This article presents the key results of the study "The Future of Renewable Energy in the Mediterranean - Translating Potential Into Reality" just published in the FEEM "Note di Lavoro/Working Paper" series. The study seeks to provide a clear and comprehensive overview on the various aspects related to the current status and the future prospects of renewable energy (namely solar and wind) in Southern and Eastern Mediterranean countries (SEMCs). SEMCs are endowed with a huge solar and wind energy potential, and the exploitation of this potential could bring various benefits to the region, such as meeting the rising energy/electricity demand at a lower cost, freeing up additional export volumes of oil and gas in energy exporting countries, reducing energy bills in energy importing countries and alleviating energy poverty. Notwithstanding all the efforts to promote renewable energy carried out over the last decade both at the regional level and at the European level (e.g. Desertec, Mediterranean Solar Plan, etc.), SEMCs continue to lag far behind most other regions in the world in terms of solar and wind energy deployment. The study explores the reasons of this paradox, particularly focusing on the key barriers to the development of renewable energy in the region: the extensive use of energy subsidies and the lack of adequate electricity infrastructures, energy regulatory frameworks and financing mechanisms. On the basis of this in-depth analysis, the study proposes an innovative approach to tackle these barriers, involving a joint action of MedTSO, MEDREG and key financial institutions under the umbrella of a newly-established “Euro-Med Renewable Energy Platform” designed to become -on the basis of an inclusive, pragmatic and bottom-up approach- the new catalyst for the development of renewable energy in SEMCs.
Keywords: Mediterranean Energy Markets; Renewable Energy; Solar Energy; Desertec.
JEL classification: Q40, Q42, Q48
Suggested citation: Tagliapietra, Simone, Renewable Energy in the Mediterranean: Current Status and Future Prospects (April 15, 2015). Review of Environment, Energy and Economics (Re3), http://dx.doi.org/10.7711/feemre3.2015.04.001
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The study "The Future of Renewable Energy in the Mediterranean - Translating Potential Into Reality" just published in the series Note di Lavoro aims to provide a complete overview on the various aspects related to the development of renewable energy in the Southern and Eastern Mediterranean region.
The study opens with an analysis of the regional energy landscape, with the aim to outline two key features: the rapidly rising energy demand of the region and the unchallenged predominance of fossil fuels in the regional energy mix.
After this overview on the regional energy markets, a specific focus on electricity is proposed, considering the crucial role that it plays -and will continue to play- in the regional energy markets. In fact, if primary energy demand is growing rapidly in the region, electricity demand is growing even faster. This is due to the economic and demographic expansion of the region, but also to other dynamics such as urbanization, growth in living standards and progressive economic transformation towards the tertiary sector.
Figure 1 - Growth rates of total primary energy demand in SEMCs and other regions
Source: own elaboration on International Energy Agency, Extended World Energy Balances Database, accessed in May 2014.
Considering all these elements, it is possible to expect a further expansion of electricity demand in the region over the next decades. This represents a major threat to the sustainability path of SEMCs, particularly considering that the regional electricity generation mix is still predominated by fossil fuels. Meanwhile, solar and wind energy continue to cover less than 1% of the region’s electricity generation mix: a figure that strongly collides with the region’s abundant solar and wind energy resources.
In fact, the Southern and Eastern Mediterranean region is endowed with a huge solar and wind energy potential. Various scientific analyses, also discussed in this study, demonstrate that the regional economic potential for CSP could be estimated at 430,000 TWh/y, a level 300 times higher than the CSP potential estimated in North Mediterranean countries (NMCs). At the same time, the economic potential of photovoltaic in the region is estimated at 122 TWh/y, a level 5 times higher than NMCs. Finally, SEMCs are also estimated to have a technical potential of 21,967 TWh/y in terms of wind power, a level 34 times higher than NMCs.
Figure 2 - Annual global irradiation on surfaces titled south with latitude angle in kWh/m2/year
Source: DLR (2005).
Figure 3 - Annual average wind speed at 80 m above ground level in m/s
Source: DLR (2005).
Such an abundant solar and wind energy endowment could bring various benefits to the region, such as meeting the rising energy/electricity demand at a lower cost, freeing up additional export volumes of oil and gas in energy exporting countries, considerably reducing energy bills in energy importing countries, creating new jobs, alleviating energy poverty, enhancing the quality of the environment and enhancing cooperation both among SEMCs and between SEMCs and the EU.
After having discussed all these issues, the study outlines how this important renewable energy potential -with all its related potential benefits- has progressively paved the way for the launch of various large-scale renewable energy projects in the region such as Desertec and the Mediterranean Solar Plan. The basic idea behind these projects is to export solar and wind electricity produced in SEMCs to the EU via electricity interconnections to be built between the two shores of the Mediterranean. However, the economic and financial crisis on the one hand, and the Arab uprisings on the other hand, have considerably diminish the initial enthusiasm concerning this prospect, also leading the promoters of these projects to reconsider their initial concept. The example illustrated in the study is the one of the Desertec project, which progressively switched its focus from the initial idea (to export electricity generated by CSP in SEMCs to the EU in order to cover 15% of the European electricity demand by 2050) to a wider activity of supporting the development of renewable energy market in the region and beyond.
Figure 4 - The Desertec concept
Source: Desertec Foundation (2013).
Furthermore, SEMCs’ abundant solar and wind energy resources did not only paved the way for the conceptualization of European-based, large-scale renewable energy projects but also for the development of national plans within SEMCs themselves, involving a series of targets for the development of solar and wind energy, typically by 2020 and/or 2030. These national plans have been often accompanied by the establishment of national renewable energy agencies aimed at supporting the deployment of renewable energy by complementing the activities of the energy ministries and of the energy regulatory authorities.
Following all this discussion, the study outlines that -notwithstanding the huge renewable energy potential and the numerous benefits potentially related to its exploitation, and the various actions that have been undertaken at both national and international level to promote the deployment of such technologies over the last decade- SEMCs continue to lag far behind most other regions in the world in terms of solar and wind energy deployment.
The study argues that this paradox is mainly due to the fact that the deployment of renewable energy in the region faces some key barriers related to some specific features of the regional energy markets:
a) The commercial barrier: the extensive use of universal energy subsidies lead to an inefficient allocation of resources and market distortions that, among other things, also limit the competitiveness of renewable energy sources vis-à-vis conventional energy sources;
Figure 5 - Potential unintended effects of fossil-fuel consumption subsidies
Source: International Energy Agency (2010).
b) The infrastructural barrier: SEMCs lack an adequate electricity infrastructure. Electricity transmission systems need to be enhanced at both the national level and between SEMCs. Furthermore, the electricity connections between SEMCs and the EU also need to be expanded/constructed in order to allow future potential “green” electricity exports from SEMCs to the EU;
Figure 6 - Annual electricity exchanges among SEMCs, physical values, 2008 (GWh)
Source: elaboration of OME (2011b), on MEDRING (2010).
c) The regulatory barrier: SEMCs lack a stable and harmonized energy regulatory framework. Such a framework would represent a fundamental prerequisite for the deployment of solar and wind energy, particularly considering these technologies’ long payback period. The current fragmentation of the regional regulatory landscape needs to be fixed in order to allow international investors to be fully committed in developing projects in the region;
Figure 7 - Renewable energy support policies in SEMCs
Source: own elaboration on REN21 (2012) and Mondaq (2013).
d) The financial barrier: also because of the three previous barriers, the region lacks an adequate financing scheme for the renewable energy. Government investment and finance from various international institutions -mainly Europeans- continue to represent the cornerstone of the regional renewable energy financing. This situation is not sustainable, as a large-scale deployment of renewable energy in the region must rely on a much more solid financing scheme in order to be fully successful.
Figure 8 - Barriers to institutional investment in green infrastructure
Source: Kaminker, et al. (2013).
In order to effectively tackle these barriers, a “double-track” approach seems to be essential. In other words, these barriers are so resilient that they should be faced both singularly and globally, at a one fell swoop.
As the study illustrates, reforming universal energy subsidies is not an easy game. Subsidies represent the cornerstone of the “social contract” in many SEMCs, and particularly in oil and gas producing countries. Over the last decades, some governments tried to reform universal energy subsidies, but did not accomplish the target. In the aftermath of the Arab uprising, such a reform process seems to be even more difficult, even if in the case of Egypt a recent reform has effectively reduced for the first time the country’s unsustainable energy subsidy system. In the medium-term all SEMCs should advance an energy-subsidy reform process, phasing out universal fossil-fuel consumption subsidies in favour of targeted subsidies aimed at effectively address the problem of energy poverty. In this field little support can be provided by European institutions. In fact, the regional governments are well aware of the major economic burden represented by universal energy subsidies; however, economic rationalities currently do not match with political requirements that only an overall process of political and economic stabilization in the region might eventually change.
As far as the development of an adequate regional electricity infrastructure is concerned, Med-TSO -in quality of association of the Mediterranean transmission system operators- might play a potentially crucial role in coordinating the various players in the field, in promoting a clear regional transport code and in developing operational tools for the coordinated planning process of the regional interconnection. Such an inclusive and bottom-up approach seems to represent the best way to promote the development of an adequate electricity infrastructure in SEMCs, among SEMCs and between SEMCs and the EU.
The same rationality might well be applied to energy regulation. In fact, as illustrated in the study, MEDREG -in quality of association of the Mediterranean energy regulators- might play a key role in promoting a clear, stable and harmonised regulatory energy framework in the Mediterranean region.
Concerning the financial dimension of renewable energy in the region, a “great leap forward” is urgently needed. As the study outlines, the key target in this area should be the creation of new financing mechanisms aimed at attracting institutional investors such as pension funds, mutual funds, insurance companies and sovereign wealth funds into the regional renewable energy market. On the basis of the principle that institutional investors will jump into this area only if a proper risk-adjusted return is considered as guaranteed, key European financial institutions such as the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) should cooperate to develop a sort of “Mediterranean Renewable Energy Infrastructure Fund” aimed at channelling financial resources from institutional investors into renewable energy companies acting in the region, solar and wind energy projects, asset backed securities or bonds.
Considering the complex interdependence of all these infrastructural, regulatory, and financial issues, a strong coordination between Med-TSO, MEDREG and the EIB-EBRD tandem seems to be essential. This would not require the creation of an additional institution, but only the constitution of a platform in charge of coordinating all these efforts in order to avoid overlaps and promote a harmonised framework of action. Such kind of entity, which might assume the name of “Euro-Med Renewable Energy Platform” (EUREP), could well have the potential to emerge as the focal point for the development of renewable energy in the Southern and Eastern Mediterranean region.
The Euro-Mediterranean region is currently characterized by the presence of countless large, medium and small-scale organizations dealing with renewable energy. In such an intricate -and often redundant- situation, it is necessary “to put the house in order” and focus on the key players in the field to develop a new renewable energy mechanism able to break with conventions. Transmission system operators, energy regulators and the key international financial institution in the region are the most important players to proceed in this direction. On the basis of an inclusive, pragmatic and bottom-up approach, they have the potential to boost the regional renewable energy market, reversing the trend of disillusion that has progressively characterized the Southern and Eastern Mediterranean renewable energy sector over the last years and ultimately translating the regional renewable energy potential into reality.
FEEM Nota di Lavoro 30.2015