Securing MENA s electric power supplies to 2020

Transcription

1 Securing MENA s electric power supplies to 2020 A report from the Economist Intelligence Unit Sponsored by

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3 About this research Securing MENA s electric power supplies to 2020 is an Economist Intelligence Unit report that discusses the energy supply challenges facing the Middle East and North Africa (MENA) region in the years to 2020; the action being taken to address these challenges; and further measures that policymakers may consider. The findings of this white paper are based on desk research and interviews with power experts conducted by the Economist Intelligence Unit. In some cases, interviewees have chosen to remain anonymous. The research was sponsored by Masdar. The Economist Intelligence Unit bears sole responsibility for the content of this report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor. Christopher Watts was the author of the report, and Aviva Freudmann was the editor. The Economist Intelligence Unit would like to thank all experts who participated in the interview programme, including the following (listed alphabetically by organisation name): Paul Otteson, manager, expansion projects and engineering, Aluminium Bahrain, Bahrain Rend Stephan, partner and managing director, The Boston Consulting Group, UAE Thiemo Gropp, director, Desertec Foundation, Germany Andrew Shaw, managing director, Ducab, UAE Roudi Baroudi, CEO, Energy and Environment Holding, Qatar Nimer AbuAli, executive manager and MENA cleantech leader, Ernst & Young, UAE David Scott, executive director of economic and energy Affairs, Executive Affairs Authority, UAE Adnan Al-Mohaisen, CEO, Gulf Co-operation Council Interconnection Authority, Saudi Arabia Khaled Ossaily, chairman, Hebron Power Company, West Bank Leila Benali, director, Middle East and Africa, IHS Cambridge Energy Research Associates, France Mustapha Taoumi, project officer, MENA region, International Renewable Energy Agency, UAE 2

4 Walid Abdelwahab, director, Infrastructure Department, Islamic Development Bank, Saudi Arabia Thamer Al-Sharhan, president and CEO, Marafiq, Saudi Arabia Yehuda Niv, commissioner, Electricity Administration, Ministry of National Infrastructures, Middle East Nick Carter, director general, Regulation & Supervision Bureau, UAE Hisham Khatib, honorary vice chairman, World Energy Council, Jordan

5 Executive summary As population growth and economic expansion place greater demands on the electric power generation capacities and on the transmission and distribution networks of the MENA region, electricity shortfalls are the result. Yet, for the countries of the MENA region, meeting growing demand is imperative to ensuring continued economic growth. However, for many countries, especially oil-importing nations, access to funding presents an obstacle to ensuring adequate supplies of power for the future. At the same time, for the region s oil-exporting states, addressing the issue of electric power demand is critical to ensuring continued supply of hydrocarbons for future generations. As oil prices continue a long-term rising trend, policymakers need to save dwindling supplies for export, rather than using them for domestic consumption. This white paper, based on extensive desk research and on a programme of in-depth interviews with policymakers, power producers, energy consumers and other industry experts, documents the electric power supply challenges that the MENA region faces in the years to The research examines the nature of these challenges; the ways that policymakers, power producers and energy consumers are tackling these challenges; and further measures that may contribute to securing sufficient power supplies. The key findings of the research are highlighted below. Demand for electric power is set to continue growing. Demand for electric power in the MENA region is accelerating rapidly, driven by population growth and urbanisation, and by economic development and industrialisation. In 2010 year-on-year growth in peak power demand reached 15% in Jordan, for example. Power demand in the MENA region is set to continue growing by 7% annually in the coming decade, according to a consultancy, Booz & Company. Electric power issues are becoming critical for the region. Some countries in the MENA region are experiencing power shortages. Yet the issues run far deeper than the provision of power alone. For example, if oil prices continue to rise in the long term as many experts forecast, oil-importing nations face a growing burden on their national accounts. At the same time, oil-exporting countries face the choice between domestic consumption and export.

6 MENA countries are diversifying fuel sources and investing in renewables. As part of efforts to expand power supply, some MENA countries are diversifying their fuel mix in order to secure continued access to primary energies. Some countries are also investing in renewable energies, especially solar power. The Paris-based International Energy Agency (IEA) expects around 7% of the region s power to come from renewable sources by 2030, up from 3% today. Nuclear power and the GCC grid will have a significant impact. Nuclear power, available in the UAE from 2017, is likely to have a very significant impact on power supply in the MENA region. In addition, the Gulf Cooperation Council (GCC) interconnection grid, due for completion by 2013, will enable power surpluses to be traded across the region. Power trading facilities will ensure greater security of supply for individual countries and will expand the power options available to policymakers, both among oil importers and oil exporters. Initiatives to curb wasteful demand are emerging. Policymakers in some countries are promoting efficiency among power consumers, for example through mandatory building regulations in Abu Dhabi, and through variable time-of-day power tariffs in Saudi Arabia. There is significant scope for measures such as these, and more, to be applied throughout the MENA region. Subsidies are the main obstacle to better demand management. Some MENA countries continue to subsidise electric power, giving little incentive for consumers to economise. Governments appear reluctant to reduce subsidies, yet reductions are critical if power demand is to be managed. A palatable alternative to direct power subsidies may be cash subsidies payable to households consumers may try to save the cash. 5

7 Part I The growing dilemma of electric power Demand for electric power in the MENA region is on the rise. One of the key drivers of this surging demand is rapid growth of the population across the region; others include increasing urbanisation, and lifestyle improvements that come with growing prosperity. Data from the Saudi Arabian Electricity and Cogeneration Regulatory Authority (ECRA) show that residential users account for 52% of power use in Saudi Arabia. And according to Rend Stephan, partner and managing director at The Boston Consulting Group, more than 50% of the power consumption in the region is linked to air conditioning. Furthermore, points out Walid Abdelwahab, director of the Infrastructure Department at the Islamic Development Bank (IDB), a multilateral development bank headquartered in Jeddah, Saudi Arabia, energy-intensive water desalination is a serious challenge, where the MENA region accounts for 60% of total desalinated water worldwide. Continued economic growth and industrialisation, driven by rising oil prices, are also significant factors propelling demand for electricity (see figure: Drivers of demand for power). Industrial users account for 18% of total consumption in Saudi Arabia, according to ECRA. Among the GCC states, most industrialisation is based on energy-intensive industries (see box, Aluminium Bahrain: Ambitious expansion plans). In efforts to diversify their economies, many oil-exporting states, for example, have invested in industries such as aluminium smelting and petrochemicals, which rely on abundant supplies of cheap energy and feedstock such as oil and gas. In addition, rising hydrocarbons prices have paved the way for high-profile investments in infrastructure and real estate in the region, which in turn have increased demand for power. Drivers of demand for power MENA population, (m) CAGR 2.1% Source: United Nations.

8 MENA urbanisation 250 Total urban population (m); left scale Urban population (%); right scale Source: United Nations MENA GDP at purchasing-power-parity (PPP), (US$ bn) 6,000 5, CAGR 6.8% 6,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1, Source: International Monetary Fund, World Economic Outlook Database, September

9 MENA manufacturing value added, (US$ bn) CAGR 9.6% Source: United Nations. Beyond this growth in total power demand, growth in peak power demand presents a particular challenge for the region. Peak demand has been quite problematic because it has been growing at a much higher pace than overall demand, says Leila Benali, director of Middle East and Africa at IHS Cambridge Energy Research Associates, based in France. In Saudi Arabia, for example, the number of power consumers grew by an annual average rate of 5.2% in the period , according to ECRA; energy consumption per head grew by 3.7% a year. Combined, the result was annual growth in peak load of 7.4%. Meanwhile, in 2010 peak demand grew by 11% in Bahrain, and in Jordan growth in peak demand exceeded 15%. For the time being, the worsening global economic climate appears to have dampened future expectations for electric power demand in the MENA region as governments revise down estimates of economic growth, industrial activity and population levels. For example, in its Statistical Report issued in 2008, the Abu Dhabi Water & Electricity Company (ADWEC) forecast peak demand of 6,783 mw for Abu Dhabi emirate (excluding export) during 2008; it later scaled down this figure to 5,616 mw in two subsequent reports published in 2009 and Nevertheless, Booz & Company expects total demand across the MENA region to grow by an annual rate of 7% in the coming decade. In response to expected future growth in demand, governments around the MENA region are implementing ambitious generation capacity expansion plans. For example, last year Saudi Arabia finalised arrangements for a 4,000-mw combined-cycle gas-fired power plant, at Qurayyah, on the east coast of the country, which will be the largest such independent plant in the world. In all, Saudi Arabia plans some US$80bn of projects in the years to 2020, expanding its capacity to 70,000 mw, from some 50,000 mw currently. Meanwhile, Egypt is planning five new power plants around the country, operated by independent power producers, which are set to add some 3,500 mw of capacity to Egypt s total. On the supply side, there has been a lot of emphasis on building capacity, confirms Dr Benali of IHS. However, Dr Benali notes that, in the past, some investments in generation capacity have come at the expense of investments in transmission and distribution networks. Iran is one example of a country

10 Aluminium Bahrain: Ambitious expansion plans When it first began operations in 1971, Aluminium Bahrain (Alba) produced 120,000 tonnes of aluminium annually. Today, annual production runs at some 875,000 tonnes making Alba the fourthlargest single smelter in the world. As part of the group s Alba Vision strategy, management is planning to more than double smelting capacity to 2.1m tonnes by To do so, Alba must invest heavily in its own electric power generation capacity. The smelter currently operates four power stations, with total installed capacity of around 1,912 mw. Together, these plants generate enough electric power for the company to be self-sufficient. We can provide our own power at cheaper rates than the Electricity & Water Authority, explains Paul Otteson, Alba s manager of expansion projects and engineering, because understandably they have transmission and distribution costs, and administration overhead. To produce one tonne of aluminium takes roughly 13 mwh of electric power. So as part of the first stage of its expansion plan, which targets growth in aluminium production to 1.3m tonnes by 2015, the company expects an additional 700-mw load. In response, it plans to invest in an additional 1,000-1,200 mw of power generation capacity. The philosopher s stone for Alba is to produce electricity more efficiently, so we have to find a way of using our gas allocation more efficiently, says Mr Otteson. He points out that the company s original power generation facility, an open-cycle power plant, operates at 18% efficiency, in contrast to its latest plant, which operates at 45%. That is why, as Alba invests in combined-cycle gas turbines to expand its power generation capacity by 1,000-1,200 mw, it plans to phase out its outdated first power plant. Total investment in the first stage of the company s expansion plan is expected to run to US$3bn, of which US$1.5bn will be in power generation capacity alone. where huge investments in transmission and distribution were not done at the right time, she says. Similarly, Mr Abdelwahab of the IDB points out that large countries of the region are still in the process of eliminating disconnection of their national power transmission systems between different regions. Saudi Arabia, for example, is only now completing links between its western, central and eastern regions. As countries in the MENA region have set about investing in generation capacity, and transmission and distribution networks, many have pushed through some degree of reform in the power sector. Starting in the 1990s, most states shifted their power structure towards a single buyer model, enabling competition at the generation level but maintaining tight control over power transmission, which is considered by some governments to be strategic. The MENA region is still lagging behind in terms of liberalising its energy markets, concludes Roudi Baroudi, CEO of Energy and Environment Holding, an energy development consultant based in the capital of Qatar. Too many have failed to come up with policies that create confidence among citizens, investors and consumers. Nevertheless, in general, the private sector is playing an increasing role in bringing electric power generation capacity on line in the MENA region including mobilising financial resources and providing operational know-how. Syria, for example, is planning the country s first power plant to be operated by an independent power producer an oil- and gas-fired 250-mw facility at the Al-Nasserieh complex, some 50 km north-east of the capital, Damascus. Yemen, too, is also planning three new power plants under a 25-year build-own-operate-transfer (BOOT) concession. These are expected to supply around one-third of the extra 950 mw of generation capacity that Yemen needs by Navigating economic pitfalls For now, however, energy infrastructure remains inadequate in some parts of the MENA region. Hot summers create peaks in power demand, meaning that power plants are operated on a load factor of 9

11 60% or less across the year. This leads to relatively low returns on capital invested and high unit costs for electricity generated. In turn, reserve margins across the region are thinner than minimum industry norms of at least 10-15%, for example 3% in Syria and Kuwait, and 8% in Saudi Arabia and Oman, according to 2009 data from MEED, a provider of business intelligence on the Middle East and North Africa. For many countries across the region, the result is daily power outages and brownouts in the peak summer season. Looking forward to the year 2020, observes Mr Abdelwahab, gaps between supply and demand are most likely to be seen among those countries with the highest growth rates for domestic electricity demand. These include, in particular, countries with a large, fast-growing, population. Among these, countries with limited access to finance face a particular challenge in meeting growing demand for power, as do countries whose power sectors are affected by mismanagement or corruption. Experts identify Iran, Iraq, Lebanon, Morocco, Syria and Yemen as being among those countries that face the toughest power supply challenges. Yet for these countries, and others in the region, the significance of meeting these challenges extends far beyond providing sufficient electric power for households, industry and commerce. Oil importing nations, for example, are facing hydrocarbon prices that most experts forecast will continue to rise in the long term; for those countries with a power generation base highly reliant on imported fossil fuel, sustained growth in oil prices presents an increasing burden on state budgets. Even for oil-exporting nations, the prospect of escalating power demand presents particular economic challenges. For one thing, many oil-producing countries offer heavy subsidies for fossil fuels and electric power. Such subsidies appear to be less sustainable for governments as demand for electric power balloons and the price of hydrocarbons trends upwards. Indeed, the World Energy Outlook 2011, published by the IEA, highlights that worldwide subsidies rose by 37% to US$409bn as fossil fuel prices rebounded in 2010; without further reform, the report warns, subsidies could climb to US$660bn by Furthermore, according to Thamer Al-Sharhan, president and CEO of Marafiq, an independent power producer in the twin industrial cities of Jubail and Yanbu on the east coast of Saudi Arabia, growing demand for electricity raises questions about the continued supply of fossil fuels, on which Saudi Arabia is largely reliant for its power generation. One of the biggest challenges in the coming years will be the availability of fuel for power generation and for desalination, he says. Currently, more than one-quarter of Saudi Arabia s oil production is consumed domestically, mostly at subsidised prices. As prices rise and stocks diminish, domestic consumption is increasingly eroding the country s future oil export revenue. Oil-producing nations are also confronting a further critical issue sustainability. As part of efforts to diversify their economies away from hydrocarbons, many have invested heavily in energy-intensive industrial processes that rely on ready availability of low-cost hydrocarbons. Already, according to IEA data from 2009, the Middle East economies have a carbon intensity of 1.93 kg of CO2 emissions per US dollar of GDP, compared with a world average of 0.73 kg, and 0.41 kg among member states of the Organisation for Economic Co-operation and Development (OECD). Widespread availability of hydrocarbons among the oil-producing countries in the MENA region, once a competitive advantage, may become a competitive disadvantage as global carbon pricing schemes take shape. 10

12 Part II The expansion of power supply As countries across the MENA region expand generation capacity, many are diversifying their fuel mix, as part of efforts to reduce the costs of supplying electric power, notes Nimer AbuAli, executive manager and MENA cleantech leader at Ernst & Young in the UAE. As an example, he points to Jordan, which has signed agreements to buy natural gas from Egypt. Now natural gas is the cheapest source of power generation, says Mr AbuAli, and if Jordan can increase its use of natural gas and reduce its use of oil, the total cost will be less. Nevertheless, some countries are concerned that there are questions around the continued availability of gas supply. Not least, a January 2009 dispute between Russia and Ukraine interrupted deliveries of Russian gas to Europe in the height of winter, and following the Fukushima Daiichi nuclear crisis that started in March last year, Japan closed many of its nuclear power plants. Already a leading importer of gas, Japan stepped up imports, leading to tighter availability of gas supplies and higher prices. Against a background of volatile prices and tightening supplies, some countries are moving away from dependence on individual types of fossil fuel, most notably in cases where these supplies are imported. Natural gas is much cleaner, and much more environmentally friendly than coal, explains Yehuda Niv, commissioner of the Electricity Administration in one Middle East government. Bearing in mind the uncertain availability of gas supplies and the requirement for fuel diversification, Dr Niv says, we have decided that our next large thermal plant will be operated by running on natural gas but it will be backed by coal. Similarly, last June, the Dubai Electricity and Water Authority announced that it would double the size of its planned 1,500-mw coal-fired power generation facilities, in part to cut Dubai s dependence on imported gas supplies. Saudi Arabia, Oman and Bahrain are also reported to have considered building coal-fired generation capacity. Yet, in spite of these investments, it will take time to make any significant change to the fuel mix in the region (see figure: Primacy of gas). As they diversify their fuel sources, many countries in the MENA region are looking beyond hydrocarbons altogether to renewable energies. Besides offering obvious sustainability advantages, renewable energies are becoming more attractive as renewable energy infrastructure is falling in price, and technologies are becoming more reliable. Of course, in the long term, while supplies of solar power 11

13 Primacy of gas MENA net electricity generation by fuel, (trillion kilowatt-hours) Liquids Coal Nuclear Renewables Natural gas Source: U.S. Energy Information Administration, International Energy Outlook The IEA includes nuclear power in these renewable energy figures. remain abundant, and as supplies of hydrocarbons diminish, the cost differential between the two energy sources will become all the more pronounced. The economics of renewable power generation would be very beneficial for most parts of the MENA region, provided the solutions are properly designed and implemented, asserts Mr Baroudi of Qatar s Energy and Environment Holding. Many other experts agree. Mustapha Taoumi, MENA region project officer at the International Renewable Energy Agency (IRENA) in the UAE, is one. We have a huge territory of land in this region, with a very high quality of solar radiation, he says. Indeed, Booz & Company estimates that the MENA region holds 45% of the world s total energy potential from all renewable sources. Algeria, reckons the consulting firm, has the greatest potential for solar power, followed by Libya, Saudi Arabia and Egypt. Already, some countries in the MENA region have announced ambitious renewable energy generation targets. Algeria has announced plans for 22,000 mw of renewable energy capacity by 2030, for example, and Morocco is targeting 2,000 mw of new solar generation capacity by 2020, as well as hosting the first reference project of the Desertec concept (see box, Morocco: A testing ground for desert solar). Meanwhile, Egypt has ambitions to generate 20% of its total energy from renewable sources by 2020, and Abu Dhabi is targeting a 7% renewable energy share in electricity generation capacity in the same timeframe. In all, the IEA expects the Middle East region to generate 7% of its power from renewable sources by 2030, up from around 3% today. 1 To reach these targets, policymakers must tackle a number of obstacles, according to Dr Taoumi of IRENA. In countries such as Jordan, Egypt, Tunisia, Morocco and Algeria, he notes, governments have put in place policy and regulatory regimes specifically designed to attract investment in the renewable energy sector. Yet Dr Taoumi believes that although the political will and the financial resources are evident in the oil-producing countries, specific policies remain absent. What is missing in many parts 12

14 Morocco: A testing ground for desert solar Desertec is a concept for making use of deserts to generate power from renewable energy sources, backed by the Desertec Industrial Initiative (DII), a consortium of European and North African companies, including Deutsche Bank, E.ON, Munich Re and Siemens. The consortium says that the 400bn Desertec project has the potential to meet significant energy demand in the MENA region and in Europe by To kickstart the concept, last November the DII announced details of the first of 2-3 reference projects a solar plant in Morocco. The reference project, to be completed in co-operation with the Moroccan Agency for Solar Energy, will be a testing ground for the larger Desertec concept. In particular, it will provide an important measure of the feasibility of creating the legal, regulatory and financial frameworks necessary across the MENA region and Europe. The 2bn, 500-mw solar plant is expected to be located on a 12- sq km site near Ouarzazate, a desert city in south-central Morocco. The power facility will use concentrated solar technology, based on parabolic mirrors that convert radiation into heat, which in turn drives steam turbines. Construction of the facility will start in 2012, and is scheduled for completion by By the end of 2012, the DII plans to unveil details of its next reference project. It says it is already in discussions with the government of Tunisia to locate a solar power facility there as a demonstration project; at the same time, a reference project in Algeria could make sense, given the country s proximity to the electricity transmission grids of western Europe. of the region are investment tax credits and other subsidies to promote investment; feed-in tariffs; and regulation and policy that ensures priority distribution for renewable energy. What we need right now in terms of national policy is more detailed measures for implementing the renewable energy strategy, acknowledges Mr Al-Sharhan of Saudi power producer Marafiq. Furthermore, there are physical and technical challenges associated with investments in renewable energy in the region. Connection of renewable energy sources to the transmission network is one of them. Changes are required in the transmission system to allow for all this new input of renewable energy, points out Dr Niv. Much of the [renewable] energy will come from much less populated areas. And various industry experts raise questions about the effects of dust and intense heat on solar power facilities other issues that need to be resolved if MENA countries are to meet ambitious renewable energy targets. A power revolution Despite the region s ambitious plans for renewable energies, it is perhaps nuclear power that is set to make the greatest contribution to meeting its future energy demands. A number of countries across the MENA region are starting, or considering, nuclear power programmes. The kingdom aims to start building its first nuclear power plant within the next decade, says Mr Al-Sharhan. Furthermore, other countries that are reportedly planning nuclear energy plants include Jordan and Bahrain. The most developed nuclear programme, perhaps, is that of the UAE. Fast forward to 2020, and we see 25% of peak energy coming from nuclear power, says Nick Carter, the director general of Abu Dhabi s Regulation & Supervision Bureau. As a first step in realising its long-term vision to construct a number of nuclear power plants, the UAE announced in December 2009 that it had accepted a US$20bn bid from a consortium led by the Korea Electric Power Corporation of South Korea to construct four 1,400-mw reactors. The first of these is expected to be in operation by 2017; by 2020, all four are scheduled to be up and running. The most important thing in terms of innovation is nuclear power, says one Dubai-based 13

15 interviewee. It could provide a substantial proportion, perhaps 20-30%, of the total power of the region, and genuinely change things. One reason that nuclear power could have such an impact is that atomic power stations run continuously, and in combination with existing gas-fired power plants, they have the potential to generate significant power surpluses within the region. Mr Carter anticipates that, after meeting domestic demand, any such surpluses will be exported, particularly in winter. On top of investments in additional power generation capacity, GCC countries are completing the final stage of an electric power transmission grid that will provide an interconnection between all six Gulf countries. Already in 2009, the connection between Saudi Arabia, Kuwait, Bahrain and Qatar was made; by 2013, officials expect Oman to join the grid, completing the final planned phase of the interconnection project. Adnan Al-Mohaisen, CEO of the GCC Interconnection Authority (GCCIA), the body located in the eastern Saudi Arabian city of Al-Khobar that is responsible for the grid, points out that one of the first objectives of the transmission network was to create a link between the Gulf countries in the case of emergencies. But now, says Mr Al-Mohaisen, we are trying to benefit from a move towards energy trading on the grid. Trading of electric power surpluses will ensure greater security of supply for individual countries and expand the power options available to policymakers, both among oil importers and oil exporters. I m confident that once the GCC grid is in place, you re going to see utilities within those countries trading back and forth as a way to share peak demand and increase their base load, explains David Scott, executive director of economic and energy affairs at Abu Dhabi s Executive Affairs Authority. Trading of power surpluses between Gulf states is unlikely to remain the only benefit of GCC interconnection. Mr Al-Mohaisen explains that the GCC grid could boost investment in generation capacity in the Gulf states. Because the grid enables power exports, greater scale in construction of generation capacity will be possible potentially enabling more cost-effective investment, and better access to project finance. Hisham Khatib, honorary vice chairman of the World Energy Council in Jordan, agrees: Interconnection is important for the region and will help to rationalise some investments. Experts believe that, in time, the grid may extend beyond the GCC. The establishment of power trading across the GCC, and the emergence of related benefits of scale, may create impetus to expand the grid further. Already, interconnection projects among the power grids of other countries in the MENA region are planned or under way: Egypt, Libya, Jordan, Palestine, Syria, Iraq, Turkey and Lebanon under the Eight Country Interconnection Project; and Libya, Tunisia, Algeria and Morocco under the Maghreb Countries Interconnection Project. By 2020, I wouldn t be surprised if we had a very integrated power grid across much of the region, confirms Mr Scott. Ultimately, MENA-wide interconnection could be the basis of power trading between the MENA region and Europe taking advantage of seasonal differences to share loads across continents. 14

16 Part III The challenge of demand management If countries across the MENA region are to secure electric power supplies to 2020, policymakers must go further than simply increasing power generation and transmission capacities, according to experts. Not least, it will take time for these power expansion efforts to bear fruit. Although most countries of the region have plans to introduce renewable energy and nuclear energy into their energy supply mix, this is expected to only slowly gain momentum, says Mr Abdelwahab of the IDB. Clearly, more must be done. Most experts interviewed for this white paper highlight the wasteful consumption across the region that stems in part from widespread power subsidies, which provide consumers with little incentive to use power more efficiently. Mr Al-Sharhan of Marafiq points out: One area that is not receiving adequate attention is educating consumers industrial, commercial and residential users alike to reduce power consumption through efficient use. On the whole, interviewees agree that heavy industry in the MENA region is reasonably efficient. Despite the prevalence of liberal power pricing regimes, and subsidies, business executives understand the need to operate efficiently, with a view to containing costs. In addition, many of the industries in the MENA region are the result of economic diversification policies of the past decade, meaning that industrial plant and equipment is relatively modern and efficient. One example is Ducab, a cable manufacturing company with factories in Abu Dhabi and Dubai. The firm s managing director, Andrew Shaw, comments: We re a young company and most of our investment is recent. So we are relatively fortunate in that we re starting with a base of very efficient and very up-to-date equipment. A more pressing issue, perhaps, is promoting efficient power use among households, and in government buildings and commercial offices. Mr Stephan of The Boston Consulting Group raises the issue of air conditioning units in the region. We know that if you replace these units, or you make sure that the new units installed are more efficient, you re going to save on efficiency and hence you re going to curb demand, he says. But the more efficient units are more expensive, so what is the mechanism by which you do that? How do you incentivise people to buy them, or countries to install them? There are no easy answers to those questions. One policy option, highlighted in the Dubai School of Government s February 2010 Policy Brief, is to make buildings more energy efficient by means of mandatory standards on new building construction, and by offering financial incentives to builders, 15

17 owners and tenants to adopt efficient technologies. In Abu Dhabi, for example, the Abu Dhabi Urban Planning Council launched the Pearl Rating System in 2010, which requires constructors to meet or exceed basic green building standards. Another possible measure is to phase out use of inefficient air conditioners, dishwashers and washing machines by banning their sale. Besides these, one further demand-side policy option is to control power usage by means of electricity tariffs. With this in mind, several policymakers across the MENA region have already reformed their power tariffs. For example, Saudi Arabia, and the emirates of Dubai and Sharjah, within the UAE, now operate accumulation tariffs: the more power consumers use, the more costly each unit of power becomes. Furthermore, some states vary tariffs according to demand, and others offer timeof-day electricity pricing; both incentivise power consumers to shift their usage to off-peak times. Meanwhile, in Abu Dhabi, the Regulation & Supervision Bureau plans to roll out a trial to a group of volunteer customers, who will receive electronic displays in their homes showing the current cost of power according to the time-of-day tariff. People often consume less when they know their consumption, of course; this trial may also enable them to spot the best time to turn on the washing machine. Furthermore, utilities in some countries in the region are installing smart meters at the premises of larger power customers; in some cases, these meters respond to local weather conditions to anticipate demand. Adnan Al-Mohaisen of the GCCIA says: If we have smart meters with two or three tariffs during the day, we can definitely reduce demand. The question of subsidies Undoubtedly, initiatives such as these have the potential to make a weighty contribution to demand management. Yet perhaps the most significant obstacle to containing, or reducing, demand for electric power in the MENA region is the widespread expectation among regional populations that power should be subsidised by the state. Subsidies are the largest and most glaring obstacle out there, GCC electricity subsidies Cost and income structure of a typical GCC utility (US cents per kilowatt-hour) Capital cost Operation & maintenance Source: Booz & Company. Fuel at market prices Transmission Distribution Total cost of provision at market prices Distribution subsidy (explicit) Fuel subsidy (implicit) End-consumer price 16

18 says one source interviewed for this research. Hydrocarbons prices are hopelessly underpriced as a deliberate political tool to keep people s cost of living modest, explains another expert. Indeed, many oil-producing nations sell oil at cost for domestic purposes, including power generation and industry, meaning that power generators have access to cheap fuel; in addition, some countries subsidise the final electricity bill payable by consumers. According to analysis by Booz & Company of the cost and income structure of a typical GCC utility, end consumers pay around 4 US cents per kwh, while the real cost of the electric power at market prices is around 12 US cents (see figure: GCC electricity subsidies). The difference is made up of implicit fuel subsidies the value of the subsidy offered to the utility by means of cheaper fuel, which is 6.2 US cents and the distribution subsidy for end-consumers, which is 1.8 US cents. In the case of Qatar, nationals receive electricity for free. In the IEA s World Energy Outlook 2011, the agency rails against subsidies: Fossil fuel subsidies result in an economically inefficient allocation of resources and market distortions, while often failing to meet their intended objectives, it writes. Many power experts agree. The oil-exporting countries are encouraging high electricity growth, and waste, through energy subsidies, says Dr Khatib of the World Energy Council in Jordan. Increasing tariffs to reflect real cost is most crucial in managing demand. Experts point out that reductions in subsidies in the coming years would be certain to promote more efficient usage of power and contain demand. Abu Dhabi is already raising awareness of subsidies among power consumers (see box, Abu Dhabi: A make-over for utility bills). Yet there is little sign that countries in the MENA region that offer such subsidies are about the change this practice anytime soon. It s very difficult for governments to begin to pull back from the population any kind of benefit that s been historically enjoyed, and so I think that s really going to be a very challenging thing, says Mr Scott of Abu Dhabi s Executive Affairs Authority. This point is perhaps all the more evident in the context of the social and political turmoil that started spreading across Abu Dhabi: A make-over for utility bills At the end of 2010, Abu Dhabi s Regulatory & Supervision Bureau stepped up its efforts to promote electric power efficiency among consumers. As part of these efforts, it launched a communications campaign to drive awareness of the cost of electric power and water. Now the regulator is going one step further. Starting in early 2012, households and other power consumers are receiving redesigned utility bills. In preparation, Pitney Bowes, a US firm, has already overhauled the billing systems of Abu Dhabi s electric power and water distribution companies. The new-look bills include specific information about consumption of electric power, divided into what the regulator defines as a sustainable block of power consumption, which is printed in green, and the remainder above that consumption band, which is printed in red. Even though the unit prices are the same, the bills are introducing this psychology of better consumption care about what you consume, says Nick Carter, who is director general of the emirate s Regulation & Supervision Bureau, which regulates both electric power and water in the emirate. Furthermore, the new utility bills include a specific breakdown to consumers of the real cost of providing the electric power consumed, the portion of that cost that is subsidised by the emirate, and the portion of that cost payable by the consumer. Although Abu Dhabi has not announced any plans to cut subsidies, Mr Carter fully expects these revised bills, in conjunction with other initiatives, to raise awareness among consumers of the cost of electric power and water, and of levels of consumption. In time, it is possible that the detailed cost breakdown provided by the new bills may pave the way for a government decision to introduce gradual cuts to electric power and water subsidies. For example, a percentage reduction of the subsidies on consumption beyond the sustainable block could help to keep wasteful consumption in check. 17

19 parts of the Arab world in early 2011 the so-called Arab Spring. Few people would argue that now is the right time to cut subsidies. Says one interviewee: The most likely scenario is that there will be no abrupt change in the pricing structure, and that subsidies will be taken out only very slowly. There are further pitfalls that policymakers in the MENA region must navigate. For example, it is not only households that policymakers must consider when debating tariff reform, or subsidy reform it is industrial policy too. Mr AbuAli of Ernst & Young cautions that policymakers should beware of the potentially negative economic effects of tariff increases. In some cases, he adds, when a country increases the cost of electricity, foreign investors may leave the country for others in the region that they consider more attractive. So countries have to balance between the subsidy and the impact of increasing the cost, he says. Meanwhile, one way of addressing the issue of household power subsidies may be to provide direct social assistance to those people most in need. In 2010, for example, Iran s government decided to sweep aside energy subsidies and replace them with targeted social assistance payments. Another way of addressing subsidies can be seen in Dubai, which has approved the introduction of a fuel surcharge mechanism, allowing the state to pass on to power consumers increases in the cost of oil. Yet another possibility is to switch the subsidy into a cash-based subsidy payable to each household direct. If they give you the money, you have an incentive to try to make savings, says Mr Al-Mohaisen of the GCCIA. And that will help to reduce the demand for electricity. 18

20 Conclusion Demand for electric power in the MENA region is set to rise further in the years to 2020, driven by population growth and economic expansion. Yet even today, widespread power shortfalls remain. As they seek to address the challenges of meeting future power demand, policymakers in the region must weigh up a number of considerations, including economic and environmental issues. These considerations are as relevant for oil-producing nations as they are for oil-importing countries if not more. Besides expanding capacity, some countries in the region are responding by diversifying their fuel mix in order to keep costs in check and to secure supplies of primary fuels; others are investing in renewable energies. Yet ambitious plans for nuclear power, and the completion of the GCC transmission grid, are set to have a more significant impact on regional electric power supply. At the same time, efforts to curtail power demand are critical. On the basis of the experience and insights of the experts interviewed for this white paper, three main conclusions can be drawn: Investment in new capacity will pay dividends across the MENA region. Over time, investments in generation capacity, especially in nuclear power facilities, and in transmission networks, specifically a pan-mena grid, may hold the key to eliminating power shortfalls in individual countries across the region. Policymakers must step up their efforts in demand management. Where wasteful consumption is the norm in many MENA countries, households and other consumers must rein in their power demand. This may be through mandatory building regulations, for example, or through efficiency standards for electrical appliances. Reducing power subsidies is key to cutting wasteful consumption. If demand is to be brought into check, those countries that subsidise electric power must find ways to ease subsidies over time. One way is to scrap subsidies made at source, and distribute the subsidies in cash to consumers giving them every incentive to economise. 19

21 Appendix Survey results Securing MENA s electric power supplies to 2020 Appendix: Charts and figures MENA GDP at purchasing-power-parity (PPP), (US$ bn) 6,000 5, CAGR 6.8% 6,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1, Source: International Monetary Fund, World Economic Outlook Database, September MENA manufacturing value added, (US$ bn) CAGR 9.6% Source: United Nations. 20

22 Appendix Survey results Securing MENA s electric power supplies to 2020 MENA population, (m) CAGR 2.1% Source: United Nations. MENA urbanisation 250 Total urban population (m); left scale Urban population (%); right scale Source: United Nations. 21

23 Appendix Survey results Securing MENA s electric power supplies to 2020 MENA net electricity generation by fuel, (trillion kilowatt-hours) Liquids Coal Nuclear Renewables Natural gas Source: U.S. Energy Information Administration, International Energy Outlook Cost and income structure of a typical GCC utility (US cents per kilowatt-hour) Capital cost Operation & maintenance Source: Booz & Company. Fuel at market prices Transmission Distribution Total cost of provision at market prices Distribution subsidy (explicit) Fuel subsidy (implicit) End-consumer price 22

24 While every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in this white paper.

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