What’s driving the Middle East towards cleaner energy?

The agreement reached by 196 countries at Paris to collectively work to limit the growth of global average temperatures to well below 2 degrees Celsius above pre-industrial levels is a landmark for efforts to avert the worst impact of climate change.  At Paris, each agreed to do its part to promote sustainable energy.  Countries in the Middle East and North Africa region are willing to do their share to mitigate climate change, as demonstrated by their respective Intended Nationally Determined Contributions.  Morocco for one indicated its interest to increase the share of renewables to 52 % by 2030, which is remarkable given the recent dependency on fossil fuels for power generation.  It is clear that energy exporters are interested to maintain their role of global energy supplier, and have a stake in the global shift towards sustainable energy.

There are significant efficiencies to be gained, as demonstrated by the increase in   energy intensity (energy per unit of GDP) in the region in the past decade, which has seen tremendous reductions elsewhere.   In their efforts to provide affordable and reliable electricity – which is still an elusive goal for some in the region- countries are planning to significantly increase the amount of renewable energy, which is currently a very small share of the energy mix.   Countries are also seeking to promote a shift from heavy fuels and diesel for power generation, towards natural gas, which is the least carbon intensive of all fossil fuels.

How Did We Get There?

In the oil-rich Middle East, many countries have traditionally viewed energy resources as a public good which means that energy is sold domestically at prices far below its market value.   As a matter of policy, a number of countries regarded low-cost energy as a key driver of economic growth, and a means to attract industrial investments.  However, over time, this economic and social policy has proven to be expensive, as countries in the region are spending an inordinate amount on energy services.  In 2014, the Egyptian government spent 22 % of its budget on subsidies (equivalent to 6.6 % of GDP), which was seven times more than it spent on health.   The Middle East and North Africa represents roughly half of the global energy subsidies, estimated at $548 billion in 2013.

Economists will tell you that energy subsidies crowd out effective public spending and tend to favor the rich.  In Egypt, 60 % of the subsidies in 2014 accrued to the rich who consume more energy than the poor.  As such they are not a good tool for social protection.  However, energy subsidies also have had a negative impact on the energy sector, as they attract energy-intensive activities, foster overconsumption and discourage investments.

After decades of inefficiencies and underinvestment, Egypt was no longer able to export natural gas to Jordan from 2011 onwards, and Jordan had to find alternate sources of fuels to supply electricity.  Although it used to rely almost exclusively on gas, it had to import diesel and heavy fuel to address the emergency, but sought very hard to secure long term fuel supplies.    Egypt also began to experience fuel shortages and power cuts, up to 6 hours per day by the summer of 2014.   This was the result of years of high growth in gas demand, driven by low prices and high domestic demand for electricity and industry.
The same story was repeated in Iraq, when in the summer of 2015, there were spontaneous protests all over the country due to the increase in power cuts, by as much as 16 hours per day.   Unlike Egypt and Jordan, Iraqi households have a parallel and informal network of diesel generators, but these tend to be very expensive for households to maintain.

What’s New?

The good news is that as a result of power cuts, these government sprang into action through nationally driven national programs to improve energy services and promote sustainable energy.  These programs have been supported by the World Bank’s Development Policy Financing, which provides budgetary support for sound reform programs.  The DPF  Interestingly, it turns out that promoting sound energy sector fundamentals – cost reflective pricing, sound governance and a diversified fuel mix – can also lead to better energy services such as reduced power cuts, and significant GHG emissions reductions.

In Jordan, government embarked on subsidy reforms and is well on its way to achieve cost recovery in the electricity sector by 2017.  Through these pricing reforms and targeted policies, Jordan aims to enable large scale fuel switching – shifting from carbon intensive diesel and HFO electricity production, to renewable energy (10 % of the energy mix) and natural gas (7% to 70 %) by 2017.  Jordan also invested in a gas regasification unit at Aqaba which became operational in 2015 that will enable it to access liquefied natural gas from the market.

In Egypt, government embarked on an emergency action plan, which sought to add new power generation capacity and improve the efficiency of power supply.  With the support of development policy financing, Egypt will also gradually reduce energy subsidies (from 6.6 % of GDP to 3 % in 2016), reduce the fiscal burden of the energy sector, incentivize the participation of private sector know how in gas and electricity, and promote renewable energy.  These measures are expected to reduce GHG emissions in the sector between 11 and 21 % by 2019 through reduced demand, fuel switching and cleaner energy.

In Iraq, government has embarked on an emergency program to take advantage of its significant gas reserves.  Because Iraq is not capturing natural gas that is associated with oil production, of which 50 % is currently flared to the atmosphere, it must use a combination of gasoil, crude oil and heavy oil to generate electricity, some of it imported with significant costs.  With the support from development policy financing, Iraq is investing in gas flaring reduction, expanding gas-to-power generation, and reducing energy subsidies.  This strategy is expected to significantly lower the financial burden of the electricity sector, and should promote a shift towards affordable and reliable electricity.   As an added bonus, these reforms are expected to reduce Iraq’s GHG emission by 4 % by 2016 against business as usual.

Following the successful negotiations on a climate change framework at Paris, countries have agreed to make a shift towards significantly reducing greenhouse gas emissions in the energy and transport systems.  The recent experience of Jordan, Egypt and Iraq shows that effectively designed reforms can yield the triple win of a lower fiscal burden of the energy sector, improved service delivery, and reduced GHG emissions.