Think engagement with Al Majalla: Charting Saudi Arabia’s path through sustainable economic transformation.

At the midpoint of Vision 2030, Saudi Arabia is well positioned to consolidate and deepen the economic transformation by increasing FDI inflows


Geothermal energy: A new frontier in MENA power generation

The ongoing climate crisis has highlighted the need for renewable, sustainable energy sources as global energy needs continue to rise. One such source, buried beneath the Earth’s surface, is geothermal energy. Geothermal energy is making up a growing share of the global energy mix, particularly in countries with high geothermal potential. For instance, in Turkey, currently the fourth-largest geothermal energy producer globally, geothermal energy makes up 1.58% of total power capacity. Its installed geothermal capacity stands at 820.86 MW[i]. In the USA, authorities have been drawing energy from The Geysers in California, north of San Francisco, since establishing a geothermal field in the area in 1960. The world’s largest geothermal field, The Geysers boasts a total installed capacity of around 800 MW, powering some 900,000 households[ii].

One of the main advantages of geothermal energy is its ability to supplement other renewables such as solar and wind, which are intermittent in nature. By serving as a geographical diversifier and a natural energy storage solution, geothermal energy substantially reduces the land needed for power production. When combined with solar and wind power, it can bolster the stability of the energy grid and mitigate against potential damage from challenging local weather conditions.


MENA seeks to boost geothermal capacity, but challenges emerge

While the MENA region is typically associated with its hydrocarbon reserves, it harbours significant geothermal potential that is estimated at 15,000–20,000 MW[i]. As a clean energy alternative, geothermal power is an opportunity for MENA countries to diversify energy portfolios while fortifying energy security. It can also serve as a linchpin in the transition to low-carbon economies.

The region has yet to tap into its potential, with installed capacity across the region currently at 953 MW[ii], although countries including Turkey, Iran, Iraq, and Saudi Arabia are making some progress. Iran has rich geothermal potential, particularly in its northern provinces, and has planned for exploration in 18 regions[iii]. Iraq is executing three geothermal energy projects in Erbil, Sulaymaniyah, and Duhok in collaboration with the EU and the United Nations Development Programme (UNDP). Jordan is exploring how to harness geothermal energy derived from nearby tectonic plate borders. In Saudi Arabia, the Saudi Geological Survey (SGS) and the Saudi Ministry of Energy are exploring geothermal energy sources and launching an innovation programme for the energy system. The Saudi initiative will involve researching potential resources, launching an innovation programme for technological advancements, building local expertise, creating a supportive policy framework, and implementing pilot projects to demonstrate the viability of geothermal applications[iv].

Despite making some progress, the region’s path to large-scale adoption is long. There are many obstacles, and these include technical issues resulting from the uneven regional distribution of geothermal resources; high initial investment requirements for drilling and exploration; competition from less expensive forms of renewable energy such as solar and wind power; and environmental concerns including groundwater contamination and induced seismicity. Furthermore, the sector is held back by a lack of regional awareness, expertise, and practical experience.

Overcoming these challenges requires a comprehensive approach involving the use of advanced technologies, progressive policies, and strategic regional collaborations. The adoption of innovative financing models and risk-mitigation measures, such as public-private partnerships, green bonds, and loan guarantees, can help mitigate financial barriers. The sector’s development would also benefit from a robust legal and regulatory framework addressing resource ownership, royalties, and surface rights while ensuring adherence to safety and environmental standards. Fostering research and development in geothermal technologies through funding initiatives and partnerships can spur advancements and reduce costs over time.

The MENA region is well-positioned to overcome these challenges as global interest in renewable and geothermal energy grows. International collaborations can help contribute to advancing geothermal energy development and assisting countries in their transition to a sustainable and diversified energy mix. Geothermal energy holds promise as a potential major source of energy in the MENA region. 


Reference:

[i] Dashti, A. and Gholami Korzani, M., 2021. Study of geothermal energy potential as a green source of energy with a look at energy consumption in Iran. Geothermal Energy, 9(1), p.28.

[ii] Dobson, P., Dwivedi, D., Millstein, D., Krishnaswamy, N., Garcia, J. and Kiran, M., 2020. Analysis of curtailment at The Geysers geothermal field, California. Geothermics, 87, p.101871. Available at: https://www.sciencedirect.com/science/article/pii/S0375650520300018

[i] Amoatey, P., Chen, M., Al-Maktoumi, A., Izady, A. and Baawain, M.S., 2021. A review of geothermal energy status and potentials in Middle-East countries. Arabian Journal of Geosciences, 14, pp.1-19. Available at: https://link.springer.com/article/10.1007/s12517-021-06648-9. Also see, Lebbihiat, N., Atia, A., Arıcı, M. and Meneceur, N., 2021. Geothermal energy use in Algeria: A review on the current status compared to the worldwide, utilization opportunities and countermeasures. Journal of Cleaner Production, 302, p.126950. available at: https://www.sciencedirect.com/science/article/pii/S0959652621011690.

[ii] Amoatey, Chen, Al-Maktoumi, Izady, and Baawain “A review of geothermal”; Lebbihiat, Atia, Arici,and Meneceur “Geothermal energy use in Algeria”.

[iii] Dashti, A. and Gholami Korzani, M., 2021. Study of geothermal energy potential as a green source of energy with a look at energy consumption in Iran. Geothermal Energy, 9(1), p.28.

[iv] Saudi Arabia to undertake exploration of geothermal energy sources, (2023). Available at: https://www.zawya.com/en/projects/utilities/saudi-arabia-to-undertake-exploration-of-geothermal-energy-sources-dttvlgru


Charting Saudi Arabia’s path through sustainable economic transformation

A version of this article was originally published by Al Majalla on 07/11/2023

At the midpoint of Vision 2030, Saudi Arabia is well positioned to consolidate and deepen the economic transformation by increasing FDI inflows – robust national capacities, the strength of institutions, and education and skills development should be at the top of the agenda in 2024.

Anchored in a comprehensive vision to reform and diversify the economy and supported by an ambitious national investment strategy and a strong buy-in from a young and dynamic population, Saudi Arabia’s economic and social transformation is impressive.

The latest IMF report attests to the Kingdom’s remarkable achievements to date and the economy’s exceptional performance during 2022. At 8.7%, overall growth in 2022 was the fastest the country had experienced in almost a decade, with non-oil GDP growing at close to 5% and inflation contained throughout.

The overall unemployment rate dropped to a 4.8% historical low; unemployment of Saudi nationals fell to its lowest level in 20 years; and women’s participation in the labour force hit 36% – double the rate of five years earlier.

Supported by favourable oil market developments, the Kingdom’s fiscal position registered its first surplus since 2013, and the current account surplus reached a ten-year high while reserve buffers remained ample. The deepening of the capital market is evident in the record overall listings and foreign capital inflows and the rating agencies’ sovereign upgrade vouches for the Kingdom’s solid reform momentum.

Seven years into the Vision, the work Saudi Arabia has put into economic diversification is starting to pay dividends. On the output side, new economic sectors have emerged, including tourism, entertainment and culture, media, mining and metals, digital technologies, and renewable energy.

Notable progress has also been made towards export diversification: the share of non-oil exports to total exports has increased to around 25%. Similarly, non-oil revenue has risen to a third of total revenue from around 10% a few years ago.

Seven years into the Vision, new economic sectors have emerged, including tourism, entertainment and culture, media, mining and metals, digital technologies, and renewable energy.

These positive developments indicate the beginning of a reduced dependence on the hydrocarbon sector that could pave the way for a more profound delinking between oil prices and economic activity. In its recent report, the IMF projects annual non-oil GDP growth of over 4% over the next five years.

In its 2022 report, the Fund indicated that non-oil GDP growth could reach as high as 8.8% by 2025 under a scenario of reforms and a full and efficient scale-up of the $3.3tn National Investment Strategy launched in 2021.

However, sustaining the high-growth trajectory for the non-oil economy will require a greater role for the private sector and higher, diversified, and knowledge-intensive foreign direct investment (FDI) inflows.

Building up FDI and expanding the private sector

While many Vision 2030 targets are on track, and some have already been surpassed, a few are lagging. At around 1% of GDP, FDI remains well below the 2030 target of 5.7%, a goal that is admittedly ambitious – particularly for an emerging economy. In the same vein, private sector GDP stands at around 40% of the total, falling short of 65% of the vision's target, although this may have been skewed by an exceptionally robust year for oil in 2022.

The growth in non-oil activity has so far been largely driven by the Public Investment Fund, which has played a critical catalytic and effective role both in strategic sectors where the private sector has a limited presence and in sectors requiring restructuring.

A greater role for the private sector and FDI may well ensue in the second half of the Vision's implementation as the Kingdom makes further advances in building the foundation it needs to achieve such fundamental objectives.

Major progress has been achieved in this regard since 2016. One important building block put in place is the introduction by policymakers of significant measures and legislation to render the business and regulatory environment more attractive to investment.

The growth in non-oil activity has so far been largely driven by the Public Investment Fund, which has played a critical catalytic and effective role both in strategic sectors where the private sector has a limited presence.

The Kingdom's global ranking in several competitiveness and efficiency indices has improved as a result, and over the past year, the number of new investment deals and licences increased considerably.

Another key move is the Kingdom's ramping up of investment in strategic sectors at home, notably transport and logistics. This sector is expected to receive an estimated $150bn by 2030, thereby positioning the Kingdom as an advanced logistics hub globally.

A third development is the forging of strategic projects and partnerships beyond the region. The recently announced India–Middle East–Europe Economic Corridor will reinforce Saudi Arabia's objective to develop into an investment hub at the crossroads of three continents.

Saudi Arabia is forging strategic projects and partnerships beyond the region. The recently announced India–Middle East–Europe Economic Corridor will reinforce Saudi Arabia's objective to develop into an investment hub at the crossroads of three continents.

Setting priorities for 2024

Next year is an important milestone for economic transformation. It is the moment at which Saudi Arabia can reflect on achievements made to date and priorities objectives for the second half of the Vision's implementation.

Consolidating and deepening progress on expanding the role of the private sector and attracting FDI from this point on will reduce the risks of procyclicality.

While pursuing the Vision's objectives, prioritising programmes aimed at further enhancing national capacities and skills will be essential.

One of the first items on the agenda should be to ensure that the new business legislation introduced in recent years is appropriately implemented and to provide investors with certainty and clarity regarding the implementation process.  

This will require strengthening the institutional capacities of implementing agencies to ensure procedures and civil servants who administer them are better aligned with the reforms.

Second, programmes to invest in education and national skills development should be accelerated, in close coordination with the private sector, to equip the Saudi workforce for the private sector jobs of the future.

This will help the Kingdom meet its Saudisation plans as the skills and talents of nationals will be aligned with the labour market needs that emerge from the diversification drive.

Riyadh city towers in Saudi Arabia

Saudi Arabia has come a long way in a relatively short period of seven years. Building on the progress made in the first half of Vision 2030 will increase the impact of the Kingdom's diversification journey and ensure that Saudi Arabia successfully builds a resilient and inclusive growth model.

It will also result in positive spillovers on the region's economies as new opportunities for private-sector cooperation and business joint ventures emerge. Moreover, the Kingdom's success in diversifying away from oil could be replicated in resource-dependent countries beyond the region.

A version of this article was originally published by Al Majalla


The rise of minilateralism

In the complex world of international relations, where former adversaries can swiftly become future allies, it is an era of transition. The global distribution of power is shifting, and key global actors like China and Russia are expanding their influence and challenging the liberal international order through both soft and hard power.1 Amid increasing competition between Washington and Beijing, middle powers are seeking a middle ground where they do not have to side exclusively with either power.2 They are leaning towards a multi-aligned world that enables them to maintain their strategic independence and are seeking alternative approaches to cooperation outside of the multilateral framework.

It is against this backdrop that an alternative approach to cooperation has gained in popularity – minilateralism. Minilateral partnerships operate on an informal, voluntary, non-binding basis. They enable groups of countries to address specific issues or pursue shared objectives in a more targeted manner – one partnership typically includes three to seven areas of focus. Minilateralism does not fundamentally challenge or threaten the existing system of governance. Rather, it provides countries with a complementary and flexible mechanism for cooperation and problem solving.

 

Multilateralism falters

In a shifting global order, states are gravitating towards minilateralism as a more practical and ad hoc approach to cooperation. Multilateral cooperation – always vulnerable to geopolitical competition and ideological conflicts – is faltering. The United States’ (US’s) abrupt withdrawal from the Paris Agreement and the Iranian Nuclear Deal during the Trump administration are two recent illustrations of how multilateral frameworks can be undermined or derailed. Confidence in the ability of global institutions to maintain international peace and security and respond to global crises is also diminished. The United Nations Security Council (UNSC) faced a critical test in responding to the 2014 Russo–Ukrainian War, and 2022 invasion of Ukraine, and failed. Russia, a permanent member of the UNSC, utilised its veto power to thwart the UN General Assembly resolution demanding an immediate end to the Russian invasion, leading to an impasse that hindered the UNSC’s ability to take decisive action.3 And despite the UNSC’s role as a key international decision-making body, it took a rather protracted eight-month period to address a resolution condemning Russia's military intervention and subsequent attempt at annexing Ukrainian territories. Unable to fulfil its mandate of maintaining international peace and security, the council is no longer serving as a multilateral collaboration for upholding global peace.

 

Minilaterals have their moment in MENA

It is in this space that minilateralism’s more flexible and ad-hoc framework has grown in popularity. Minilateral partnerships operate outside the boundaries of formal institutions, giving participating countries greater flexibility and alignment without being burdened by divergent interests beyond the point of collaboration.4 In the Middle East and North Africa (MENA) region, where states are increasingly prioritising internal stability and are focusing on expanding relations with both the East and the West, minilaterals are becoming a trendy mechanism for this very reason. They are an opportunity for states to capitalise on a range of opportunities, particularly economic ones, without having to make a political choice between key players.5 It is a strategic move driven by rational self-interest, mutual benefit, and non-alignment with one bloc in order to maintain their autonomy.

One notable collaboration is the I2U2 partnership between the governments of Israel, India, the United Arab Emirates (UAE), and the US.6 In July 2022 the first I2U2 summit took place virtually between the foreign ministers of the four nations. In a joint statement released after the summit, they announced their intention to collaborate in the following critical sectors: water, transport, space, health, technology, food security, and energy.

Each of the four I2U2 members view their participation in the partnership as a means to achieve concrete goals that serve their national priorities. India’s participation is primarily driven by its economic priorities and ambitions. It seeks to increase investment in the country and promote trade diversification, especially to address food insecurity – a key concern for multiple states following the disruption to global supply chains caused by the Russo–Ukrainian War. The UAE has already committed to invest $2 billion in building a series of integrated food parks in India through the partnership. The US and Israeli private sectors will also participate by providing their expertise and innovative solutions, thereby enhancing the project's sustainability.7

For the UAE and Israel, the I2U2 is an outcome of the Abraham Accords and a pathway to developing stronger economic ties. It presents an opportunity for the UAE to increase its cooperation with Israel in technology, as well as knowledge transfer on shared issues including energy, security, trade, and water security. In 2022 the two countries achieved over $2.5 billion in bilateral non-oil trade volumes, with the UAE aiming to reach $10 billion by 2030.8 Additionally, in terms of the political benefits the I2U2 gives the UAE greater leverage with Washington and ensures ongoing normalisation between Jerusalem and Abu Dhabi.

On the US side, the I2U2 is an opportunity to strengthen both economic and security ties between the MENA region, Israel, and India. The US views India as a counterbalance power to China,9 which is expanding its geopolitical and economic influence in the region through its Belt and Road Initiative (BRI). The BRI aims to connect China with the world through two new trade routes.10 It is investing across the Middle East and West Asia in ports, roads, rail, energy pipelines, and associated infrastructure – many of which are priorities within the Arab Gulf states’ own development plans – to establish a global trading structure that serves China’s energy and security interests. A key concern in Washington is that the BRI will create an economic system outside its control. By drawing on a stronger interconnection between India and the region, Washington hopes to redefine “West Asia” and confront China’s expanding influence.

Importantly, the I2U2’s approach – to diversify relationships based on shared interests –enables economic growth and regional stability to take priority over political and ideological differences. This allows states an equal representation on issues. India, Israel, US, and UAE come to the table as equals and counterbalance each other – each has something to offer and something to gain, therefore, political weightings do not matter. This gives confidence to all parties that collaboration will lead to clear, direct, and relevant benefits. The I2U2 partnership accommodates countries with various foreign policy stances on Iran: the minilaterals model allows states to transcend these differences to pursue balanced engagement between members.11

 

Complementary approaches enhance global governance

The October 7th multifaceted attack launched by Hamas against Israel will be a critical test of the apolitical nature of minilaterals in the MENA region, such as the I2U2. Their prioritisation of practical collaboration over political considerations is increasingly important in the face of such geopolitical turmoil, and they should be viewed as a resilient and adaptable means of fostering dialogue and cooperation, even when political tensions run high.

Multilateral organisations are increasingly insufficient and ineffective in the face of today’s geopolitical challenges. While they still have the capacity to enforce rules and norms, and formal treaties and binding conventions remain important in addressing global challenges that require broad-based cooperation and consensus, such as climate change, political tensions have made them increasingly unable to fulfil the role for which they were designed. Established in the wake of World War II and vital in forming the global order in its immediate aftermath, they are becoming out of date, cumbersome due to their size, and therefore difficult to reform. As Stefan Lofven, Chair of the High-Level Advisory Board on Effective Multilateralism appointed by the UN Secretary-General in 2022, states: “Multilateralism can work, but it must work better.”12 Countries should take advantage of both minilateral and multilateral approaches to deal with the complexities of global governance effectively.

 

References

1 Pinto, Teresa. “The Failures of Multilateralism.” GIS, March 30, 2022. https://www.gisreportsonline.com/r/multilateralism-crisis/

2 Haqqani, Hussain. “The Minilateral Era.” Foreign Policy, January 10, 2023. Why Minilateral Diplomacy Is Having a Moment (foreignpolicy.com)

3 Majid, Shelby, and Yulia Shalamov. “Russia’s Veto Makes a Mockery of the United Nations Security Council.” Atlantic Council. March 15, 2022. https://www.atlanticcouncil.org/blogs/ukrainealert/russias-veto-makes-a-mockery-of-the-united-nations-security-council/.

4 Tirkey, Aarshi. Minilateralism: Weighing the Prospects for Cooperation and Governance. Issue Brief No. 489. Observer Research Foundation. 2021. PDF

5 SRMG Think Research and Advisory. MENA Forum Report: The Case for Co-operation Beyond De-escalation. September 2023. https://srmgthink.com/en/featured-insights/annual-report/19/mena-forum-report-the-case-for-co-operation-beyond-de-escalation

6 Calabrese, John. “The US and the I2U2: Cross-Bracing Partnerships Across the Indo-Pacific.” Middle East institute. Sept 27, 2022. https://www.mei.edu/publications/us-and-i2u2-cross-bracing-partnerships-across-indo-pacific

7 Markey, Daniel, and Hesham Youssef. What You Need to Know About the I2U2. United States Institute of Peace. July 28, 2022. https://www.usip.org/publications/2022/07/what-you-need-know-about-i2u2#:~:text=The%20UAE%20also%20recently%20signed,according%20to%20Israel%27s%20economy%20minister.

8 Uppal, Rachna, and Lisa Barrington. “Analysis: UAE Plans Long-Term Economic Ties with Israel Despite Political Strains.” Reuters. April 4, 2023. https://www.reuters.com/world/middle-east/uae-plans-long-term-economic-ties-with-israel-despite-political-strains-2023-04-03/#:~:text=Bilateral%20non-oil%20trade%20volumes,lot%20of%20ups%20and%20downs.

9 Schuman, Michael. What Limits Any U.S. Alliance With India Over China.” The Atlantic. March 1, 2023. https://www.theatlantic.com/international/archive/2023/03/india-relations-us-china-modi/673237/

10 Jie, Yu, and Jo Wallace. “What is China’s Belt and Road Initiative (BRI)?” Chatham House, September 13, 2021. https://www.chathamhouse.org/2021/09/what-chinas-belt-and-road-initiative-bri

11 Baig, Muhammad, and Alyaan Waheed. Analysing the First I2U2 Summit. Edited by Arshad Ali. Institute of Strategic Studies. July 22, 2022. https://www.issi.org.pk/wp-content/uploads/2022/07/IB_Ali_Baig_and_Alyan_July_22_2022-1.pdf

12 United Nations University Centre for Policy Research (UNUCPR). A New Blueprint Calls for Reinvigorated Global Governance. April 18, 2023. https://unu.edu/cpr/blog-post/new-blueprint-calls-reinvigorated-global-governance#:~:text=Stefan%20L%C3%B6fven%20also%20commented%20on,Goals%20and%20the%20Paris%20Agreement.

 


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

This article was originally published in Al Majalla by Jessica Obeid, Head of Renewable Energy at SRMG Think Research & Advisory.

While the MENA region’s brand remains tied to petroleum, several companies such as Masdar and Acwa Power are building regional renewable energy investment portfolios.

Climate change, energy security and economic concerns are driving the energy transition forward in the MENA region and rendering energy systems more complex. To accommodate the energy systems of the future, financial, technological, and resource sharing across the region will be necessary.

As such, regional collaboration on several levels will be essential for a sustainable future. This will manifest — at different paces and levels of success — in electricity grid interconnections, cross-border renewable energy investments, and in knowledge and technology sharing.

Collaboration is already underway on some fronts in MENA countries, particularly in renewable energy investments and grid interconnections.

While the MENA region’s brand remains tied to petroleum, several companies such as Masdar and Acwa Power are championing clean energy, building regional renewable energy investment portfolios and growing their market share in the global renewables industry.

Such investments and cross-regional partnerships already contribute to energy and economic diversification across MENA.

Yet, these partnerships will have to expand to address the region's climate and energy security challenges. Without significant growth in collaboration, the region will not thrive economically or in terms of energy security.

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.

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.


Arab News: A decisive moment for Egypt: Economic reforms for a prosperous future

This article written by Hazar Caracalla, Senior Advisor at SRMG Think Research & Advisory, was originally published in Arab News.

Egypt’s economy is at an important crossroads as the country tries to lessen its reliance on aid and mega projects and reduce the public sector's outsized role in a broad array of economic activities. Global financial shocks exacerbated by the Russia-Ukraine war have heightened the urgency of IMF-agreed efforts to reform Egypt’s economy. Egypt must accelerate fiscal consolidation, commit to a flexible exchange rate regime, and attract foreign investment as part of a sustainable, private sector-led business model. Reform will help make Egypt a prosperous and competitive partner in the Middle East’s economic transformation.

Egypt’s economy has experienced a build-up of imbalances, accelerated by difficult global financial conditions since the end of 2021 and shifts in investor sentiment towards the country, amidst a pegged currency. At the outbreak of the Russia-Ukraine war, Egypt witnessed massive portfolio outflows and widening sovereign bond spreads, thereby significantly increasing pressure on the Pound and on foreign currency reserves. Costs of living soared as the war drove up global food prices, exposed the country’s deep reliance on Russian and Ukrainian wheat, and cut off important tourism inflows from both countries, further increasing external and fiscal pressures. Egypt’s debt service has absorbed around half of total government revenue in recent years and the public debt to GDP ratio stands at around 90%.

In order to secure much-needed funding from the IMF, the Central Bank of Egypt has taken steps since October 2022 to make its exchange rate flexible. It has, however, devalued its currency through multiple “step” devaluations rather than allowing full flexibility to absorb external shocks. The “step” devaluations have so far failed to build investor confidence. As a result, Egypt is experiencing a severe shortage of foreign currency, with headline inflation having soared to 32% in February 2023.

The $3 billion IMF loan agreement, Egypt’s fourth such pact since 2016, has three main pillars. First, Egypt should implement a permanent shift to a flexible exchange rate regime to help absorb external shocks and rebuild foreign exchange reserves, while gradually reducing inflation through tight monetary policy. Second, Egypt must make reforms aimed at decreasing the debt to GDP ratio, contain its sizeable financing needs, strengthen fiscal governance and transparency, enhance revenue mobilization, and allow for a well-targeted and much-needed expansion in social spending. Third, Egypt should reduce the state’s outsized role in the economy including through the divestment plan and levelling the playing field by removing preferential treatment for state-owned and military-owned enterprises.

The IMF program may prove challenging for Egypt amid high financial uncertainty and increased global challenges. The IMF itself recognized in a December 2022 report that fiscal consolidation and the shift to a flexible exchange rate are not easy steps and could face political and social resistance. Furthermore, structural reforms take time to be completed and deliver results, while measures to reduce the state’s footprint in the economy could face opposition from interest groups.

Under previous loan agreements with the IMF, Egypt took notable steps toward devaluing the Pound, reducing subsidies and ensuring social safety net programs are better targeted. Egypt has also received substantial support from international and regional partners, including a total of $28 billion in central bank deposits from Gulf states. However, Egypt has not implemented meaningful structural reforms that could build economic competitiveness and secure stable currency inflows by developing a private sector-led industrial base, boosting exports, and attracting foreign direct investment. Instead, Egypt has continued to rely on volatile portfolio flows to finance its economy.

Egypt’s immediate priority must be to instil market confidence and attract strong, sustainable foreign currency inflows. Even the Gulf states, Egypt’s traditional Arab donors, have indicated a desire to shift away from unconditional direct financial support and towards economically and financially feasible investments. To secure such funding, Egypt should show investors quick and effective progress on economic reforms. An important policy test is its commitment to permanently shift to a flexible exchange rate regime and make progress on the divestment plan—central elements of the IMF program. According to the program’s financing strategy, divesting from state-owned assets would inject an estimated $8 billion of much-needed private sector financing into the economy.

Egypt met a key structural benchmark of the IMF program in December 2022, when President Abdel Fattah El-Sisi approved the State Ownership Policy Document. The document identifies economic activities from which the state plans to withdraw in the coming three to five years, and those in which it plans to increase or reduce its presence. It also lists several modalities for private sector involvement and underscores that fairness of competition will be ensured among all market players. Egypt’s government also recently announced plans to sell stakes in at least 32 publicly-owned companies and financial institutions by 2024. These important steps should be followed up with an elaborate execution plan and timetable to provide more clarity to potential investors. Implementation should move fast and in a transparent fashion to demonstrate progress and give evidence of continued political commitment to the divestment program.

A stable, competitive and prosperous Egypt is important to the MENA region, especially at a time when Gulf Cooperation Council (GCC) economies are undergoing momentous transformation. The region is witnessing a new dynamic driven by increased private investments underpinned by large oil and gas windfalls. Egypt is well-positioned to benefit from and contribute to this positive dynamic. For this to materialize, Egypt must wean itself off foreign aid, reduce the state’s footprint in the economy, and transition to a sustainable economic model built on strong exports with a solid manufacturing base supported by private investments. The alternative is a protracted cycle of macroeconomic instability, lower living standards and lost opportunities for the Egyptian economy.