The MENA power sector presents formidable challenges for both the region’s governments and power utilities. It also presents a bonanza for investors in Independent Power Projects (IPPs), as well as equipment manufacturers and contractors. ‘Challenges’ within the MENA power sector (which some would call failures) present prospects for outsiders. The sector’s rapid demand growth calls for large investments; at the same time the sector is rapidly depleting local fuel sources. This article concentrates on these challenges.
CHALLENGE #1: ELECTRICITY DEMAND GROWTH
MENA power demand is growing at 6-8 % annually. Growth has been at such rates for decades and this is likely to continue. Regional development bank APICORP expects capacity to increase at 8.4% annually over 2014-18 (MEES, 3 May). This is at a time of global electricity demand growth of only 2.3%/year. MENA’s electricity demand is growing at three times the global rate!
Are there valid reasons for this?
Usually energy and power demand is driven by economic growth and to a lesser extent by demography. However it is controlled by: prices (tariffs), efficiency, demand side management, strategy and management skills.
MENA’s average economic growth of 3-4% annually is not much higher than the global average. However the region’s population growth is somewhat higher than the global average. Although the region contains a high concentration of energy-intensive industries, economy and demography cannot explain MENA’s ever-rising demand for electrical power. Most of electricity demand is in buildings.
Globally, there is some coupling of electricity demand and economic growth. World electricity demand growth in recent decades has averaged around two thirds of global economic growth. However, in MENA, electricity demand has shot ahead: rising by three times the increase in economic growth since 1980 (see Figure 1).
MENA’s power demand growth appears unstoppable. It has grown rapidly even when economic growth has been modest (or even non-existent). The energy/economy linkage has been severed.
Therefore the problem lies elsewhere. It is mainly in subsidies, and to a lesser extent, in the absence of demand side management and energy conservation, particularly in buildings. Electricity is subsidized in every MENA country, but at varying degrees. In some MENA countries electricity is provided almost free or even free.
Subsidies lead to waste, overuse, and neglect for efficiency and conservation practices (see Figure 2). The Arab proverb says “what is free consume in plenty”. Nowhere there is this more true than in the MENA power sector. Therefore, proliferation of subsidies is the biggest threat to MENA’s power sector.
This rapid subsidy-driven growth in power demand has led to:
• Undue huge investment (with high costs and financial shortages).
• Shortages of fuel (natural gas) and depletion of natural resources, leading to some oil producers becoming importers (Egypt, Syria, Tunisia and Yemen). In the case of natural gas even most Gulf countries have developed shortages.
• Detrimental emissions and environmental threats.
CHALLENGE #2: GAS SHORTAGES
Natural gas is the ideal fuel for electricity generation. It is relatively cheap. It can be utilised in combined cycle plants which typically are over 55% efficient. It is also clean.
The Middle East contains 43% of global gas reserves (18% in Iran alone), and North African countries a further 4% (see figure 3).
However in most of MENA countries there is shortage of gas fuel for power generation. This is because of:
• Lack of regional cooperation and regional gas networks, sometimes there are also rivalries instead of cooperation.
• Subsidized local gas prices which do not encourage investment and development.
• Flaring of associated gas in some instances (mainly in Iraq).
• Extensive use of gas injection for enhanced oil recovery.
Only 60% of MENA’s power is generated by natural gas, while valuable crude and oil products generate almost one third (40% for Arab countries). The Arab world is practically the only region in the world that still relies on crude and oil products to generate a significant portion of its electricity. What a cost and what a waste!
This paradox of a natural gas ‘shortage’ in some MENA countries despite a surfeit of reserves, has led some MENA countries to invest in coal-fired power plants (using imported coal) and in nuclear power (which is an expensive source of electricity). Simultaneously some MENA countries are increasingly importing LNG from sources as far away as Russia.
CHALLENGE #3: ATTRACTING INVESTMENT
The rapid growth of MENA power demand requires huge investments to finance a 140GW capacity growth over 2014-18. MENA’s 2012 generating capacity was 310GW. This implies 45% growth over five years (that is to say an average annual growth rate of 7.7%). That is incredible!
APICORP estimates that $280bn (excluding Iran) – or $56bn/year – is needed to achieve this growth. And this is at a time of difficulties in procuring investment funds worldwide due to economic slowdowns. In MENA the problem is compounded by post-Arab Spring markdowns of the credit ratings of many Arab countries. Therefore financing is becoming scarce and relatively expensive; funds – if and when available – are 2-3% over LIBOR.
GROWING ROLE OF IPPs
Therefore, most MENA governments are shying away from power investments because of managerial and budgetary shortages. This has led to the emergence of an increasing number of Independent Power Producers (IPPs) in most of the MENA region, a phenomenon that was unknown ten years ago, when the power sector was a sole government domain.
The IPP phenomenon is delaying the financial burden on governments (in the short term), but it is increasing cost to consumers (though this is somewhat compensated for by the fact that IPPs often improve the efficiency and management of power stations).
CHALLENGE #4: LACK OF REGIONAL COOPERATION
There are only modest regional power and gas networks in MENA. The Gulf Regional Power Network and the East Mediterranean Network are modest in capacity and not properly utilized. They cannot be compared to the highly meshed networks of Europe and the Americas. Regional gas networks are also small in geographical extent and capacity, due to technical and especially political reasons. The existence of networks – power and gas – is essential for MENA economic development.
CHALLENGE #5: MODEST RELIABILITY OF SUPPLY
In a handful of MENA countries reliability of power supplies is still poor (very poor in Iraq, Lebanon, Sudan and Yemen). Interruptions are common and electricity is available for only a few hours a day in spite of the fact that some of these countries are rich in energy resources. Causes are: political instability, poor management and planning of the power sector, and corruption.
Even in other MENA countries interruptions are not uncommon during summer peak periods. This in spite of huge investments in the sector.
The current state of the MENA power sector presents evidence of failures of governance, failures which have long-term social and financial costs. Simultaneously it offers rewarding opportunities to foreign suppliers and contractors.
The challenges (failures) are of our own making. Therefore the solution has also to be of our own making.
• Phasing out subsidies, the sooner the better (while maintaining help for the lowest income groups, whose consumption is modest).
• Impose strict demand-side management by regulations, standards and education (mainly for buildings).
• Enhance regional cooperation in power and gas networks. This is to the benefit of all.
• Restructure the sector by corporatizing (and privatizing) power utilities whenever possible.
• Phase out corruption.
I realize, in MENA, this is easier said than done.
*Dr Khatib is a Global Energy Award Laureate and former Chairman of Jordan’s Electricity Regulatory Commission.