Financing the Energy Transition

Measures to increase economies’ energy efficiency represent a great opportunity for the Arab region. But to do so presents many challenges. Energy is overused in the Arab region because it is highly subsidised, meaning government funding for other programs is reduced. In theory, removing subsidies is a very good idea. However, in practice, this can be very difficult politically, as was recently witnessed in Chile – a relatively more stable country than many countries in the Middle East.

With heavily subsidised fuel and electricity prices for domestic consumers, market incentives for property developers to invest in, and for property owners to upgrade, the energy performance of new and existing buildings has been limited. This can change.

As the Arab region depletes its energy and water resources and pollutes its air faster than any other region in the world, the region’s policymakers have a unique opportunity to show global leadership on enhanced resource efficiency.

Yet there is no clear regional trend towards enhanced energy efficiency. Bahrain’s energy intensity, for example, both in absolute terms and on a per capita basis, is among the highest in the world. GCC fossil-fuel exporters Bahrain and Qatar register some of the world’s highest energy-intensity levels, but also some of the largest declines in energy-intensity rates from even higher levels during the 1990s within the Arab region. This signals a capacity for rapid progress.

Since the turn of the century, reductions in energy intensity in the Arab region have been lagging significantly behind those in other regions. Between 2000 and 2014, global energy intensity fell by around 1% annually, 2% per year since 2010, while the average intensity in Arab countries rose by around 1% during the 2000s and has since been largely stagnant.

Many of the barriers to energy-efficiency improvements in the Arab region are well known and documented. Final user motivation to invest in energy-efficiency improvements across sectors depends on end-user energy prices and their energy spending compared to other costs.

In seeking to improve progress towards 100% clean energy, regional investors and policymakers can refer to the three key pillars that underlie both the Sustainable Energy for All (SE4ALL) initiative and the United Nations Sustainable Development Goals (SDGs). These are:

• Scaling access to modern energy through electrification and access to modern clean cooking fuels and technologies;
• Doubling the global rate of improvement in energy efficiency; and
• Doubling the share of renewable energy in the global energy mix.

Sample ContentThree-quarters of the Arab region’s energy used in transport is consumed in the GCC economies and Egypt, indicating the important role these countries have to play in bringing down the region’s energy intensity in transport.

The GCC economies have by far the most energy-intensive transport sector in the world. With prices for transport fuels in many Arab countries being among the lowest in the world, due to subsidies, individual vehicle owners’ incentives to buy more efficient vehicles are non-existent.

In the region’s lower- and middle-income countries, this means markets absorb the cheapest car stock available, whereas, in high-income countries such as in the Gulf region, demand is overwhelmingly in favour of larger, more luxurious high emissions vehicles. This means that significant additional energy-efficiency potential exists in transportation, as more countries choose to implement overdue fuel-economy standards along with wider improvements in the quality and availability of public-vehicle stocks and public transport.

Little or no regulation of vehicle emissions, the ability of old and inefficient vehicles to continue operating in large numbers due to heavily subsidized transport fuels, and a lack of available cleaner diesel fuels in some countries, all contribute to higher emissions. Limited public transport options and reliance on private modes of transport across all countries is a challenge. In an economy with no reliable forms of public transport, a personal car is a necessity rather than a luxury, constraining a large share of private car owners in their choice of vehicle to focus on as cheap a vehicle as possible over and above considerations such as fuel efficiency and economy.

Renewable-energy sources, in particular, solar, wind, and geothermal, are abundant across the region. Country-level applications and financing of larger-scale projects, such as wind power and Concentrated Solar Power (CSP) and photovoltaic (PV) in Morocco and solar PV power in the UAE, have demonstrated the cost-competitiveness of such technologies if assessed and financed under the right conditions.

Such financing will play a fundamental role in the Arab region’s progress towards sustainable growth and development and enhanced prosperity for all residents. Economic growth across the region would be boosted with access to clean, sustainably sourced and affordable energy.

Currently, renewable energy plays only a marginal role in the Arab region’s energy consumption. No other world region plays such a small role in renewable energy, reflecting the Arab region’s globally unparalleled reliance on non-renewable sources. In 2014, renewable energy, including biomass, accounted for some 4% of the region’s final energy consumption.

Rapidly falling costs for technologies such as wind and solar power since the late 2000s have slowly begun to reverse the cost disadvantage. The lack of financial market instruments and experience in funding renewable energy projects at utility-scale and micro-level further complicate deployment

According to the Fifth Assessment Report (AR5) of the Intergovernmental Panel on Climate Change (IPCC), mean annual temperatures in East Africa and the Maghreb states are likely to exceed +2° degrees Celsius above the pre-industrial average with maximum projected increases up to +6°C. This level of regional heating requires major cross-sectoral action. A number of collective commitments at the regional level would support emissions reductions and mitigation of the most severe climate impacts.

Some countries have opened the power and water utility sectors to private co-investors for new power and desalination projects, against the background of the region’s longstanding history of heavily subsidized public utility provision. The transition to more accurate and inclusive pricing for fossil fuels and water will support the financial systems shift to a more resource-efficient, lower emissions economic system.

Proactive policy is a key enabling factor in the Arab region’s transition to a more sustainable pattern of resource use, including energy, and to achieve the SDGs. As this process gathers pace, there is an opportunity to enhance regional energy markets by improving access to information, creating incentives for clean energy switching, incorporating new technology, and communicating the economic benefits of SDG-aligned policy to individuals and companies in the medium and long term.

Massive annual subsidies to the fossil fuel sector distort price signals to all market actors, G7 members lead the way on global subsidies to the fossil fuel sector. [For more information read this analysis on the Arab region as well as this report], hobble energy-efficiency regulation and slow the financial of distributed energy access for all citizens. Redirecting fossil fuel subsidies to cleaner, more efficient and, in the long term, more cost-effective technologies holds potentially vast benefits for citizens, governments and the wider economy. The experience of the G7 group of countries – who have committed to reform fossil fuel subsidies but have failed to act on these commitments, indicates the challenges of weaning the sector off subsidies.

The contribution of renewable energy towards the domestic energy mix remains highly concentrated in a few Arab countries, primarily those that have continued to use large quantities of biomass since the 1960s. Egypt, Morocco and Sudan together account for over two-thirds of the Arab region’s renewable energy consumption, mostly biomass and hydropower.

Sudan alone consumes almost half the region’s renewable energy, owing to the continued use of biomass for large shares of the country’s energy supply in the absence of more modern energy sources and electricity being available to large parts of the population. Compared to the region’s total energy needs, modern non-hydropower renewable-energy technologies such as wind and solar power remain, with very few exceptions such as Morocco and the UAE, a marginal energy source.

A variety of reasons account for the Arab region’s low levels of clean energy deployment to date. These include: continued reliance on traditional biomass in most countries; missing market incentives; and political will to tap into the vast potential for renewable-energy-based technologies. Among these factors, entrenched pricing policies for existing fossil fuels and the power utility sector appear to be a fundamental impediment to more systematic deployment.

Reinforced local governance and the role of cities in financing the SDGs is important. The Arab region is mostly urbanised and cities continue to grow faster than the international average. In this context, local transitions to solar and geothermal energy systems can be achieved at the city level, alongside larger national and international projects.

The roll-out of decentralized solutions in lower-income countries including off-grid solar power is one example. Rooftop solar panel programmes, feed-in tariffs (FIT), urban and rural public transport, infrastructure development and building energy efficiency standards are all areas where local governments could build capacity and implement policies supportive of the SDGs. Governments can make greater use of these opportunities by encouraging municipalities and regional governments to drive national progress in sustainable energy and financing at the local level.