The benefits of electricity trade between countries cannot be overemphasized. Regional electricity trade allows utilities and market participants to benefit from economies of scale, which enable the development of high capacity plants and access to cost-effective supply options. It provides more flexibility in accessing generation capacity from other countries in the region and an opportunity for countries to meet their capacity and power reserve requirements at lower cost. Resource pooling provides security benefits that stem from the diversity of supply and demand derived from the integration of energy systems across the region. The environmental benefits come from the ability of integrated electricity systems to use a greater share of renewable energy resources and rely less on liquid fuel generation.
Aware of these benefits, the Arab Ministerial Councils for Electricity (AMCE), under the umbrella of the League of Arab States (LAS), have made the creation of the Arab Electricity Market (PAEM) a priority. Working with the World Bank, the League of Arab States and the Arab countries have made a strong economic case for further integration of energy systems in the region, underpinned by the creation and operation of PAEM. The electricity fiscal market agreements are intended to be legally binding on any Arab country that signs them – by facilitating electricity trade transactions.
The AMCE Council approved the PAEM ratification process in the summer of 2020, paving the way for Arab countries to finalize their internal procedures in preparation for signing the agreements in 2021. While this represents a milestone in the process of establishing a PAEM, its effective operationalization will be a long and complex process It requires greater commitment and support from participating governments. Previous Arab regional integration agreements may have failed to gain the required momentum between governments, but the momentum to create the Arab financial market for electricity now is different and unique for many reasons. Unbalanced energy resources across the region, the energy transition agenda, the unique position of Middle East and North Africa (MENA) countries to exploit solar energy, the rapidly declining cost of renewable energy technologies, as well as the rapid growth of renewable energy technologies mean that governments in the region will benefit Dramatically by improving clean energy resources and diversifying demand patterns when PAEM is in operation. PAEM enables countries to integrate their national grids and thus commit to cross-border commercial electricity trade.
The impact of the COVID-19 pandemic, as well as the need to reduce the region’s exposure to global oil price fluctuations, have added a new sense of urgency and a renewed political commitment to rethink regional supply chains and integration. Rapid population growth in the MENA region, along with an industrial and economic recovery in the wake of the pandemic, means that energy demand will continue to increase – making the availability of reliable electricity supplies an urgent priority for Arab countries in the future. The financial constraints imposed by COVID-19 and the importance of the energy sector in the post-pandemic economic recovery underline the importance of PAEM for all participating countries in the short and long term. Active commercial trade through the public financial market for electricity and water would bring great value to treasury reservoirs, utilities, and citizens in the region.
The region is indeed highly interconnected with the GCC subregion being the most integrated compared to the interconnection made up of eight countries in the Mashreq and Maghreb sub-regions. However, only 2 percent of the electricity produced in the MENA region is traded per year. The Public Electricity and Water Authority will help integrate existing cooperation efforts and increase the use of existing cross-border transportation infrastructure by introducing new pricing mechanisms to launch bilateral commercial electricity trade and pave the way for a greater number of market participants. PAEM aims to increase cross-border electricity trade from the current 2 percent to between 37 and 41 percent by 2035. This will provide the MENA region with one of the largest multi-country integrated systems in the world – resulting in total generation capacity More than 600 gigawatts by 2035. In addition, the size and geographical scope of PAEM opens opportunities for trade with power grids in the European Union, Sub-Saharan Africa, and Asia.
Finally, the establishment of the public financial market for electricity and water deepens the commitment of the participating countries to cooperate in building confidence and resolving common concerns about security and national sovereignty. By introducing new pricing mechanisms for cross-border electricity trade, the establishment of the PAEW will encourage participating countries to reform their domestic electricity sectors, phase out subsidies, enable greater private sector investment, and enhance the competitiveness of their economies. This can help with growth, job creation, and shared prosperity for the MENA region and beyond.