The complexity of future energy systems and the need for regional collaboration

Complex future energy systems

Much has changed in global energy markets over the last few decades, with technological advancements leading to new sources of supply, the introduction of decentralisation and increasing focus on decarbonization.

It was initially socio-environmental concerns that prompted the birth of the energy transition to address climate change. Yet, in many countries worldwide — particularly in the MENA region — the ultimate drivers for the energy transition have been economic and security-related.

MENA countries are diversifying their energy systems, specifically their power mixes, to either free up hydrocarbons for export (in the case of net-exporters), or, for net-importers, to reduce the fossil fuel import bill.

Climate change, as a threat multiplier, is also becoming another major driver. The MENA region is increasingly experiencing the impact of climate change in terms of higher temperatures — exceeding 53℃ in some cities — drought and extreme weather conditions.

Sandstorms are increasing in intensity, and flash floods are a recurrence. The climate is an emerging threat to economic, national and regional stability, and the region's vulnerability to climate change is heightening the need for mitigation and adaptation measures, including decarbonisation of energy sources.

These trends are resulting in growing momentum for the energy transition and complexity in energy systems.

Challenging road ahead

Several factors are contributing to the increasing complexities of the energy sector. These factors include 1) the impact of increasing temperatures on existing infrastructure and water and energy demand, 2) the emphasis on variable renewable energy, and 3) the deployment of decentralised models.

Firstly, as temperatures soar, so does energy demand — driven by the increased need for desalinated water and air conditioners. However, this growing demand cannot be met by existing infrastructure.

This puts a strain on the power sector and leads to blackouts, even in countries with significant power generation reserve margins, such as Egypt and Kuwait.

Climate change also negatively impacts existing energy infrastructure; extreme heat decreases power plant performance and increases water demand for plant cooling, and drought reduces the availability of hydroelectric energy.

Additionally, the region's soaring heat negatively impacts the yield from solar photovoltaic plants. PV modules' standard test conditions are conducted at 25°C, meaning plant performance is compromised at higher temperatures.

Secondly, the bulk of investments in the energy transition in the region are targetting power generation, neglecting other sectors such as industries and buildings.

Even within the power sector, the pace and success rate of renewable energy deployment differs across countries, and the challenges for integrating renewable energy are many, weakening the prospect of matching supply and demand.

Grid infrastructure is at the core of a successful transition in the power sector. Yet, the grid in the MENA region is beset with challenges, including limited capacity, losses, and under-investment.

Grid expansions have not been as fast as renewable energy implementation, and pressure will only mount with the adoption of electric vehicles and the choice of renewable energy sources fed into the grid. MENA countries have favoured variable renewable energy thus far: solar photovoltaics and wind energy.

The variability of these systems creates risks for grid integration, such as curtailment and non-reliability. Low investment levels in transmission and distribution networks worsen the grid outlook, which represents only 8-12% of all power sector investments in the MENA region.

Third, where energy systems have historically followed a centralised model with heavy involvement from the state, new models include distributed systems such as rooftop solar photovoltaics and mini-grids.

This has led to the emergence of prosumers — consumers who are simultaneously producers of energy — adding further complexity to grid management.

Collaboration for a sustainable future

Regional collaboration is crucial for a sustainable and resilient future. From electricity grid interconnections to cross-border investments in renewable energy, working together is vital, particularly if regional states are to meet their renewable energy and net-zero targets.

MENA countries have pledged ambitious 2030 renewable energy targets that range from 15% of electricity generation in Kuwait to 50% in Saudi Arabia and 52% in Morocco.

These targets cannot be met without an interconnected electricity grid and an efficient electricity exchange market to improve grid stability, reduce the curtailment of electricity generated from renewable energy, and balance load and demand.

With continuous spikes in energy demand, cross-border grid interconnection will defer the need for significant power generation capacity additions.

An interconnected grid will also secure reliable electricity supply to countries increasingly struggling with blackouts, as well as post-conflict countries as they rebuild their power systems.

Collaboration must occur on multiple fronts, including financial, technological, resource and data sharing. MENA countries are extremely vulnerable to fiscal risks, with oversized public sectors and high reliance on oil revenues.

Oil price volatility threatens fiscal stability in exporting economies that depend on these revenues, and importing economies that rely on remittances from exporting countries. The external shocks and the global economic slowdown worsen these challenges.

Furthermore, most countries have chronically struggled to attract financing, including climate funding. Despite tapping into twelve climate funds, the region's approved total volume of climate financing is among the lowest globally.

Meanwhile, the capital expenditure required for the energy transition is massive and significantly increases when accounting for broader climate adaptation and mitigation measures.

Yet, in the wake of the oil windfalls post Russia's invasion of Ukraine, regional oil exporters, particularly in the Gulf Cooperation Council (GCC), are recording robust growth and advancements in economic diversification policies.

Read more: How Saudi Arabia is building a realistic roadmap for a circular carbon economy

Thus, collaboration can mind some of the financial gaps and remove market barriers in low and middle-income countries while allowing diversification and investment returns for high-income countries such as those in the GCC.

Resource diversity and energy access make another strong case for collaboration. MENA countries have abundant renewable energy resources; however, these resources are unevenly distributed across geographic locations, especially in the case of hydropower and geothermal energy.

Geothermal and some hydroelectric systems are vital for baseload power generation and should be a central part of renewable energy deployments. Geothermal can further power desalination plants and provide district cooling and could benefit from the region's petroleum producers' extensive drilling experience.

Leveraging these various renewable energy resources requires cross-border collaboration and optimisation of resources and technologies.

Moreover, extending energy infrastructure, especially through renewables, across borders from areas of abundant resources and better prospects for project bankability to low energy access areas in the least developed or conflict countries will increase the share of renewable energy and improve energy access.

Championing collaboration

Collaboration in many forms is already underway in the region, indicating a recognition of the imperative of cooperation. UAE-based renewable energy developer and investor, Masdar, plays a key role in developing renewable energy in regional and international markets.

Its current investments total $30bn with 20GW of capacity, aiming to reach 100GW by 2030. Among its key investments in MENA are within Saudi Arabia, where the company has developed the Kingdom's first operational wind farm of 400MW, the largest in the region.

Similarly, Saudi-backed Acwa Power, an electricity and water developer and investor, has an extensive global portfolio of renewable energy projects with a total capacity of 23.4GW, with significant operations in the GCC, Jordan, Egypt and Morocco.

In October, the company signed a 30-year agreement with the Dubai Water and Electricity Authority (DEWA) to develop the first phase of the world's largest renewable energy-powered desalination plant.

On the grid interconnection front, albeit slowly, bilateral projects are being developed. The biggest development in the sphere is the first expansion of the GGC grid interconnection beyond GCC countries, through an interconnection project with Iraq scheduled for completion by the end of 2024.

The project includes the development of a platform for electricity trade between the GCC and Iraq through bilateral and multilateral agreements.

MENA countries are well-positioned to reap the benefits of collaboration in order to accelerate the energy transition and build a more sustainable future. Partnerships on regional energy systems will increase and translate into electricity grid interconnections, exchange markets and cross-border renewable energy investments, among others.

Yet, the pace of these partnerships and the extent of collaboration remain uncertain. If collaboration is not inclusive of all countries and remains within a small group, then advancements will be uneven, and the energy transition will lag behind, thus, jeopardising energy security in the region.

Cooperation is essential – and is only just beginning.