January 2014 A Roadmap for Renewable Energy in the Middle East and North Africa Laura El-Katiri OIES PAPER: MEP 6 The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its members. Copyright © 2014 Oxford Institute for Energy Studies (Registered Charity, No. 286084) This publication may be reproduced in part for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgment of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies. ISBN 978-1-907555-90-9 ii Abstract Home to more than half of the world’s crude oil and more than a third of its natural gas reserves, the MENA region has, for the past fifty years, gained enormous significance as a global producer and exporter of energy. The MENA region is already a major energy consumer, and is forecast to continue to account, alongside Asia, for the majority of the world’s energy demand growth well into the 2030s; placing domestic energy policies at the heart of the region’s economic agendas for the coming decades. This paper argues that renewable energy – most importantly solar power, with its particular regional climatic advantage – could play a significant role as a cost-competitive alternative to conventional fossil fuels, if the full opportunity cost of domestically consumed oil and natural gas resources is fully priced into the regional energy system. The absence of cost-reflective energy and electricity tariffs in the MENA region today currently conceals this potential cost advantage; and leaves renewable energy deployment subject to further, economically distorting, policies such as renewables targets and fiscal incentives. Systematically opening up the economic opportunities offered by renewable energy to the MENA region will hence require structural reform of regional energy market and pricing mechanisms, thereby rationalizing the use of different energy sources in each domestic market. January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa iii Acknowledgements The author would like to express her special thanks to Bassam Fattouh, Robin Mills, David Robinson, Malcolm Keay, Mari Luomi, and Abdulrahman Al-Ghabban for their helpful comments on earlier drafts of this paper. Many thanks also to the Arab Union of Electricity Producers for kindly providing some of the underlying data for this research; and the Israeli Public Utility Authority for providing data on Israel and the Palestinian Territories. All remaining errors are the sole responsibility of the author. January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa iv Contents Abstract ................................................................................................................................................. iii Acknowledgements ............................................................................................................................. iv Contents ................................................................................................................................................. v Figures ................................................................................................................................................... v List of Abbreviations ........................................................................................................................... vi 1. Introduction ....................................................................................................................................... 1 2. The MENA Region’s Changing Energy Landscape ....................................................................... 2 2.1. Growing regional consumption of fossil fuels................................................................................... 3 2.2. The rising economic cost of business-as-usual ............................................................................... 4 2.3. Environmental costs ......................................................................................................................... 6 3. Barriers to Renewables Deployment in the MENA ........................................................................ 8 3.1. Electricity pricing in the MENA region .............................................................................................. 8 3.2. Domestic pricing of fossil fuels ....................................................................................................... 11 4. Promoting Renewables in the MENA Region ............................................................................... 14 4.1. The economics of the first best: market incentives ........................................................................ 14 Energy market liberalization (i): Reforming domestic energy prices................................................. 14 Energy market liberalization (ii): Bringing in the private sector ......................................................... 15 4.2. The economics of the second best: fiscal and regulatory incentives ............................................. 16 Regulatory incentives: Renewable energy targets ........................................................................... 16 Fiscal incentives: carbon taxes, tax benefits, feed-in tariffs .............................................................. 18 4.3. Integrating renewable energy within national energy strategies .................................................... 20 Exporting renewable energy to the Middle East and Europe ............................................................ 20 Making use of ‘green growth’ opportunities ...................................................................................... 21 Institution-building and research ....................................................................................................... 23 Renewable energy and rural electrification ....................................................................................... 23 5. Conclusion ....................................................................................................................................... 25 Bibliography ........................................................................................................................................ 27 Appendix I: Basic Considerations when Estimating the Cost of Renewable Energy in the MENA .............................................................................................................................................................. 35 High initial capital costs ..................................................................................................................... 35 Comparison of costs on a lifecycle basis .......................................................................................... 35 Need for specialized financial products ............................................................................................ 38 Difficulty of credit access ................................................................................................................... 38 Transaction costs .............................................................................................................................. 39 Integrating intermittent energy .......................................................................................................... 40 Positive and negative externalities: costs unaccounted for .............................................................. 40 Appendix II: Renewable Technologies and their Application in the MENA .................................. 43 Figures Figure 1: Regional Trends in Energy Use, Compound Average Annual Growth, 1971–2010 ............... 3 Figure 2: Regional Trend in Energy Intensity, Compound Average Annual Growth in Energy Use, 1985–2010 .............................................................................................................................................. 3 Figure 3: Share of Fuel Types in Total Electricity Generation by World Region, 2010 .......................... 4 Figure 4: Per Capita CO 2 Emissions by Region, 2009 ........................................................................... 7 Figure 5: Regional Trend in CO 2 Emissions Growth, 1980–2009* ......................................................... 7 Figure 6: Cross-Country Comparison of Average Residential Electricity Prices in Selected MENA and non-MENA Countries, 2008 .................................................................................................................... 9 Figure 7: Residential, Commercial, and Industrial Electricity Prices in Selected MENA Countries, 2012 .............................................................................................................................................................. 10 Figure 8: Trends in Renewable Energy Investment in the MENA Region, 2009–2012 ........................ 18 January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa v List of Abbreviations CO 2 Carbon Dioxide CSP Concentrated Solar Power ECRA Saudi Arabia’s Electricity and Co-generation Regulatory Authority EIA U.S. Energy Information Administration ESIA Emirates Solar Industry Association FIT Feed-in tariff GCC Gulf