COP27 Preview: Electrifying the Middle East

Jon Alterman: Ali al-Saffar is the program manager for the Middle East and North Africa region at the International Energy Agency. He's been there for more than a decade. Ali, thanks very much for joining us on Babel.

Ali al-Saffar: Thank you for having me.

Jon Alterman: As we look forward to COP27—the big international climate conference coming up in Egypt in a little more than week—what are the most interesting things you're hearing now about Middle Eastern energy?

Ali al-Saffar: There are two dynamics that are particularly interesting. On the one hand, because of the Russian invasion in Ukraine, energy security is higher up the agenda than it has been for several years. A lot of people are worried about supply. A lot of people are worried about prices, and it's catapulted the region to its natural position—at least its natural position over the last few decades—as being a really integral part of the global energy system. I think that has been forgotten to one degree or another.

The second dynamic that I'd like to highlight is that in the longer term, many countries in the region are trying to focus on what it looks like to transition away from fossil fuels. The oil and gas exporters of the region who have made massive amounts of revenue, and who've relied on revenues from oil and gas for decades to finance their economies, are looking to see if they can remain at the forefront of global energy supply while moving toward low carbon energy. There are a number of things that are evidence of that. The region has consistently obtained some of the lowest prices in the world for renewables auctions. They have really low prices for solar. They have also thought about how to add value or get beyond electricity as well. Gulf producers and Egypt are trying to make progress on clean hydrogen, or low carbon hydrogen—what some people would refer to as “green hydrogen.” Those are the two trends that I would highlight as being important in the region.

Jon Alterman: Is the export of electricity a realistic option for Middle Eastern countries—especially the scale at which they're exporting hydrocarbons? And who do they export to?

Ali al-Saffar: At this point, electricity export would just be small bits of cross-border trade between neighboring countries. There are existing grids that link countries. For example, there is the Gulf Cooperation Council Interconnection Authority (GCCIA) that links the six Gulf states. That’s supposed to be an exchange. It's not really supposed to be infrastructure for the export and import of electricity, with one party exporting and the other party importing. It’s more of an exchange of electricity to increase resilience across the region, and that’s only tiny amounts of electricity. The last number I’ve seen is that the GCCIA was trading something like 5 percent of its capacity. It’s a trickle. Even in an instance where Gulf producers or North African producers of renewable electricity could export for longer distances, it would be difficult to see any sort of replacement of oil revenues to the extent they are today.

Jon Alterman: One of the things that we've talked about is that you say that there are countries in the Middle East that don't have enough electricity—countries like Lebanon and Iraq—and countries in the Middle East that have too much electricity—like Egypt and Jordan. How does it happen that you have too much electricity, why is it a problem to have too much electricity?

Ali al-Saffar: Incidentally, Jordan and Egypt both did the exact same thing. They reached this point because of the same issue. Around the middle of the last decade, both countries were facing the spectrum of a deficit. They had blackouts and shortages—the kinds of things that makes the citizenry very angry—so they both moved very quickly to close that deficit by contracting with power producers. They overshot, so beyond just meeting demand, and then having some contingency on the top of that, they both have over capacity. That’s less of a problem than having under capacity because you're not facing blackouts and angry citizens, but as long as you have overproduction, you're not going to be thinking too much about investing in new infrastructure. This is an issue is because you do need to renew your infrastructure. You need to keep moving with the times, and that doesn't necessarily happen if there's no market for it. On the other end of that equation, there are the countries that are producing too little electricity. In the case of Syria and Iraq, that's probably primarily due to a loss of physical infrastructure from conflict. But in the case of Iraq and Lebanon, it’s also the result of really bad mismanagement of the sector. There are profound levels of corruption, mismanagement of the way the sector is run, and investment only in parts of the sector. In the case of Iraq, they've invested billions of dollars in generation, but its transmission and distribution sectors are among the worst in the world. So, you get this situation where they can produce electricity, but they can't really send it to the people who will be using it.

Jon Alterman: What does the overproduction of electricity mean for the renewables markets in these countries, and what does the production of renewables mean for the ability to export energy to other countries?

Ali al-Saffar: If a country already has capacity far in excess of what it requires, then it won't need to be investing very much in the production of electricity. Now, that's fine if you're happy with the existing power generation mix. But often what happens is that you have a diversified power mix. You might have some low efficiency gas turbines. You might have some high efficiency gas turbines, as you do in Egypt. Then on top of that, you have some variable renewables, like solar or wind. If no investment is made because the capacity is already there, then some of these low efficiency generators continue in the system because they're not really being pushed out. It's difficult to incentivize an investment in greater renewables uptake because you already have over capacity, so for countries like Egypt or Jordan, you essentially have three options. The first is to try to stimulate demand at home, and the way you would do that is by either electrifying end use sectors—trying to see ways that industry can be electrified, or you can stimulate the demand in electric vehicles. Then you consume more electricity. The second option is to export, and Egypt and Jordan and several other countries in the region are looking at interconnecting far beyond their borders. Egypt has signed an agreement with Cyprus and Greece, and I think work is about to start imminently on that interconnection. It's already signed an agreement with Saudi Arabia. There's an agreement between Egypt, Jordan, and Iraq, essentially, helping to export some of that excess. The third option is just to live with what you have, and therefore live in a basically suboptimal system.

Jon Alterman: How much is seasonal demand a challenge for regional electricity? So much of the electricity usage for cooling in the summers, and Middle Eastern summers are getting longer and hotter. How much of a problem do you have when your electricity demand fluctuates with the seasons, but you have a plant that exists year-round?

Ali al-Saffar: I think this is one of the top issues for people planning electricity sectors in the region. For some producers in the Gulf, there is a lot of investment going into power plants that are running for only several months a year, and that's not really a good use of money. There is a lot that countries can do to try to alleviate that, and that's where trading can be a more efficient use of infrastructure spending because different countries will have peaks at different times. Countries in the region could use basically the same generating infrastructure to spread the electricity as it's needed across the region. The other thing that countries can do—which is not that interesting a topic for many—is basically just implement demand side measures. Demand side measures could include investments in efficiency. We were looking at some of studies done on buildings in Iraq, for example, and just the simple act of properly insulating the building can reduce electricity consumption in the building by 60 or 70 percent. If you do that, then you're saving yourself a lot of capacity in electricity that won't be used for most of the year, so it's really about determining where to spend your investments for the greatest return.

Jon Alterman: You said there are some demand side issues, but trading and having more of a regional grid could also make a big difference. The United States has had a profound problem creating a genuine national grid. Should we be more optimistic that the Middle East will be more successful? What can the Middle East learn from the difficulties in the United States that would make it possible to really have a regional grid?

Ali al-Saffar: Some of the issues that the United States faces is the fact that it’s almost a victim of its own success. The United States was one of the earliest adopters of electricity, so a lot of the transmission lines were built at a time when there was no centralized vision for an electricity market. In the Middle East and North Africa, they start at a different point. A lot of the infrastructure exists. The interconnections are available, but they face a very different issue—which is not so much the physical infrastructure, but rather the regulatory infrastructure. These things are not that easy to manage. They require a lot of goodwill exchange, and a lot of signed agreements between countries that aren't politically that close to one another. Another one of the real elements here is that energy price subsidies are a big issue in the region. If you have one country with an effective subsidy rate higher than another, the first country could be asked to subsidize the second if they are trading at a rate that’s unfavorable to the first. Harmonizing these regulations and prices would go a long way toward offsetting some of these issues, but that kind of interconnection is the ultimate angle, especially in a decarbonizing electricity center. When you're trying to invest a lot in renewable electricity, it becomes quite difficult to manage because it requires a much more flexible grid. It requires more investment in grid infrastructure, and if there are exchanges between countries that can help manage the peaks in demand and the peaks and troughs in supply—because there's a variability element in solar, for example—then that makes for a much more stable, much more efficient system for all.

Jon Alterman: How hard are these systems to maintain if you really set up a robust regional grid, and how vulnerable would systems be to sabotage?

Ali al-Saffar: Grid connections are no more or less at risk of sabotage than existing infrastructure. It’s effectively the same, and protecting that type of infrastructure is probably already a known quantity to many countries.

Jon Alterman: You’re talking about the oil and gas pipelines that run through the region?

Ali al-Saffar: I’m also talking about the existing transmission lines. Connections effectively look no different, so I wouldn't say that protecting the infrastructure is a prohibitive part of it. But connecting grids like this could help rationalize a lot of the investments that are made in the region, and it could help rationalize the way energy is produced and consumed in the region for the benefit of all. If you create these co-dependencies, they, theoretically, should lead to better political decision-making. That’s not always the case, but generally speaking, there are instances where you just look at the energy map and think, “this exchange makes absolute sense”—whether it's in electricity or natural gas, or in the industrial use of oil and gas. Just to show you the level of inefficiency in some of these grids, in Iraq, they flare around 18 billion cubic meters (bcm) of natural gas per year. 18 billion cubic meters of natural gas has a market value in Europe right now of around $18 billion. There isn't any huge technical reason why this gas should not be captured and then used domestically in an electricity system that is currently not producing enough electricity for its people. But investments need to be made. One of the stop gap measures that could happen now is that some of this gas could be captured, and rather than do the costly part in Iraq—which is to process it and then separate the elements that would be useful for electricity generation—they could pipe this really easily to Kuwait, which does have capacity to process this gas. Iraq would get some of this gas back from Kuwait in its processed form, ready for electricity consumption, while Kuwait would be getting the ethane—which is a very valuable part of the gas stream used by industry and which Kuwait needs for their huge petrochemical sector. If they were to do this, the project could happen much quicker than if Iraq developed all the infrastructure domestically, and it would create value for even the ethane component of natural gas—which Iraq is not really making much use of right now. To me, looking at these things, at least a theoretical level, it's a no-brainer. It should happen, and it would create a codependency that would probably lead to much more efficient uses of gas energy and also create political ties.

Jon Alterman: As you think about energy broadly—and think about electricity as part of that—one part of that equation is to move away from hydrocarbons. Is there enough future in the use of hydrocarbons 20, 30, or 40 years into the future to justify creating hydrocarbon dependent infrastructure right now?

Ali al-Saffar: This is the million-dollar question, and under the current trajectory that the world is moving in, one could argue that. It doesn't look like there's going to be a massive decrease in hydrocarbon demand going forward if policies that are in place today do not significantly change. However, we know because the scientists have told us, that we need to reduce our greenhouse gas emissions considerably, starting almost immediately. And there's no way that this can be done without a drastic change to the way we both produce and consume energy. In scenarios that we've done at the IEA, it's very difficult to envision this kind of a pathway without a drastic decrease in the demand for oil, gas, and coal. And given the fact that these investments are made for a period of 20, 25, or 30 years, it's difficult to see that being justified. Having said that, however, even in a world where the net zero emissions trajectory was reached, the demand for oil and gas is not going to be binary. It's not going to exist one day and then stop the next. There is going to be a curve, and when you look at the region, there are strong arguments to suggest that this region will be important even during the energy transition for the simple reason that the cost of extracting oil and gas is lower than most other places. And if demand is diminishing, then people will become more attentive to cost because the prices decline. The second reason is because not all oil and gas are created equally. Production from one country might have a completely different greenhouse gas emissions intensity than in another region. If you are looking at the best performing Gulf producers—like the United Arab Emirates and Saudi Arabia—the greenhouse gas intensity for a barrel of oil produced is around half the world average. In a carbon constrained world, one would imagine that these guys produce the last barrel even if you're only taking that into consideration, the greenhouse gas intensity of that produced barrel, so I think it will remain a consideration well into the future. But anybody who has covered the region or who's worked on things like economic diversification know that any transition—whether it's energy or economy—can take decades. It’s really important for countries looking to do the energy transitions in the region to start now because there's really no time to lose.

Jon Alterman: As we think to this energy transition, and we think about the world's move away from fossil fuels, are the Middle East's supply of sun and wind likely to keep the Middle East as the world's largest energy producer? Can they use green hydrogen or something else to remain central to the world? The export of electricity? Or does the rise of renewables in the Middle East just slow the diversification of energy production from the Middle East to local production everywhere in the world?

Ali al-Saffar: The answer to this question has two parts. On green hydrogen, given the fact that countries in the region have had multiple decades of experience in infrastructure development, engineering, management, and knowhow in the upstream sector of oil and gas, a lot of these skills and supply chains can quite easily be reoriented towards the establishment of a hydrogen sector. If they are able to do this, then they can be at the forefront of these more nascent low carbon technologies. There are countries really taking quite aggressive steps today to ensure that. As you said, though, because of the geographical spread of renewables, that doesn't necessarily have to mean that you're going to swap out one dependence for another. If you look at countries with hydrogen plans, the geographical variation is vast. It goes from Chile and Namibia to Australia and, of course, the Middle East and North Africa. That is a huge geographical spread. Think about the counterfactual to this kind of industrialization through green hydrogen and the clean energy sector. Imagine a world where oil production and demand fall precipitously—as it must if we are to reach our climate targets. If oil demand falls as drastically as it needs to, and therefore oil prices fall in conjunction with that, then countries who haven't diversified their economies would see a huge fall in their revenues. We had a glimpse of what that looks like in 2020. If that drop in demand were to be structural in the absence of really massive diversification, you're looking at one of the youngest, fastest growing regions in the world with very little revenue. That would become a problem for all. I am not saying there would political and social upheaval across every producer in the Middle East and North Africa, but some of the fiscally weaker ones would certainly be the first to fall. That would create all sorts of ruptures in the region. So the thing that I like to focus on in my work and the thing that I'm really insistent upon is: yes, the energy transitions are something that we really absolutely have to keep front and center of our minds as policymakers, but in tandem with that, we also need to find solutions or help countries find solutions for themselves to ensure that if revenues fall because of the energy transition, they are not left wanting. Merging these key imperatives and making sure that the economic diversification is done in tandem with the energy transition is one of the ways that can happen.

Jon Alterman: Ali Al-Saffar from the IEA, thank you very much for joining us on Babel

Ali al-Saffar: Thank you very much, Jon.