PARALLEL PATHS: Energy Reform in Egypt and Jordan
By Robert Barron
Exclusive interview with H.E KHALED IRANI, Former Energy Minister of Jordan, exploring the remarkable similarities between Jordan’s past experience and Egypt’s current challenges.
A decade ago, Jordan faced major challenges in its energy sector. The country faced limited domestic energy resources; a strong dependence on imported energy; a subsidy system which was overwhelming the state budget; and rapidly increasing domestic demand for energy. This should sound familiar. Jordan’s path towards energy reform over the past decade is closely related to the path Egypt is now taking. That’s not to say that the two paths will be the same or that Jordan has figured it all out. But in a number of ways, Jordan can serve as a model as Egypt takes new steps towards energy reform – particularly in the fields of subsidy reduction and attracting investment. To gain an understanding of these paths, Egypt Oil & Gas spoke with His Excellency Khaled Irani, who previously served as both Energy Minister and Environmental Minister of Jordan.
For much of the past decade, Irani has been near the center of the Jordanian government’s efforts to overcome the country’s energy challenges. Among the largest challenges he faced, which Egypt also now faces, was subsidy reduction. When he became Minister of Environment in 2005, “we were heavily subsidizing electricity and fuel,” amid quickly rising global energy prices. At the time, energy subsidies accounted for 5.8% of Jordan’s total GDP. Jordan’s energy subsidies has been possible due to subsidized imports from neighbors, notably Iraq, but at the time prices were rapidly rising and traditionally low-priced imports were drying up. Amid financial strain, the government sought to eliminate energy subsidies over the next five years, leading to “a lot of painful decisions,” Irani said. Despite the challenges, the effort proved successful, at least in the beginning, as spending on energy subsidies fell from 5.8% of GDP in 2005 to 2.5% of GDP in 2007 to 0.3% in 2009.
According to Irani, the key for Jordan was raising awareness and creating properly functioning social safety net, ensuring that those who need assistance receive it, while those who can afford to pay the full cost of their energy do. In virtually all countries with energy subsidies, the rich, who have many more options for consuming energy, benefit much more than the poor. This was the case in Jordan, Irani says. “We agreed that, if we get out of subsidies, we will pay the poor the difference, rather than pay the rich.” Jordan raised wages for government and private sector employees and stepped up cash transfers to Jordan’s poor.
Communication was also key. “These decisions are never popular, but communication was very important,” the Minister said. “For fuel prices, we set up a system where prices rose monthly. You saw it at gas stations where every month new prices are announced based on international prices, the cost of transportation, et cetera.” These explanations also found their way to the bills consumers received in the mail: “In electricity and water bills, we started to show how much the treasury is paying for your electricity. So when you receive a bill for 10 pounds, and the real cost is 30 pounds, we tell you on the bill. Consumers know the real value of their consumption.”
In 2009, however, Jordan’s subsidy reforms were disrupted. The country relied heavily on low-priced Egyptian gas to support electricity production, the supply of which began to decline in 2010. “When I became minister of energy in 2009, it was the peak of gas imports from Egypt. Almost 70% of our electricity was produced from Egyptian gas and suddenly that gas started to deteriorate.” As a result, Jordan was forced to import more expensive fuels to produce electricity, which raised energy prices so rapidly that subsidies were re-implemented in 2010 – again putting heavy pressure on government coffers. In 2011, 17% of government expenditures and 5.5% of GDP went towards electricity subsidies to cover the cost of more expensive fuels. NEPCO, Jordan’s national electricity provider, “had debt of less than $100m in 2010. Today it is $5b because we got back into subsidies.”
These are challenges that the Egyptian government faces today. In 2013, Egypt’s energy subsidies accounted for around 7% of GDP. In 2014, government subsidies accounted for one third of the total government budget, 75% of which went towards energy alone. The Sisi administration has made subsidy reduction a priority and in July 2014, sweeping measures were taken to cut energy subsidies; diesel prices increased by 64%, gasoline prices increased between 40%-78%, and natural gas and heavy-fuel prices rose quickly as well. Electricity prices have increased for mid-to-high range households by an average of 19% this fiscal year. As a result, consumers have been forced to deal with higher prices for all goods, not just energy, headline consumer prices increased by 11.9% in 2015, partly the result of higher energy prices.
Egypt has benefited from low global oil prices, scaling back subsidy-reduction plans from full elimination to 30% over the next five years. Going forward, however, a key challenge facing the Egyptian government will be the development of social safety nets which ensure that those needing help receive it and those who do not need subsidies do not receive them. Irani said that “in Jordan, the social safety was easier to build than it may be in Egypt with 90m people.” With 90m people and major advances to be made in registration and confirmation of poor people, Egypt faces serious difficulties in building such a safety net – a challenge that was easier for Jordan: “In Jordan’s case, we have a good database for employees and the Social Ministry has good records for poor people, their income and support they are receiving.” The challenge of recordkeeping in Egypt has been demonstrated by the numerous delays of Egypt’s “Smart Card” system – in which subsidized gasoline is unavailable to consumers without a government-issued card – which is reportedly set to start in May after a number of delays.
Another key reform in which Irani took part, which echoes Egypt’s current efforts, was Jordan’s goal to diversify energy resources. In 2007, Jordan developed a new energy strategy looking towards 2020. The government set a “target of a different energy mix that depended on three main pillars: for Jordan to depend more on local resources, to be more environmentally friendly, and to diversify energy resources.” For Jordan, this meant developing untouched shale reserves, tapping local gas, pursuing nuclear energy and driving towards renewable energy.
Progress in these areas has not been easy. Efforts to develop Jordan’s shale, where it is “among the eight largest countries in the world in reserves,” have been delayed by low prices, although Irani remains optimistic for the future. Jordan’s nuclear plans have been stalled by environmental challenges, particularly water. The area where Jordan seems to have made the most noticeable progress may to be renewable, an area Egypt also hopes to expand, aiming for a 20% renewables energy mix by 2020.
Among Irani’s major achievements in government were the introduction of the Renewable Energy and Energy Efficiency Law; the development of Jordan’s Energy Efficiency Incentives Program; the development of the Renewable Energy Transaction Policy; and the establishment of the Renewable Energy Fund. While too many to describe in detail, these programs have a common thread, they aim to make investment in Jordan’s renewables sector more attractive and easier. “We made sure our laws and regulations were very inviting,” Irani said. The effort has largely worked, according to Irani. Since 2010, “we have had 12 companies come to build solar farms producing 400MW-500MW. We have the largest private-sector windfarm in the region producing about 120MW. We have regulations which allow the private sector to sell electricity to not just the government, but direct sales to banks, hotels, hospitals and others.” For a region with a wealth of alternative resources to complement traditional fossil fuels, Jordan has been a leader in creating the legal framework to promote invest in renewables, Irani says.
Still, there is a lot more to be done to take full advantage of the region’s renewable resources. Among the most important challenges Egypt faces is declining foreign currency reserves – which has worried a number of companies hoping to enter the Egyptian market. In short, Egypt’s declining foreign currency reserves, now around half of 2010 levels, seem to undermine expansion of the energy sector. Central Bank policy prohibits banks from lending dollars to projects which will receive payments in Egyptian pounds. And as the Egyptian government usually insists on paying for energy in Egyptian pounds, financing for energy projects which require international purchases becomes more difficult. Jordan has worked to create a system which prevents this problem. Irani stated that stability and currency convertibility are key for promoting investment the energy sector: “In addition to the regulations that the investor and developer are looking for, you need financial stability, stability of laws, taxes and so on. An example is convertibility. In Jordan you can generate dollars and send those dollars outside the country, while in other places you cannot.”
Over the past two years, Egypt has been progressive in promoting renewables investment, particularly through the feed-in tariff program. The potential for renewables in both countries is extremely high, but both countries faced challenges. The key is developing the legal and economic institutions to support investment in renewables. “We are probably more progressed in terms of regulations and projects in renewable energy and the privatization of power generation. Egypt must look at financial and convertibility issues which will encourage investors to come, especially with renewables and gas,” Irani said. Jordan began down this path a decade ago. Egypt is quickly working to catch up – ensuring that eager investors are not scared away by financial regulations.
Irani is quick to point out the differences between Egypt and Jordan. He recognizes the challenges unique to Egypt: “The scale is so much different. We are 10m here in Jordan. In Egypt we are talking about a totally different scale.” He also notes that the resources available to both countries are quite different: “Egypt has better resources, especially after the gas discovery. By 2017 or 2018 Egypt will be in a better situation than today in terms of local resources.” This is important for subsidy reform, as Jordan did not have the domestic resources to keep reforms in place, as Egypt now does. He also recognizes that Jordan’s reforms have not been perfect and there is much to be done. Still, he believes that Egypt can learn from observing Jordan’s paths to reform and that the two countries face many of the same goals going forward.
Chief among these shared goals, common across the region, is a need for much greater energy efficiency. “Energy efficiency is a low-hanging fruit, but countries in the Arab world tend to ignore it. We spend double the energy to produce $1 of GDP compared to Europe and the US.” A key weakness has been laws and regulations for promoting efficiency: “Efficiency policies have not really progressed as renewable energy policies have.” The challenge, has says, is that energy efficiency policy is not particularly exciting or easy to see: “It requires more awareness. With renewable energy, it is easier to see for the client, so they pay for it. With energy efficiency, you’re investing in something you don’t see.” Among the solutions, according to Irani, are tax incentives for energy-saving devices and governments leading by example: “One good example is the government just tendered for 12 of its buildings to showcase energy efficiency programs. So it is getting there but it’s much slower.”
Another important goal for Egypt, Jordan and the rest of the region going forward must be interconnectivity of energy – using both countries’ central locations to serve as regional hubs. While the limitations regional trade networks are obvious at the moment, the potential is also clear: “If we go back to before the problems of the region, the plan was to use Jordan and Egypt’s privileged location to bring gas from Egypt to Jordan to Syria and Turkey and on,” Irani said. “Political problems have obviously made it hard to use geographic location, but with a better regional political situation there are lots of potential projects that we can dream of. But for now, everything is on hold.”