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Deferred liberalisation of electricity sector, continued subsidies - Daily News Egypt

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Deferred liberalisation of electricity sector, continued subsidies

Proposal to apply VAT on highest consumers instead of cross-subsidy

The full liberalisation of the electricity sector was postponed to the fiscal year (FY) 2021/22 after the final subsidy was set to be lifted in 2019. Three years have been added to the plan, which began in 2014, considering the social dimension and the burden on citizens.

A radical change awaits the electricity sector after the final lifting of subsidies both in terms of prices or legislation, controls and rules governing the entry of the private sector in investment, as well as the launch of projects to produce electricity and power directly to consumers.

The Energy Engineering Professor and former Head of Egyptian Electricity Regulatory Authority, Hafez Salmawy, said that with the final lifting of subsidies on electricity, a committee will be set up to study the real price per kW/hour and its task is to set the price to no more than or less than a certain percentage.

The difference will be put into a consumer protection fund to avoid hiking prices. This trend has been

implemented by a number of countries and the price is reviewed after three or six months.

He explained that the transition plan for the electricity market is comprised of three phases, which includes major consumers (super and high consumption), and the second is medium consumers (over 400 kW) followed by small consumers.

Salmawy pointed out that the standards and controls must be observed at all stages, and the transition period for large consumers is about three years compared to six years for small and household customers.

Furthermore, he explained that after the lifting of subsidies for electricity prices, the tariff will not be established, and will be taking into account the maximum and minimum prices, to ensure the continuity of the market and protect consumers from price fluctuations.

However, he expressed reservations about the idea of the cross-subsidy, which is currently being implemented and will continue after lifting the final subsidy for electricity. He suggested instead that the electricity tariff for consumption should be subject to value added tax (VAT) and the proceeds from these amounts to be directed to the most vulnerable and limited income categories.

The ministry of electricity has announced cross-subsidies to support low-income groups, which includes raising the price for large consumers to support low-income groups.

Salmawy added that the price of fuel supplied to the power plants will rise after the lifting of fuel subsidies.

The cabinet had previously determined that the economic price is the cost price. If part is imported it can be calculated to an average price.

“I think a “rarity coefficient” will be applied, which means the imposition of a slight increase in the price of fuel, and placed in a fund to avoid high prices in order to achieve a balance in prices. The fund can also invest the money in it, following the path of Denmark and Norway,” he said.

Former New and Renewable Energy Authority (NREA) Head, Mohamed Salah El Sobky, said that the effect of the gradual removal of subsidies on electricity is clear, and that the decision to extend the period for three years is in the interest of the citizen.

He explained that the price of electricity produced from renewable sources of energy is less than the electricity produced from conventional stations after the permanent lifting of subsidies, which gives potential for the private sector to expand and establish power plants to sell energy directly to consumers.

“Market rules allow this. The private sector can compete with state electricity companies after two years of complete liberalisation of electricity, which will mainly benefit consumers,” El Sobky remarked.

Furthermore, he added that renewable energy prices will be fixed for 20 to 25 years as they are not subject to fuel prices. On the contrary, technology lowers the price of renewable energy over time.

Maher Aziz, advisor to the former minister of electricity, said that the lifting of subsidies on the electricity sector was delayed for a long time, which rendered losses to electricity companies.

He explained that the opportunity available to Egypt during the next three years to expand the establishment of projects to produce electricity from different sources, which ultimately affects the cost of electricity, stressing that the average consumption per capita in Egypt of electricity is lower than the average consumption globally.

Minister of Electricity and Renewable Energy, Mohamed Shaker, said that the electricity sector is working to achieve full balance and remove subsidies in FY 2021/22.

He told Daily News Egypt that the ministry will not subsidise electricity prices after FY 2021/22, but the ministry of finance would support a very limited category of consumers, including limited-income and the most vulnerable.

Shaker pointed out that the subsidy of electricity prices is supposed to end this year. However, due to the many changes that have occurred, the subsidy has been extended by another three years. The subsidy to the household sector is EGP 46bn, while allocations in the budget are only at EGP 16bn.

Moreover, he pointed out that the liberalisation of the exchange rate caused a large increase in allocations, which prompted the government to extend the period set to remove subsidies.

In addition, he said that the ministry cannot rely on renewable energies at the expense of traditional capacities, as it offers unfixed rates of productivity, stressing the importance of balance in dealing and benefiting from renewable energies.

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