Enterprise Article – May 7th, 2024
The lowdown on solar energy use in the industrial sector
Solar energy use is picking up in the industrial sector: More and more, private sector manufacturers have been setting up solar power stations to power their operations in recent years amid tighter global sustainability regulations and the state’s push for greater private sector involvement. The government in 2022 drew up a plan to phase out its involvement in 45 sectors, including energy infrastructure and renewable energy projects, in a bid to open up space for the private sector to enter these fields. So what does the solar energy landscape look like for private industrial players? And what challenges does it pose?
The latest policy moves: The Egyptian Electric Utility and Consumer Protection Regulatory Agency in March approved a peer-to-peer (P2P) system that will enable private sector energy players to produce and sell renewable energy to other private sector companies through the national grid. The initiative, which will act as a trial phase as part of the country’s plans to transition to a fully open electricity market by 2025, has drawn interest from 20 private sector energy companies.
What’s prompting factories to opt for solar energy? A key driver behind manufacturers shifting to solar energy are efforts to comply with ESG standards and the ability to market their products as green, said Romany Hakeem, the chairman of Beneshty Solar and vice chairman of Sustainable Energy Development Association (SEDA). One regulation that is of particular concern for manufacturers is the EU’s Carbon Border Adjustment Mechanism — which imposes a tax on the estimated carbon emissions associated with certain imported goods — said Hakeem. In the near future, cutting emissions will also help local manufacturers make money through carbon credits and tradable certificates representing verified greenhouse gas reductions, he added.
Remember: The government is working to launch Africa’s first voluntary carbon market — a plan which first saw the light in 2022. The Financial Regulatory Authority in March issued the registration and delisting rules for companies looking to sell certified carbon credits on the EGX after authorizing three bodies to verify projects that claim to reduce carbon emissions in February.
Switching to solar power can unlock considerable savings: Each MWh of solar energy currently saves around EGP 2.25 mn per year in electricity costs under the current electricity tariffs, said Hatem Tawfik, the managing director of Cairo Solar and secretary general of the Sustainable Energy Division at the Cairo Chamber of Commerce. With successive electricity price hikes expected to take place, the cost saving potential is expected to rise to EGP 3.25 mn over the next five years, he added.
It all boils down to the financial model behind the installation: There are two schools of thought when it comes to the construction of solar power stations, said Tawfik. Some solar energy companies build solar stations at the client’s premises and then sell the electricity produced to the client at around 10% less than what they would pay for public electricity. Under this setup, called a purchase power agreement (PPA), the provider owns and operates the station. While this scenario saves the client steep upfront costs, the long-term financial gain is modest, Tawfik explained, adding that this model is best suited for corporations that are more concerned with corporate social responsibility than cost-cutting.
The alternative: Engineering, procurement, and construction (EPC) agreements, on the other hand, are turnkey solutions under which the client purchases and owns the solar facility. Although this type of agreement is capital-intensive, the end user ultimately saves up to 100% — rather than c. 10% — of their electricity bill, depending on how much of their electricity needs the solar station provides, said Tawfik, who is a long-time advocate of this model.
There are effective financing mechanisms for EPC projects: Manufacturers can finance the costs of EPC installations by taking out subsidized loans offered to industrial players. They may then apply for grants from the European Bank for Reconstruction and Development amounting to 10% of the loan’s value, Tawfik explained. Investing in solar stations can yield an internal rate of return of around 30% or more with the help of subsidized loans and grants, which together cut back the payback period from 7.35 years to 5 years, he said.
So how much of the energy consumed by factories does solar power cover? Solar energy provides anywhere between 10-100% of manufacturers’ electricity needs, depending on the space they have for installations, their energy consumption, and their financial capacity, Hakeem said. That being said, factories don’t usually meet all of their needs through solar energy because they are major consumers of electricity compared to households, he said.
On the ground: Almarai subsidiary Beyti’s USD 5 mn, 7.6 MWp solar power plant — which came online in 2020 — supplies around 20% of its two factories’ consumption, Corporate Affairs and Communications Director Ghada Fouad said. While for home appliances manufacturer Passap’s refrigerator factory, 50% of the energy comes from its 257 KW solar power station, said Sherif El Sayad, president of Tredco for Engineering Industries.
The challenges of going fully solar: “Full dependence on solar energy is currently not feasible due to the need for extensive battery storage, which significantly impacts costs,” said Yehia Shankir, the director of renewable energy at Elsewedy Electric. Both Fouad and El Sayad believe that it’s theoretically possible to power their operations entirely through solar energy. However, El Sayad cited “the sharp increase in the prices of solar panels due to the devaluation” as the main obstacle to doing so, while Fouad noted that “technological solutions — mainly in battery technology — and more flexible regulations” would be needed.
On the regulatory front, more incentives are needed: To encourage private sector investment in renewables, the government offers incentives like minimizing customs tariffs on renewable equipment imports and VAT on the sale of renewable energy, both Shankir and Fouad said. But more can be done, they suggested. “To further encourage renewable adoption, introducing auction systems like those in Europe and the US and expanding energy spot markets could streamline the process and promote renewable energy utilization,” Shankir said.
Proposals on the table: SEDA has presented proposals to the Electricity Ministry on ways it can incentivize producers to opt for solar energy, Hakeem said. One suggestion is to exempt components imported for solar panels from VAT — as is the case with production equipment — he explained. The Sustainable Energy Division at the Cairo Chamber of Commerce has also proposed that the government roll out a green fund that offers grants and subsidized loans for solar stations, Tawfik said. This fund can be financed through the taxation of energy-intensive products — such as traditional cars and electric heaters — and the money that the government saves as the transition to renewables drives down its natural gas bill.
https://enterprise.news/egypt/en/news/story/am/2024-05-07/12
