Jurisdictions such as Algeria, Jordan and Morocco have limited native energy resources and are motivated by a desire to reduce their reliance on hydrocarbon imports. Conversely, those countries with substantial domestic reserves of fossil fuels, such as Saudi Arabia and the UAE, are pursuing a strategy of economic diversification. These oil-rich nations are also driven by a need to free up energy resources, currently sold domestically at heavily subsidised rates, for sale at more lucrative prices in the international markets. According to the World Bank, energy subsidies cost the region the equivalent of 7.1 per cent of its gross domestic product (GDP) in 2006, whereas reducing these subsidies could raise the region’s GDP by two per cent.
In addition, there is an increasing recognition by Mena countries of the implications of climate change and the need for environmental sustainability. The majority of these countries are signatories to the Kyoto Protocol (the Protocol) and have set 2020 as their targets. Whilst the region contributes to a small percentage of overall global emissions, the carbon footprint per capita of some of the Mena countries is large compared with other nations outside the region. For example, Qatar, Kuwait, the UAE and Bahrain respectively have the first, third, fourth and fifth largest global carbon footprints.
According to a recent report by Meed1, installed generating capacity across the Mena region in 2010 totalled 169,400 MW of which only 9,500 MW was generated from renewable energy sources. The renewables total was primarily made up of hydroelectric capacity at 90 per cent, with wind power comprising 834 MW and installed solar energy capacity totalling 71 MW. Only three regional states have significant solar and wind farm capacity: Egypt (490 MW wind energy and 20 MW solar power); Morocco (280 MW and 20 MW); and Tunisia (64 MW wind energy).
Egypt has the largest renewable sector in the region with projects such as the 140-MW solar thermal installation at Kuraymat, which forms part of plans to export North African-generated electricity to Europe through the Desertec project. Future solar projects are expected to use concentrated solar power with backup natural gas-fired generators. In December 2010, the Egyptian government announced plans to expand wind farm capacity by over 2.6 GW over the next five years as part of a programme to increase wind’s share of electricity2 but with the recent political situation, the future of Egypt’s renewables programme appears uncertain.
The challenges to the development of a renewable energy sector across Mena include:
· Reliance on large hydrocarbon reserves, particularly in nations such as Saudi Arabia;
· Heavily subsidised domestic fuel prices;
· Lack of feed-in tariffs for the price of energy;
· High domestic consumption and the increasing need for new grid capacity, which will require substantial upgrades of the domestic grid infrastructure to take on this capacity as well as the integration of renewables technology;
· High capital and operational costs of producing energy from renewable sources compared to fossil fuels;
· Lack of transparent institutional and legal frameworks in some of the more emerging economies in the region;
· Recent political instability in the region which may act as a constraint to private investment and mean that support in the form of development banks, ECAs (export credit agencies) and multilateral participation (either by direct funding or the implementation of intermediate schemes) is necessary; and
· The impact of the Eurozone sovereign debt crisis, which has severely damaged liquidity in the European banking market, which will almost certainly impact the ability of private developers to raise long-term debt in the current market.
However, there are also various incentives to develop the renewable energy sector. These include:
The use of feed-in tariffs (FIT) is a well-established and proven mechanism to encourage the development of the renewables sector that has been introduced in more than 40 countries globally, with some adjustments to meet country-specific needs. It comprises the following key elements:
· Right of the renewable generator to feed electricity into the grid;
· Obligation on the regional/national utility to purchase the renewable electricity;
· Payment of a premium tariff to the generator for the renewable electricity to reflect the higher cost of production as compared to electricity produced from conventional sources;
· The additional cost of renewable electricity is passed back to the consumer;
· The premium tariff is guaranteed in the long term (for example, 20 years in Germany).
The key to a successful FIT is that it should only be a temporary solution, until grid parity is achieved. The idea is that the tariff should be adjusted each year for newly installed renewable installations as efficiency gains and corresponding reductions in capital and operational costs are achieved.
A critical issue in the application of FIT to the Mena region is that under the usual model, the additional costs associated with renewable electricity are distributed to all consumers. The region has long benefited from heavily subsidised domestic energy prices and it can be stated with some certainty that a policy of higher power prices would be politically unfeasible. Accordingly, adjustments would need to be made to the concept of FIT to take into account the inherent nature of the Mena energy market. In the wealthier nations comprising the GCC, the additional costs of producing renewable energy may be borne by government. The successful implementation of Fit in the less wealthy North African nations would necessitate development bank, ECA and multilateral involvement.
Priority grid access
A regime of priority grid access and favourable licensing rules for renewable generators is another way to incentivise the Mena renewables market. In Europe, the Renewable Energy Directive3, amongst other things, introduced the concept of priority access by requiring that EU countries take "the appropriate steps to develop transmission and distribution grid infrastructure, intelligent networks, storage facilities and the electricity system … to accommodate the further development" of renewable electricity, and "appropriate steps to accelerate authorisation procedures for grid infrastructure and to coordinate approval of grid infrastructure with administrative and planning procedures."
Germany and Spain have both implemented legislation that guarantees priority grid access and priority transmission of electricity generated using renewable resources.
Off-grid hybrid power
A programme of off-grid electrification may provide another solution. Local grids powered by one or a combination of energy sources at local level offer the advantages of lower generation costs, increased efficiency (due to the absence of power losses associated with long transmission lines) and the availability of energy to remote communities. A study undertaken at sites located at the coastal city of Dhahran in Saudi Arabia concluded that hybrid-based power generation would be a more viable and cost-effective approach for remotely located communities (that need an independent source of electrical energy) where it is uneconomical to extend the grid.
The carbon markets may help achieve an increase of renewable projects across the Mena region, in particular by the utilisation of the clean development mechanism (CDM). The CDM was established under the framework of the Protocol, under which Annex I countries have country-specific targets to reduce emissions of greenhouse gases. CDM is one of the (and the most) successful market mechanisms established under the Protocol.
CDM permits an Annex I Country to implement projects that will reduce emissions in a Non-Annex I Country (known as the host country) or that absorb carbon through accredited project activities, in return for certified emission reduction units (CERs). Each CER is equivalent to one tonne of carbon dioxide and can be traded and sold. The Annex I Country must also assist the Non-Annex I Country in achieving sustainable development and contributing to the objectives of UN targets on climate change.
To date, there are only 22 registered CDM projects from the Mena region, accounting for 1.5 per cent of global CDM projects.
1 Source: Meed Insight
2 Source: Energy Information Administration
3 EC Directive 2001/77/EC on the promotion of electricity produced from renewable energy sources in the internal electricity market
* Melanie Henry is a banking and projects associate at Norton Rose (Middle East) LLP Bahrain office. Norton Rose Group is a leading international legal practice with offices in Europe, Asia Pacific, Canada, Africa and the Middle East, and – from January 1 2012 – Latin America and Central Asia.
Norton Rose Group is recognised for its involvement in pioneering "first in jurisdiction" projects and complex and innovative renewable energy transactions where no market precedents exist and as ‘the best firm for renewables work bar none’. Core expertise in renewable energy includes: biofuels; biomass; CCS (carbon capture and storage); geothermal; cleantech; climate change; hydro; marine (wave and tidal); solar; waste to energy; and wind power (onshore and offshore).