Power play New energy strategy, new conundrum

A new energy pricing system is still making waves in political and industrial circles

Since Minister of Trade and Industry, Rachid Mohamed Rachid, announced that a new pricing mechanism for natural gas and electricity used by energy-intensive industrial sectors will be applied, the decision has triggered mixed reactions in industrial and political circles as well. Having been approved by the Supreme Energy Council, the new pricing mechanism is the second phase of a new industrial policy which, Rachid’s ministry says, includes a series of measures to enhance the efficiency and competitiveness of the Egyptian industry.

According to Rachid, the first step is introducing a new mechanism for pricing natural gas and electricity used by 40 plants which consume large amounts of energy. “This aims to better clarify and make predictable the prices of energy for investors,” Rachid pointed out. He added that the new system was developed in coordination with both the ministries of petroleum, and electricity and energy. “The new system aims to raise the price of natural gas and electricity gradually until it reaches cost recovery,” he added. At that level, the price will not be subsidized at all after a three-year transitional period. Accordingly, the price of natural gas will gradually rise from $1.25 to $2.6 per million units, while the price of electricity will be divided into three categories. Very high voltage will go up from 11.1 to 17.8 piastres per KW; high voltage from 13.4 to 21.6 piastres per KW; medium voltage from 18.3 to 29.5 piastres per KW.
The new pricing system will be applied to 40 factories operating in four vital sectors, namely cement, steel, fertilizers and aluminum. The combined production of these plants represents 20% of output by local industry, and uses 55 per cent of subsidized energy, according to Rachid. The forty plants employ only seven percent of the industrial labor force.
The new pricing system, as a matter of fact, will help save LE15 billion for the government’s budget which were paid in subsidies. According to Rachid, the government will create a fund that uses part of the redirected subsidies to promote local manufacturers’ attempts at increasing their energy efficiency and minimize their energy consumption. A committee will also be formed to monitor and regulate energy prices for industry, in order to ensure the smooth transition into the new system.
The new system will neither be applied to small industries nor sectors which employ a large number of the labor force, as they will enjoy current energy subsidies for one more year. However, the ministry will reconsider their energy prices.
The decision, in fact, ruffled members of the parliament’s tempers. In a heated parliamentary session held last month, members of the parliament voiced their fears from a hike in commodity prices due to the new energy pricing system. Replying to the criticisms of MPs, Rachid retorted that the new system was aimed at increasing the competitiveness of the Egyptian industry. He said that the aluminum plant in Nagaa Hammadi, for example, “doesn’t determine the prices according to energy price, but according to international prices.” As for the cement industry, he pointed out that the government determines its prices, which are also not influenced by energy prices.

Mohamed Abul-Enein, chairman of the Industry Committee at the People’s Assembly, supported the government’s move, nevertheless. He said that “the decision is fair and will take subsidies from the companies that used to get energy at cheap prices and give it to ordinary citizens. The three year transitional period is enough for the plants to redraw their strategies.”

However, economists and energy experts cast doubts on the efficiency of the new system. Abdallah Shehata, professor of economy at Cairo University and researcher at the Egyptian Centre for Economic Studies, is of the opinion that “the new energy pricing will not affect industrial businesses, for they will employ high technology that saves energy.” But the problem, Shehata continues, is that these businesses “will unjustifiably raise the price of their end products. Therefore, local consumers will be the only losers due to this new system.”

Shehata attributed the current economic conundrum to a lack in governmental tools to put a brake on sky-rocketing prices of vital commodities. “The government does not have a price-controlling system that can undermine any unjustified hike in prices,” he pointed out.

Reda Moharram, professor of petroleum engineering and mining at Al-Azhar University, begged to differ. He argued that energy prices should be applied to all plants regardless of the amount of their energy consumption. “The ministry should review the decision of exempting plants that employ a large number of workers from the new energy prices system, for most of the new plants employ high technology and fewer numbers of workers,” he said.

Moharram believes that a great part of products that receive energy subsidies is exported, thus subsidies do not benefit their target—ordinary citizens. “There are great amounts of fertilizer, steel and cement production that are covered by energy subsidies and are exported. This means that the Egyptian government provides subsidies for foreign consumers who buy these products,” he added.

Mohamed El-Sobki, former chairman of the Electricity and Customers Protection Agency, saw the new energy pricing system from another perspective. “The new system is a positive step towards protecting Egyptian exports, since some European countries impose anti-dumping fees on Egyptian subsidized products.” If the government continued to provide plants with electricity with reduced prices, he added, “electricity companies would have gone bankrupt.”

He ruled out the possibility that product prices would increase “since the price of energy input in the production of steel and cement does not constitute a burden. However, Aluminum industries will be negatively affected since they consume huge amounts of energy.”

By Mohamed El-Sayed


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