Energy Efficiency Policies in the MENA Countries

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Energy intensity in MENA

It is a well known characteristic of the MENA region that it encompasses countries with structural parameters often at opposite extremes of the spectrum: the range goes from the world's major hydrocarbon producers to countries that hardly have any domestic energy resource at all; from geographically vast to very small countries; from countries that are relatively populous to others whose national population would fit in a small city; from some of the highest to some of the lowest GDP per capita ... and the list could continue.

It is, then, very difficult to generalize and formulate statements that will apply equally well to all countries in the region. When it comes to energy efficiency this is as true as for other development-related issues.

Taken as a whole, the MENA region is characterized by high levels of energy consumption per capita and energy intensity per unit of GDP. However the situation of individual countries differs markedly: the Maghreb countries (Morocco, Algeria, Tunisia) display relatively low energy intensity, while and the Gulf countries (including Iran and Yemen) register very high values. (Figure 1 below)

Figure 1

Energy intensity is determined by multiple factors, and no exact link may be established to oil and gas production. Some oil exporting countries, such as Algeria or Libya, record low energy intensity, while some very poor countries, such as Yemen, come out in the top group.

Enhancing energy efficiency is normally considered the most attractive way to counter excessive reliance on fossil sources and mitigate climate change. Pursuing efficiency is an approach that, almost by definition, can only be viewed positively. It is also the approach that promises the greatest benefits at the lowest cost. In all GHG abatement scenarios, improved energy efficiency is expected to contribute the most to the desired total reduction.

And yet, improved efficiency is also the most elusive and difficult of the components of the package of policies that humankind will need to implement in the coming decades. Efficiency is lagging behind stated ambitions in all countries. The EU is expected to meet all of its objectives for 2020 except with respect to the envisaged improvement in efficiency.

This is due to the difficulty of articulating and enforcing the complex and detailed policies required for improving efficiency. It is also due to the need for achieving convergent behavior on the part of the state in all its ramifications; on the part of the corporate world in all productive sectors; and on the part of households and individual consumers in their daily behavior and choices.

Such convergence is very difficult to achieve, because the temptation of free riding becomes stronger the more effective are the policies. Actually, greater efficiency may encourage consumers to simply demand more of the various energy services, thus frustrating the ultimate objective of containing emissions.

Energy efficiency in industry

Industry is the area where the easiest energy efficiency progress may be achieved, because of the large scale of emissions and the concentration of the same in the hands of a few actors whose behavior can more easily be influenced and monitored. There is considerable attention to energy efficiency in industry in the MENA region, more so than is frequently recognized.

Oil and gas production

Large amounts of energy are needed in oil and gas production. The primary form of energy waste in this area is gas flaring or venting, two totally wasteful ways of utilizing precious fossil resources, and highly damaging to the environment.

Some MENA countries have long ago attributed the highest priority to curbing associated gas flaring, and have turned gas utilization into the cornerstone of their industrial development. This is particularly the case of the GCC countries: Saudi Arabia, Abu Dhabi and Qatar. Elsewhere in the MENA region, the situation is less encouraging: notwithstanding clear and major progress, there still is a surprisingly high volume of flaring in Algeria, and in Iraq the drive to increase oil production, while infrastructure for the gathering and exploitation of associated gas is not yet in place, is leading to very worrisome levels of flaring [1]

Figure 2

Source: Sonatrach Downstream Environmental Regulation and Impact on Gas Flare" NAAR Mokhtaria, Sonatrach Downstream Activity, paper presented to the 2009 World Gas Congress of the IGU, available from http://www.igu.org/html/wgc2009/papers/docs/wgcFinal00422.pdf

In comparison to other regions, however, MENA stands out as being more aware of the need to curb flaring and having done a great deal to valorize associated gas: this has definitely been a constant policy concern in the region.

Refining and petrochemicals

The refining and petrochemical industries are the backbone of the region's effort towards economic diversification, and the major expansion of these industries in Saudi Arabia, Qatar, Iran and the UAE is well known. Kuwait, Egypt and Algeria lag somewhat behind, while major future developments can also be expected in Libya and Iraq.

Opportunities for increased efficiency in refining and petrochemicals have systematically been pursued, and the management of the main companies (Saudi Aramco, Qatar Petroleum, SABIC, Bourouge...) has been in the forefront of promoting energy efficiency.

This drive is facilitated thanks to the clustering of plants in large industrial cities, of which the foremost is Al Jubail. This facilitates centralization of utilities and practices like heat recovery and combined heat and power generation (CHP).

Power generation and water desalination

Power generation is a key area for energy efficiency. Electricity demand in the MENA region is highly concentrated in the GCC countries, and there is a wide gap in individual countries' per capita electricity consumption.

Figure 3

Source: World Bank, World Development Report Database

In a recent article [2] Maruyama and Eckelman have compared the energy efficiency of power generation across regions and years. (see Figure next page). In the Middle East the main primary source for power generation is gas, which has been playing a growing role relative to petroleum. Normally, the efficiency of natural gas plants is higher than with other fossil fuels, thanks to the combined cycle technology. However, in the Middle East oil fired power plants appear to be more efficient.

The efficiency of electricity production in Iran, Saudi Arabia and the UAE also displays some wide fluctuations, which the article has no explanation for. In the case of Iran, the decline until 1985 and major recovery thereafter is probably due to the Iraq-Iran war. As for Saudi Arabia and the UAE, lower energy efficiency is probably due to the fact that several gas plants are used for meeting seasonal peak demand: these are open-cycle gas turbines rather than combined-cycle. Also, gas is used in plants that combine power generation and water desalination. The combined production of power and desalinated water in MSF plants is in fact much more energy-efficient that having separate plants; but if the plant is considered only for power generation, it will appear to be inefficient.

Figure 4

The synergy between power generation and water desalination is a major theme for efficient use of energy in the MENA region, because all countries in the region face more or less insufficient water supply. The optimization of the interface between power generation and water desalination is extremely important and carefully looked at in the region, as different desalination technologies may contribute either to power generation or to consumption.

The reliance on open cycle gas turbines for power generation and the importance of water desalination are, at the same time, important features that may allow for more efficient deployment of renewable energy sources, such as wind and solar, whose main drawback is intermittency.

In fact, open cycle gas turbine plants are one of the most flexible technologies for power generation, capable of ramping up power production very rapidly, and optimally compensate for the intermittence of some renewable sources. Hence in the MENA countries the stage is well set for enhanced penetration of intermittent renewables.

With respect to water desalination, the key to achieving higher efficiency is in greater reliance on technologies such as reverse osmosis, which absorb electricity. As water can be stored in large quantities, while electricity cannot, it would be possible to operate the desalination plants at times of low electricity demand and store the water. At times when electricity demand is near its peak, water desalination could be stopped or slowed down, and water demand would be satisfied drawing from the water reservoirs.

Pending detailed feasibility studies, it may be possible to substantially reduce the variability in the load, thus also achieving much higher efficiency in the utilization of the power generation fleet.

Transmission losses

Another aspect that has been flagged for attention in the context of energy efficiency is the high level of transmission losses [3] . Transmission and distribution losses in the power systems are high by industry standards-with the exception of Israel (2.8 percent) and Saudi Arabia (10.7 percent). For the other countries, losses range from 12.2 percent in Tunisia to 26 percent in Yemen (table 1.6). The integration of grids across borders is expected to lead to an improvement of transmission efficiency.

Table 1

Other manufacturing industries

Some of the other industrial sectors experiencing rapid growth in the region are also major consumers of energy and potential sources of improved efficiency. Aluminum smelting, cement, glass, other construction materials are in the forefront in this category.

Aluminum smelting is attracting large investment in several GCC countries, and the region is poised to follow in the path of other energy-rich countries, such as Canada, Norway and Russia, to become a global hub for this highly electricity-intensive activity. The challenge in this respect is to achieve a closer integration into the national grid of the power plants destined primarily to satisfy the requirements of the smelters. Ideally, the smelters should consider modulating their output and electricity demand for short periods of time in coincidence with the highest seasonal peaks, in order to reduce the need for other, less efficient, peaking power sources.

For other, heat-intensive production processes there may be untapped opportunities for CHP generation and heat recovery.

Energy efficiency in the residential sector

Energy efficiency in the residential sector is where the MENA region has relatively lagged behind, undoubtedly because of the complexity and higher level of administrative capacity required for pursuing this objective.

The residential sector is also where a relatively larger proportion of energy is used in the MENA countries. As Figure 5 shows, the share of the residential sector in total electricity consumption exceeds 50% in Kuwait, Saudi Arabia, Bahrain, and Oman, is about 40% in the UAE, and is the lowest in Qatar.

Figure 5

Improving efficiency of electricity consumption in the residential sector has therefore special importance as a strategy to address the excessive growth in electricity demand.

Lighting

Curbing consumption for lighting through the substitution of incandescent light bulbs with other, more efficient forms of lighting is an approach that has attracted a lot of attention. It is a popular approach in the OECD countries, where incandescent light bulbs either have been or are in the process of being withdrawn from the market (but in the US a repeal of the relevant legislation is possible). In the MENA region, three countries have announced target dates for the phase-out of incandescent light bulbs: Lebanon (2012), Tunisia (2013) and Egypt (2020). Others may follow.

That said, in the region consumption for lighting is relatively less important than consumption for air conditioning. Thus percentage wise the benefit that can be achieved through substitution of incandescent light bulbs also appears to be more limited. If we exclude Algeria and Yemen, where more efficient lighting could achieve significant energy savings (14 and 11.4% respectively) in the rest of the region the potential benefit is rather limited (1.1% in Qatar, 0.6% in Kuwait...).

Table 2

Insulation

The most important opportunities for energy savings in the residential and commercial sector in MENA is to be found in improving the quality of buildings, minimizing the demand for air conditioning; and then in improving the quality of air conditioning equipment and technology. We shall discuss the latter aspect in a separate section.

It is difficult to generalize about the quality of buildings in the region, as no systematic survey or statistical data exist. However, simple observation and direct experience allows us to say that the quality of many buildings, especially individual residential villas, is poor.

The negative outcome is the result of a combination of factors:

1. 1. There has been a strong preference for imitating the isolated villa pattern which is typical especially of American suburbs over townhouses or apartment buildings; the traditional central courtyard model has been abandoned almost everywhere.
2. 2. There is a strong preference for large houses, with very large inner volumes.
3. 3. Construction is frequently of poor quality, based on precast concrete slabs with little or no insulation.

In short, in most residential housing projects simply very little attention is paid to minimizing the requirements for air conditioning.

Steps that may be taken to achieve a much better level of insulation are known and frequently discussed, but there is little drive to impose better standards, mainly because these would increase the cost of new houses and be unpopular. Measures to retrofit existing houses with better insulation are hardly considered at all, as normally the quality of older houses is so poor that rebuilding from scratch would be more convenient than retrofitting.

Modern high-rise apartment complex, as are increasingly common in the cities along the Gulf coast, may offer better quality; but it is not clear that this is the case. There is no mechanism for the systematic monitoring and rating of the energy efficiency of buildings (an objective which is difficult to achieve even in the OECD countries).

New building codes have been under discussion or preparation in some countries for many years, but resistance has been strong. Economic conditions also play a role: residential markets that are plagued by excess capacity accumulated during a speculative bubble, like in Dubai, are unlikely to welcome the additional burden of having to prove or improve energy efficiency.

Investment in real estate has played a very significant role in the circulation of the oil rent and the accumulation of private wealth in all oil producing countries. Quite frequently, the state has actively encouraged the expansion of real estate investment and allowed very high rates of return through various rules in support of private investors. It would require a major shift in economic strategy to change direction and pursue a substantial improvement of energy efficiency in buildings.

Nevertheless, some initiatives signal increased awareness of the problem: the Abu Dhabi Municipality, for one, has recently launched a major energy efficiency study of the city's buildings' stock [4] .

Air conditioning

In the absence of a major improvement in the quality of buildings, it is still possible to pursue greater efficiency in the equipment and technologies that are used for air conditioning.

Some countries, such as Saudi Arabia, have introduced labeling of appliances for energy consumption, including air conditioning equipment, and Abu Dhabi will soon do the same. However, the less efficient equipment, which is normally cheaper to buy initially, remains on the market. A large share of the resident population has limited means and little or no incentive to invest in better quality; so inferior products will continue to be popular.

Circumstances that are typical especially of the Gulf region needs to be taken into account. There, a large part of the population lives in rented housing and does not have a long-term residence perspective. Charges for electricity consumption may be bundled with the rental fee, but the owner of the property nevertheless has little incentive to invest in quality - and the monetary return is limited because of low local tariffs.

The potential for the utilization of alternative technologies is also significant. Solar air conditioning based on adsorption, air conditioning from gas and district cooling are all technologies that have considerable promise. There is some possibility that such technologies might be adopted in the top layer of quality commercial and residential buildings, such as office towers, shopping centers, hotels, large apartment complexes [5] etc. This would be primarily in view of obtaining an image advantage, and may create some emulation. However, the aggregate impact of any such development would be, realistically, limited.

Policies

Overview of MENA policies

It is not easy to summarize policies for energy efficiency, because they are by nature complex and articulated. I shall refer to a "smiley" table recently proposed in a report [6] published by the Regional Center for Renewable Energy and Energy Efficiency (RCREEE), which is an independent organization established in Cairo with funding from the European Commission and two EU member countries, Germany and Denmark. The Center has 10 founding member countries (Algeria, Egypt, Jordan, Lebanon, Libya, Morocco, Palestine, Syria, Tunisia, and Yemen), while the Sudan, Iraq and Bahrain became members in October 2011. The Center has published national and regional reports covering its member countries - hence not all of MENA's countries.

Table 3

The table summarizes several aspects of policy, namely:

• Strategy and targets
• Energy efficiency legislation
• Pricing policy
• Energy efficiency agencies
• Labeling and standards
• Financial incentives
• Energy efficiency obligations
• Audits and promotion of ESCO (Energy Service Companies)
• Transport and spatial planning
• Dissemination of information

For each of the above indicators, the table includes three "smileys": The first smiley indicates whether work has begun on the matter; the second indicates that the instrument is operational and the third indicates that positive impacts have been obtained.

The table shows that the only country that appears to have done a lot of what is necessary and has recorded positive impacts is Tunisia. Outside of Tunisia, other countries have taken some steps, but positive impacts are almost universally absent. The only positive impacts recorded outside of Tunisia are in Algeria, with respect to the establishment of an energy efficiency law and the dissemination of information; and Egypt, with respect to the establishment of a strategy and targets.

One cannot avoid noting that the existence of the RCREEE is due to the initiative and funding extended from the European Commission and two EU member countries. This confirms that the preoccupation for energy efficiency and for promoting renewable energy sources remains primarily rooted in Europe. The Center does not include members from the GCC (except just recently Bahrain): in fact the GCC countries (and Tunisia of course) have shown greater interest in renewable energy sources - at least at the experimental level - and energy efficiency - at least in industry.

Faced with political turmoil, extensive poverties and faltering economies, it is not surprising that for most Arab countries outside of the Gulf energy efficiency does not rank in a top position among the priorities that governments need to address urgently.

Domestic pricing

The question of domestic pricing of energy deserves special attention. The common view is that energy prices are extensively subsidized in all Arab countries, and this is deemed to be a major cause of the lack of awareness towards energy efficiency among the wider public and in the residential/commercial sector. The conclusion that prices are subsidized is reached by confronting domestic with "international" or "border" prices, i.e. prices at which oil and gas are exported from the countries that are net exporters of the same.

This approach is however logically fallacious. The international or border prices of exported hydrocarbons include a large rent component - in other words they are well above the cost of production. This rent is akin to a tax that the oil producing countries are able to levy from importing countries due to international oil market conditions and the higher cost of production for hydrocarbons sourced from other regions of the world. It is logical that the exporting county will do every effort to benefit in full of its privileged position and extract the highest rent possible when trading with the rest of the world. But should it do the same with its own citizens?

In fact, normally the state in an oil exporting country is the direct recipient of the oil and gas rent, and the national population only benefits of the rent when this is injected in the national economy through government expenditure. Recirculating the rent is the main preoccupation of an oil rentier state: if the money is not spent at all and just simply accumulated the national economy and population does not at all benefit out of it.

Thus, it is certainly appropriate that the level of domestic energy prices be set high enough to recover the cost of production, but it is logically and politically dubious that it should be set higher.

This is not to exclude that current prices may in some countries be pitched too low: not all Arab countries are net exporters, and costs of production are increasing even in the most prolific producers. There certainly is ground for reviewing current practices and adjusting prices also in view of encouraging greater efficiency and reining in demand growth - but the common view about the pervasiveness of subsidies is not correct.

It is frequently said that the domestic prices of energy and other consumption essentials are not increased for fear of a negative political backlash. However, experience seems to demonstrate that this is not a necessary outcome, and much depends on the specific modalities of introducing price increases. There are major differences between domestic energy price levels: electricity prices in the UAE are considerably higher than in other GCC countries. In Iran, a major increase has been implemented in gasoline prices to curb runaway consumption, and there has been no visible political impact. There should be little doubt that the MENA governments could increase domestic energy prices if they decided to do so.

If energy prices are adjusted upwards, while at the same time maintaining a degree of protection for the poorer layers of society through a low tariff for minimum vital levels of consumption, it is likely that better energy efficiency might be encouraged. It would, however, not be logical to expect a very significant impact on consumer behavior because prices might remain low relative to incomes.

Need for a comprehensive approach

It is then necessary to accompany price adjustments with other measures in order to achieve any significant outcome. Imposing minimum mileage requirements for light duty vehicles, or minimum efficiency standards for appliances, and much more stringent standards for the quality of buildings may yield better results if prices are increased, but price increases alone are not likely to have a major impact.

Energy efficiency and the MENA development model

What is interesting about the energy efficiency issue is that it is one of a string of questions that touch at the heart of the MENA development model- whether development means just GDP growth and international competitiveness, or it should incorporate quality of life and concepts of inclusion and social justice.

The development model of the Gulf countries - whose energy consumption, as was shown, is significantly higher than that of the rest of the region - is based on promoting the transformation of the economy through the establishment of a price-competitive investment environment. The most important threat to the economic diversification of resource-rich economies is the so-called Dutch disease, i.e. the tendency for domestic prices to increase and erode or prevent the competitiveness of all actual or potential export activities, except those based on natural resources. The development model of the MENA oil exporters has been based of keeping domestic prices low through massive investment in infrastructure and real estate, openness to imports and expatriate labor, and low energy prices. This combination of policies has worked rather well in encouraging economic diversification, but has tended to favor quantity over quality.

This is clearly seen in several areas, such as the urbanization model, the real estate market, the prevailing mode of transportation and more.

Economic growth has led to a massive process of urbanization, and cities have expanded horizontally. The preference for individual detached villas and the little consideration for the energy efficiency of buildings have already been commented upon. Urban transportation is based on large, multi-lane motorways, which facilitate and encourage long-range commuting by car. There has been no incentive to encourage consumers to buy smaller, more fuel-efficient cars; the fleet is dominated by large, sometimes technologically antiquated gas-guzzlers.

The costs of this development model are becoming increasingly evident, and steps are being taken in a different direction. There obviously is much increased interest toward rail transportation, both within cities as well as over long distances: multiple projects are underway, and where systems have become operational - such as the metro in Dubai - the uptake has been encouraging. Yet a great deal remains to be done.

Environmental awareness is growing everywhere, and some countries, notably the UAE, are attempting to be recognized internationally as leaders in this respect. We may expect that this will translate into more stringent requirements for quality, especially in residential and commercial buildings - nevertheless progress may be slow.

The key obstacle is that "quality" is a privilege that the public sector can afford - large state-owned industry, or flagship initiatives such as Masdar in Abu Dhabi. In contrast, the private sector, and especially small and medium enterprises, is very vulnerable to a shift towards an environment of more stringent regulations and higher standards across the board.

Conclusion

There is growing awareness, at least in the Gulf countries, of the importance of reining in energy consumption through increased attention to efficiency. Policies are slowly being implemented to improve efficiency, nevertheless the latter requires a shift in the behavior of the vast majority of consumers, which is difficult to achieve and will only come in the longer run.

For individual consumers, the incentive to improve efficiency is limited by low prices. However in most cases the low prices are still such that they allow recouping costs. Prices should be increased, but it is not to be expected that they will be brought to levels comparable of those of countries in which energy consumption is taxed and an important source of government revenue.

Improved standards and specifications, first and foremost in the building sector, will be progressively adopted, while keeping an eye on maintaining the cost of housing at competitive levels.

There is considerable potential for technological innovation and cooperation in designing more efficient solutions adapted to the conditions of the Middle East and North Africa, and OECD companies will be able to establish partnerships with local investors to develop innovative ideas and products, as energy efficiency will increasingly be accepted as a societal and developmental priority.