The Climate Technology Partnership Supports the Spread of Cogeneration to Reduce GHG in Egypt
USAID’s Global Climate Change team recently completed a project in Egypt to promote the
use of cogeneration technology in the tourism sector, thus taking advantage of Egypt’s i
nterest in shifting energy demand from liquid fuel to natural gas. Egypt’s proven reserves
of natural gas are currently at approximately 65 trillion cubic feet, with similar amount identified
as probable reserves. The Global Climate Change team had been working with counterparts in Egypt to
promote technology cooperation that leads to greenhouse gas (GHG) emission reduction. Under the
Climate Technology Partnership (CTP), a bilateral initiative between the US and several developing
countries including Egypt, opportunities to cost-effectively reduce GHG emissions through energy
efficiency improvements in the industrial and commercial sectors have been identified.
The cost-effective use of cogeneration in Egypt is one of the promising technologies that may
achieve widespread replication in Egypt’s tourism sector, one of the country’s top
revenue generating sources. Past market assessment surveys provided different scenarios for the
development of the cogeneration market in Egypt ranging between 400-1700 MW of power generation
that can be produced more efficiently through cogeneration. This offers a potential reduction in
CO2 of 1.2- 5.4 million tons.
Existing Challenges
The high costs of cogeneration equipment and the associated installation and maintenance costs
provide a disincentive to energy end-users to consider it for their electric and thermal needs.
Current subsidy in electricity rates causes simple payback for a cogeneration installation to be
in the double digits. Additionally, the novelty of the approach presents a barrier for potential
customers who are reluctant to incur the costs of the engineering and legal review needed in order
to engage into contracts with service providers.
Project Scope & Support
Realizing this opportunity, the Global Climate Change team retained the services of Nexant Inc.,
a consulting firm with existing operation in Egypt developing energy policies for the Egyptian
energy sector through the local USAID mission in Cairo. The project focused on developing a
prototype pilot approach that can be replicated throughout the tourism sector in Egypt. The team
also carefully identified prominent stakeholders in the Egypt business environment to participate
in this pilot in order to increase the visibility of the efforts.
A recently built 5-star hotel, managed by Hilton, was selected. Hilton Pyramids Golf Resort is
a 229-room five stars hotel located in the in the City of 6th of October a satellite city
approximately 30 kilometers from downtown Cairo. It was opened in 2002 to support the growth of
the new city and to take advantage of its proximity to the most popular tourist around the Giza
Pyramids. The resort is built on approximately 12 acres and includes an 18-hole championship golf
course. A major energy investment group with interest in small power generation (Egypt Kuwait
Holding Company – EK Holding) was also selected as a potential developer of the project.
The Climate Change team, through Nexant, provided support to these players in assessing the
technical and economic feasibility of the project, developing a monitoring plan, and producing a
legal instrument that can be used to facilitate the power purchase activities over the life of the
contract.
Results
The analysis indicated that an acceptable return to EK Holding could be achieved with a reasonable
annual operational savings to Hilton. With a total investment of $291,000, EK Holding would need to
establish a sale price structure of electricity to Hilton, through a formula that addresses exchange
rate volatility and the cost of natural gas. The formula resulted in an average cost per kWh for
Hilton of $0.0293 with the current exchange rate and gas price, which is more than 10% below the cost
of buying from the utility national grid ($0.0329 per kWh).
Nexant applied the legal expertise of its subcontractors in defining the key elements that should
be documented to govern the relationship between both EK Holding as a seller of power, and Hilton
as a buyer. A proposed power purchase model contract was developed, defining the responsibilities
and obligations of the parties, including operational criteria, calculations methods, payment terms,
ownership of equipment, taxes, and other related business and legal issues.
New Changes in Gas Pricing Add to the Challenge, but Signal Hope
Approximately 2 weeks prior to concluding the analysis, a 30% increase in natural gas rates for
industrial and power generation facilities was announced. The recent change introduced a major
economic challenge for cogeneration projects in absence of a similar increase in electricity rates.
The new gas price will significantly reduce the savings that would have materialized as a result of
the cogeneration operation.
However, and despite the economic challenge that this sudden increase introduced, it signals hope
for the long awaited change to the subsidy that is currently imposed on energy products in general,
and on electricity end-use rates in particular. Economic returns from investment in cogeneration
would be attractive to investors such as EK Holding and to Hilton if electric rates were to increase,
which is a result that most energy experts are expecting to see in the near future.
Future Expected Institutional Development
The aligned interest of the Ministry of Petroleum and the Ministry of Electricity of shifting
reliance from oil products to natural gas makes the use of cogeneration an attractive option.
It is envisioned that future activities will focus on finding ways to reduce the cost of
electricity as a stand by to the cogeneration operation, or to establishing natural gas rates
that are specific to cost-effective cogeneration applications. A Cogeneration pricing structure
can provide a solution to remove the constraints imposed by subsidized energy rates.
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