For decades Egypt has been a significant energy exporter and one of the MENA region’s largest centres for manufacturing, with the latter having traditionally benefitted significantly from the former. Sizeable reserves of natural gas and crude have allowed the country to provide energy at low prices to large industrial consumers, such as steel and cement producers. However, with energy prices rising due to reductions in government subsidies and increasing domestic consumption, energy-hungry industrial companies are turning to alternative sources of power, including renewable energy and waste, to maintain their operations.
The Context
Egypt’s consumption of natural gas has increased at a rapid rate, in large part due to the shift towards the fuel type by power stations. Over the past decade, the amount of natural gas consumed nearly doubled, according to BP’s “Statistical Review of World Energy 2014”, rising from 29.7bn cu metres (bcm) in 2003 to 51.4 bcm in 2013, even as local production levels began to decline. In light of the rise in consumption, Egypt was forced to import natural gas to address domestic demand from other sources, such as Algeria.
The rise in consumption has meant that the government’s ability to continue paying for subsidies is in question (see Economy chapter). The country’s energy subsidies represent one of the largest and weightiest forms of current expenditure in the budget. Over the course of the 2013/14 fiscal year, nearly LE100bn ($14.2bn) went to supplying consumers – corporates and households – with low-cost fuel.
As a result, in July 2014 the government announced a number of subsidy cuts across the board, to minimise the drag on the budget and push fuel types closer towards market price – and cost-recovery levels for the country’s refineries. Prices for diesel grades, for example, rose by between 64% and 78%, while gas saw an even greater increase of 175% and 92-octane petrol was made 40% more expensive.
Industrial Impact
Not surprisingly, for large industrial consumers, this represents a sizeable increase, with a corresponding impact on their bottom lines. Cement and steel factories will pay between 30% and 70% more for their fuel under the new system. This has a significant impact on overall operations for these segments, given that roughly 40% of the total cost of cement production comes from energy inputs for operating the heat-intensive furnaces for clinker, with another roughly 15% going towards electricity. Even before the July 2014 subsidy cuts, rates for the natural gas that is used to supply cement manufacturers had been creeping up, from $2/m British thermal units (Btu) pre-revolution to $6/mBtu in 2013 and $8 /mBtu in 2014.
Talking to OBG, Mohamed Shoeib, the managing director of the energy division of Qalaa Holding, an Egyptian holding company with subsidiaries across core industries, including energy, cement, agrifoods, transport and logistics, and mining, said, “Heavy industry consumers who relied on subsidised fuel for low-cost production have felt the biggest impact from the liberalisation of energy prices.”
Alternatives
As a result, large industrial consumers are looking for alternative sources of energy, not only to help improve cost control but also to stave off supply disruptions. Speaking to OBG, Hisham Sherif, CEO of Tawazon, Qalaa’s waste management unit, said, “Egypt’s subsidies for traditional energy products limited the development of alternative energy sources, but that is now changing. As the cost of fuel and natural gas goes up, customers are starting to look at alternative sources of energy.”
As with many markets around the world, coal is one of the alternative energy sources that Egypt is considering. The government cleared factories to use coal as an energy source in 2014, and a number have already begun the transition process.
According to local press reports, Suez Cement is investing roughly LE300m ($42.6m) to convert two of its four plants to run on coal, while several other producers, including Arabian Cement, Misr Beni Suef Cement, South Valley Cement and Sinai Cement, are making similar plans. Coal provides roughly lower costs to natural gas, at around $5.50/mBtu compared to $8/mBtu for gas, although the imposition of a carbon tax could reduce the differential.
Waste Not
However, coal also comes with a host of negative environmental externalities, which limits large-scale consumption and curtails the fossil fuel’s ability to serve as a full-scale replacement for natural gas. To fill in the gap, Egypt has begun turning towards other sources, including renewables and waste. “The beginning of price liberalisation in the energy market has opened up space for waste and alternative energy to become more competitive, and address market demand,” said Shoeib.
The benefits of using waste as a source of energy – including biomass and refuse-derived fuels (RDF) – are fairly well known and include lower carbon emissions and low-cost access, but they are still very much an early stage of development, with only a handful of countries, such as the UK and Japan, using them on any significant commercial scale. In Egypt, according to Tawazon’s Sherif, at least half of the annual output of municipal waste – estimated to be around 20m tonnes at the low end – is burned.
Yet waste-to-energy facilities have been attracting increasing attention. A pilot project was begun in 2007 by the Egyptian Environmental Affairs Agency (EEAA) to produce energy from 500-700 tonnes worth of rice straw, for example, and in October 2013 a group of Saudi and Emirati investors announced plans to explore the possibility of an agricultural waste management facility.
Then in February 2014 Suez Cement finished construction on a €5m waste-processing plant in Kattameya. Handling around 35,000 tonnes of waste per year, the new plant should provide roughly 20% of the energy required by the firm’s nearby factory. The new facility will allow Suez Cement to diversify its energy mix and decrease its reliance on fossil fuels. The plant is expected to reduce carbon dioxide emissions by nearly 40,000 tonnes per year.
Feedstock
The scope for expansion over the near and medium term is sizable. Tawazon, for example, has rolled out a number of waste management operations in recent years to target heavy industry consumers. The company, which owns two subsidiaries handling both agricultural and municipal solid waste, currently has contracts with five cement companies to provide pre-sorted waste for processing.
“Out of the roughly 20m tonnes of waste that Egypt produces every year, 4m tonnes of that is readily usable for RDF. That alone could provide between 27% and 37% of the cement industry’s energy needs. If waste is properly managed and other forms of biomass are included, we could cover 40-60% of the needs of heavy industry,” Sherif told OBG.
One key advantage of biomass and RDF is the fact that – contrary to popular belief – waste is not seasonal. While the current pilot project run by the EEAA relies exclusively on rice straw, which is only collectable during two months of the year, if inputs for waste-to-energy facilities were broadened to include sugar cane straw, municipal waste or tree branches, for example, then the availability of feedstock would go up significantly. According to Sherif, more than 50,000 tonnes of waste are generated on a daily basis across the country.
The energy crunch that Egypt faces in terms of supplying domestic demand is sizeable, and the likelihood of continued supply disruptions over the near term, combined with price volatility, have made alternative energy sources more attractive for heavy industrial consumers. While Egypt still lacks a waste management policy, the regular availability of feedstock makes the segment appealing. As the country tightens carbon emissions regulations in the coming years, that appeal is only likely to grow, offering more scope for investment over the next decade.
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