Solar Power isn't Feasible!

Solar Power isn't Feasible!
This cartoon was on the cover of the book "SolarGas" by David Hoye. It echoes the Sharp Solar slogan "Last time I checked nobody owned the sun!"

Saturday, March 8, 2008

Cost structure for electricity and gas in Cairo

In our sample the average estimated monthly expenditure on electricity was as follows:

Zabaleen: LE 43.03 (Median = 35)
Darb El Ahmar: LE 39.92 (Median = 35)

Average Estimated monthly electricity bill for those who use electric water heaters:

Zabaleen (n=62) : LE 58.39 (median = 40)
Darb El Ahmar (n=126) LE 46.0 (median = 40)

Average Estimated monthly electricity bill for those who use gas water heaters:

Zabaleen (n = 16): LE 40.81 (median = 30) (difference from 58.39, the average of electric heater users: LE 17.58; median difference = 10)
Darb El Ahmar (n= 46): LE 40.35 (median = 40) (difference from 46.00, the average of electric heater users: LE 5.65, median difference = 0)

Average Estimated monthly electricity bill for those who use the kitchen stove to heat water:

Zabaleen (n = 104): LE 38.64 (Median = 30) (difference from 58.39, the average of electric heater users: LE 19.75)
Darb El Ahmar (n= 46): LE 27.85 (Median = 25) (difference from 46.00, the average of electric heater users: LE 18.15)

Average Estimated monthly electricity bill for those who use a One Eye Portable Stove:

Zabaleen (n = 10): LE 29.7 (Median = 30) (difference from 58.39, the average = 28.69, difference from median = 10)
Darb El Ahmar (n=3): LE 18.33 (Median = 15) (difference from 46, the electric users average, = 27.67, medians difference = 40 - 15 = 25).

Average Estimated monthly electricity bill for those who use a Hamil floor grill to heat water:

Zabaleen (n = 26): LE 32.8 (Median = 32.5) (difference from 58.39, the average = 25.59, difference of medians = 7.5)
Darb El Ahmar (n=1) LE 14 (Median = 14) difference from average = 25.92, difference from median = 21)

Average Estimated monthly electricity bill for those who use a Babur to heat water:

Zabaleen (n = 3): LE 16.7 (Median = 20) (difference from 58.39, the average = 41.69, difference from 40, the median = 20)
Darb El Ahmar (n=8) LE 25.15 (Median = 23.50) difference from 46, the average = 20.85 difference from 40, the median = 16.50)

Though there is no question that heating water with electricity is more expensive per liter than heating with gas, more detailed analysis is needed to determine why electric heater users in the Zabaleen community appear to be (or at least report) spending as much as three times as much on water heating than the gas users in Darb Al Ahmar. It may be that there is greater awareness of the true price differences among the Zabaleen (i.e. that water heating can take up to a third of the electric bill) but it could also be that the Zabaleen, who frequently run home businesses with electricity intensive machinery, have larger family dwellings with more light bulbs and other appliances per building, have generally larger electric bills. Evidence that it might be a family size issue is supplied by the fact that the amount of electricity used by stove heating families in the Zabaleen is also higher than that used by stove heating members of Darb El Ahmar, and the same difference in cost is observed in both cases: A differential of approximately 18 to 20 LE per month.

It is hard to say why those using gas heaters in Darb El Ahmar have such a high electric bill, but perhaps those who can afford white goods like electric hot water heaters and gas hot water heaters are also those who consume more in general.
The differential between the electric heater users in the Zabaleen and those in Darb El Ahmar could reflect that the types of Zabaleen families that can afford to use electric water heaters also consume more electricity; i.e. those that are conservative about electricity use and costs would be those least likely to own electric hot water heaters.

Gas and electricity are heavily subsidized by the Egyptian government. This makes any transition to renewable energy systems particularly problematic. It is estimated that Egypt loses approximately 40 Billion LE (about 7 or 8 billion dollars, depending on how the dollar slides; it's hard to convert to dollars these days!), or roughly 8% of her GDP subsidizing gas and electricity, money that could be invested, as Tunisia is now doing, under the UNEP initiative, in solar energy systems for long term savings and benefits.

The current subsidies on power and fuels make prices roughly five times lower than they would be in the free market. This means that what would normally be a 5 year pay back period on a solar thermal system, for example, will take 25 years to pay back in Cairo. A solar electric system, with a payback period of normally 15 years, will take 75 years in Cairo.

Small wonder, then, that so few people are using renewable energy in Egypt!

Cairo offers a tiered subsidy system that is supposed to benefit the poor. As you can see from the table below, the first 50 kWH each month only cost 5 piastres -- about a penny! The next tier, from 51 to 200 KWh, cost only 9.2 pt, and up to 350 KWh one is only paying 12.5 pt, still roughly 2 and a half cents per KWh.

First, the Tariff Structure for Cairo Electric Services (from the Annual Report 2005/2006):

(Pt = piastres; 100 Pt = 1 LE = 20 cents, 5 pt = 1 cent)


kWh monthly: Pt/KwH

1) First 50: 5

2) 51 - 200: 9.2

3) 201 - 350: 12.5

4) 351 - 650: 18

5) 651 - 1000: 25.5

6) More than 1000: 31


1) First 100: 19.8

2) 101 - 250: 28.7

3) 251 - 600: 36.6

4) 601 - 1000: 45.3

5) More than 1000: 47.5

Public lighting: 33.1 pt/KWh

The author and his wife monitored a typical 50 liter Olympic Electric heater for a month, taking two 5 minute showers a day (25 liters per shower) and found an average use of 2 KW per 50 liters. At this rate, over a month, we are consuming 60 KWH. The first 50 cost 50 cents, the next 10 cost roughly 20 cents, thus a month of showering cost 70 cents for a couple.

Figuring that 50 liters a day costs 2 KWH per day, we ask ourselves, what would be the cost to heat 200 liters per day (the equivalent of our solar hot water tank)? 200 liters would consume roughly 8 KWH per day; over the month that would be 240 kWh. That would cost 50 x 5 = 250 Pt + 150 x 9.2 = 1380 Pt + 40 x 12.5 = 500 Pt; So to heat 200 liters per day for a month would cost 2130 Pt or 21 LE 30 piastres. This is equivalent to 4 dollars.

Since it costs us, in materials, roughly 2500 LE to build a solar hot water system, it would take 117 months, or 9.7 years, to pay back the investment!!

With a 10 year payback, it is no wonder that almost nobody in Egypt (and virtually nobody among the urban poor) find it economical to switch to the use of solar hot water systems.

Here is an article describing the issues of subsidies from the Magazine Egypt Oil and Gas. It contains quotes from my mentor professors at the American University in Cairo, Dr. Tarek Selim (Economics) and Dr. Salah El Haggar (Environmental Engineering):

Subsidies in Egypt: An issue too hot to touch or too cold to change?
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Subsidies have become the keyword to an ongoing controversy in the Egyptian energy sector. Arguments swinging between keeping and lifting oil and gas subsidies have raised concerns about the negative effects of “inefficiency” in implementing the subsidization system; its threats endangering the future of energy reserves and its state of being an economic burden on the government. Egypt Oil & Gas Newspaper examines the different perspectives of this debate

Subsidies: The Facts
According to the Shura Council’s Financial and Economic Affairs Committee report, the subsidies allocated to petroleum products have increased from nearly LE290 million in 1970 to more than LE40 billion at present. Egypt’s Minister of Petroleum Eng. Sameh Fahmy revealed in an interview in Al-Ahram Newspaper that the bill of subsiding petroleum products costs around LE44 billion annually ($7.4 billion). Meanwhile, the total revenue of exports counts for $10 billion. However, the bill of subsidies has been increasing and the Ministry of Petroleum (MoP) had to request the interference of the People’s Assembly to decide whether to keep the subsidies or cut them down. Fahmy pointed out that subsidies are not just directed to the lower income bracket, some of the wealthy people benefit from subsidies as well. “We need to face this problem clearly regardless its negative effect on the ministry’s image,” Fahmy said.
Last May, the Shura Council approved an amendment of LE20 billion in the 2005/2006 budget aimed at subsidizing petroleum products and natural gas. In the session, the Minister of Finance Youssef Boutros Ghali stated “three urgent reasons” behind this additional budgetary allocation. The first reason lies in the dramatic increase in oil prices worldwide. This rise has consequently led to an increase in the price of petroleum products, which the government buys from oil companies operating in Egypt. Thirdly, the local consumption of both petroleum products and natural gas has increased. “The government’s strident efforts to raise growth rates to more than seven percent have resulted in a large increase in the consumption of these products,” Ghali said.

The Debate
However, the increasing subsidies’ budget draws more economic problems as it is a temporary solution to monetary problems. Ghali said that in Africa, governments “usually bear only 10% of the price of petroleum products while the government in Egypt bears around 75%,” which represents a huge economic burden. For instance, the approved subsidies’ increase will result in an additional deficit of LE5 billion to the state budget. To solve this deficit, the government has to ask for either more loans from local or foreign banks or to modify its current subsidies’ policy. The first solution can be considered as an easy way out in the short term “but in the long run it will be disastrous, since it also means a big rise in public debts.” Thus, many may favor the latter choice, which creates a critical debate; to leave subsidies as they are, to lift them or to have a middle ground.

Lift them or leave them?
The suggestion to remove subsidies has been supported by different scenarios. Tarek Selim, assistant professor of economics at the American University in Cairo (AUC) said that the removal of subsidies should be implemented gradually and in specific conditions. The amount of subsidies allocated for the oil and gas sector are excessive, which makes prices artificially low. Subsidies encourage under production, as economies of scale cannot be achieved with subsidized prices, clarified Selim. Asked about public reaction to such a decision, he declared that when fuel prices were raised last summer, people complained for a while and then they got used to this increase.
The gradual lift of subsidies has also been supported by Paul f. Rea, chairman and managing director of fuels marketing at ExxonMobil Egypt. He told Business Monthly Magazine that the subsidies system can be dismantled only gradually. “The government shouldn’t remove subsidies entirely, but the drive should be in the right direction for the safety of the country,” said Rea, who recommended immediate incremental price increases of a few piasters per liter of fuel in order to fulfill this goal. Rea warned from a possible public intense rage in case of removing all subsidies at once. He referred to countries such as India, Indonesia, Nigeria and the Philippines in which ending petroleum subsidies had been “a disaster.”
In an interview with Abdallah Shehata, professor of economics and political science at Cairo University, he tackled this issue from another perspective; the loss of massive amount of subsidized energy utilized in heavy industries. Shehata said that industries which depend on crude energy to produce final products, such as cement, fertilizers, iron and steel enjoy double privileges. They receive oil, natural gas and electricity at low prices, while they sell their final products in international markets at high prices.
Shehata added that, “the subsidization policy, as it exists, does not achieve its purposes. It does not increase the competitiveness of locally produced products and it does not give the consumer affordable products.” He recommended the gradual removal of subsidies, while making a reform strategy in the way dealing with heavy industries.
Agreeing with the same argument, Salah Hafez, former vice president of Egyptian General Petroleum Corporation (EGPC) confirmed the necessity to lift energy subsidies allocated for factories, such as cement and fertilizers. In an interview with Al-Masry Al-Yom Newspaper, Hafez recommended to suspend authorization for new similar factories in regard to the limited source of energy and to direct this energy towards more beneficial use especially that factories export their products to international markets and do not sell them in local markets.
“In general, I am against the concept of subsidies, except for natural gas used in the transportation sector. I believe this is the only subsidy that should remain in the energy sector in order to promote the concept of natural gas usage in public transportation to minimize both fuel and economic losses,” commented Salah El-Haggar, professor of energy and environment at AUC. El-Haggar highlighted that removing subsidized energy allocated for industries will result in developing an efficient energy system better than the traditional one, and therefore promote the concept of energy conservation. For instance, encouraging taxies, buses and microbus drivers to use natural gas instead of fuel by providing them with subsidized prices will definitely help in decreasing the rate of energy loss and achieving more economic profit.
Sharing the same vision of promoting energy conservation through subsidies removal, SUCO former chairman Hamed Mohamed Al-Ahmady told Business Monthly Magazine that citizens “are abusing our resources… If gas stations charged LE 3 per liter rather than LE 1, everybody would cut their consumption – even if it means walking to buy a pack of cigarettes rather than driving.” Energy subsidies create a culture of mass-consumption; citizens use fuel carelessly as long as it is available at cheap prices.

Finding middle grounds
Representing the intermediate perspective, some have recommended to differentiate between the quantities and prices of subsidized energy directed at lower-income citizens and the one allocated for factories, and to maintain a balance between the needs of both sides.
Last December, Fahmy proposed to the Shura Council’s Industrial Production and Energy Committee lobbying the High Constitution Court to reverse its 1997 decision prohibiting multi-pricing of gasoline and natural gas. Fahmy argued that since demand for investment in Egypt has increased, especially in the cement and steel manufacturing sectors, the ministry could afford selling energy at higher prices to factories, while maintaining the subsidized price for the public. Fahmy’s suggestion has not been approved yet; however some experts believe that it will solve the problem of subsidies.
Commenting on Fahmy’s suggestion, Selim declared that pricing in general has been a major problem in Egypt’s energy sector. “There is no economic incentive to expand investments and achieve economies of scale because prices are fixed, not market based.” He added that due to this pricing issue, the government is acting as a monopsonist (the only buyer), which is another symbol of inefficiency because being the only buyer of oil means that it is fixing the prices for oil companies to sell their products to the public and expand their activities.
Based on the idea of establishing a middle ground, some suggested setting energy prices based on the international ones only for factories, while maintaining subsidized energy for citizens. Yosry Kotb, Board Member of the Administrative Committee of the Engineering Industries Chamber said that international prices should be used only with factories that sell their products in the international markets.
However, this suggestion has been criticized by some experts. Nabil Farid Hassanein, head of the Chamber of Engineering Industries pointed out that low prices of energy, personnel and infrastructure are factors to attract more foreign investors, thus selling energy at high prices will decrease the level of both local and foreign investments in Egypt.
On the contrary, some foreign investors criticize the system of subsidies, stating that it limits the expansions of investments in Egypt. In an article published in Business Monthly Magazine, Michael Barron, former policy and corporate affairs manager at British Gas (BG) Egypt, said that the subsidies system “distorts the market, is unattractive to investors and provides people with no incentive to buy more fuel-efficient cars or switch to cleaner fuels.” Barron emphasized that BG conducts studies on energy subsidies as an attempt to assist the government in forming a more effective policy.
Rea believes that “the government oil sector is going to have difficulties ahead if the oil subsidies continue. The money is going to have to come from somewhere.”
However, lifting subsidies is a double edged sword. It can be the solution to a possible energy and economic crisis in the oil and gas sector, yet it can create negative effects if the impacts of such a decision on the market are not studied well.

Thinking positive
Focusing on the bright positive side, Shehata confirmed that lifting subsidies will strengthen the sense of competition in the market. Most of the factories enjoying subsidized energy are in control of a large share of the local market. For instance, an aluminum company and two iron and steel companies hold around 60% of the market. As for fertilizer factories, three companies control 92% of the market, while in the cement industry, three companies control 70%. This wipes out the competition factor in the Egyptian market.
Concepts of energy conservation can be easily achieved when citizens realize the value of fuels when subsidies are removed, which diminish the sense of careless mass-consumption and save energy reserves for future generations, said El-Haggar.
Besides, Selim confirmed that energy sustainability can be one of the attained goals in the presence of subsidies allocated only for the natural gas, but this sustainability will never be achieved if subsidies are directed to all energy types.
On the other hand, Selim warned of two main social and economic losses that might accompany the implementation of this decision. First, there will be an increase of required expenditures from households; the estimated amount of expenditure needed to break-even these subsidies is almost 100LE per month for every household incorporating four people. This represents an additional economic burden on the government. To tackle this negative consequence of removing subsidies, we need to enforce a minimum wage law. In order to set this law, we have to formalize the informal sector that represents 40-50% of the economy and find out the incentives for this objective. Egypt signed the UN Millennium Development Goals, which sets a minimum wage standard for work contracts, equivalent to 342 LE per month in the case of the Egyptian status.
The second loss lies in inflation. Lifting energy subsidies will create from 5-7% additional inflation repression on the economy because energy is input in almost everything in our daily life.

By Yomna Bassiouni

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