GRM 2010 GRM 2011

Abstract Details

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Interlinking the Arab Gulf: Opportunities and Challenges of Cross-GCC Electricity Trading
Paper Proposal Text :
One of the key challenges faced today by the countries of the Gulf Cooperation Council (GCC) is without doubt their rapidly growing domestic demand for energy, in which electricity plays a critical role as the driver of both residential and commercial life, and industrial expansion. The tremendous economic growth experienced by Gulf countries since the oil price boom of the early 1970s, and in consequence the accumulation of oil and natural gas revenues in the region, has been a key driver of this demand growth for electricity. With GCC electricity consumption growing tenfold between 1980 and 2008, one of the main challenges has been to provide the necessary infrastructure to secure supplies of electricity, both at times of peak demand and in the long term, for the region’s fast growing industries and commercial sectors which are forecast to continue to grow at rates mostly above 5 per cent annually in the coming years. Recurring peak electricity shortages that are experienced throughout large parts of the region during the summer months are merely the most visible reminder of the GCC countries’ overall problem of electricity shortages that concern all parts of their economies.

In this context, the GCC has only recently launched the first two phases of its largest and most comprehensive joint project in the area of energy security to date, a GCC-wide electricity grid that will eventually interlink the national power grids of all six GCC countries. At the time of writing, only Oman’s interconnection to the grid, planned for 2013, remains to be completed. The interconnection of the GCC countries’ national power grids is intended to become the backbone for systematic regional electricity market cooperation that will enable the sharing of reserve and generation capacity between the GCC countries. First and foremost, this cooperation is aimed at providing greater security for the national power systems, through a peer emergency supply mechanism. The GCC grid could, however, one day also become a tool for the creation of a genuine regional market within the GCC, allowing for commercial trading of electricity along the lines of European and North American regional power markets. Successful regional trade in electricity may ultimately also enable the GCC countries to link their power system with other regional grids, such as the North African grid and the Mediterranean Ring.

Nevertheless, the road ahead for GCC electricity market cooperation is long, and it is argued in this paper that the policy choices made in the coming years by all six GCC members will be critical to raising the level of security the grid can provide, and for the development of a fully integrated, commercial regional electricity market. Some of the most immediate challenges ahead include current domestic market conditions within the GCC countries. In particular (i) the level of spare capacity available amongst countries facing essentially similar demand patterns and peak shortages; (ii) the lack of system diversity between the GCC countries, most importantly the lack of diversity of fuels used for power generation, a key condition for commercially viable electricity trade; and (iii) incomplete domestic market liberalization that involves both ownership models and pricing regulation. Secondly, regional electricity market cooperation, most importantly in the area of commercial trade, still lacks a complete and detailed legal framework at GCC level. Even in the case that enough of these preconditions are fulfilled, the effective creation of a regional electricity market within the GCC will be a long term endeavour – following regional electricity market development experience elsewhere. It is hence argued that regional cooperation between the GCC countries in electricity will require many more years to evolve fully, but its beginnings come at the right time.

The paper sets out to explore these points by first providing an overview over the current electricity market environment in the region, including some of the domestic challenges faced by all six GCC countries caused by the rapid growth in their domestic electricity consumption; second, it discusses the arguments that support regional cooperation efforts in the area of electricity supply, based on (i) the security aspect, and (ii) the economic aspect relating to commercial trade; third, the paper briefly explores the history of GCC electricity trading, including the reasons why the GCC countries now have an almost complete grid that acts as an emergency mechanism, but not as a tool for electricity trade; fourth, it discusses the current state of GCC electricity cooperation through the interconnection grid, and the challenges ahead for further cooperation. The conclusion summarizes and returns to the original question: how beneficial is the GCC electricity grid for the region?