Power to the People

Abstract

Market-oriented electricity sector reforms have spread across the world in the last decades, with the aim to increase efficiency and stimulate investments. In many cases the outcomes of these reforms did not met up with expectations in terms of among others pricing, social welfare and efficiency. An often mentioned reason for these undesired outcomes is that the ‘content’ (the reform, the intervention), did not match the ‘context’ (of a country in which the reforms take place). Egypt is a developing country which adopted in 2015 the New Electricity law, that laid the legal foundation to restructure its electricity sector into a competitive one. The aim of this research is to investigate what the most suitable restructuring modality is for an efficient and reliable electricity sector in Egypt, given the institutional and political-economic context in which these reforms have to take place. The research question for this research is as follows:
Which restructuring modality for Egypt’s market-oriented electricity sector reforms is the most suitable for an efficient and reliable electricity supply, considering the institutional and political-economic context?
The majority of the countries that reformed their electricity sectors followed the ‘standard model’ which provided a sequence and steps for implementing these reforms, and became a global trend during the 1990s. This model has been defined differently by multiple authors, but roughly follows the same steps: corporatization, commercialization, requisite legislation, an independent regulator, sector restructuring, IPPs, divestiture of generation assets, divestiture of distribution assets, and competition (wholesale and retail markets). However, after 25 years since this model has been advocated, it has not been fully realized anywhere in Africa. Instead, different varieties emerged, often referred to as ‘hybrid power markets’; a market structure somewhere between the pre-reform structure and retail competition. Several authors and organizations made an attempt to categorize these different structures. For this research, five types of restructuring are distinguished; a vertically integrated monopoly, a vertically integrated monopoly with IPPs, unbundling with IPPs, a wholesale market, and a wholesale market with retail competition. Each with different advantages, disadvantages and pre-conditions.
Many studies have been conducted on the reasons for the undesired outcomes of electricity sector reform in developing countries. Among others, it was not part of broader institutional reform, there was political instability, public opposition, or not enough regulatory capacity. Most reasons are contextual factors, which justifies the extensive contextual analysis of the case of Egypt. These reasons have been translated as criteria into a framework to assess which type of restructuring fits the best with a certain context. The earlier distinguished five restructuring modalities each have a different institutional set-up, role of the state and the private sector, and therefore pre-conditions to be met in order to successfully implement this particular structure. This framework can help practitioners to assess which of the five restructuring modalities fits the best in a certain country context. This framework has been developed with multiple assumptions since criterions are interrelated, not mutually exclusive or difficult to measure. A framework like this has not been made before, so there was no previous work to build on. The criteria have been operationalized and will for this research be applied on the case of Egypt.
Now that the framework to assess the case of Egypt has been developed, the technical and political-economic context was assessed. The more technical contextual analysis provided an overview of Egypt’s electricity sector (its institutional structure, the value chain and an elaboration on the proposed reforms). After this a Political Economic Analysis has been done. These two analysis combined, together with information out of interviews with experts and stakeholders, the framework with the defined criteria has been applied on the case of Egypt.
After the application of the framework on the case of Egypt, it became clear that crucial pre-conditions for a competitive wholesale market are not present in Egypt. These include among others, political commitment, regulatory independence, cost-reflective tariffs, public acceptance and a good investment climate. In the long run (>25 years), a wholesale market might be possible but for the short to medium term (as stipulated in the Electricity Law) this is too optimistic, due among others to the ‘cultural’ changes within the government that have to take place. Instead, the government should focus on improving the status quo; a legally unbundled and state dominated structure with IPPs, before ‘moving on’ to the next, more competitive, type of restructuring, being a wholesale market. Improving the status quo means in this case; continuation of the subsidy reform, and the IMF reform program in general, strengthening the independence and effectiveness of the regulator, and capacity building within the involved ministries and authorities. These measures, primarily focused on the second level of Williamson’s four layer model, will take time. Longer than the timeline of the reforms as outlined in the Electricity Law.
This recommendation does not imply that a competitive wholesale market cannot work in Egypt. With 100 million customers and a population growth rate of 2% per year, there are ample opportunities for private parties to invest and operate in Egypt’s electricity market. But to push now for a competitive market without the necessary pre-conditions and transparency, will delay the process (as is currently happening) and creates uncertainty among all the stakeholders that are needed to make such a market work. The literature provided multiple examples of countries where market-oriented reforms happened too fast, with undesired outcomes as a result.
Liberalization is not a goal in itself. It is merely a mean to achieve the overall goal of the Egyptian government: a reliable and efficient electricity supply. Strengthening the current structure with a focus on the pre-conditions needed for a competitive market, is for now, according to this research the mean to achieve this.

Discussion and suggestion for future research

The developed framework can be useful for policy makers and other practitioners in the field of electricity sector reform in developing countries, considering the large amount of vertically integrated utilities in Africa alone. This framework is however the first of its kind and open for improvement and especially extensive validation. Based on the results of the research suggestions for future research are:
1. The research done is from a qualitative nature. A quantitative/modelling approach to electricity sector reform in Egypt can be valuable as well.
2. Influence of intermittent sources and decentralized production on a suitable restructuring modality and the standard model. These issues were less urgent in the early 2000s when most literature about electricity sector in developing countries was written.
3. Development of an extensive sequencing and prioritization framework for Egypt’s electricity sector reforms.
4. A framework with weighted criteria to determine a suitable restructuring modality.
5. Operationalization of political commitment for electricity sector reform.