Advancing Renewable Energy in Resource-Rich Economies of the MENA

Abstract

As much of the world pushes ahead with the deployment of renewable energy, resource-rich MENA economies are lagging behind. For the region to catch up, new policies are required to remove barriers of entry to the industry and create investment incentives. This paper contends that while the main obstacles to deployment of renewables are grid infrastructure inadequacy, insufficient institutional capacity, and risks and uncertainties, the investment incentives lie on a policy instrument spectrum with two polar solutions: (i) the incentive is provided entirely through the market (removing all forms of fossil fuel subsidies and internalising the cost of externalities); or (ii) the incentive is provided through a full government subsidy programme (in addition to the existing fossil fuel subsidies). However, there is a trade-off between the two dimensions of the fiscal burden and political acceptance across the policy instrument spectrum, which implies that the two polar solutions themselves are not easily and fully implementable in these countries. Therefore, we propose a combinatorial approach in which the incentive for renewables deployment is provided through a partial renewable subsidy program and partial fossil fuel price reform in a way that balances the fiscal pressure on the government against political acceptability. Additionally, the paper argues that the fact resource-rich countries are behind advanced economies in electricity sector reform gives them a last-mover advantage in the sense that they can tap into years of international experience to avoid design mistakes and create a sustainable solution that is compatible with renewables deployment and their own context.

Electricity Markets in the Resource-Rich Countries of the MENA: Adapting for the Transition Era

“…In this paper, we focus on major resource-rich economies of the MENA region which are locked into a cycle of dependency on fossil fuels, due to two primary interconnected factors: rising domestic hydrocarbon consumption on the back of underpriced and plentiful fossil fuel reserves (oil/gas); and, rising dependence on oil and gas export revenues to finance domestic economic activities and maintain rent distribution (Poudineh et al, 2016). We use an indicator of resource dependency (oil rents 6 as a percentage of GDP at 10% or higher) to identify the relevant countries.…”

“…Future electricity markets will need entirely new supporting institutions that complement the characteristics of a sector predominantly based on renewable energy. One aspect of this includes the existence of renewable energy entities and regulators, their resources, competencies, laws, strategies and activities in renewable energy (DIE, 2012) The key weakness of these institutions is that they are not sufficiently integrated with the other energy institutions in these countries, which have been historically dominated by oil and gas (Poudineh et al, 2016). For instance, the role of these institutions is often confined to administering tenders for private renewable project developers (e.g.…”

“…These agencies also have to contend with powerful state owned electricity companies which oversee generation, transmission and distribution assets, and to whom widespread renewables deployment may be seen as a disruption to their business models, rather than an opportunity. Renewable policy institutions on their own arguably do not yet have sufficient influence over these companies to the extent that renewables could be favoured within the energy mix (Poudineh et al, 2016).…”

“…The lack of regulatory independence is also a major concern for renewables deployment in these countries, as governments often overturn regulatory decisions and in many cases tariffs are set inflexibly. For instance, Saudi Arabia's 2005 reform legislation envisaged competitive market structures, yet its regulator ECRA has no control over tariffs, and is thus unable to engender competitive forces and incentive regulation in the industry (Poudineh et al, 2016).…”