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Mismanaged energy sector destroys viability of Jordan's industrial businesses

Business owners in Jordan are calling on the government to adopt long-term strategies to reform the energy sector that is threatening their survival.

AMMAN, Jordan — A beleaguered energy sector lacking in long-term strategy has led to high energy bills, which now threatens the viability of Jordan’s manufacturing businesses, according to critics. In the midst of their fight for survival, business owners along with industry experts are calling on the government to act before an already deteriorating sector suffers further blows.

Plagued by poor planning, over-commitment to energy generation and procurement, and a seeming reluctance to move away from a heavy reliance on fossil fuels, Jordan faces high energy costs that are crippling businesses and destroying their ability to compete with companies in neighboring countries.

As the biggest contributor to Jordan’s gross domestic product (24%), the industrial sector plays a crucial role when it comes to the stability of the kingdom’s economy. It provides the Treasury in excess of 1 billion Jordanian dinars ($1.4 billion) annually in direct or indirect taxes and employs more than 240,000 people across 18,000 industrial facilities countrywide — a significant contribution considering Jordan’s tough economic climate and its 18.7% unemployment rate.

Calls are being made for an overhaul of tariffs and the way in which renewable energy is utilized in order to better support its industrial sector.

Specialized Co. for Plastic Industries, established in 1977 and located in the east of Jordan’s capital Amman, is a family-run plastics manufacturing business, which produces parts for hot water, drinking water and sewage systems. Heading the business is Ghalib Soghayyir, 60, who took over from his father in 1990.

The company’s annual turnover is $17 million, but just $775,000 of that is profit. Nonetheless, they are one of the lucky ones, Soghayyir told Al-Monitor, for they are still operational.

“So many businesses have closed or moved overseas because they just can’t compete with our neighbors where energy costs are much lower in comparison,” Soghayyir said. “Places like Turkey have much more favorable conditions for businesses.”

He said the diminishing local competition is something his business is benefitting from, but considers this to be a short-term gain. Moving the business abroad in the future is not something he is discounting. Figures from the Jordan Chamber of Industry (JCI) show that around 2,000 businesses in the industrial sector were forced to close between 2015 and 2018.

“Moving a business overseas is not easy but remaining competitive here is an incredibly tough task,” Soghayyir said.

Soghayyir acknowledges the difficult conditions are not just a result of high energy bills — companies have to contend with high taxes and trade hampered by the closure of borders due to conflict in the region — but the cost of energy consumption remains a big challenge.

Energy accounts for around 25% of his business’ operational costs — lower than the average 35% across the industrial sector. His factory operates 24 hours a day, which means he pays an average rate of $0.11 per kilowatt-hour (kWh) — 64% higher than the tariff paid by Saudi Arabia’s industrial sector ($0.04). In addition, he also faces a peak load price — which is calculated in a different way from the normal rate — of $2.82 per kilowatt (kW) three hours each day, when electricity demand is at its highest. Larger factories, which are larger energy consumers, pay $4.23 per kW during those three peak hours. Due to the nature of Soghayyir’s business, like many others, shutting down the factory during that time is just not possible. 

“My concern is the future of the industrial sector. If businesses continue to close, there will be no sector left and then where does that leave Jordan?” Soghayyir said. 

Unlike the majority of other manufacturers, Soghayyir has been able to invest $1.4 million in his own renewable project, which will cover 35% of his energy consumption initially, but he hopes to increase this.

In 2012, the government passed a law enabling private investors to link their own renewable projects to the country’s electricity grid — lowering energy costs for those able to invest. Critics, however, argue the scheme has been enjoyed predominantly by companies in lucrative sectors such as telecommunications and banking due to the initial financial investment and land needed.

There has been some success for the sector, however. Last year, the government approved a renewable energy project, which will generate 100 megawatt (MW) of electricity, exclusively for small to medium enterprises (SMEs) to benefit from. Albeit a positive step, energy costs only partially covered for some 160 businesses in an industry boasting 18,000 — most of which are SMEs — is just a drop in the ocean.

Maen Ayasrah, coordinator of the energy and environmental sustainability unit at JCI, said high energy bills play a major part in the closure of businesses. “The industrial sector accounts for 24% of energy consumption. It is the second-largest consumer of electricity after domestic use. Energy in this sector is not a luxury, it is a necessity,” Ayasrah told Al-Monitor.

Although electricity rates have remained unchanged for the industrial sector in the last four years, they doubled between 2008 and 2015.

JCI is calling for industrial sector energy needs to be prioritized in relation to upcoming renewable projects and a review of electricity tariffs. It is also pushing for greater energy efficiency awareness — something the government is supporting.

A report published in March by Renewable Energy Solutions for the Mediterranean highlights Jordan’s potential to run a 100% renewable energy system, saving around $12 million per year. Of the country’s total 4,300 MW capacity, 1,134 MW is currently generated from renewable energy resources, according to the Ministry of Energy and Mineral Resources.

However, according to the report, the absence of a comprehensive plan to “effectively manage a growing renewable capacity” is a “major threat to the power system cost-effectiveness and to electricity bills affordability.”

From 2011, as a result of conflict in the region, Jordan suffered a huge hike in fuel costs. Attacks on the gas pipeline from Egypt delivering 80% of Jordan’s energy requirements forced the government to rely on alternative fuel to generate electricity. Jordan’s consumed energy cost increased from $3.7 billion in 2010 to $5.6 billion in 2011, according to the state-owned National Electric Power Company (NEPCO), and today, the company faces a $7.7 billion debt.

Lacking in natural resources, Jordan has continued to depend heavily on imported fuel — 94% in 2018 — to maintain a reliable energy supply amid the surrounding instability. Due to the high cost of this energy, the length of the deals and a 1.5% decline in energy demand instead of the forecasted 5-7% growth, critics have accused the government of signing unnecessary contracts.

A further 1,186 MW of renewable energy and 470 MW through an oil shale project — an expensive and heavily polluted extraction process — are set to be operational by 2022. However, a source close to the latter project told Al-Monitor that talks regarding the possibility of backtracking on the deal have taken place.

The country is drowning in energy. In January, the government announced a temporary freeze on further major renewable projects (above 1 MW) with immediate effect, leaving the energy sector reeling. Without a doubt it will result in company closures and thousands of job losses. It is another indicator of an energy sector in turmoil and there are concerns it could deter investors.

Samer Judeh, vice president of EDAMA, a not-for-profit association in Amman that provides support to energy, water and environmental companies, admits total reliance on renewables would be unfeasible due to the intermittent nature; the minimum requirement of energy demand cannot be met when the sun sets or the wind stops blowing.

He does, however, question the continued dependence on imported fuel when a $2 billion investment in renewable energy was made between 2011 and 2018.

Judeh also highlighted the need for NEPCO to explore privatization. “The whole world has moved away from this single-buyer model and freed-up electricity,” Judeh told Al-Monitor.

NEPCO’s managing director Amjad al-Rawashdeh said minimizing the cost of electricity and creating a sustainable system to benefit both NEPCO and end users is his priority.

Addressing criticism regarding overcommitment to energy deals, Rawashdeh said that Jordan has suffered as a result of conflict in its neighboring countries. “Who could have predicted an influx of 1.5 million refugees?” Rawashdeh told Al-Monitor. “This unpredictability makes long-term strategy very difficult.”

He admits a saturated energy market is behind the freeze on new renewable energy projects. “We need to pause and develop a strategy that delivers the optimum configuration of energy,” he noted.

Rawashdeh added that NEPCO is currently working to reduce tariffs and changes will be implemented this year. He also believes NEPCO will move away from the single-buyer model in the future, but being tied into 25-year energy deals and the need for a stronger regulatory framework currently make this difficult.

According to him, by 2022, renewable energy will account for 30% of the total consumption.

Neither the minister of energy and mineral resources nor the ministry's secretary-general provided a response.