* Ageing power grid urgently needs modernisation
* Expert sees major blackouts this summer
* Fuel subsidy reform must precede overhaul of sector
* Inefficient grid and plants waste fuel
By Maggie Fick
CAIRO, April 23 (Reuters) - Egypt needs to find at least $5 billion to invest in its dilapidated power grid, a government official told Reuters, highlighting a major challenge for the next president as the country faces the risk of worsening blackouts this summer.
Energy is a politically explosive issue in Egypt, where power cuts have become commonplace even in the capital Cairo. Blackouts deepened discontent with Islamist President Mohamed Mursi before his ouster last July.
While gas shortages have been blamed for the crisis, senior electricity ministry official Sabah Mohamed Mashaly said modernising the grid should be a priority.
"We don't have any (capacity) reserves, we just cover the load demand," Mashaly said in an interview.
She said additional power capacity was needed to fill sudden production falls caused by accidents and maintenance work at Egypt's 51, mainly gas-fired, power stations, of which about a quarter are more than 20 years old.
Mashaly said renovating these and building new ones would carry a price tag for cash-strapped Egypt of "no less than $4 or $5 billion" plus several billion more to boost the generation capacity of the system.
HEADACHE FOR SISI
Egyptians vote in presidential elections next month in which former army chief Abdel Fattah al-Sisi is expected to easily defeat his only challenger, leftist Hamdeen Sabahi. Though Sisi's supporters credit him with a magic touch, there is no instant solution to the decrepit state of the power grid, a glaring example of decades of mismanagement.
The ageing state-run infrastructure is increasingly unable to handle the burden of rapidly growing demand for electricity in a country of 85 million people. And gas shortages have worsened in recent years as dwindling local production has failed to meet domestic demand and export commitments.
Electricity demand is highest in summer, when Egyptians keep their air-conditioning running day and night. But lack of gas caused blackouts even in winter this year, for the first time in decades.
Using alternate fuels like diesel to fire the plants risks damaging the facilities. "The gas shortage (forced us) to delay maintenance at some stations and made things more complicated," said Mashaly.
The situation threatens to come to a head in July and August, the hottest summer months.
The interim government, like its predecessors, is grasping for short-term solutions, mostly encouraging citizens to cut energy use and negotiating with friendly Gulf Arab states to import petroleum products on favourable terms.
But unlike last year Egypt does not have its former friend Qatar to help it out with extra supplies of liquefied natural gas. The Gulf state was sympathetic to Mursi and the Muslim Brotherhood, but has withdrawn its support since their ouster.
Energy officials say a lack of reforms to the wasteful fuel subsidy system is keeping away private investors who could finance modernisation and boost gas output.
No one wants to build capacity to generate electricity that will be sold at less than it costs to produce. And the artificially low prices provide little incentive for Egyptians to curb consumption.
Egyptians pay the equivalent of between 1 to 7 U.S. cents per kilowatt hour for electricity in their homes. By contrast, U.S. householders pay between 8 and 37 U.S. cents, according to U.S. Energy Information Administration data.
Mashaly says private investment is needed for renovation of the grid. But she cautioned that this will not happen until the government eases the fuel subsidies, which drain more than 20 percent of the state budget.
"Once the subsidies are removed, companies will come right away," said Mashaly.
Yet some experts are sceptical. "Why should a private investor commit to building another gas-fired plant, if the government cannot guarantee a stable fuel supply and the plant won't be able to run at its planned capacity?" asked Jens Zimmermann, a Middle East energy analyst at Wood Mackenzie.
Mashaly said that the power sector should eventually be privatised, in keeping with the global trend.
Her ministry says that installed capacity of the grid will be close to 34,000 megawatts (MW) by this summer, provided that maintenance on several plants is completed on schedule and if three new plants come on line.
This will be enough to safely handle the peak summer load of around 28,000 MW, the ministry says.
Experts dispute that forecast.
Justin Dargin of the University of Oxford said the average operational efficiency of the nation's power plants was between 80-85 percent. When transmission and distribution losses are factored in, he said, this would leave an actual shortfall of about 4,000-5,000 MW in July and August.
Dargin said the substantial megawatt shortfall would not only cause major blackouts. It would also put severe strain on the central power grid which was already "in serious disrepair."
"Egypt is now paying the price due to chronic under-investment and neglect in the central power grid," he said. ($1 = 6.9902 Egyptian Pounds)
(Editing by Michael Georgy and Mark Trevelyan)