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Background

The World Bank and its partners have embarked on the Pan-Arab Regional Energy Trading Platform (PA-RETP) Initiative. The objective of the Initiative is to provide support for the Arab countries to build a shared vision and the regional institutions necessary to increase electricity and gas trade within the region and eventually neighboring markets. The World Bank and League of Arab States (LAS) launched a cooperation program in 2016 to support the implementation of building blocks (governance, institutions, trade enablers, and financing solutions) to establish the Pan-Arab Electricity Market (PAEM).

International practice has shown that developing regional institutions is essential to institutionalize electricity trade and build institutional capacity at the outset of market development. However, the process is gradual and takes time. The PAEM transition will follow a pre-defined roadmap for establishing regional bodies as described in the Memorandum of Understanding (MOU) that establishes the PAEM and was signed by 16-member countries in 2017. According to the MOU, these regional bodies would not originally serve as “independent” institutions but would have the mandates of regional institutions until the time is right to recognize them as standalone organizations.

PAEM Transitional Stages

A regional market design with full wholesale and retail competition and multiple sellers and buyers would be expected to deliver the greatest benefits to the Arab countries and maximize the value of the interconnections. Such a design would include a bilateral contracts market supported by a power exchange, spot markets such as a day-ahead market and intra-day market, balancing market, various system services markets, etc. However, proceeding with implementation of such a complex market design in the Arab region in the near or even the medium term would not be possible. Numerous constraints and risks must be mitigated and managed before the ultimate regional market design can be successfully implemented. Therefore, consistent with experience elsewhere in the world, a phased approach to regional-market integration is proposed that will increase regional trade while allowing time for the Arab countries to address obstacles and mitigate risks. It is anticipated that the phased approach will include multiple steps, with each step moving the regional market toward the ultimate regional market design with full wholesale and retail competition.

The PAEM has been categorized into a number of stages to achieve its vision by 2038. The “foundational stage” has been completed, including completion of governance and institutional frameworks to support trade at the sub-regional level. The next stage is “Transitional Stage 1” is being conducted during the 2020 – 2024 time-frame and will include implementation of a transitional regional market design focusing on identifying and expanding trade opportunities. This stage will be followed up by “Transition Stage 2” and “Transitional Stage 3” and the “Ultimate Goal” of a fully integrated Arab regional market focused on a fully interconnected and synchronized Arab electricity network. As noted, “Transitional Stage 1” will include implementation of a transitional regional market design focusing on identifying and expanding trade opportunities, including the formation of regional market institutions, completing the governance framework, infrastructure readiness, enforcing secure regional operations, scaling up commercial trade and deepening electricity trade knowledge.

PAEM Transitional Stage 1 – focused on identifying and expanding trade opportunities

Looking to build on existing infrastructure, governance documentation, and regional institutions, this market phase will emphasize strengthening and improving the efficiency of existing and planned interconnections, improving reliability, and increasing trade opportunities. It will require modifications to governance documentation and regional institutions but will not require reform of the national power sectors. It will result in improved reliability by bringing national power markets up to a minimum reliability standard through the introduction of a standardized Arab Grid Code, and will result in improved sustainability by identifying and promoting regional trade opportunities that will result in the increased operation of the most-efficient power plants in the region. It will assign responsibility and authority for increasing regional trade, provide incentives for increasing regional trade, and establish capacity-building programs to train stakeholders on increasing the value of national and international power-system assets.

More specifically, during this phase, trade volume is expected to expand through an increase in the number of transactions between contiguous and non-contiguous countries. Trade will occur through direct utility-to-utility bilateral contracts while intermediate countries provide transit service. Infrastructure will be improved and expanded to increase capacity and synchronization to enhance trade opportunities. In this stage, regional-market institutions will be formed to cover all Arab countries, including a Secretariat, a Pan-Arab Regional Advisory and Regulatory Committee, and an Arab TSOs Committee including representation from the national TSOs and a regional market facilitator. Further, regional-market governance documentation covering all Arab countries will be drafted, including an Arab Grid Code defining the technical rules and a Pan-Arab Electricity Market Agreement defining the commercial or market rules.

Regional-market governance documents will be consistent with a memorandum of understanding (MOU) and General Agreement signed by participating Arab countries prior to implementation of this stage of the market integration scheme. The MOU establishes the commitment to market integration, an intergovernmental framework, and a legal basis for the regional market and its supporting institutional infrastructure. The General Agreement defines the roles and responsibilities of the regional market institutions, and sets out objectives and principles of the market. In this stage, cross-border electricity trade will cover the cost of supply, and coupled with the expected increase in trade volume, will trigger incentives for expanding generation capacity in certain countries for export to other market destinations.

Focus Areas