Greening the Energy Sector in the Middle East and North Africa

One question that often arises when I meet colleagues who work on climate change is how the energy sector in the Middle East will adapt to a carbon-constrained world.   In May 2015, my inbox was flooded with articles that quoted the Minister of Petroleum and Mineral Resources of Saudi Arabia, Mr. Ali al-Naimi, who declared that Saudi Arabia aspires to be a global power in solar and wind and could start exporting renewable energy instead of fossil fuels in the coming years.   
 
It is well known that energy resources are an important factor in the socio-economic development of the Middle East and North Africa (MNA) Region, as hydrocarbons are the region’s largest exports and source of foreign currency. The region remains the only large source of low-cost oil, with 48 percent of global reserves, and an important source of natural gas, with 41 percent of global reserves (mainly in Iran, Qatar and Saudi Arabia).  As elsewhere, domestic economic growth in the region is dependent on the availability of accessible and affordable energy, as primary energy demand is expected to continue to grow for the next two decades at a rate of 2.8 percent per year, on par with that of other emerging economies.  
 
According to a conservative assessment from the International Energy Agency (IEA), global energy demand is expected to increase by 37 percent by 2040, which assumes that growth in global demand slows down by half going forward, and takes for granted a structural shift in the global economy towards services and light industries.  The IEA anticipates that Asia will contribute 60 percent of the growth in energy demand, supported by strong growth from across the developing economies.  By 2040, the world is likely to be more dependent on the Middle East as a source of oil, according to the IEA, with two out of every three barrels consumed in Asia originating in the Middle East.  Demand for natural gas would increase by 50 percent by 2040, the highest demand growth of any fossil fuel, largely driven by the power and industrial sectors.   
 
The global community will be gathering in Paris in December 2015 to seek an agreement to avert the dangerous impacts from global climate change, while scientists are calling for deep decarbonization to limit temperature increases to no more than 2 degrees Celsius compared to historical norms.  The conservative IEA scenario described above takes into account current commitments by the global community to reduce greenhouse gas emissions, including extensive energy efficiency measures, but indicates that the scenario falls short, as it would likely increase global temperatures by 3.6 degrees Celsius.  What is at stake in Paris is whether the global community can agree on a path that would bring together the incentives and innovations required to change the relative mix of oil, coal, gas and low-carbon technologies to meet global energy demand.   The success on the global combat on climate change will depend on whether we can incentivize cleaner energy, as the energy sector accounts for two thirds of global greenhouse gas emissions.
 
The MNA countries are shifting towards greener growth through a number of drivers, mostly related to national objectives.Countries that are highly dependent on fossil fuel imports had already sought to diversify their energy mix as a means to reduce adverse effects of potential price shocks.  In 2009, Morocco announced plans to invest US$13 billion to get 42 percent of its electricity grid form renewable energy sources by 2020, and followed up with investments in solar power, wind and hydroelectricity.  Jordan is seeking to increase the share of electricity produced from natural gas from 10 percent to 70 percent through the import of LNG, which would displace the more expensive and carbon-intensive fuel oil and diesel.  Gas is the cleanest of the fossil fuels and typically emits around half as much carbon as coal at the point of combustion when used to generate power. In an effort to diversify its economy, the United Arab Emirates has adopted an objective of increasing non-oil growth to 5 percent annually in its Vision 2021.
 
That said, much more can be done. From 2000 to 2012, the energy intensity of lower-middle-income countries worldwide fell by 2.5 percent a year, while the average intensity of MNA countries in the same income bracket rose.  Given the opportunity costs, the Middle East should reduce the use of oil for electricity production from 36 percent in 2012 to zero.  Oil should be reserved for uses for which alternatives are still costly, such as transportation.  While gas remains the main fuel for electricity production, this valuable resource is wasted through flaring, as five of the top twelve flaring countries are in MNA.   Countries such as Iraq can further develop their gas resources to meet their growing electricity demand and alleviate power cuts.  While the share of renewable energy other than hydropower remains small at less than 3 percent of the world’s energy supply, MNA countries can increase investments in renewable energy to diversify the energy mix, especially for solar energy given that the region has the highest rates of direct normal irradiance in the world.   According to a Bank analysis, the technical potential for energy efficiency improvement is 20 percent across the region, taking into account existing technologies.  
 
Getting to cost-reflective pricing of energy services will also stimulate investments in alternate and cleaner sources of energy as well as efficiency improvement.   As the price of oil has fallen by about half from its peak in June 2014, countries also have an incentive to implement pricing and sectoral reforms with a relatively lower impact.  The IMF has estimated that removing all energy subsidies would reduce greenhouse gas emissions worldwide by 20 percent.

Coming back to the Saudi Minister of Petroleum and Mineral Resources, Mr. Ali al-Naimi.   What I understood by his statement was two things:  (i) countries in the region wish to retain their position as the primary energy supplier in the world and are willing to respond to the demand for cleaner energy; and (ii) the region is rich in solar energy, and is interested in developing this resource to meet a new and emerging export market.