By: Perrihan Al-Riffai (Sr. Research Analyst – IFPRI), Julian Blohmke (Ph.D. Researcher - Maastricht University), Clemens Breisinger (Sr. Research Fellow – IFPRI), and Manfred Wiebelt (Sr. Research Fellow – Kiel Institute for the World Economy)
Under certain conditions, fostering the renewable energy strategy may be a promising way to provide an urgently needed impetus for Egypt’s troubled economy. Lessons from other countries suggest that sound institutions; appropriate, clear and lasting regulations; careful technology transfer; and cross-ministerial coordination are important for success
Investments in renewable energy can be beneficial for economic growth, employment, and the poor. However, the quantity and quality of those benefits depend on the natural conditions, opportunity costs of conventional energy, structure of the economy, institutional capacity to implement energy sector reform, among other factors.
One of the main criticisms of renewable energies is that they are often not cost competitive and thus have to be subsidized. However, production costs for windmills and solar panels have decreased (in part because of subsidies) and—depending on location and the relevant opportunity costs for conventional energy—energy production from renewables can be profitable. Egypt has significant potential for renewable energy production and has ambitious plans for developing renewable energy technology (RET). In fact, one of the reasons for developing RET is the hope that it will help promote economic growth and job creation. This is particularly important since recent political events have slowed down economic growth prospects and increased unemployment and poverty (which has increased by nearly 50% in the past 15 years from a low of 16.7% in 1996 to 21.6% in 2009 and to 25.2% in 2011.
Egypt’s current energy facts
Energy production and use has been growing rapidly in Egypt over the past years. Oil and natural gas are the most important natural resources in Egypt’s natural assets. Egypt’s current installed capacity for electricity generation consists of 88% fossil-fuel-based technologies and 12% renewable energy technologies, of which 83% is hydropower. Since all major hydropower sites have been developed there is little potential to expand electricity production from hydropower. In order to satisfy demand increase, the power sector expanded its installed capacity to roughly 25,000 megawatts by the end of 2010. However, those efforts were still insufficient to fully meet the high and rising demand, and, widespread electricity shortages persisted across the country. The government’s interest in the diversification of the energy mix has been evolving rapidly over the past few years. Egypt has solar irradiation and appropriate wind conditions, both prerequisites to producing electricity from renewable sources. Egypt has large deserts that are sparsely populated and thus, in principle, both solar and wind technologies have potential for widespread application.
Egypt’s planned energy future
The Egyptian Supreme Council of Energy has approved a strategy that aims to increase the share of renewable energy to 20% of electricity overall by 2020, with 12% coming from solar and wind technologies and 8% from hydropower. Specifically, Egypt’s wind target is set at roughly 7200 megawatts by 2020 and is clearly prioritized due to its lower cost compared to solar technologies. Solar development targets are less pronounced and not as ambitious with a solar photovoltaic (PV) target at 220 megawatts by 2020 and 1100 megawatts of concentrated solar power (CSP). Egypt announced a further 2027 target of 2800 megawatts of CSP and 700 megawatts of PV. Achieving these targets will require swift mid-term development of solar and wind power plants. In order to meet this requirement, the current installed capacity of wind electricity generation needs to grow by 13 times, PV by 15 times, and CSP by 55 times.
Empirical evidence and policy recommendations for Egypt’s RETs
Solar and wind technologies in Egypt are not only expected to contribute to fuel savings and CO2 reductions but also to meet the increasing electricity demand in the country and may cover part of the electricity demand in Europe. To assess the potential impacts of alternative renewable investment schemes for Egypt, we build a multi-sector dynamic computable general equilibrium (DCGE) model. The Egypt DCGE model is run forward from 2008 to 2020 using an appropriately disaggregated 2008/2009 Egypt social accounting matrix. The resulting scenarios are compared against a baseline scenario that assumes no expansion in renewable electricity production. In all the scenarios, we assume that all renewable electricity is exported while additional domestic demand for electricity is satisfied by domestic and import supply of conventional electricity, which is a perfect substitute to renewable sources. Investments in renewable energy can be beneficial for economic growth, employment, and the poor. However, the quantity and quality of those benefits depend on the natural conditions, opportunity costs of conventional energy, structure of the economy, institutional capacity to implement energy sector reform, and other factors.
Our results generally conclude that Egypt should focus on the generation of wind power. Not only is wind power the sole renewable energy source competitive without subsidies, but it is also among the most favorable for economic growth, employment, and poverty reduction. More specific recommendations include:
- Dutch disease can offset some of the positive effects brought about by an export-led renewable energy strategy. If all renewable energy planned under the Egyptian strategy is exported, it will make up around 20% of all exports by 2020. However, given the related appreciation of the real exchange rate and potential loss of jobs in other export sectors, consuming a significant amount of additional energy domestically would be more advisable.
- The implementation of the renewables strategy would be better accompanied by a reduction of energy subsidies. Energy subsidies distort markets and render most of the renewable energies uncompetitive; they also contribute to Egypt’s high budget deficit. Reducing energy subsidies would not only lower the deficit but also support the development of renewable energies.
- While investments in renewable energy have positive growth and employment effects, their impact on the poor has been rather modest. Thus, if poverty reduction is the main policy goal, other policies that support broader-based growth and targeted social safety nets are more appropriate.
- Finally, it is important to stress that the implementation of a renewable energy strategy can be very challenging and complex. For example, windmills and solar panels designed for a European climate may not function well in Egypt’s desert region, where temperatures are higher and the volume of sand is a concern.
If these potential caveats are carefully assessed, however, sun and wind have the potential to support economic development. Sound institutions, appropriate and lasting regulations, careful technology transfer, and cross-ministerial coordination are the keys to success.
