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Sunday, 18 August 2019

Waiting for the bills: Egypt's anticipated hike in electricity prices

Ghada Raafat sounds out expert opinion on the announced increases in electricity prices

Ghada Raafat , Wednesday 29 May 2019
Electricity meters
Electricity meters (Photo: Ahram)
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Electricity prices in Egypt will increase by an average of 15 percent in July, the minister of electricity announced last week.

Electricity prices for the commercial sector will increase by an average of 14 percent, while prices for the industrial sector, including high-energy sectors such as the iron and steel industry, will increase by 10 percent.

Electricity prices for household consumption will rise by an average of 20 percent.

Hafez Al-Salmawi, former head of the Egyptian Electric Utility and Consumer Protection Regulatory Agency (EgyptERA), said that the continuation of the price-restructuring programme had made a huge difference to the market.

He said the market had been transformed from being rigid and lacking in incentives to one characterised by improved performance and efficiency.

The present price rises come as a result of the fourth cut in energy subsidies since Egypt embarked on an economic reform programme with the backing of the International Monetary Fund (IMF) in 2016.

The move is part of a package of reforms aimed at containing the budget deficit. The government is hoping to save LE16.5 billion by cutting electricity subsidies, which came to LE33.5 billion in the fiscal year 2018/2019, according to investment bank Beltone Financial.

Electricity subsidies represent 15 per cent of the government’s goods support bills, Beltone said. The government lowered the subsidies by an average of 30 per cent in July 2016, followed by 40 per cent in July 2017 and 26 per cent in July 2018.

However, despite his overall approval, Al-Salmawi said the government needed to do some things differently. The higher prices borne by the industrial sector limited the competitiveness of Egyptian goods, he pointed out, and the fact that high-voltage subscribers, mostly the industrial and services sectors, cross-subsidise the household sector was no longer viable.

Cross-subsidisation is the practice of charging higher prices to one type of consumers to artificially lower prices for another.

Al-Salmawi said that the higher bills paid by industries and service providers were reflected in the increased cost of goods sold to consumers. In the end, households ended up bearing the increase in prices, he added.

According to Beltone Financial, household electricity accounts for 42 per cent of subsidised electricity in Egypt.

Overall price increases were what Aida, a daily worker, worries about most. She does not worry about her electricity bills, as she thinks they will only increase by a few pounds. However, she said that any increase in utility prices was usually reflected in the price of finished goods, which are already expensive.

After the rise in electricity prices, the prices of goods will increase again, constituting an additional burden on households, she said.

Al-Salmawi stressed that besides tackling the issue of subsidies, the government should focus on the efficiency of the sector. He said that the electricity companies should make sure that their plants are working efficiently in terms of fuel consumption, the reduction of electricity losses in transmission networks, and the efficiency of bill collection and the reduction of administrative expenses.

He wanted to see a market in which consumers, especially the industrial sector, would be able to move freely among producers, depending on their efficiency.

Fair competition would not only improve performance, but would also attract investments to the sector, whether traditional or renewable energy production, he said.

Mohamed Al-Sobki, founding head of the EgyptERA, warned that if the cost of the fuel used in the current power plants rose above $3 per million British thermal units (BTU), electricity prices to the end-user would need to increase again, in which case the government might intervene again with subsidies.

The highest price increases, averaging 30 per cent, would be borne by the lower consumption brackets, Al-Sobki said, adding that this group of consumers constituted most of the recipients of state subsidies.

Residential higher-consumption brackets, consuming more than 1,000 kWh/month, would not see their bills increase at all, Al-Sobki said.

He explained that this was because users in this segment were already paying an unsubsidised rate, adding that they accounted for less than one per cent of the total number of domestic subscribers, with total consumption not exceeding 7.6 per cent of total consumption.

The electricity subsidies had been scheduled for phasing out by 2019-2020, but the deadline was extended for another year to ease the burden on households.

A faster schedule would have meant more drastic cuts in the subsidies, which will be fully phased out by June 2022, according to the minister of electricity.

*A version of this article appears in print in the 30 May, 2019 edition of Al-Ahram Weekly under the headline: Waiting for the bills

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