The Government of Egypt has said that Egypt must invest US$12 billion in the electricity sector over the next five years in order to meet that country's urgent electricity demands. Renewable power - both solar and wind - will be a key part of this initiative.
Egypt plans up to 2,300 MW of solar and up to 2,000 MW of wind generation in the first regulatory period. This will include 2,000 MW of Solar PV from 500 kW up to 50 MW, 300 MW of Solar PV Projects below 500 kW and 2,000 MW of wind generation. The first regulatory period will end when these targets are met, or after 2 years, whichever is sooner.
In late 2014, Egypt announced a feed in tariff (FiT) in order to implement this plan. FiT's have been successfully implemented in other countries to swiftly ramp up renewable power development. They have the advantage to the developer of creating certainty and not requiring a risky competitive tender process.
The first renewable energy tender results are in (see table). These developers/consortia are eligible to develop multiple projects (each below the applicable maximum size). However, material changes could result in the need to reapply. This is likely to be of concern to some of the consortia. Some consortia may wish to sell their position or to admit new members. However, the Egyptian government has made clear that there will be restrictions on the ability of consortia to change their composition. How restrictive this will be is rumoured to be a matter of ongoing discussion between the government and individual developers.
Formally speaking, the door is still open for additional developers and consortia to qualify. It has been announced that there could be up to four rounds per year. Disappointed applicants who failed to qualify are eligible to reapply in future rounds and will have the opportunity to learn the reasons why their application was not successful. However, the scope for additional rounds of large scale PV seems low as the initial round has produced a surplus relative to the actual number of projects needed. Much greater opportunities may exist for future wind power rounds as fewer developer/consortia were included in the initial prequalification round than expected.
Solar projects will have a 25 year PPA while wind projects will have a 20 year PPA, both on a take or pay basis. The PPA draft is expected to be made available soon.
Projects are expected to be able to access government land pursuant to a Presidential law that is expected to be promulgated soon. The cost of the usufruct will be 2% of the energy generated and the tariff is expected to accommodate this. The usufruct is backed by a land bond that steps up at notice to proceed and first use of the land and then steps down following commercial operation. However, projects will not be required to use government land. The same Presidential law will define targets and other aspects of the programme, including site decommissioning.
The land committee of the central department for FiT in the Egyptian Electricity Transmission Company will have a database of available public land for renewable energy projects and will facilitate the usufruct agreement with the relevant public authority and the necessary permits and licenses. It is not permitted to reserve land for future projects.
These tariff prices are not quite as attractive as they may appear. Both interconnection costs and taxes - in the range of 20-25% - will take out a significant bite. Nevertheless, the prices are attractive enough to spark significant interest in the market.
PPA payments for either PV or wind will be made in Egyptian Pounds. However, the payments will be structured so that the Government will take currency risk. Based on previous IPPs, it can also be expected that payment will be escalated taking into account Egyptian and international indices.
There will be no ongoing grid access fees but projects will be expected to bear the cost of interconnection to the nearest grid substation and potentially the cost of expanding the substation to accommodate the additional load. These costs may be quite substantial - almost US$2million for a 50MW project by some reports. These costs will pay for an average of 10km distance to the substation. On the other hand, multiple neighbouring projects can share the costs associated with interconnection and upgrades and up to eight projects will be connected to each substation. These costs are said to still be under internal discussion within the Government of Egypt.
Power Purchase Agreements
Many details of the programme will be fleshed out in the PPA and associated documentation. The draft has not yet been published but it is expected to be released soon following meetings in which prospective lenders are to be granted access to the draft and an opportunity to comment on it. Egyptian regulators have stated that they hope that this process will produce a PPA that is bankable and one which will avoid issues that have arisen in some earlier renewable energy programs around the region.
Prior Egyptian IPP transactions also provide indications of what might be expected. If it follows the expected pattern, then developers/consortia can expect the following:
- The PPA will be structured as a take or pay contract up to the maximum output of the Project. There will also be the possibility of early generation revenues prior to the commercial operation date.
- The project company will benefit from a government guarantee issued by the Central Bank of Egypt on behalf of the Government of Egypt backing the obligations of the PPA offtaker.
- A project development bond can be expected to be deliverable at the signing of the PPA. It would be returned after the commercial operation date of the Project.
- The PPA may have a term that can be extended by mutual agreement of the project company and the offtaker.
- The PPA may prohibit refinancings without the consent of the PPA offtaker. If a refinancing is permitted, the PPA offtaker may be entitled to a percentage of the benefit derived from the refinancing.
- The PPA will contain change of law protections. However, previous Egyptian IPP PPAs have imposed strict notice periods that must be complied with in order for Projects to take advantage of these provisions.
- The PPA will contain force majeure provisions that are expected to conform broadly to regional precedent, including division of force majeure events into Government Force Majeure and Other Force Majeure events, with compensation being payable to the project company in the case of Government Force Majeure. Where force majeure has been invoked, there may be a possibility of the term being extended, but only at the discretion of the offtaker.
- The PPA will contain termination provisions, including scenarios where termination gives right to either a right or a requirement for the offtaker to purchase the project. As is typical for such IPPs, different termination scenarios give rise to different purchased price calculations.
The offtaker can be expected to have a right under the PPA to step in and operate the project directly at the cost of the project company if in the offtaker's reasonable opinion there is a real and immediate risk that the project company's ability to deliver electricity is affected by the occurrence of a default. In such a case, the project company would continue to be paid, but it would have to pay the costs of the offtaker's operation of the project.
The PPA can be expected to prohibit assignments or changes of control without the consent of the offtaker.
The PPA will probably be governed by Egyptian law with disputes resolved in Egyptian courts.
Other Programme Features
As is common in regional IPP programmes, it is expected that the project documents will impose share retention obligations on the investors. The investor that is considered to be the main investor will be required to maintain 30% of shares in the SPV until the commercial operation date of the project.
After COD, the main investor may sell down but that sell down right is still expected to be conditional on notice to and approval of EgyptERA. Since the draft PPA has not yet been released, it is possible that it will contain further details on these share transfer restrictions.
Other documentation based on precedent transactions will comprise:
- Land Use Agreement
- Interconnection Contract
- Third Party Access Agreement in the event the transmitter is not the offtaker
- Implementation Agreement
Initial Post-Prequalification Requirements
The next steps for qualified bidders culminates in the issuance of an interim licence. The interim licence will only be offered for a project that is "ready to go." Egyptian regulators have stressed that while the programme is not structured as a competitive bid process, there could be situations where competing projects will be evaluated side-by-side. In such a case, technical capability will be the main deciding factor.
The interim or temporary licence that will be granted to those developer/consortia who meet the initial post-prequalification requirements is valid for two years or until the final license is issued. There are indications that it can also be revoked if EgyptERA receives strong evidence of the developer/consortium's inability to finalize permits, reach financial close and increase the paid capital to be equivalent to the equity of the planned project.
The interim licence may be extended for an additional year if the developer/consortium provides convincing evidence of its ability to fulfil these conditions within that extended time.
The FiT programme permits the SPV to be incorporated as either an LLC or a joint stock company. Project finance lenders will likely require a joint stock company as it may not be possible to take an effective share pledge in an LLC.
Establishment of an SPV is an absolute prerequisite to negotiations over the land, the land bond and the connection fees. It is also a prerequisite to obtaining a temporary/interim licence or the final licence.
Some aspects of project implementation timing may present difficulties if they proceed as currently contemplated. These include the following:
- Presentations circulated by Egyptian regulators have suggested that the permanent licence for a project will not be issued until after financial close. Most lenders would ordinarily expect a project to be fully licenced before financial close.
- There is some confusion regarding when the tariff for the project will be locked in. Some guidance has indicated that it will be locked in once the interim licence is approved. However, other guidance has been promulgated that suggests that the tariff may not be locked in until after the permanent licence is issued. If the permanent licence is not issued until after financial close, this could be an issue.
- It is not entirely clear at this time what provisions will be made regarding convertibility and transferability of foreign currency. Generally, Egypt has relatively few restrictions on repatriation. However, some of the specific guidance issued in respect of the FiT Programme has suggested that coordination with the central bank regarding availability of foreign currency will only cover a percentage of project revenues to pay debt service.
- The PPA may be initialled before financial close. However, it is currently intended that the PPA will not be actually signed until the issuance of the final licence, which according to some guidance received will not be until after financial close. This sequence may be a challenge for some lenders.
However, the PPA will be discussed with certain key lenders and it is possible that lender comments will be incorporated to address these potential issues.
Companies that generate electricity benefit from a number of incentives under the Investments Incentives Law Number 8 of 1997 (as amended). These include:
- Immunity from nationalisation or expropriation
- Immunity from administrative attachment or freezing of assets
- The right to acquire buildings or land required to carry on the activity of the company
- The right to directly import (as opposed to through an agent) equipment, raw materials and vehicles required for the business, and to export directly
- Exemption from some provisions of the companies law, including a requirement that would otherwise require distribution of 10% of profits to employees
- Exemptions from the stamp tax
- Exemption from certain notarisation and registration fees
- Application of a unified 5% customs duty
Egypt is a party to bilateral investment treaties with 112 other countries, including with most major countries.
Middle East Power Team
Bracewell & Giuliani is a leading U.S. law firm with its headquarters in Houston and around 500 lawyers spread across the U.S., the Middle East and London.
Bracewell & Giuliani's team of lawyers have extensive experience in Egypt, together with an in-depth knowledge of wind projects, both in the region and globally. Our lawyers' record of executing transactions in Egypt includes having acted for InterGen on the landmark development and financing of the Sidi Krir IPP, Egypt's first IPP.
We have been recognised in Legal 500's 2014 Europe, Middle East & Africa (EMEA) United Arab Emirates listings in Corporate and Mergers & Acquisitions, 2014. Legal 500 EMEA commended Bracewell for having "embraced the region" and noted that the firm "understands the culture, and the business practices, well." We have also been recognized in the United Arab Emirates by Chambers Global in the Corporate/Commercial category, 2014.
Our team comprises internationally recognised and experienced lawyers based in our Dubai and London offices who are focused on the power industry. Members of the London and Dubai offices rely on seamless collaboration, sharing resources and ensuring deals are adequately staffed with attorneys who have the requisite experience to serve our clients' needs most effectively.
Partner | Dubai
ROBERT J. HARKER
Partner | Dubai
Managing Partner, London | London
Partner | London
Partner | London
Senior Counsel | Dubai