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. 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. We propose a new dynamic combinatorial approach (partial subsidy programme and partial fossil fuel price adjustment) that gradually moves towards market-based incentive provision over the medium to long-term where energy subsidies are eventually phased out. The approach balances fiscal sustainability with political stability, enabling the gradual scaling up and development of markets for renewables.

Renewable energy policy trends and recommendations for GCC countries

“…This is in fact the dominant model today in Middle East and North Africa (MENA) region [43] although there are locations (e.g. Abu Dhabi in the UAE) where a state-owned holding company has subsidiaries that separately operate the different activities within the power sector value chain [4,44]. The IPP model is one of competition-for-markets where potential investors compete against each other in an auction process and competition ends with a contract award and off-take governed by long-term PPAs.…”

“…Stated targets must, therefore, be supported by defined policies and regulations that reflect regional context, and thus have the highest likelihood of achieving stated ambitions. Although a body of literature does exist on the topic of renewable energy policy in the GCC [2][3][4][5][6], it generally does not seek to identify the optimal regional policy framework based on underlying motivations for regional energy system diversification and the most recent trends in global renewable energy policy. Hence, this paper reviews global trends in renewable energy policy and then specifically focuses on the application these trends to the GCC.…”

Financing renewable electricity in the resource-rich countries of the Middle East and North Africa

“…The appropriate business model for renewable projects is a function of government's renewable policies (that is, incentivizing renewable investment through subsidies, market pull due to cost-competitiveness, or a combination of the two -for a detailed discussion see Poudineh et al (2016)). Other factors, such as a supportive financial infrastructure, the presence of creditworthy EPC contractors, and access to the site, are also important.…”

“…This means that government support (through, for example, provision of subsidies) is the key for renewable generators to have a viable business model. There are various potential models of support schemes that government can adopt; however, as stated in Poudineh et al (2016), a renewable support policy for MENA countries needs to satisfy a set of criteria such as compatibility with the structure of the electricity system in the region, harmony with the existing institutions, suitability for the scale of the project, coverage of economic risks and the provision of efficiency.…”

“…At the same time, it avoids the need for the government to pay the upfront capital cost, and thus reduces pressure on the public budget. If the IPP model is the method of choice for renewable promotion, a systematic comparison of different incentive models by Poudineh et al (2016) shows that the most efficient scheme that satisfies all the aforementioned criteria for support policy is an auction that awards a PPA, potentially linked to a pre-defined escalator over time, to the lowest cost developer. The structure of the MENA electricity industry does not support incentive models that require a liberalised electricity market with many buyers and sellers (such as the renewable portfolio obligation model based on Renewable Energy Certificates (RECs), the approach favoured in the United States (U.S.)), and renewable investment is still considered too risky without a long term guaranteed purchase agreement.…”