Clearing regulatory hurdles to exploit renewable energy in North Africa

January 21, 2013 | 00:00

Interview: Benjamin Gallèpe of the Mediterranean Energy Regulators (MEDREG)

Clearing regulatory hurdles to exploit renewable energy in North Africa

It is taking longer than expected for renewable energy in the Middle East and North Africa to develop, as political and social unrest make investors uneasy and the European economic crisis has taken a toll. According to Benjamin Gallèpe, Director of the Permanent Secretariat of the Mediterranean Energy Regulators (MEDREG) association, North African countries will have to develop an economic model that better reflects "the real costs of energy". European countries for their part will have to develop a model that will make imports of (more expensive) renewable energy from the south possible. Gallèpe says the EU-sponsored Mediterranean Solar Plan, the flagship initiative of the Union for the Mediterranean to promote renewable energy in North Africa, has so far been "largely a diplomatic exercise", which will now have to be turned into a more practical approach: "We need to facilitate dialogue with the main energy investors" and "build a common, level playing field in terms of regulatory and economic conditions".

Benjamin Gallèpe (MEDREG)
"In Egypt there was no problem during or after the revolution in terms of the energy sector. There was not a moment we could not talk or meet with our Egyptian counterparts."

Benjamin Gallèpe, the dynamic, down-to-earth Director of the Secretariat of the Mediterranean Energy Regulators (MEDREG), in which the 23 energy regulators of all countries on the Mediterranean Sea cooperate on a voluntary basis, is proud of the work independent regulators have been able to do during the turmoil that has struck Northern Africa over the past two years. He points out that in Tunisia, where there is no independent regulator, there have been several blackouts. In Egypt, which does have an independent energy regulator, there were no problems.

Gallèpe, who helped set up MEDREG in 2007 in his position at that time of international relations project manager at French energy regulator CRE and who was named Director of the MEDREG secretariat in 2010, is convinced that the creation of an independent regulator and a strong, stable and transparent regulatory framework cannot be an afterthought for countries on the southern shores of the Med seeking to attract energy investments. He says that the renewable energy sector in these countries presents great opportunities, but adds that more needs to be done to convince private investors to put up their money.

Instructive is the fate of the key Mediterranean Solar Plan, which was launched in 2008. This EU-backed plan, a "flagship initiative of the Union for the Mediterranean, the most important partnership organisation of the countries bordering the Mediterranean (plus the EU), aims at having 20 gigawatts of renewable energy capacity built in the southern Mediterranean countries by 2020. The plan, which runs parallel to other initiatives that have targeted renewable energy investments in the southern Mediterranean, such as Desertec, also aims to develop electricity grid connections within the region and with Europe and improve energy efficiency. However, up to date few new solar, wind or other renewable projects have come online in recent years in the region. The current total (excluding hydro) stand at just over 1 gigawatt.

"After almost four years we are only now reaching a very general agreement on the most important elements of the solar plan," notes Gallèpe. Indeed, the project is now in a phase known as "Paving the way for the Mediterranean solar plan" (http://www.pavingtheway-msp.eu)/), a three-year EU-supported technical assistance program running through September 1, 2013 to lay the groundwork for actual implementation.

Nevertheless, Gallèpe remains positive about the potential for renewable energy generation in the region. It is just the 2020 deadline that now looks ambitious. "In theory, the (renewable energy) potential is unlimited in these countries if you can also send the power to Europe and neighbouring countries because you have lots of space and strong natural resources. The proximity to Europe represents an opportunity." But growing domestic demand in the countries in North Africa is also expected to be a driver for future investments, although Gallèpe notes that traditional fossil fuel energy sources will remain dominant in the local energy pie for the next 20 or 30 years.

At the MEDREG secretariat in Milan, housed in the offices of the Italian energy regulator AEEG, Gallèpe spoke to European Energy Review about what progress has been made at a regulatory level – and the work that still needs to be done -- to attract greater renewable and other energy investments to countries on the southern Mediterranean.

Q: What does an investor see at regulatory level when he looks at this region?

A: There is a need for more investment in the energy sector but southern Mediterranean countries have not opened up to a

In Tunisia, where there is no independent regulator, there have been several blackouts. In Egypt, which does have an independent energy regulator, there were no problems
competitive market in a way that private investors would be certain to have a satisfactory return on their investment in five or ten years time. This is because of political and regulatory constraints, economic and social instability and other factors. So the first task of MEDREG and other actors at a Mediterranean level is to show it is possible to implement a stable, harmonized framework and establish the conditions for the development of infrastructure and efficient energy markets.

We also need to facilitate dialogue with the main energy investors so that there is a joint effort to build a common, level playing field in terms of regulatory and economic conditions. One of our roles is to serve as a bridge between regulators and investors. Indeed, one of the problems with the Mediterranean Solar Plan is that it has largely been a diplomatic exercise based mainly on industrial and engineering cooperation but did not consider the perspective of industry.

Q: How developed is the regulatory framework in North African countries?

A: The regulatory framework has developed at national levels. Many countries have their own renewable energy plans and are trying to demonstrate they are pushing for the development of renewable energy, and in particular solar. At a national level they are very interested in finding investors, with new financing schemes in some countries. Countries like Morocco, Egypt and Algeria are also having bilateral negotiations with international investors, with the European Union and with others. What is more difficult to see is a more regional approach. When it comes to the Union for the Mediterranean, which is responsible for developing the Mediterranean Solar Plan, in the beginning everyone saw things differently from industrial, financial and political points of view. After almost four years we are only now reaching a very general agreement on the most important elements of the solar plan. This shows that every country has its own approach and that the regional dimension is not always a priority when thinking about developing energy policy.

Q: Why is a regional approach needed?

A: At MEDREG, we try to demonstrate and promote the fact that it is more efficient to look at energy at a regional level than having energy policies going in different directions from country to country. In the end, for example, these countries will have to have connected electricity grids and have some comparable incentive schemes, in order to receive money from international financial institutions like the IMF, World Bank, EIB and EBRD. And to start financing this kind of project, you have to first convince these investors and then private investors will follow.

International financial institutions are looking at this region.

One of the problems with the Mediterranean Solar Plan is that it has largely been a diplomatic exercise based mainly on industrial and engineering cooperation but did not consider the perspective of industry
The European Bank for Reconstruction for Development (EBRD), for example, is reconsidering its investment policy, and is now in the process of identifying four or five priority countries in the Mediterranean in which to support energy investments. First the EBRD focused on Eastern Europe and now it is seriously looking to diversify and strengthen its policy towards Mediterranean countries. This means it considers there is significant opportunity and that, in the long term, it will be interesting to invest in this region.

Q: Where does energy market integration in North Africa stand at this moment?

A: Energy trade is being developed, but it needs to be done at a more intense level. While there are bilateral projects between countries, too few of these have been done.

Now there is an association of Mediterranean TSOs (transmission system operators), MeD-TSO, which was set up in 2012. The idea is to try to put together all the information, expertise and best practices of Mediterranean TSOs, to look at the possibility of enforcing synergies and see how we could progressively move forward to a more integrated power market. The combined efforts of MEDREG and Med-TSO are aimed at supporting integration of Mediterranean electricity markets. MEDREG is now working with the three Maghreb countries (Tunisia, Morocco and Algeria) in the framework of a regional project approved in 2010 on the integration of electricity markets. We have this focus on Maghreb countries, but every time we make recommendations and studies, we try to develop a consensus that can be applied to the whole region.

In the Maghreb countries, the system is dominated by public and usually vertically-integrated companies so it's important to see that there are different kinds of models in other countries that may be useful to implement. For example, in Europe there was a choice to develop an unbundled system with clear separation between suppliers, transmission distribution companies and generators. In Europe, the idea was to enhance and foster competition and to avoid the problems that we had with the monopolies from incumbents so that's one of the options proposed to the Mediterranean region as a whole.

Q: Do all North African countries have an independent energy regulator? And in those countries that do, what is their track record when it comes to having strong, and truly independent regulators?

A: Most of them have independent regulators. Exceptions are Morocco and Tunisia, where this task is carried out by government ministries. Now Morocco is planning to have an electricity and gas regulator by 2014. While Tunisia does not yet have plans for a regulator, we are discussing with them what would be the best option in this department. In Algeria, Egypt, Jordan and other countries, they all have at least one authority. In general, countries start with electricity regulators and then add natural gas or oil. What we've been promoting is the idea that at the least there should be regulatory authorities covering electricity and gas and preferably a single authority in charge of both sectors. They are complementary sectors. The issues are not exactly the same but there are lots of similarities when it comes to things like setting tariffs, network access and transparency.

In terms of how independent they are, it can vary considerably from country to country. In general, however, there is at least independence in terms of expertise,
which I think is very important, even if there can be political or governmental influence on the final decision, as is also the case in the EU. At least there is the feeling from the government side that it is more efficient to have an independent body making the technical inquiries and developing technical solutions rather than ministries or governments. Having an independent authority represents a more mature approach to dealing with technical problems that can very easily become political ones.

Q: Morocco does not have an independent energy regulator, but it also has a reputation as one of the best places to invest in renewable energy in the region. How has that happened?

A: What Morocco did was to set up public-private partnerships. The first thing they did was not to create a regulator but to create an agency for renewable energy investments, so they considered foreign investment first and national regulation as a second step. In the end, though, they realized that they need an electricity regulator. Attracting private investors for new solar or wind power plants is possible up to a certain point when you see that there are the geographical and environmental conditions and that the government is ready to implement very convenient laws for investors at interesting conditions. However, if you see there if there is no clear framework and no clear position from the region's grid operators on how they will connect Morocco's grid with Europe or with neighbours, you can build as many plants as you want but it's difficult to make them sustainable in the long term. The main customers for this power will not be Moroccan citizens, so you have to make sure first that electricity will be bought by northern countries or at least a significant part.

In Morocco, there has been a political will to do these projects for many years. But even with political will and direct involvement of the government and organizations like the World Bank, major projects have not yet been built. There is a major concentrated solar power (CSP) plant project in Ouarzazate, Morocco (slated to be 160MW in an initial phase and expected to be increased to 500MW by 2015) that is seen as possible model for other similar Mediterranean projects, but if you go to the site where the project is located you're in the middle of the desert and nothing has been built yet. So you can face difficulties if you do not involve all actors from the very beginning. Of course, at the same time, it's also simply the first large-scale project and it is more difficult to start the first major power plant and then to industrialize the process.

Q: What impact has the Arab Spring had on the energy sector in Northern Africa?

A: It can be difficult to measure the impact, since energy markets in the south tend to be closed markets, where there is little transparency. Yet there is clearly a difference in the impact in countries with and without independent regulators.

There are really no functioning markets in the south. They are all administrated markets, run by the government
In Tunisia, for example, where regulatory responsibilities are carried out by the government, there were two blackouts in the last four months. There were some power shortages because the grid needs to be modernised, and there has been disorganisation in the state-owned companies because of the political situation. It is important to see that in other countries like Egypt, where there is an independent regulator; there was no particular problem during or after the revolution in terms of the energy sector. There was not a moment we could not talk or meet with our Egyptian counterparts.

Q: Partially due to weaker economic conditions, some European countries are now forecasting they will no longer need to import renewable power from third countries Do you still see a high degree of interest from European investors in renewable energy investments in the Southern Mediterranean?

A: That's one of the key elements of the discussion, to be able to have reliable figures on expected demand for both electricity and gas. It seems that in the next ten years demand from European countries will be quite flat and could actually decrease a little bit because of energy efficiency, diversification of energy production and generation and the fact customers might be able to manage their consumption more efficiently. So you not only have to develop environmentally-friendly generation from the south, but you also have to find the right economic model to convince people from the north they can consume less but perhaps pay a little bit more for the energy they do consume because we want to be sure that this energy is produced and conveyed from generators to consumers in a sustainable way.

From the northern side, they have to look at what would be the best options for support electricity from the south from renewable sources and what would be an acceptable model in terms of incentives and final costs of the energy produced. As was the case in Europe, we need to study how to subsidize the first renewable power plants and then to progressively phase out support to move towards a market model.

In the south there is a reflection in these countries that as they develop new clean energy power plants they want to make sure first that all of their citizens are connected to the grid. It is a priority for them to have their citizens among the beneficiaries. So the issue for them is finding a sustainable economic model not only to export but also to have an important part of their production provided to the benefit of customers in their countries.

That is a quite tricky model to develop because there is no reference price or reference model because there are really no functioning markets in the south. They are all administrated markets, run by the government. Secondly, we know that new technologies and renewables in particular, still have higher costs than the production costs, for example, where they have a lot of gas. Yet even in that case, electricity from oil and gas is subsidized in these countries so people don't pay the real cost anyway. So at some point the final price will have to reflect a bit more the real cost of energy in these countries as well. Otherwise, the development of renewable energy will not be sustainable.

MEDREG as bridge

Set up in 2007, MEDREG includes energy regulators (or the government ministries that handle energy regulation duties in the case of Morocco and Tunisia) from Albania, Algeria, Bosnia-Herzegovina, Croatia, Cyprus, Egypt, France, Greece, Israel, Italy, Jordan, Malta, Montenegro, Morocco, the Palestinian Authority, Portugal, Slovenia, Spain, Tunisia and Turkey. It is supported by the European Commission and the Council for European Energy Regulators (CEER). MEDREG has no legally binding powers but takes a bottom-up approach to cooperation and market integration. One its major aims is to promote a transparent, stable and harmonised regulatory framework fostering market integration and infrastructure investments. In this respect, MEDREG sees itself as a bridge between regulators and investors. MEDREG also aims to increase consumer protection.

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