2004 IEEE International Conference on Electric Utility Deregulation, Restructuringand Power Technologies(DRPT2004) April 2004 Hong Kong

Restructuring of the Egyptian

Electricity Industry
Mohamed Shaaban, Member, IEEE

Abstract-As the electricity industry in Egypt is embarking
on a major paradigm shift toward unbundling its vertically
integrated structure into smaller entities, devising a suitable
restructuring approach, which takes into accord the
ideological and economical implications, becomes crucially
important. This paper provides and overview on the
restructuring process of the Egyptian electricity industry. A
conceptual framework for the industry restructuring is
outlined in which the retention and regulation of existing
generation facilities and the establishment of a separate
entity handling the transmission network as well as the
introduction of retail business in the distribution supply is
proposed.
Index Terms-Power systems, restructuring, power pool,
regulation.
I. INTRODUCTION
Lower rates to end users
Increased customer choice
Additional customer services and products
Enhanced reliability and system diversity
Efficient use of system resources
Minimized bureaucracies and obstructions
Provide incentives for innovation.
The electricity industry in Egypt used to be one of the
most successful sectors in the nation. With an installed
capacity of 16648 MW and a peak demand of 13326 MW
[2], the country’s level of electrification approaches the
recognized international standards. With the country’s
eagerness to improve the performance of its service
sectors, a massive restructuring program is underway
which would have a significant impact on the electric
power system operation and planning in Egypt.

F OR almost a century, the electricity industry used to

operate in a vertically integrated fashion. In this
environment, the electric utilities controlled the
generation, transmission, and distribution. The economy
of scale concept made larger generating units cheaper to
run than smaller ones. In addition, the electric power
industry is capital intensive and, because power cannot be
stored, it must be generated so as to meet the
instantaneous demand. On those grounds, the electricity
industry was basically perceived as a natural monopoly
and electric utilities enjoyed servicing their assigned areas
incontestably [I]. However, the economic benefits
materialized from the restructuring of natural gas, airlines,
and telecommunications have compellingly provoked the
question of electricity deregulation. Prominent economists
and public policy analysts have promoted the idea that free
markets can drive down costs and prices by reducing
inefficiencies in production. Price differentials among
utilities coupled with the technological advances in gas
turbines, making smaller units more reliable than large-
scale plants, created the climate for the change.
The UK was the pioneer in deregulating the electricity
industry. Similar initiatives were trailed by Norway,
Australia, Latin America, and the United States. While
different restructuring strategies were adopted by various
countries, the common endeavors of power industry
restructuring can be summarized as follows:
M. Shaaban is with the Department of Electrical Engineering,
Faculty of Engineering at Port Said, Suez Canal University, Port Fouad
42523, Port Said, Egypt (e-mail: shaaban~~,~radurtte.likii.li~).
This paper provides an overview on the restructuring of
the electricity industry in Egypt. A background about the
Egyptian electricity industry is first summarized, the
development of the regulatory reforms is then outlined, the
present market architecture is described, and finally
suggestions on the envisaged market structure and
deregulation policy are presented.
11. BACKGROUND
The Egyptian Electricity Authority (EEA) was
established in 1976. EEA was a state owned entity that
managed the generation, transmission, and distribution. It
fell under the direct control of the Ministry of Electricity
and Energy (MOEE). As of 2000, EEA had an installed
capacity of 14582 MW with a peak demand of 11736
MW, and a total of 16714 km of transmission lines (ranges
of 500 kV, 400 kV, 220 kV, and 132 kV) [3]. Along with
generation units connected to the unified transmission
grid, EEA also operated 60 power plants, which are not
connected to the grid, serving remote unpopulated areas
with a nominal capacity of 624 MW [3].
EEA commenced the operation of Sidi Kreir power
plant 1&2 with a capacity of 640 MW in 2000 and Ayoun
Moussa power plant with a capacity of 640 MW in 200 1.
In 1998, EEA awarded Sidi Kreir 3&4 to interGen, an
international power generation and energy related
infrastructure company. The plant, which has a capacity of
682 MW, was the first Build, Own, Operate, and Transfer
(BOOT) of its kind in Egypt. The plant was commissioned
in 2002. In 1999, Electricite de France (EDF) was
awarded the BOOT projects of Port Said East and Suez

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2004 IEEE International Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004)April 2004 Hong Kong

Gulf with of a capacity of 650 MW each. They came into former, EEA, the government undertakes liability for all of
service in 2003 [2]. the outstanding debts, while the latter, EEHC, is not
Furthermore, EEA was interconnected to Libya in May allowed anymore to receive state subvention to cover its
1998 with a 220 kV overhead transmission line with an revenue deficiency. EEHC is also allowed to enjoy
average exchanged energy of 25.7 GWh (import). financial and managerial independence as compared with
Interconnection to Jordan took place in October 1998 EEA.
through a 400 kV transmission line and a submarine cable In August 2000, a presidential decree enacted the
at El-Akaba gulf. The average energy exchanged with the reorganization of the electric utilities [ 5 ] .This decree may
Jordanian side mounts to 18.4 GWh (export) [ 3 ] .In March well tum out to be the key legislation in setting the stage
2000, the interconnection between Jordan and Syria was for introducing competition in the electricity industry. The
put into operation through a 400 kV transmission line. The decree institutes the establishment of the Electric Utility
subsequent interconnection with Turkey would bring to and Consumer Protection Regulatory Agency
reality the long-awaited dream of the interconnection (EEUCPRA). The agency has an objective of regulating,
between the Mediterranean ring and the European monitoring, and controlling over all matters related to
continent. It is worth mentioning that the Maghreb states electric generation, transmission, distribution, and
(Morocco, Algeria, and Tunisia) were connected to consumption. The powers of the agency include:
Europe in October 1997 with a 400 kV submarine cable a) Setting regulations that ensure lawful
from Morocco to Spain across the Straits of Gibraltar. The competition in the field of electric power
average energy exchange between the Maghreb states and production and distribution in the best
Europe is around 2.3 TWh [4]. interests of the consumers.
EEA had 7 distribution companies, under its structural b) Granting licenses relating to construction,
organization, which distributed electricity within specified management, operation, and maintenance
territories. The distribution companies are responsible for necessary for carrying out power
building and maintaining their local medium and low production, transmission, and distribution
voltage (LV), 66 kV and below, distribution systems. activities.
They buy the power from the generation companies at the
uniform national set of tariff. They mainly operate as The agency has already prepared the rules and
meter-reading and billing organizations and as retailers of procedures for obtaining licenses for the generation,
electricity. transmission, and distribution.
Moreover, EEA operated the National Energy Control The decision to form EEUCPRA and granting it
Center (NECC), for managing the operation of generating autonomy in setting the rules governing the market
stations and ultra high voltage (UHV) transmission operations and the behavior of all entities to ensure lawful
networks, as well as 4 regional control centers for competition is definitely a big step on the right track.
operating substations, high voltage (HV) and medium Perhaps the issue at stake is how to best articulate the rules
voltage (MV) networks. so that they do not create opportunities for gaming or
By and large, EEA functioned reasonably well with no market abuse. Obviously it is not possible, though, to get
major service disruptions. It used to be one of the most all the rules correct on day one. A process for change must
successful enterprises in the nation. Thus, the decision to therefore be part of the rule-setting activities.
reorganize it should not be interpreted as a measure to
combat major failures. IV. CURRENT
MARKETORGANIZATION
The Egyptian Power Pool (EPP) was created in 2002 to
111. REGULATORY REFORMS facilitate the trading arrangements between the generation
With the government's pursuit of improving the and distribution companies particularly between the EEHC
efficiency of its service sectors, the Parliament passed a subsidiary companies. Currently, there are 23 companies
law transferring the Egyptian Electricity Authority (EEA) playing in the market; 14 out of them are affiliated with
into a Joint Stock Company. Immediately afterwards (in the EEHC while the others are the BOOTS and
July 2000), the Egyptian Electricity Holding Company Independent Power Producers (IPPs) [ 6 ] . The present
(EEHC) was formed. The government-owned EEHC has structure of the Egyptian electricity market is depicted in
14 affiliated companies: 5 generation companies (4 Fig. 1.
thermal, and one hydro), one transmission, dispatching, The most prominent feature of the model is the single
planning, and purchasing power company, and 8 buyer represented by the Egyptian Electricity
distribution companies, where on of the distribution Transmission Company (EETC) which is the sole
companies, namely the delta electricity company, was organization allowed to purchase bulk power from
broken down into two companies. generating companies and sell it to distribution companies.
The difference between EEA as a government-owned EETC also purchase electricity from BOOTS, IPPs, and
enterprise and EEHC as a holding company is that for the imports. It sells electricity directly to some high, and ultra

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2004 IEEE Intemational Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong
high voltage customers as well as controlling exports to
neighboring countries.
The pool operates where distribution companies bill
end-use customers, then they make payments for EETC
for the transmission and generation services. EETC in tum
pays the generation companies for their generation supply.
In other words, the revenues flow back from the
distribution companies to the generation companies.
Charges to end-users, including HV and UHV ones, are
still based on the uniform national tariff. More or less, the
conventional bottom-up charging policy is still prevailing.
Fig. 1 . Present structure of the Egyptian electricity market
The charges and cash payments between EEHC and its
subsidiary companies participating in the EPP are based
on the charges model [7]. The charges model calculates
the total charges between each generating company and
EETC and between EETC and each distribution company
such that each company is equally profitable. The input to
the model comes from a 1-year forecast of financial and
technical data, which is provided by the companies as part
of EETC’s budget process. The output of the model is the
required transfer payments between the companies for the
forecast period. The revenue allocation for each company
is set such that each company will have the same
percentage return on equity as for the sector as a whole.
EETC subsequently administers cross-subsidies between
distribution companies to ensure that each company’s net
earnings equals to the cost of service revenue proportion.
The power pool operation is quite similar to the old
operation paradigm. The key difference perhaps is that
generation dispatch is based on contract provisions rather
cost-based economic model albeit the results will be the
same. The charges model provides a transparent criterion
for the valuation of services between the electricity
companies. However, the model does not promote both
technical and productive efficiencies. On the contrary, it
provides a disincentive for efficiency as it is not related to
the performance. In addition, the pool offers no direct
commercial link between buyers (distribution companies)
and sellers (generation companies), but instead all
transactions are mediated through EETC.
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On the other hand, the market structure shown in Fig. 1
is known as a purchasing agency or single-buyer model
[l]. This model can introduce competition in the power
generation and make it easier for the government to
advance its policy objectives. It also ensures investors
against market risk as they (IPPs as well as BOOTS
through the take-or-pay arrangements) engage in long-
term contracts with the purchasing agency. The latter gives
incentives to raise capital. Nevertheless, this model blunts
the dynamic benefits of competition rendering many
aspects in the hand of central planners [ 11.
V. PROPOSED
RESTRUCTURING
APPROACH
The restructuring of the Egyptian electricity industry so
far aims merely to introduce contractual arrangements into
electric power purchases. However, a profound
transformation in the way the electricity industry operates
in Egypt should go much further by splitting up the
integrated functions of the EEHC into separate generation,
transmission-dispatch, and distribution. Typically,
unregulated generation companies, a central entity for
transmission and dispatch of power, and regulated
distribution companies. In a competitive environment, the
two major elements in a power market are generation and
retail supply.
A. Power Generation
The effective operation of the competitive generation
supply entails the existence of considerable number of
participants. In fact, the number of generation participants
differentiates between an oligopoly and a competitive
market. Currently, EEHC, represented with its 5
subsidiary generating companies, has a market share of
89.64 % [SI. EEHC has therefore the ability to exercise
market power inhibiting fair competition among market
participants. To prevent market power abuses, the
regulatory agency (EEUCPRA) has to instruct EEHC to
divest its generation assets into a smaller number of
generators. The question which poses itself would be
whether the divested EEHC companies remain to be state-
owned entities or should it be privatized? The unequivocal
reality is that the hydropower company must continue to
be a state-owned entity for various historical, ideological,
social, and political reasons. One option would be to
privatize the thermal generating companies with the
government retaining a significant stake of them.
The second viable option would be to regulate existing
generation assets, after divestiture, to permit private sector
investment through the construction of new generation
(IPPs) and to exert competitive pressures in the operation
of contemporary generation facilities. The author of this
paper advocates the second option for the following
reasons:
It promotes the introduction of new
competitive supplies in a progressive and
gradual manner
2004 IEEE Intemational Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong
It allows the Egyptian government to benefit
from correct, past investments and operating
decisions
It establishes a yardstick by which the
regulatory agency, and the government, can
adjudge the economic performance of the
regulated contemporary generation facilities
It provides certain and transparent results in
terms of benefits to consumers
It avoids the dilemma of stranded cost
recovery as encountered in the US
electricity market [9]
It reduces the regulatory, legislative, judicial
and administrative costs associated with the
privatization programs.
However, the current rate of return on equity
regulation policy applied at the electricity sector does not
promote efficient capital expenditure or cost minimization.
Performance based regulation is therefore proposed to
incentive regulated generation companies to be more
efficient.
B. The Transmission System
The transmission system is the key element in the
restructuring of the electric power industry. It must offer
non-discriminatory open access to all power suppliers and
consumers. It must be used efficiently and the rules
governing its operation must be impartial and transparent
to promote competition among market participants. The
transmission system is analogous to the superhighway
transportation system which has an inherent geographical
natural monopoly status. Therefore, the transmission
system must continue to function as an integrated and
regulated entity [lo].
The Egyptian Electric Transmission Company (EETC),
a subsidiary of EEHC, should be legally separated
inheriting all the ownership, management, and operation
functions of the transmission system. This paper proposes
the formation of the Egyptian Transmission Network
Administration (ETNA) as a public domain entity at arms
length from the government. ETNA would assume the
responsibilities of transmission ownership, preserving
system security, expansion and planning, operation and
maintenance, designing tariffs which encourage efficient
use of transmission assets, and operating the ancillary
services and balancing markets.
A separate entity can be established to deal with the
power pool operations, which acts as a commercial
marketplace, and carry out settlements of accounts
between bids and offers.
C. The Distribution Svstem
The Egyptian govemment steps to corporatize the
distribution companies is actually motivated by its intent
to privatize them eventually. The regulated privatized
companies would maintain the ownership of the
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distribution infrastructure. Performance based regulation
is again proposed for the distribution business to promote
incentives to achieve higher efficiency.
A wholesale competition would perhaps be
implemented at the first stage where distribution
companies can buy their bulk power directly from the
market. To expand competition in supply to consumers,
retail business should be introduced where consumers can
ultimately choose their electricity supplier. This requires,
however, the opening of the distribution network, on
equitable basis, to retail suppliers.
The proposed Egyptian power market model is
illustrated in Fig. 2. The model retains the following
characteristics:
It takes into accord the ideological and
economical impacts on the Egyptian electric
power sector
It maintains the transmission system under
indigenous control as it is a key part of the
national infrastructure
It splits up between the network security and
financial trading in order not to compromise
the system’s integnty
It supports more effective regulation
measures to achieve higher efficiency.
EEHC thermal generators
Fig. 2. Proposed power market structure in Egypt
VI. CONCLUSIONS
A conceptual framework for the restructuring of the
Egyptian electricity industry was presented in his paper.
An extensive background about the extent of the industry
and its structure was described. The regulatory
developments paving the way for introducing competition
were highlighted. Retention of the existing generation
facilities and the creation of a stand-alone entity for the
transmission system management as well as the
introduction of retail business in the distribution sector are
the main components of the proposed restructuring
framework. Further research is still needed to expand the
notions expressed in this paper.
2004 IEEE International Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong

VII. REFERENCES
[I] S. Hunt, and G. Shuttleworth, "Unlocking the grid," IEEE
Spectrum, pp. 20-25, July 1996.
123 Egyptian Electricity Holding Company: Annual report,
200 1/2002.
[3] Egyptian Electricity Company: Annual Report, 199912000.
[4] J. Schwarz, "Recent developments in the European interconnected
power system," Electra, no. 197, pp. 16-21, August 2001.
[5] Mohamed Hosni Mubarak, "Reorganizing electricity utility and
consumer protection regulatory agency," Presidential Decree 339,
August 2000.
[6] M. C. Webster, "Market change: Egypt," in Proc. ofthe Executive
forum on Regulation in Emerging Electricity markets, Cairo,
Egypt, October 2002.
[7] Nexant, "Charges model for Egypt power pool," Tech. Rep.,
August 2002.
[8] M. M. El-Saadawi, M. A. Tantawy, and T. R. Tawfik,
"Development of power marketing strategy under interconnected
system conditions", in Proc. 7th Al-Azhar Engineering Int. Con$,
Cairo, Egypt, April 2003.
[9] J. M. Kelley, "The missing manifesto: what economists should be
saying about electric utility restructuring in the United States ," The
Electricity Journal, pp. 13-24, January/February 2002.
[IO] N. Leeprechanon, A. K. David, S. S. Moorthy, and F. liu,
"Transition to an electricity market: a model for developing
countries," IEEE Trans. Power Systems, vol. 17, no. 3, pp. 8 8 5 -
894, August 2002.

VIII. BIOGRAPHY
Mohamed Shaaban (M'2004) received his BS and MS degrees in
Electrical Engineering from Suez Canal University, Egypt and his PhD
degree in Electrical Engineering from the University of Hong Kong in
1990, 1996, and 2002 respectively. He is currently an Assistant
Professor in the Department of Electrical Engineering, Suez Canal
University, Egypt. Since October 2003, he is a consultant to the
Egyptian Electric Utility and Consumer protection Regulatory Agency
(EEUCPRA). His research interests include restructuring of the electric
power industry, power system stability and control, optimization, and
available transfer capability calculations. Dr. Shaaban is a member of
IEEE.

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