Since the onset of the global financial crisis in 2007, energy investment growth in the Middle East and North Africa (MENA) has seriously contracted. As the ‘option to wait’ was becoming more valuable for some investors, we advocated the exclusion of enabling energy infrastructure such as power from any such option. Long-standing underinvestment in this sector has caused shortfalls in electricity supply and led to serious economic bottlenecks and social frustrations. Ongoing turmoil in parts of the region has somewhat vindicated our stance. Power may indeed emerge as a critical sector featuring prominently on top of governments’ policy agendas. Catching up large unmet potential demand needs massive investment, which cannot be achieved without addressing broader challenges. This commentary discusses the growth potential of MENA power sector, the investment requirements and the challenges involved.
Contrary to previous analyses, which focused on the generation link of the electricity value chain, investment is extended to the transmission and distribution (T&D) systems. The commentary is in three parts. The first provides a descriptive overview of the growth pattern and performance of MENA power generation. The second assesses the potential for capacity growth and the resulting capital investment in new power plants as well as in T&D for the five-year period 2013-17. The third discusses the major challenges associated with implementing policies and programs. In a move to improve efficiency and lessen funding constraints, the power industry has undergone significant institutional and regulatory changes in many MENA countries during the last decade or so. However, despite governments being able to shift part of the burden of developing and financing projects to the private sector, the industry has continued to struggle to keep pace with fast-growing demand. Electricity demand and the resulting generation capacity and production have been driven by rapid population growth and greater urbanization, sustained economic and industrial development, and heavily subsidized electricity tariffs for consumers. This is not to mention the changing characteristics of the electricity demand profile, in particular its summer peak, which in a context of hotter climate, has increasingly been shaped by air conditioning load. These drivers cannot easily be captured in a succinct overview. over the last three decades, staring from the common base year of 1980 (index 100), capacity and production have consistently grown more rapidly than GDP, actually much more during the last decade or so. Furthermore, during the 1980s, then later in the 2000s, capacity and production grew in close parallel with each other. Meanwhile, however, in the 1990s and early 2000s, production grew faster than capacity as excess capacity inherited from past periods of high infrastructure investment had to be absorbed. However, this trend analysis is not enough to evaluate the performance of the power system. Before delving more specifically on performance, it might be useful to briefly examine the patterns of growth at the country level. Fully available data for 2010 indicate that 11 countries (out of 23), whose installed capacity is higher than 5gw, generated a little more than 90% of total output. Among them, the six countries of the Gulf Cooperation Council (GCC) accounted for 43% of MENA total and 54% of the Arab world.2 We should expect country differences to reflect different demographic and economic levels and structures, as well as contrasting climate conditions. A 2010 cross-section regression analysis highlights these differences. As shown in Figure 2, on a log transformed basis per capita capacity increases with per capita GDP in a nearly linear pattern. This stems from the fact that GDP per capita is a proxy for domestic factors that are strong determinants of electricity demand in the region. Accordingly, the GCC countries have ended in the high-end tier.
