MANAMA: Electricity demand continues to grow rapidly in the Arab world where consumption has increase 10-fold since 1980. This surge can be attributed to several factors including: population growth, urbanisation, industrialisation and electricity prices made artificially low through government subsidies.
APICORP in Energy Research said as electricity demand in the region maintains its strong growth, governments are continuing to invest heavily in adding power-generation capacity.
At the same time, the region is trying to provide impetus to intra-regional electricity trading. While there are several benefits to increasing cooperation and trade, the region lags substantially behind more mature markets in other parts of the world. Despite an increase in intra-GCC trade, several barriers stand in the way and governments will need to support trading initiatives and demonstrate strong willingness to explore this untapped potential.
Although growth rates have slowed in the last few years owing to weaker economic activity and increases in electricity prices as those subsidies are reduced, we still estimate that the MENA region will need to add capacity at 7.4% annually until 2021, which corresponds to additions of more than 130GW, and investments of approximately $180bn (See Vol. 2 No. 6 – MENA power investment: finance and reform challenges persist). Governments continue to meet this challenge by expediting new projects and upgrading their infrastructure while also encouraging the private sector to join as partners and financiers.
Most Arab countries are struggling to meet increasing electricity demand and thus experience frequent blackouts. Looking forward, governments will continue to invest heavily and increase the role of the private sector in power generation. But another option is also available to them: they can cooperate with their neighbours and explore further the potential of electricity trade as a supplement to their capacity additions. The region has several interconnections, yet trade remains minimal and often only takes place in response to emergencies and outages. The GCC countries are connected via the Gulf Cooperation Council Interconnection Authority (GCCIA) since 2011 while Egypt is connected to the Levant, albeit through small transmission lines. North Africa is also connected with lines linking Algeria, Morocco, and Tunisia. The benefits of regional electricity trading include enhanced energy security, economic benefits due to higher efficiencies and reduced investments in new capacities, as well as more institutional cooperation.
According to the World Bank, electricity trade could save the Arab world $17-25billionand reduce required capacity by 33GW through better mutual utilization of existing capacity – while the GCCIA estimates that GCC trade could achieve savings of up to $24bn by 2038. At the same time, chronic technical, institutional and political barriers are major impediments to trading in the region, whose networks are expected to remain amongst the most under-utilized in the world for this purpose.
To increase supply of electricity, governments have been investing heavily in power-generating capacities. Absent, however, has been a coherent strategy to improve regional cooperation and stimulate intra-regional trade despite the many obvious potential benefits for the region.
First, electricity trading can provide significant economic gains. At times when GCC governments’ revenues have been falling, and other governments in the region are struggling to invest in new infrastructure and provide key public services, there is significant pressure to make substantial investments for capacity additions. Trading could relieve some of this pressure by importing electricity and avoiding substantial investment costs in power generation. According to the GCCIA, the interconnector’s economic benefits surpassed $400m in 2016, with the majority of benefits deriving from installed capacity savings. Governments could have access to cheaper electricity given that cost of generating electricity differs from one country to another. At the same time, it will facilitate more efficient utilisation of existing capacity – where the World Bank estimates that the region’s utilization rate of generating capacity (capacity factor) stands at only 42% while that of the existing interconnection capacity is around 10%. If governments continue their drive to liberalise electricity prices, electricity demand might fall, resulting in larger unutilised capacity, which could be absorbed by trading with neighbouring countries.
Second, governments are putting energy security at the forefront of their agendas. While this has meant efforts to diversify the energy mix away from fossil fuels and towards renewable energy, it has also driven countries to diversify the sources of their energy imports. This is mainly the case for countries that rely on gas imported via pipeline. In principle, electricity trading should thus improve the region’s energy security, especially in countries that suffer recurring power outages. Currently, most electricity exchanges take place on an emergency basis to cover either unexpected outages or scheduled ones due to maintenance. Given the almost identical peak demand patterns (both days and hours) in the GCC and regulatory and institutional barriers, trading within the region will likely remain on an emergency basis. This means that the most effective electricity trading will be with Egypt and the Levant, where demand patterns differ.
Several challenges in the long term
Despite the desire to foster greater cooperation and improve regional electricity trade, many challenges have impeded progress.
First, energy security is a key national priority for all countries in the region, and the escalating geopolitical tensions are likely to reduce governments’ willingness to rely on each other, despite the apparent economic benefits. Gas trade in the region is also one of the lowest in the world despite the region’s vast and uneven distribution of gas reserves. In addition, debilitating security conditions will mean that transmission lines could potentially be sabotaged. This was particularly the case in Yemen, when tribal disputes with the government resulted in the repetitive sabotage of transmission infrastructure.
Second, strong institutional capacity and a clear regulatory framework are still missing. Despite establishing the GCCIA to foster cooperation and interconnect the grids, there is a lack of transparency concerning the regulatory framework, as well as limited information around the legal, commercial, and pricing structure.
Third, limited spare capacity – especially during peak demand – will mean that more capacity needs to be added. The region will need to continue to invest heavily in generating capacity as well as transmission infrastructure to meet rising demand. These investments need to take place despite weaker economic activities and lower government revenues – while a more active role from the private sector will also be pivotal.
In addition, the existing capacity of the current interconnector is small and is suitable for limited electricity trading. The Saudi and Kuwaiti links, for example, are amongst the largest in the region despite capacity of only 1.2GW.
Fourth, subsidy reform and diversification of fuel mix are issues in the region that have yet to be fully resolved. In the case of subsidy reform, electricity prices need to reflect actual costs to enable trade of more efficiently produced electricity, since electricity imports will almost certainly cost more than domestically produced and subsidised electricity. At the same time, diversification of fuel away from liquids to gas is essential since the cost of the electricity is determined by the fuel used in power plants. For instance, electricity exports sourced from oil- fired plants will always be uneconomical, whereas there is an arbitrage between direct gas export and power sourced from gas-fired plants – depending on gas prices. Additional capacity particularly from renewables will make trading more attractive.
MENA electricity trading thus lags significantly behind other regions. Although there has been some progress, there is still a long way to go before intra-regional trading represents a substantial part of electricity consumption. GCC electricity exchange has grown over the past year, but this is driven mainly by unscheduled outages and not due to commercial trading. The Saudi-Egyptian link is the largest planned project for the region and is expected to become operational early next decade. Several plans and studies to link the GCC with Iraq, Jordan, and Yemen could translate into projects, but are unlikely in the short and even medium term. While economic benefits to trading exist, several barriers – mainly geopolitical – are proving to be hefty impediments. Although in principle trading should improve energy security, the deteriorating geopolitical situation will be one of the key concerns for all Arab governments, which will continue to focus on meeting their own demand through investing in their local power generation.
