{"id":557132,"date":"2021-09-07T04:00:15","date_gmt":"2021-09-07T04:00:15","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/goinggreens\/investor-confidence-in-egypts-renewables-is-rising-but-risks-remain\/"},"modified":"2021-09-07T04:00:15","modified_gmt":"2021-09-07T04:00:15","slug":"investor-confidence-in-egypts-renewables-is-rising-but-risks-remain","status":"publish","type":"goinggreen","link":"https:\/\/enterpriseam.com\/egypt\/goinggreens\/investor-confidence-in-egypts-renewables-is-rising-but-risks-remain\/","title":{"rendered":"Investor confidence in Egypt\u2019s renewables is rising, but risks remain"},"content":{"rendered":"

<\/a> Investor confidence is rising in Egypt\u2019s renewables, but major risks are still seen in some <\/strong>areas: <\/strong>Since the launch (pdf)<\/a> of Phase Two of Egypt\u2019s solar feed-in-tariff (FiT) program and the completion of the 1.5 GW Benban solar park<\/a>, Egypt\u2019s been a hotbed of renewable energy investment. Wind energy investment is also well underway, with players keen to get in on projects like the Ras Gharib wind farm<\/a>.<\/p>\n

Covid-19 and the electricity supply glut slowed the renewables transition:<\/strong> Egypt\u2019s renewable energy ambitions have been tempered by our electricity supply glut<\/a>. To avoid exacerbating overcapacity amid pandemic-driven reduced energy demand, the government took steps last year<\/a> to limit renewable energy generation. We should expect investment in renewables to slow down substantially over the next 18-24 months,<\/strong> the CEO of a prominent renewable energy company told us at the time.<\/p>\n

An April 2021 <\/strong>report (pdf)<\/a><\/strong> by RES4Africa and PricewaterhouseCoopers assesses the perceived risk of investing in renewable energy,<\/strong> in seven countries in the Southern and Eastern Mediterranean (SEMED). It follows an earlier 2016 report (pdf)<\/a>. The 2021 report\u2019s Egypt-focused section uses data from five public sector and 21 private sector survey participants.<\/p>\n

The good news: overall, Egypt\u2019s renewables investment environment is seen as less risky than it was in 2016. <\/strong>Investor confidence in Egypt\u2019s renewable energy sector has improved markedly in the last five years, with Egypt now considered medium-risk rather than high-risk.<\/p>\n

How does Egypt compare to its regional peers?<\/strong> Regionally, overall perceived investment risk in renewables has decreased since 2016. Morocco\u2019s risk level is lowest. Egypt, Jordan and Tunisia are all considered medium-risk markets, and Algeria, Libya and Lebanon high-risk. Like Egypt, Morocco, Jordan and Tunisia all see pronounced gaps in risk perception between the public and private sectors, the report notes.<\/p>\n

What\u2019s helped reduce perceived risk? A more stable macroeconomic climate and support from DFIs.<\/strong> The government has improved Egypt\u2019s credit rating, stabilized the macroeconomic climate, and drawn financing and technical support from development finance institutions (DFIs), the report tells us. 73% of private sector survey respondents now see financing availability in Egypt as being of low concern.<\/p>\n

Thanks to gov\u2019t efforts to improve the legislative framework, Phase 2 of the FiT attracted much more interest than Phase1,<\/strong> the report tells us. Phase Two\u2019s contractual arrangements included a 25-year Power Purchase Agreement (PPA) with the Egyptian Electricity Transmission Co. (EETC)<\/a> and a sovereign guarantee backing the payment obligations of energy-purchasing parties.<\/p>\n

Now, investors feel the likelihood of not seeing project revenues is low: <\/strong>Over 60% of private sector respondents see risks related to project counterparties (usually EETC), capital transfer or termination as being of low concern. Phase Two\u2019s PPA and the sovereign guarantee upped investor confidence substantially over five years, the report tells us.<\/p>\n

Meanwhile, construction, operational, social and environmental risks aren\u2019t a worry:<\/strong> Construction and operation concerns remain low, perhaps driven by the affordability of local raw materials and components, competitive terms offered by Egypt\u2019s engineering companies, and our highly qualified workforce, the report says. 80% of private sector respondents see obtaining licenses and permits as of low concern \u2014 a substantial improvement from five years ago. And perceived environmental and social risks are low, perhaps because of the job-creation potential renewable projects offer, the report notes.<\/p>\n

Still, major investment concerns remain \u2014 particularly among the private sector. Despite gov\u2019t reforms, the regulatory framework tops them all. <\/strong>The law is considered the most problematic risk area among investors, with perceived risk actually increasing in the last five years, \u201cin contrast to the improvement in all other areas.\u201d But while 79% of private sector respondents consider regulatory and policy issues to be of very high concern, only 20% of public stakeholders agree. More business-government dialogue is needed to bridge this perception gap, the report says.<\/p>\n

What\u2019s driving this? EETC\u2019s perceived high influence over gov\u2019t policy: <\/strong>Many investor concerns relate to a dispute<\/a> about the cost-sharing agreement between the EETC and Benban project companies, where the EETC unilaterally raised the cost-sharing costs, the report says. Investors see the EETC as able to exert undue influence over government policy, it adds.<\/p>\n

Along with the belief that non-megaprojects face greater risks than megaprojects: <\/strong>The private sector sees Egypt\u2019s legal framework as inadequate to support investment in renewables projects, aside from government-backed megaprojects, the report says. Projects that aren\u2019t megaprojects face more uncertainties when it comes to permitting, wheeling charges and curtailment, investors believe.<\/p>\n

And lingering concerns about dispute resolution:<\/strong> Dispute resolution was particularly challenging during Phase One of the FiT, when international arbitration was banned, the report says. Though this was resolved during Phase Two, investor concerns remain about the quality of Egypt\u2019s judicial processes. Egypt ranked 166 globally for contract enforcement in the 2020 World Bank Doing Business Report (pdf)<\/a> \u2014 well below the MENA average, the 2021 report notes.<\/p>\n

Some 60% of private sector respondents also have concerns about Egypt\u2019s tax regime,<\/strong> the report tells us. Although a 30% tax deduction on net income for renewables projects was among the incentives introduced by the new Investment Act of 2017, investors are said to be concerned that new taxes may be introduced in the wake of the pandemic to make up any budgetary shortfalls.<\/p>\n

The public and private sectors are much more aligned on FX risks,<\/strong> which are heightened by pandemic-driven instability, the report says. Although the FX rate has stabilized since the 2016 devaluation, covid-19 and decreased tourism revenues have driven the value of the EGP down. The central bank issued a convertibility guarantee, which offers investors some relief, but more FX stability is needed to lend it credibility, the report adds.<\/p>\n

The report has a series of recommendations for how to reduce perceived risk: <\/strong>These include working to reduce the influence of the EETC, and increasing business-government dialogue. Dispute resolution timeframes should be shortened, and the quality of Egypt\u2019s judicial processes improved. The EGP should be stabilized to maintain the government convertibility guarantee \u2014 a crucial part of boosting investor confidence, it says. Small and medium-sized projects should see increased access to private capital. Renewables projects should continue to receive tax breaks, and fossil fuel subsidy reductions should continue.<\/p>\n

\n

Your top climate stories for the week:<\/strong><\/p>\n