Political instability has weighed on the power sector

Political instability has weighed on the power sector

Mena needs $260bn in power spend

The electricity demand and consumption have been growing rapidly in the region, driven by population growth and urbanisation, rising income levels and industrialisation

May 2018

The Middle East and North Africa (Mena) region will require $260 billion of investments in the electricity sector over the next five years to meet rising electricity demand driven by population growth, urbanisation and growing income levels, said a report.

In the GCC, governments have coped well with demand. However, recent increases in electricity prices in Saudi Arabia will slow demand growth, stated Arab Petroleum Investments Corporation (Apicorp), the multilateral development bank focused on the energy sector, in its latest research report.

In the Mashreq region, inadequate investment and political instability have weighed on the power sector, and persistent blackouts continue to put pressure on governments to take action, it stated.

Apicorp’s report pointed out that the electricity demand and consumption have been growing rapidly in the region, driven by population growth and urbanisation, rising income levels, industrialisation, and low electricity prices; and while economic growth has slowed compared with historical highs, the International Monetary Fund still expects an increase of 3.2 per cent this year and in 2019, rising to 3.5 per cent in 2022.

The region’s population is also expected to grow at an average rate of 1.5 per cent every year in that same period.

In order to meet this rising demand, Apicorp estimates that Mena power capacity will need to expand by an average of 6.4 per cent each year between 2018 and 2022, which corresponds to additional capacity of 117GW.

As per the report, $152 billion will be needed to deliver this additional capacity, with a further $108 billion needed for transmission and distribution.

Turning to more specific parts of the Mena region, the GCC dominates the landscape, stated Apicorp in the report.

Whilst it currently represents 47 per cent, or 151GW, of current Mena power generating capacity, Arab petro bank forecasts that it will need to invest $55 billion to create 43GW of additional generating capacity and another $34 billion in transmission and distribution over the next five years.

Some countries in the GCC, notably Saudi Arabia, have also taken steps to control demand, as a means of keeping required levels of investment in capacity at manageable levels.

This was the thinking behind the Saudi Arabian government’s most recent round of price increases, as demand had risen significantly on the back of cheap electricity, and with lower oil revenues, subsidizing high levels of consumption is no longer sustainable, said the Apicorp report.

To give an idea of the scale of the increases, Saudi Arabia increased electricity tariffs from SR0.05/kWh to SR0.18/kWh for residential consumption levels below 6,000kWh/month, it added.

On the investment side, the required additional generating capacity in the GCC will be found in traditional and renewable forms of power generation.

Saudi Arabia will lead the way in both, with the country needing to invest around $21 billion, which will increase capacity to 92GW. Saudi Arabia is also kick-starting its renewable-energy initiative, seeking to develop 10GW of solar and wind energy by 2023, stated the report.

According to Apicorp, the UAE needs to invest at least $33 billion to meet its expected additional 16GW capacity requirement over the medium term.

The country is pushing strongly to diversify its energy sources in the power mix, and Apicorp estimates that nearly 10GW of capacity additions are already in execution, including 5.6GW of nuclear.

Solar power also features heavily in the UAE’s plans and is expected to account for 25 per cent of the generation mix once its latest $13.7bn (5GW) solar park is fully commissioned, it stated.

In other GCC countries, Kuwait’s generating capacity will need to reach 24GW by 2022, requiring $15 billion of investment; Qatar will need to invest around $9 billion to add 4.2GW to meet rising demand in the medium term: $6 billion in generation and $3 billion in transmission and distribution; Oman’s rising electricity demand will require an additional 4GW of generating capacity, which Apicorp estimates will cost $8 billion; and Bahrain will need to grow capacity by 6 per cent every year, with $3 billion of investment to meet capacity additions of 1.4GW, bringing the total to 5.8GW by 2022.

Elsewhere, historic and ongoing geopolitical issues are creating different challenges for the countries concerned.

Iran is likely to need an additional 25GW over the next five years (almost a third of its current capacity), which the Arab petro bank estimates will cost approximately $50 billion. Currently, only 12GW worth of projects are in execution, so Iran will clearly need to accelerate its investment to meet rising demand.

However, the government has not been successful in attracting much needed foreign investments due to several political and economic challenges, not least uncertainty over the possible re-imposition of sanctions, said the report.

In Iraq, the government is prioritising the power sector, following loss of generation and transmission during the war against the so called Islamic State, which has made the generating capacity of the country difficult to assess.

Apicorp estimates that capacity at the end of 2017 stood at 17GW, meaning an additional 12GW of power-generation capacity is required over the next five years, amounting to $39bn of investment.

On Egypt, the bank said it will need to invest $28 billion in power generation and a further $18 billion in transmission and development. This would increase capacity in Mena’s most populous country by 22GW to reach 60GW in 2022.

Egypt’s historic gas supply issues are likely to be alleviated by the development of the recent discoveries, and the bulk of this investment will therefore be in gas fired power stations: indeed, three 4.8GW combined-cycle gas-power plants, which will be among the largest in the world, are expected to come on line this year.

Apicorp estimates that 25GW of capacity is in execution in Egypt and ready for commissioning, meaning the country should be on track to meet its requirements by 2022. 

The rest of the Mashreq region will need at least 3GW of additional capacity within the next five years, amounting to $7 billion of investment. Jordan already has 1GW of capacity additions under execution, nearly half in renewable energy. This falls slightly short of the 2.1GW that Apicorp estimates the country will need to add by 2022.

Lebanon’s major concerns will revolve around reforming electricity prices and investing in generation and adequate transmission and distribution infrastructure to alleviate frequent power outages, it stated.

Ghassan Al Akwaa, the energy sector specialist at Apicorp, said: “Fiscal challenges have meant that governments are no longer able to support the provision of cheap power. Many countries are accelerating their price reform plans with the aim of liberalising prices in the
short term.”

“While these programmes will aim to reduce the fiscal burden on governments, they will also put downward pressure on power demand. Already, electricity demand growth forecasts in Saudi Arabia has been dramatically revised downwards to 1.5-2 per cent in the next five years, down from over 5-6 per cent,” explained Al Akwaa.

“At the same time, there is a growing role of Independent Power Producers (IPPs) in the region’s power sector,” he noted.

“Governments have limited options in the medium-term and IPPs will continue to be at the forefront of governments’ strategies to add generating capacities, which will provide significant relief to government finances and state utilities,” he added.

Mustafa Ansari, senior economist, said: “Success in implementing key power projects and attracting the necessary investment will vary across the region. The GCC governments will continue to cope well with rising demand, using price reforms as an effective tool.”

“Renewable energy projects will also continue to be at the forefront of long-term government plans to diversify generation capacity. Meanwhile, in other parts of the region, the challenge to meet electricity demand is more serious: political instability and inadequate investments will continue to result in power shortages, damaging their economies and frustrating their citizens,” he added.

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