Development finance agencies are making a comeback into Egypt’s renewables sector after they withdrew support from the country’s first phase of its feed-in-tariff scheme for solar and wind projects. Rebecca Spong reports.


After a short hiatus, a number of development finance institutions (DFIs) have returned in force to support Egypt’s renewables sector, helping the country to reach its ambitious target of ensuring 20% of its electricity is generated from renewable sources by 2022. Renewable energy accounted for just 6.41% of Egypt’s total energy consumption in 2014, according to data from the World Bank.

DFIs are seen as a vital source of funding for this sector. The organisations typically have an internal mandate to support renewable energy in emerging markets, which – unlike commercial banks – enables them to take on higher-risk transactions in unstable markets such as Egypt.

“There is a real interest from the DFIs. They are an important feature and are needed to mobilise financing over the long term that is not always available for countries like Egypt,” says Guillaume de Luze, deputy head of advisory and project finance for the energy group, Emea, at Société Générale.

The European Bank of Reconstruction and Development (EBRD), France’s Proparco and the private arm of the World Bank, the IFC, have demonstrated their renewed support for the sector with the recent signing of multi-million-dollar agreements to finance the country’s solar and wind farms. In one such example, in August, the EBRD and Proparco signed a US$116mn deal to support two 50MW solar plants in Egypt.

The return of the DFIs is welcome news for Egypt’s authorities. Last year many of these finance institutions and other investors pulled out of the first phase of Egypt’s renewable energy feed-in-tariff (FIT) scheme due to concerns about some of the clauses within the power purchase agreement (PPA).

The FIT system is a programme launched in 2014 whereby private sector investors can enter a PPA with the Egyptian Electricity Transmission Company (EETC) to build and then operate power stations, selling the electricity to the government at a fixed price.

Negotiations between the government, DFIs and other investors derailed in mid-2016 due to concerns about currency risk and whether disputes would be resolved locally or offshore. Ultimately, just a handful of renewable projects under phase one of the FIT scheme have successfully closed.

With some DFIs now returning to the sector – reassured by key alterations made to the PPA following the launch of phase two in September 2016 – hopes are rising that more deals will be signed. Indeed, the race is on to complete deals since the government requires all phase two projects to reach financial close by October.

“There have been a number of concerns which have entered around currency liquidity and devaluation and the forum for arbitration, amongst other things, but the lenders and sponsors have got comfortable with these,” says Michelle Davies, head of clean energy and sustainability at the law firm Eversheds.

“We were advising over 25 clients in round one: not all went through. In round two we have advised on about 19 projects. We are delighted to be engaged to this extent. Our team is very busy at the moment as our clients are hoping to reach financial close soon,” she adds.


Lack of power

Egypt urgently needs to increase its renewable energy output to meet the growing demand of its population. Power outages and blackouts are all too frequent in the country, as it grapples to cope with a shortage of electricity and inadequate infrastructure. Even Cairo’s international airport suffered a major power outage in late July that disrupted and delayed some flights.

By 2022, Egypt plans to generate 12% of all energy from wind, around 2% from solar and 6% from hydroelectricity. The country is in a good position to develop its renewable sector, enjoying hours of sunshine due to its geographic location, as well as strong winds it can harness, particularly in the Gulf of Suez.

Increasing the output of the renewables sector would not only free up some of its oil and gas reserves for the export market, but also attract much-needed foreign investment into a country that has suffered years of political turmoil including the ousting of President Hosni Mubarak in 2011, the subsequent removal of President Mohamed Morsi in 2014 and the rise to power of the current president and former army general Abdel Fattah Al-Sisi.

Furthermore, a population that has its basic energy requirements met – and can therefore run their homes and businesses without constant outages – may be less likely to want to be part of any future revolutions.

It was under President Al-Sisi that the FIT scheme was originally set up to support small solar photovoltaic and wind projects with a capacity of 50MW or less, aiming to generate 2,300MW of solar and 2,000MW of wind capacity.

It allows for different fixed fees for producers, depending on whether they are a private household providing solar power, a commercial producer or a producer generating more than a certain capacity of power.

The flagship project under the FIT programme is the 1.8GW Benban photovoltaic solar park, which is set to be one of the largest of its kind in the world. It is being built across a 37km2 plot of land in the south of Egypt, divided up into separate projects, each capable of producing 50MW each.


Phase one woes

Calls for tenders under phase one of the FIT programme (covering both wind and solar projects) initially attracted a lot of international interest. The project was seen as a possible sign that the troubled North African country was emerging as a viable investment opportunity after years of instability.

“The FIT scheme certainly gathered a lot of interest from Egyptian and international investors,” says Kilian Balz, a Cairo-based partner at the law firm Amereller.

“The reasons were manifold. First, the law was enacted at a time when there was a shortage of electricity. So, reducing power cuts was the talk of the day. Second, due to forex restrictions, many Egyptian companies were looking for new investment opportunities in Egypt. Third, international renewable energy investors – following the decline of markets like Spain and Italy – were looking for new opportunities,” he says.

The FIT tariff was originally set at a fairly high level of 14.34 cents per kilowatt hour (kwh) for projects between 20MW and 50MW, a price that some investors say the government came to regret.

Compared to other Middle East countries, this is a considerable price for the government to pay. In contrast, last year, the award of phase three of Dubai’s Mohammed bin Rashid Al Maktoum solar park saw solar PV power priced at less than 3 cents per kwh.

After the initial flurry of interest, the scheme ran into trouble with investors and international lenders – mainly the development finance institutions – who raised various concerns about the bankability of the PPA that they were to sign.

“There is a general consensus amongst the investors and developers’ community that Egypt’s renewable energy market has great potential, and this is why the first round attracted over 175 multinational energy companies and financial backers,” says Sarah El Ashmawy, corporate intelligence analyst on KPMG’s Middle East desk.

“However, financing quickly became challenging amid rumours of an imminent currency devaluation and then devaluation itself,” she adds.

Egypt’s currency was devalued last November after the central bank decided to float the currency, responding to demands set out by the International Monetary Fund (IMF) in order for the country to secure a US$12bn loan from the fund. Uncertainty in the run-up to the devaluation was cause for concern for investors being paid the tariff fees in Egyptian pounds.

“Our contacts in the developers’ community told us that finding financing when media was reporting weekly changes in the terms of payment of the FIT scheme had become impossible. The confidence in the business environment had been broken,” explains El Ashmawy.

There were also concerns over the government’s insistence that disputes be resolved domestically via the Cairo International Arbitration Centre, while investors wanted international arbitration.

Some say that the Egyptian authorities dragged their feet on coming to a resolution on these issues as they were reluctant to pay out the high tariff rate. Ideally, they wanted to limit the number of deals closed under phase one, those involved suggest. Representatives of the Egyptian government did not respond to GTR’s requests for comment.

Beset by difficulties, the appeal of the projects rapidly diminished and many DFIs decided to drop out of the first round of the FIT programme.


A new PPA

By September 2016, Egypt had launched phase two of the FIT, making a series of amendments to the PPA in an effort to win back the DFIs. Anyone that had been prequalified under phase one was allowed to bring their projects under the second phase.

The new PPA features some major changes. The government has agreed to allow for offshore arbitration in the case of disputes. It decreased the tariff paid out for projects between 20MW and 50MW to 8.40 cents per kwh. It also changed the proportion of US dollar funding required to come from foreign sources from 85% under phase one to 70% under phase two.

The revisions were mainly welcomed by investors, and were sufficient to bring back some DFIs. “The Egyptians agreed to an offshore seat of arbitration – that made multilateral and DFI participation possible,” says Chris Down, partner at Norton Rose Fulbright, a law firm that is working on a number of phase two projects.

In July, the IFC demonstrated its new commitment in Egypt by approving an investment of US$635mn to help construct, operate and maintain up to 11 solar power plants in the country, with a combined capacity of 500MW.

The UK’s CDC is also back. “CDC is very interested in the Egyptian renewable programmes and projects and is actively working on a number of projects in the solar FIT round two programme under the IFC programme,” Iain Macaulay, investment director and head of project finance at the development finance institution, tells GTR.

“We did actively pursue a number of projects in round one, but these were halted for various macro reasons. These have cleared and we, along with other DFIs and the power development community, have been eager to re-engage in the process for round two,” he says.

“We would commend the Egyptian government on the structural and regulatory changes brought to bear to make a programme like this feasible to attract international power developers, equity investors and the international DFIs. In particular the reforms around the floatation of the Egyptian pound leading to a more stable exchange rate,” he says.

Similarly, France’s Proparco has returned, along with the EBRD, with which it jointly signed the US$116mn deal in August to fund the two solar plants in the Benban complex. The plants will be constructed, owned and operated by two Egyptian subsidiaries of the French firm EREN Renewable Energy and the Dubai-based operator Access Power.

“The amended terms and conditions set by the Egyptian authorities for the second round of the FIT scheme provided for a bankable PPA for DFIs,” Alice Lucas, senior investment officer for Proparco’s energy and infrastructure division, tells GTR.

“The major investments signed in August by Proparco and the EBRD are illustrative of the determination of the authorities and DFIs to work together to overcome the challenges inherent to ambitious projects such as the Benban complex,” she adds.

The transaction falls under a US$500mn framework agreement the EBRD signed with Egypt in June, through which it plans to finance 16 solar projects, delivering a total of 750MW of capacity. The EBRD said in an official release it expects construction to begin on some of these projects by the end of this year.

One such project is the construction of six solar plants within the Benban park totalling 400MW. Norway’s Scatec Solar and partners signed a 25-year PPA with Egypt in April under phase two. The EBRD is leading the financing for the projects and the expected total debt for the six plants is as much as US$350mn. Scatec confirmed to GTR it was expecting to reach financial close in October.

Furthermore, in August, the EBRD announced it was joining forces with the Green Climate Fund (GCF) to contribute towards a US$1bn renewable energy project in Egypt. The EBRD is to commit US$352.3mn, while the GCF is providing US$154.7mn, and other sponsors and lenders will make up the rest of the amount.

The funding is set to be used in two ways: to finance technical assistance on renewable projects, and to help mobilise and co-finance debt financing with other development financial institutions, and eventually potentially from commercial banks. The funding will mainly support projects falling under the FIT scheme.

A further sign that confidence in Egypt’s FIT programme is returning is the signing of a PPA between Saudi Arabia’s ACWA Power and the Egyptian government in August. The contract – which falls under phase two – will see ACWA develop, finance, build, own and operate (BOO) three solar photovoltaic projects in the Benban solar park.


Commercial bank involvement

The DFIs are clearly needed at this early stage of the FIT programme to get projects funded, due to the still limited interest and risk appetite from international commercial banks. Currency risk, Egypt’s unstable political situation and the small size of some of the projects are just a few reasons given to explain the absence of the banks.

“I just don’t think there is a market for uncovered commercial debt in Egypt,” says Down at Norton Rose Fulbright.

There have been some exceptions, with news in March that commercial lenders Arab African International Bank and BayernLB worked on a US$126mn project financing for a 50MW solar plant project in the Benban park that closed under phase one of the FIT. The deal was guaranteed by the German export credit agency (ECA) Euler Hermes.

The project is eligible for the 14.34 cents per kwh tariff and the EETC is purchasing the electricity under a 25-year PPA. German solar developers Ib Vogt and Solizer, together with their local Egyptian partner Infinity Solar created a project company – or special purpose vehicle – called Infinity 50 for Renewable Energy.

“It was principally funded by US dollar debt and that was only possible because Hermes was prepared to accept domestic arbitration,” says Down, who advised on the transaction.

Typically, to date, most commercial banks are likely to be more attracted to the larger renewable projects that sit outside the FIT scheme. Yet, even these bigger projects still often require some support from ECAs or DFIs, say those working on the transactions.

One project which is edging towards financial close is an onshore BOO 250MW wind farm under development in the Gulf of Suez. It is being built by French firm Engie, Japan’s Toyota Tsusho and the Egyptian firm Orascom.

Société Générale is working on this deal. “We are keen to be involved in these kinds of projects,” says de Luze.

Speaking broadly about the Egyptian market, de Luze says that typically the bank will look to work alongside ECAs or DFIs to help mitigate risks of operating in Egypt’s renewables sector. He also says the smaller renewable projects are usually less interesting for his institution.

“One of the issues we had initially when looking at the overall renewables sector in Egypt is that they were very keen to develop small projects – the US$50mn or less-type opportunities. Clearly this is a bit small for an institution like ours. They are perhaps easier for DFIs. It is true for any international project finance institution that US$50-100mn projects are less appealing.”

The pan-African renewable power generation company Lekela Power, which is 60% owned by UK firm Actis, is also developing a 250MW wind farm in the Gulf of Suez. It signed an agreement with the EETC in 2015. It is not yet known if there are any commercial banks on-board.

Given the current limited commercial bank interest in Egypt’s renewables sector, the future of the country’s wind and solar farms is still very much dependent on DFIs. The sector needs them to provide funding, mobilise financing from other sources, and demonstrate to the wider market the financial feasibility of these projects.

Thankfully for Egypt, many of these institutions have now returned with renewed vigour to the sector.