Over the next five years, the Mena region will need to invest $209bn in the power sector according to the latest Mena Power Investment Outlook 2019-2023 report issued by The Arab Petroleum Investments Corporation (Apicorp), a multilateral development financial institution.
Between 2019 and 2023, Apicorp estimates that investment in the Mena energy sector could reach $1 trillion, with the power sector accounting for the largest share at 36 percent, spurred by growing electricity demand and greater momentum for renewable energy, noted the report.
Dr. Leila Benali, Chief Economist at Apicorp, said: “We have observed that a large share of the funding requirements in Mena’ss energy sector will go to the power sector, of which renewables account for a substantial share of around 34 percent.”
“We also estimate that Mena power capacity will need to expand by an average of 4 percent each year between 2019 and 2023, which corresponds to 88GW by 2023, to meet rising consumption and pent-up demand. Highly leveraged power projects in the region continue to be largely financed based on non-recourse or limited recourse structure, with debt-equity ratios in the 60:40 to 80:20 range, even 85:15 for lower risk profile projects backed by strong government payment guarantee,” further commented Benali.
According to Apicorp, the power sector continues to evolve throughout the Mena region, driven by the need for countries to meet demand growth, diversify their economies and create efficiencies. The Mena region will require the addition of 88GW by the end of 2023 to meet demand growth. Governments have been accelerating their investment plans and Apicorp estimates that 87GW of capacity additions are already at the execution stage. This is expected to translate into $142bn for power generation and approximately $68bn for transmission and distribution.
While the government remains involved at different phases of power projects, even in PPPs, the private sector is critical for risk management due to its track record in performance, technology and cost efficiency that it provides for financing.
Speaking about the private sector’s involvement, Mustafa Ansari, Senior Economist at Apicorp, said: “Greater participation and financing from the private sector is imperative to the energy sectors growth; as more evenly shared responsibility in financing will ensure a reliable supply of competitively priced power. The energy sector represents significant opportunities for private sector financing in the long term.”
Apicorp anticipates governments and central authorities to continue to remain involved particularly in central generation and transmission, and it has noticed some forays of the private sector into distributed power through aggregating sites or clusters and leasing.
Electricity demand growth is expected to slow over the medium term leading to some overbuilding. Efforts to promote energy efficiency and support the public with smarter and more responsible consumption, whilst tackling infrastructural and regulatory hurdles are equally important. Consequently, Apicorp forecasts that over the next five years, electricity demand growth will slow to around 3.8 percent CAGR.
Apicorp predicts that close to $350bn could be invested in Mena’s power sector in the next five years, with renewable energy accounting for 34 percent of power investment, or 12 percent of total energy investment. Renewable energy developments in the Arab world have gained tremendous momentum in recent years, driven primarily by governments that recognize the urgency of tackling rising demand for energy coupled with the declining costs of solar PV.
“From a business model perspective, Jordan and Morocco have so far led the region with their renewable initiatives. Morocco’s target for renewable energy as a share of total generation is ambitious, standing at 42 percent by 2020. However, across the region, the policy signals, change in business models and investment/credit support required in grids and storage to accompany the introduction of renewables is yet to be seen,” added Benali.