The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™

Ratings Update: Benban Solar Park, Egypt

Egypt’s ambitious plans for the world’s largest solar park kicked off with an attractive feed-in tariff rate and an enthusiastic response from developers, including Enel, EDF, Engie and Mainstream. However, a recent switch in negotiation tactics by the Egyptian government has thrown the future of the solar park into doubt.

Key developments

  • In 2014, as part of an ambitious renewables strategy, Egypt announced plans for the development of the world’s largest solar park. The government allocated land near Benban (650 kilometres south of Cairo), with 41 individual plots that would support projects between 20 and 50 MW.
  • The proposed solar park and feed-in tariff scheme attracted a strong initial response from high-profile developers such as Enel Green Power, EDF Énergies Nouvelles, Engie and Mainstream Renewable Power, among others. Many of these developers were backed by international financiers such as the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD). However, recent challenges in power purchase agreement (PPA) negotiations with the Egyptian government – as well as broader economic and security issues – have caused a number of developers to put their plans on hold or halt them indefinitely, demonstrating that renewables projects can encounter many of the same issues faced by extractive projects.

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Evaluation

  • In 2015 and early 2016, the outlook for the Benban solar park seemed promising. In support of its renewable power targets, the government announced the first phase of a feed-in tariff scheme with what were seen as attractive rates in a 25-year PPA for solar projects. The EBRD funded the New and Renewable Energy Authority’s Strategic Environmental and Social Assessment for the Benban site, thereby reducing permitting time and costs for developers.
  • In the latter half of 2016, however, many PPA negotiations have broken down, chiefly over the issue of arbitration. The Egyptian Ministry of Electricity and Renewable Energy has insisted on domestic arbitration in the PPAs for the first phase of the feed-in tariff scheme, even though early drafts of the contracts reportedly included an option for escalation to international arbitration. The domestic arbitration requirement was a showstopper for both international financial institutions and developers. The EBRD and IFC, for example, reportedly pulled funding for proposed Benban projects, and EDF Énergies Nouvelles has reportedly withdrawn from its joint venture project as well.
  • Some speculated that this was a concerted tactic by the government to push developers into the second phase of the feed-in tariff scheme, which was very recently announced to include much lower rates and allow for international arbitration. The government’s initial stance on arbitration may have also been a reflection of its desire to avoid the kinds of rulings it has been subject to at international arbitration recently, such as the $1.76bn fine it was ordered to pay to Israel over disruptions to gas exports following the political turmoil in 2011. Whether or not the inclusion of international arbitration in the second phase of the feed-in tariff scheme will be enough to restore developers’ confidence in Egypt’s solar prospects remains to be seen.
  • Egypt’s broader economic issues are also making the country an increasingly challenging place to do business generally. Following a severe shortage of foreign currency, the government devalued the Egyptian pound in March 2016. Amid rising inflation, the country is set to receive a $12bn loan from the International Monetary Fund, but some have questioned President Abdel Fattah al-Sisi’s ability to effectively steer economic reforms given his performance to date. Mismanagement of economic issues have historically been a driver for civil unrest in Egypt and could again become a potential flashpoint for social conflict in the future.
  • The country’s security issues are an ongoing point of concern for investors. The shortage of foreign currency is due in part to a drop in foreign investment following the Arab Spring in 2011 and a subsequent decline in tourism, exacerbated in recent months after the bombing of a Russian plane by ISIS after its departure from Sharm el-Sheikh. The murder of an Italian graduate student in Cairo (alleged by some to have been carried out by Egyptian security forces – accusations that have been denied) strained diplomatic relations between the two countries. Some analysts have also speculated that the incident may have contributed to Enel Green Power’s decision to halt its projects in the country. Overall, the security threat is doing little to provide investors comfort around Egypt’s operational risks and will continue to be an issue for developers to monitor carefully.
  • Egypt’s imminent supply of offshore gas – particularly via recent discoveries such as the Zohr field – may be contributing to a reprioritisation of the country’s renewables targets. The development of the Zohr field has progressed significantly (expected to enter production in late 2017 or early 2018), and it may be that the country is more focused on the prospect of meeting its growing domestic energy demands through natural gas rather than solar energy.

This article uses Critical Resource’s LicenseSecure™ model to assess the likely level of political and stakeholder risk. Our updates provide a rapid overview of new or updated ratings in our database, with a focus on projects in the news. Please note that these ratings updates are provisional, based in part on open source analysis and are not from client projects. Full LicenseSecure analyses are in-depth, involve extensive intelligence gathering and are confidential.

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