Egyptian Electricity Tariff Projections & On-Grid Solar PV Feasibility

Take Away Points

? Despite the significant increase in electricity tariffs in 2024 (up to 87%), it could not compensate for the heavy currency devaluation experienced since 2020 with tariffs now in the range of 4 c/kWh as opposed to 7 to 10 c/kWh back in 2020.

? With current tariffs, on-grid solar PV systems are not feasible which is further exacerbated by the high lending interest rate resulting in > 20% increase in the LCOE

? Further tariff increase is expected in 2025 due to government direction to gradually remove subsidies from electricity sector

? Pitfalls in PV system financial modelling were discussed with recommendation to model all costs pegged to USD or EUROS

? Tariff predictions were carried out for all user categories with floor values equal to pre-2023 USD pegged values and ceiling values assumed based on various indicators.

? Three (3) scenarios were proposed for tariff increase: slow, moderate, and aggressive escalation rates. It was concluded that the government is likely to pursue a moderate tariff escalation scenario, with annual tariff increase not exceeding 40%, but with some consumer categories who might experience steeper escalation.

? Finally, the feasibility of solar PV under the proposed scenarios and predicted tariff pricing were assessed. Under a moderate tariff escalation scenario and predicted tariffs, solar PV would be feasible and a lucrative investment for industrial and high electricity using residential and commercial consumers. However, when the system is financed through debt, the high interest rate would make it much less lucrative unless the tariffs were increased to reach the ceiling target pricing i.e. 10.2 c/kWh. Otherwise, a mix of grants and concessional loans provided by the banking sector with support from multi development banks would be required.

An Increase, for real?

In 2024, Egypt experienced significant increase in electricity tariffs, reaching up to 87%, after 5 years of fixed tariffs to mitigate the impact of COVID 19. This increase is a consequence of government direction to gradually remove subsidies and to compensate for the heavy devaluation in the local currency starting 2022. However, despite this significant increase in the tariffs, it failed to keep up with the devaluation. As a matter of fact, when pegged to USD, electricity tariffs experienced a net decrease reaching up to 54% in some cases, as shown in table below as well as the figure which highlight the variation in the industrial tariff; with tariffs currently in the range of 4 c/kWh as opposed to 7 to 10 c/kWh back in 2020.

Consequences

As a result for such decrease in tariffs, one can conclude that the fiscal burden on the government by subsidizing the tariffs became even heavier; but that was not the only dire consequence, another industry was heavily impacted if not devastated!

You guessed it right: renewables especially residential, commercial and industrial on-grid scale solar with sizes less than 25 MW (ii) , which is the largest size that is eligible for net metering and self-consumption schemes as per Egypt ERA rules (iii) . In particular, with such low tariffs, on-grid solar PV in Egypt is simply not feasible, for the simple reason that the levelized cost of the generated electricity, which we estimate to range from 6-7 c/kWh, is much higher than the current tariffs. For the same reason, currently the implementation of such system is with sole purpose to meet internal sustainability targets or international requirements but not at all for OPEX reduction.

Adding salt to injury, with the current high lending interest rates with a corridor of 28% (iv), applying for a loan to install solar PV would result, according to our estimate, in further whopping 20% increase in the LCOE, killing any hope for a feasible residential/commercial scale solar PV system.

Further tariff increase is imminent

It is, therefore, imperative and expected that the government keeps hiking the tariffs as per their current policies to remove subsidies - and here, it must be mentioned that in a country economically struggling like Egypt, as much as we need fair pricing for electricity tariffs to promote solar PV, we cannot turn our eyes from the consequent social impact on large portion of the society, a difficult dilemma the government needs to always keep in mind (we shall discuss this later).

In this context, the challenge that many analysts can face is the ability to predict the future tariff projections given their significant impact on the feasibility of solar PV. Accordingly, in this article we propose various potential scenarios to project future electricity tariffs, hoping this would help for more certainty for both suppliers and beneficiaries.

Pitfalls in solar PV system financial modelling

Before we delve in the scenarios, let’s highlight couple of challenges/pitfalls that I commonly noticed in solar PV financial models. The first is whether to conduct the analysis in USD/EUROS or local currency. This is a critical matter as it can significantly impact the model. Here, I suggest pegging all prices to USD or EUROS for the simple reason that it is impossible in Egypt to predict future FX rates - at least over 25 years period.

The second pitfall, is that models pegged to USD, sometimes treat tariff escalation rates as if they are still in local currency assuming sometimes up to 10% tariff escalation rates, which is not reasonable and result in overly optimistic results by unrealistically boosting the revenue of solar PV systems. In fact, one may not expect the tariff increase, when pegged to USD, to increase more than the US inflation rate. In that case, an annual increase of 2-2.5% is more reasonable. However, 2-2.5% increase is only reasonable in the long run, but now, as we concluded, the tariffs need to be heavily adjusted to match the current FX rate as well as those expected in the next 4 years as per IMF projections (v) .

Projected Tariffs & The true cost of generation

An important question to be posed to predict projected tariff prices is “what is the true cost of generation?”. According to a statement by the prime minister , the current cost of electricity generation in Egypt is 2.35 EGP/kWh which is equivalent to 4.7 US c/kWh. However, this value is questionable as the rates pre 2023 were already ranging from 7 to 10 c/kWh with exception to the heavily subsidized low electricity using categories especially the first 3 residential tariff categories and first commercial tariff category, where tariffs ranged from 2.4 to 4.1 c/kWh.

Now, we understand that Egypt ERA increases the pricing on high electricity using categories to partially offset the subsidies on the low electricity using categories. As far we are aware, back in 2020, the rate of the highest using residential category (CAT 7), set back then at 1.45 EGP/kWh or 9.24 c/kWh, was likely to be the unsubsidized rate i.e. the true cost of generation (including transmission & distribution). Accordingly, one may expect that according to government direction to gradually remove subsidies, that industrial and all high electricity using residential and commercial categories should increase to at least 9.24 c/kWh. Conversely, we do not expect low electricity using residential and commercial categories to be ever unsubsidized allowing the government to consider the social aspect. In this case, to address the gap (while still removing the subsidy burden from government expense), we expect the same practice of additional tariff increase beyond the cost of generation to remain.

Accordingly, the table below shows our prediction on what should the tariffs be. The use of word “prediction” here is intentional as proper estimation would require an in-depth study to assess the actual cost of generation and the revenues of the Egyptian Electricity Holding Company as well as the consumption profile for each tariff category to accurately balance expenses and revenues, which is difficult to do due to lack of data.

The rules used to estimate the target tariff pricing are as follows:

1- As floor, all tariffs were assumed to least increase to pre-2023 US pegged values

2- The ceiling for CAT 5 Commercial tariff is assumed to be the same as the pre-2023 values which as discussed were already likely to be higher than the generation cost to reduce subsidies on low electricity using consumers’ categories

3- Similarly, we expect the ceiling target tariff for industrial low voltage to be the pre-2023 CAT 5 commercial tariff for the simple reason that the government raised its price in 2024 to be the same as CAT 5 commercial, a strong indicator that industrial tariff would also contribute to subsidizing low electricity using consumers’ categories.

4- For highest use electricity residential consumers’ category, it is highly likely that they will be also used to subsidize low electricity using categories; yet indicators from 2024 tariffs shows that their tariffs are likely to stay at the same level as pre-2023 values i.e. cost of generation levels. But in all cases, a ceiling value as the pre-2023 CAT 5 commercial tariff will be assumed.

5- The ceiling for all other tariffs were adjusted using the same ratio as in 2024 tariffs using CAT 5 commercial tariff as base given most of these tariffs are likely to remain subsidized with exception to CAT 3 and 4 commercial tariffs. This is unless the estimated value is lower than pre-2023 values; and in this case, only one target tariff is used which is the pre-2023 value.

The scenarios

To reach the aforementioned predicted target tariffs, we propose 3 tariff escalation scenarios as follows:

Table below shows the expected percentage escalation rates for all tariffs with main focus on industrial, commercial CAT 5 and residential CAT 6/7 categories as these would be the main users for solar PV systems in Egypt (vi) . We also considered CAT1 residential category as an example for subsidized tariff categories.

Given the results shown, it is highly unlikely that the government would pursue an aggressive approach of raising tariffs as this will entail tariff increases ranging from 92% to 145%; knowing that in 2024, the maximum percentage increase in tariff did not exceed 87%.

In fact, it is likely for the government to pursue the moderate/gradual tariff increase approach, which, while it would mean more subsidy burden at least for 4 years, it would consider the socio-economic aspect and keep commodities inflation controlled. With that said, some tariffs especially the highest electricity using commercial and residential tariff may experience higher percentage increases in the first couple of years i.e. to fall between scenario 1 and 2. Conversely, for scenario 3, while would be more gentle on the consumers and result in more controlled commodities inflation, we highly doubt the government would pursue such scenario given their direction to remove subsidies on a faster pace.

Finally, the decision on whether to set tariffs closer to the estimated floor or ceiling values is challenging to predict. We believe that at least the industrial low voltage, and CAT6/7 residential tariffs would be closer to the ceiling values along with CAT 5 commercial tariff to generate enough revenue to subsidize the low electricity using categories without adding any subsidy burden on the government.

Solar PV feasibility with new projections

Table below shows the feasibility of on grid solar PV for industrial applications, knowing that the results are also applicable to CAT6/7 residential and CAT5 commercial category consumers.

It is clear that under the current tariffs, solar PV systems are not feasible with negative present value even without debt finance through. It is also observed that the escalation profile for the tariff as expected would impact the feasibility with best outcome occurring under the aggressive scenario. Under a moderate tariff escalation scenario, the payback times are reasonable and sufficient to get the market to grow again in Egypt. Finally, the impact of the current high interest rate is well noticeable with significant impact on the payback time. This would require a mix of grants and concessional loans provided by the banking sector with support from multi development banks. With that said, the ceiling tariffs would be more or less sufficient to render such systems feasible even under high lending rates.

Endnotes

(i) Egypt ERA, 2024, Tariff, Link

(ii) Utility scale applications are not impacted as electricity is directly purchased by the EETC from the private sector through PPP such as BOT, or the plants are fully owned by the EETC.

(iii) Egypt ERA, 2024, Circular 6 of 2022, Link

(iv) Central Bank of Egypt, 2024, Overnight Deposit and Lending Rate, Link

(v) IMF, 2024, World Economic Outlook database: April 2024, Link

(vi) Such clients typically would afford purchasing such systems and have roof space to do so

(vii) Assuming floating currency

(viii) Independent Arabia, 2024, Egyptians are anticipating an increase in electricity prices of up to 30 percent (Translated from Arabic) , Link