required documents. It is very difficult to transfer an LLC to a joint stock company.

It is not a practical option to acquire an existing shelf company. Shelf companies are not known under Egyptian law. The only way to acquire a joint stock company is through a share transfer. Share transfers require a lot of notarized and consularized declarations and documents in addition to appointing a stock broker to effect the transfer on the Egyptian Stock Exchange.

Joint stock companies offer some advantages that are not available in LLCs, such as the ability to list the company on the stock exchange and to offer shares, bonds and other securities to the public. There is a minimum capital requirement for joint stock companies, but only 10% of the share capital must be paid up upon incorporation and another 15% must be paid up within three months and the remainder within five years after incorporation. Joint stock companies are more appealing to banks when financing a project because it is possible for banks to obtain pledges over the shares as security; the enforceability of pledges over partnership interests in LLCs is unclear under Egyptian law.

More details about the differences between LLCs and joint stock companies are in a sidebar with this article.

Grid Connection Downpayment

Each developer is responsible for its share of grid interconnection costs. We understand from government briefings and recent feedback from developers that interconnection costs will be split among developers sharing the same substation.

Each qualified bidder will be required to make a grid connection downpayment. In early February, qualified bidders were officially notified of the downpayment amount.

Government sources have confirmed that this downpayment can only be made through the provision of a check or cash.

PPA and Government Guarantee

We understand from government briefings that draft project documentation (including the power purchase agreement and usufruct agreement) have been prepared. Developers and financiers are expecting these documents to be broadly consistent with Egypt’s IPP template.

Egypt’s IPP template originates from the Sidi Krir IPP (a 682.5-megawatt gas-fired steam power plant initially developed by InterGen that went into commercial operation in late 2001), the Port Said IPP (a 683-megawatt gas-fired power plant initially developed by EDF that commenced commercial operation in 2003) and the Gulf of Suez IPP (a 683-megawatt gas-fired power plant initially developed by EDF that reached commercial operation in 2003). This precedent has since been further developed in connection with the Dairut IPP and other projects such as the Gulf of Suez wind IPP.

The draft project documentation is currently being reviewed from a bankability perspective by leading financial institutions based on discussions with the New and Renewable Energy Authority about the required terms. The project documentation is expected to be amended to address any bankability concerns raised by the relevant financial institutions and then issued to successful bidders. Given the program’s ambitious timetable, the New and Renewable Energy Authority and Egyptian Electricity and Transmission Company will have to provide developers with a bankable form of power purchase agreement as soon as possible. As with any new IPP program, the development of standard-form templates can be a time-consuming process. We expect that developers may have some reservations about making upfront financial commitments without any visibility on the form of PPA and proposed risk allocation.

The power purchase agreement tariff for large-scale projects will be denominated in US dollars, but be payable in Egyptian pounds. This is significant given that the Egyptian pound has not been pegged to the US dollar since 2003. Fifteen percent of each invoice amount will be converted at a fixed rate of 7.15 pounds to dollars, and the remaining 85% will be converted at the prevailing rate. This means that the Egyptian government will more or less assume exchange risk. A key question for financiers of these projects will be the extent to which the government will also assume the risk that that Egyptian pounds can actually be converted to US dollars. Depending on the extent to which the Egyptian government assumes convertibility risk, the preferred creditor status of multilaterals in the financings of these projects could prove to be critical.

Projects with a capacity above 500 kilowatts will benefit from a government guarantee issued by the Ministry of Finance.

The extent to which an equity sponsor may participate in multiple consortia is unclear. Government sources previously indicated that an equity sponsor could participate in multiple consortia, so long as it acts as a lead developer in no more than one consortium. However, we understand that the government may be reassessing this position.

The Feed-in-Tariff Program

Last year saw Egypt launch an ambitious program to procure 12,000 megawatts of renewable energy capacity by 2020, the largest renewable energy target in the Middle East and North Africa region, after Saudi Arabia.

Any seasoned Middle Eastern renewable energy stakeholder would be forgiven for treating target announcements with some skepticism. However, recent developments suggest there is cause for excitement.

On October 20, 2014, the Egyptian government issued a request for qualification to participate in the initial procurement round of its freshly-issued feed-in tariff program for renewable energy. The deadline to submit qualification requests was November 26, 2014. The Egyptian Electricity Transmission Company, Egypt’s renewable energy procurement arm, is reported to have received 177 submissions. In the first week of January 2015, Egypt surprised market participants by releasing its shortlist of 110 qualified applicants.

Since the release of the shortlist, the Egyptian government has made it abundantly clear to all stakeholders that it wants to move fast with the roll out of its feed-in tariff program.

For many years, Egypt has faced a major challenge in providing enough electricity to its citizens. Power blackouts, a daily occurrence for many Egyptians, stand out as one of the most explosive socio-political issues in the Arab world’s most populous country; they were a key factor in deepening discontent with President Mohamed Morsi, who faced mass protests before Abdel Fattah al-Sisi, then army chief, ousted him in 2013.

In early September 2014, the country experienced one of its most severe blackouts in decades. The outages knocked TV stations off the air and halted parts of the Cairo subway, a major embarrassment for a government that sought to provide stability after protracted turmoil. As officials struggled to address the public outcry, President Abdel Fattah al-Sisi addressed the country in a candid television address saying that power black-outs were the result of years of underinvestment. Tackling blackouts stands as a key government priority; however, there is no immediate solution, he said. The President said the country needs to add 12,000 megawatts to its grid over the next five years at a capital cost of around US$12 billion.

Beyond the desperate need to increase generating capacity, the country also faces a challenge to diversify its energy sources.

Oil and natural gas currently contribute 95% of the total energy resources needed to generate electricity in Egypt. However, according to the Egyptian energy strategy for 2030 together with its update until 2035, Egypt is expected to become a net importer of oil and natural gas between 2030 and 2040.

As the cash-strapped country strives to meet other pressing challenges such as water treatment and education needs, reducing dependence on oil and natural gas via energy-source diversification is viewed as critical.

Egyptian authorities see the procurement of solar photovoltaic and wind facilities as an effective way to deploy additional power generation capacity rapidly — conventional facilities take considerably more time to bring on line — and to reach their diversification goal.

Egypt’s feed-in tariff program was approved by the Cabinet of Ministers on September 17, 2014, weeks after the major blackouts.

The deployment of the program is spread out in a series of “regulatory periods.” The first regulatory period runs from 2015 to 2017.

During the first regulatory period, Egypt aims to procure 4,300 megawatts of solar photovoltaic and wind capacity. (The explicit references to photovoltaic technology imply that solar thermal technologies are currently excluded from the feed-in tariff program.) On the solar side, the plan is to procure 300 megawatts of small-scale facilities (i.e., below 500 kilowatts) and 2,000 megawatts of medium-scale facilities (i.e., between 500 kilowatts and 20 megawatts) and large-scale facilities (i.e., between 20 megawatts and 50 megawatts). The wind target is 2,000 megawatts with project sizes ranging from 20 megawatts to 50 megawatts.

There is no need for a developer that qualified under the first request for qualification to submit a qualification application under a subsequent request for qualification that is included in the same regulatory period, unless the developer’s status changes.

The Egyptian Electricity Transmission Company or distribution companies (depending on project sizes) are committed to purchase the electricity produced from renewable energy facilities via power purchase agreements lasting 25 years for photovoltaic facilities and 20 years for wind facilities at the last prices announced by the Cabinet of Ministers.

The last prices announced by the Cabinet of Ministers for solar photovoltaic facilities are as follows:

The last prices announced by the Cabinet of Ministers for wind facilities are as follows:

Regional Perspective

To put Egypt’s feed-in tariff values into perspective, the Jordanian feed-in tariff stood at approximately US17Ȼ for solar photovoltaic facilities and US12Ȼ for wind facilities: more generous than the Egyptian regime.

Jordan was the first country in the Middle East and North Africa region to implement a feed-in tariff. The incentive scheme is viewed by many as the most important factor in kick-starting Jordan’s renewable energy program, which arguably became a regional template. Jordan is the first country in the region to have successfully banked both wind and solar projects on an independent power producer basis.

However, the Jordanian feed-in tariff had limited application. It applied only to the first round of renewable energy procurements. This included 12 solar photovoltaic projects ranging from 10 to 20 megawatts (excluding one project of around 50 megawatts) and one 117-megawatt wind project. Also, all solar photovoltaic projects procured under Jordan’s first renewable energy procurement round were subject to an electricity production cap.

However, as Jordan moved on to its second renewable energy procurement round, it dispensed with the feed-in tariff model opting instead for a ceiling-tariff model. This model prohibits developers from bidding over a certain tariff and incentivizes bidders to tender the lowest possible tariff. The ceiling tariff is currently set at US14Ȼ for solar photovoltaic facilities and US11Ȼ for wind facilities, very close to where Egypt has set its tariff.

In late 2014, the local utility in Dubai, the Dubai Electricity & Water Authority (DEWA), tendered a 100-megawatt solar photovoltaic independent power project, the largest privately-financed solar photovoltaic project to be tendered in the region. On January 15, 2015, DEWA announced the appointment of ACWA Power as preferred bidder and said that it had accepted the Saudi developer’s alternative bid to provide a facility with a capacity of 200 megawatts (on an alternating current basis) with a startling tariff of US5.84869Ȼ per kilowatt hour over 25 years, the lowest tariff ever witnessed anywhere in the world for a privately-financed solar photovoltaic project. It will be interesting to see whether this project sets a regional pricing benchmark for solar photovoltaic projects or is viewed by the market as an extraordinary result driven by intense competition and an IPP model that provides for significant government support.

Time will tell how Egypt fine tunes its renewable energy procurement policy. In the meantime, as Egypt gets back on its feet after several years of unrest, investors from all over the world are flocking in to get a foothold into what is fast becoming a renewable energy hotspot.