Clean energy investment could steer Egypt past instability

The country’s increasing demand for electricity along with depleting oil reserve present the need for alternative energy sources

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While Egypt appears headed to put behind months of political and security instability with a constitutional plebiscite next month, overcoming its deep economic woes might require a bold approach to investment in renewable energy, an expert said.

Egypt’s increasing demand for electricity combined with depleting oil reserves call for renewed consideration in alternative energy sources.

“Resource politics will be an integral factor in shaping Egypt’s policy moving forward,” said Dr. Paul Sullivan, Professor of Economics at the National Defense University. It is both a means of addressing the state’s energy policy and its general socioeconomic turmoil, he explained. The country’s location, topography and climate, boast impressive wind and solar potential.

Sullivan has one idea on how to boost Egypt’s economy. “Private foreign investment in Egypt’s renewable resources can generate economic growth,” he said.

A stronger economy would strengthen the institutions that promote the Rule of Law and contributes to remedying Egypt’s inadequately enforced contract law. This, in turn, would create greater business certainty and jobs and slowly introduce stability to the region.

Egypt is recognized as a global leader in wind resources, with one of the world’s largest onshore wind farms located in the Zafarana district. It is also the second largest natural gas producer on the continent, behind Algeria. The ousting of Mubarak’s government has led to widespread instability and consequently, a weakened economy. This in turn has significantly slowed development in renewable energy.

Egypt remains the largest consumer of oil in Africa, accounting for almost a quarter of total oil consumption in 2012. Currently, however, Egypt’s consumption levels are surpassing its production levels. Partly due to the resulting power outages, food prices have surged, and this has created an environment of discontent within the country.

Reforming Egypt’s electricity sector is necessary to attract private sector investment. This will also be instrumental to Egypt’s success in delivering renewable energy targets, presently aimed at 20 percent by 2020.

In late 2012, positive steps were taken to ‘kick-start’ the renewable energy industry. The Supreme Council for Energy announced exemptions from customs duty and sales taxes on parts for renewable energy systems.

The demand for solar products and renewable energy in countryside housing, coupled with the region’s potential in wind energy, has increased due to Egypt’s inadequate electricity system. Sullivan, who lived in Egypt for six years, said: “electricity systems black out once a day. People sidestep the issue through setting up diesel generators, harming the health of women and children…solar is cleaner.”

Currently, Egypt’s finances are stabilized through multibillion-dollar loans from Persian Gulf countries such as Saudi Arabia, the UAE, and Kuwait. But Sullivan said it is the West that is best positioned to invest as it has the “best technological capabilities.”

Unsurprisingly, Egypt faces the challenge of persuading wary private international investors to enter the market. According to the World Bank, the Jan. 25 Revolution resulted in a significant decline of foreign direct investment flowing into the country.

Investor confidence was damaged due to the political and economic turmoil, slowing growth in the renewable energy sector. Egypt owes approximately $6 billion to companies working on projects in the country. Long-term investors, as a result, face difficult questions from shareholders as Egypt struggles to pay its bills.

Structural transformation of the Egyptian economy is necessary for improving both the business atmosphere and the job market. This requires a prolonged period of political stability and timely payments to investors to revive development activity in the region.

Foreign Investment and Strengthening Democratic Institutions

The United States is reluctant to commit itself to Egypt through energy investments, including oil, gas and renewables. However, the absence of economic growth due to lack of private investment is likely to result in greater instability. Investment generates jobs, and jobs assist Egypt in stabilizing itself, Sullivan explained. The wind energy industry alone could create 75, 000 direct jobs by 2020. Thinking long term, jobs in renewable energy also require investing in Egypt’s youth, providing training for higher skilled entry-level positions to manage infrastructure supporting solar and wind energy systems.

Sullivan further said that private investors in the United States could apply for political risk insurance through the Overseas Private Investment Corporation (OPIC). Earlier in September, OPIC provided $40 million in political risk insurance to cover expropriation, political violence and currency inconvertibility for Apache Corp’s $11 billion investment in Egypt’s oil and gas sector. While this may help slightly, it is likely to still prove insufficient in attracting investors.

He cautions against the United States neglecting Egypt and leaving a sphere of influence vacant for other investors. These include China, which recently acquired a 33 percent stake in Apache Corp. (APA) – the largest United States investor in Egypt, and Moscow who secured a $2 billion in arms deal with Egypt.

Sullivan described the situation as a “Catch 88” or a “Catch 22, times four.” Private investment is required to generate economic growth, but investment requires political stability. In the absence of private investment, however, the volatile situation facing Egypt is likely to continue. This is particularly true for the same youth who championed the Arab Spring, but who still face high unemployment rates.

On the United States investing in Egypt, Sullivan said: “Perfection is the enemy of the good. (If) we wait for institutions to perfect themselves prior to investing, we would all be dead – we must move now before Egypt…turns away completely from the United States or combusts.”

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