Egypt's renewable energy opportunity key to attracting foreign investment

For millennia Egypt has depended on the Nile and its delta as the source of irrigation and fertility for its civilisation and agriculture remains a vital sector in its economy. Climate change puts this at risk.

Rising sea levels threaten not just its shoreline but salination in the Nile, which in turn poses a risk to the fertile tracts that fringe the river. Heatwaves or other extreme weather events are also an obvious risk.

For a country that is self-sufficient in vegetable and fruit crops, and which exports five million tons of produce every year, the dangers of climate change are very real. At the same time Egypt is tackling climate change at the source – energy generation and consumption. The country’s energy sector reflects a global story in which hydrocarbons are currently vital economically, but where future prosperity lies clearly in the world of solar power and renewable fuels.

Egypt’s immediate challenges from rising sea levels and the direct effects of climate change may help explain the high level of environmental awareness among Egyptian consumers. According to professional services firm PwC’s Global Consumer Insights Survey, 76% of consumers in Egypt, will pay a higher price for goods that are made from recycled, sustainable, or eco-friendly materials.

This high awareness of environmental issues among the population naturally helps support and drive governmental initiatives. The Egyptian government has established a Council for Climate Change. Its role is to promote adaptation and mitigation. Adaptation to face those climate change affects that are now unavoidable, and mitigation through the development of renewable energy, water management and green finance.

Importantly, Egypt was the first country in the MENA region to issue a green bond, raising $750 million in 2020 to help finance a portfolio of green projects – in renewable energy, clean transportation, sustainable water and wastewater management and pollution prevention and control – valued at $1.9bn.

Egypt’s largest private commercial bank, Commercial International Bank (CIB), followed this up in 2021, issuing $100m of green bonds to finance or re-finance eligible green projects, the first from the country’s private sector.

The bond may be a single transaction, but it’s the first of more to come, and importantly emblematic of the bank’s broader determination to play a key role in the country’s sustainable development.

Such groundbreaking developments are important for the country, and the broader region, in the pursuit of creating and sustaining a more sustainable economy. Yet, no one is underestimating the challenge of achieving that; oil and gas loom large over the Egyptian economy.

Following the political turbulence of 2011-2012 Egypt’s hydrocarbon sector was set back. Gas production declined between 2012 and 2016 and for a period the country become a net importer of gas. But since then, there has been a significant turnaround.

New discoveries, notably the El Zohr offshore gas field identified in 2015 have seen gas production rise, until in 2019 Egypt became a net exporter of hydrocarbons. The state retains a significant role in the sector, but there is plenty of foreign investment, too, from both global multinational oil groups including Chevron and BP, as well as many smaller exploration and production groups.

Liquified Natural Gas (LNG) is a vital component of exports. LNG exports rose 150% in 2019 alone according to the Central Agency for Public Mobilisation and Statistics. Gas exports in 2021 reached $3.9 billion. Rising prices and supply disruption from Russia has expanded the potential market for Egyptian LNG and 15% of those exports went to Europe.

Imports of gas from other regional producers for turning into LNG and then further export could see Egypt become regional hub for LNG. The location of the Suez Canal as a gateway from the Mediterranean to Asia is a bonus.

At first glance, the improving prospects for Egypt’s hydrocarbon sector may not appear to be a sign of a nation tackling climate change. But this is to underestimate the importance of LNG as a transition fuel – cleaner than coal – that, in fact, plays a major role in reducing carbon emissions in comparison with the past.

As LNG production boomed, Egypt itself cancelled the construction of its own coal plant. Even as the world moves to renewables, Tarek Abdel Rahman, managing partner at Egyptian private equity firm, Compass Group, thinks it is far too early to call time on Egypt’s hydrocarbons sector.

“I don’t think it’s going to die anytime soon. People look at it as a uniform sector all over the world and that’s not really true,” he says, pointing out that as along as hydrocarbons have any role in global energy, extraction costs in the Middle East are likely to continue to be far lower than in other regions, such as the North Sea.

Abdel Rahman also cites the value of gas as a transition fuel allowing the world to move away from coal, and points to the importance of equity in global development.

“If you look at what is going on the ground most greenhouse emissions come from the 50 most advanced countries. So why should the next 200 countries in the world really stop their own development in hydrocarbons when the 50 most advanced countries are not,” he says.

Given the recent expansion in gas production, it is hardly surprising that Egypt depends on gas for the vast majority (about 94%) of its electricity generation. But its climate change strategy has set ambitious targets for renewable energy.

In June, Egypt’s Minister of Electricity and Renewable Energy, Mohamed Shaker, said the country’s target is for new and renewable energy to account for 42% of energy generation by 2035. And if there is one energy source that Egypt has in even greater abundance than gas, it is sunlight.

“Egypt is abundant in pristine desert for possible energy generation,” says Krisjanis Krustins, director at Fitch Ratings.

The renewable drive underway in Egypt is also a central plank of its opening up to foreign investment.

Embedded infrastructure investment is vital for Egypt if it is to free its balance of payments from dependence on the short-term carry trade that has made its economy vulnerable to every twist and turn of global interest rate and currency markets (see our main report on Egypt’s economy).

Abdel Rahman of Compass Capital, points to renewables as one area where the government has cleared the way for private foreign investment. “Renewables are generally a private sector driven initiative. The government has designed a very good initiative where they have this huge framework, around locations and regulations for renewable energy, and the private sector money poured in,” he says.

The shining example of solar energy generation is the Benban Solar Park in Egypt’s western desert. The site has a planned capacity of 1.8GW, which will give it an annual energy production of more than 4Twh per year. The site is owned by Egypt’s New and Renewable Energy Authority, but financing was sourced from banks from other Middle Eastern countries and Europe, with Germany’s Bayerrische Landesbank providing 85% of the debt.

Meanwhile, Egypt’s Red Sea coast is proving a highly suitable location for wind farms. The Gabal El-Zayt wind farm, begun in 2015 and linked to the grid in 2018, is the largest wind farm in the region. To encourage overseas investment in its renewable plan, Egypt has allowed private sector investment in energy generation since 2015.

The first fully independent wind power project is now in place at Ras Ghareb, close to the Red Sea coast. The operation is jointly owned by French group Engie (40%), Toyota Tsusho (40%) and Orascom Construction (20%).

Egypt’s potential for renewable electricity generation also has regional significance, with electricity grid connections being established with neighbouring markets including Saudi Arabia and Sudan.

Already a net exporter of electricity, Egypt could prove to be a renewable electricity hub for the Middle East and North Africa.

For all the domestic focus, Egypt’s green horizons could end up being global. The country’s renewable electricity is also a way to produce green fuel, more specifically green hydrogen.

“There seem to be some very promising developments in the area of green hydrogen,” says Fitch Ratings’ Krustins, pointing to the Suez Canal and Egypt’s global location as a boon.

Indeed, if Egypt can develop as a hub for the production and global distribution of LNG, then the same goes for green hydrogen.

“The Suez Canal Zone may bring together a lot of the factors that could make Egypt into a very successful player in that space,” says Krustins.

In the first half of 2022, Egypt announced a pipeline of green hydrogen projects with total investment estimated at $40 billion. The plans have attracted considerable international interest and the first such plant, located near the Suez Canal, is scheduled to open in November to coincide with COP27.

The long-term potential for Egypt as a green hydrogen producer is being hailed by some as transformational.

Earlier this year Dr Minh Khoi Le, head of hydrogen at Norwegian energy research group Rystad Energy, said: “Egypt has all the prerequisites to become a green hydrogen giant. Sitting between three continents and with the Suez Canal carrying approximately 12% of all the seaborne freight in the world, Egypt can supply renewable energy near and far.”

The path ahead for Egypt’s sustainable economy is clear to see. The country has the natural hydrocarbon resources and the LNG facilities to play a role in energy transition, but also has the potential to shift its own electricity generation towards renewables. Green hydrogen could provide an even wider market for Egypt’s nascent sustainable energy industry.

This path may also hold the key to bringing lasting foreign investment and green finance to Egypt. As well as being a contribution to tackling climate change, it may also be a vital contribution to bringing economic stability and sustainable growth in every sense.