201. A second key element to be addressed in the wider MENA region is the need for structural reform of domestic energy markets and pricing mechanisms. The presence of conflicting policies that support fossil-fuel consumption, through government subsidies, makes it particularly difficult for renewable technologies to compete, drains immense financial resources from the state and weakens the perception of a country's clean energy commitments.
202. Shifting investment incentives away from conventional energy towards renewable energy has become a priority. Recent advances in certain RE technologies mean that grid parity43 is becoming a reality in a growing number of jurisdictions. However, in order to level the playing field with conventional power, it is essential to engage in a comprehensive overhaul of the energy market, including phasing out fossil-fuel subsidies and better pricing carbon emissions.
• Overhauling domestic energy subsidy systems and removing inefficient fossil-fuel subsidies. The prevalence of energy subsidies in the MENA region, especially in oil-exporting countries, is often cited a major constraint to renewable energy development. Reducing energy subsidies is politically sensitive and requires a pragmatic approach, which could include minimising possible adverse effects on the poorest segments of the population by increasing spending on education, health, and social safety nets as compensation for potentially higher energy prices (IMF, 2014)44.
• Pricing carbon emissions. While the economics of RE can be improved by factoring in opportunity costs, the exact determination of those costs in specific MENA cases is less obvious in the absence of cost-reflective energy and electricity tariffs45. Governments need to ensure that the price of carbon emissions is set in a transparent, credible and predictable manner, and consider introducing a market mechanism (tax or cap-and-trade systems) to better price carbon and level the playing field with renewable energies.
• Promoting the structural separation of the power sector to create a level playing field between independent power producers (IPPs) and state-owned incumbent operators. Renewable energy infrastructure investments usually take place in a situation of imperfect competition where a state-owned enterprise (SOE) is the incumbent. Policy-makers need to ensure that the adequate regulatory provisions are in place to guarantee independent power provision, and that actors are encouraged to engage not only in power generation, but also in transmission and distribution (OECD, 2014). Competition authorities and energy regulators also need to possess the appropriate resources and independence to effectively enforce regulation.
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43. Grid parity is achieved when the cost of producing RE is equal to or less than the cost of buying from the grid.
44. Sdralevich, Carlo et al. (2014), Subsidy Reform in the Middle East and North Africa: A Summary of Recent Progress and Challenges Ahead, IMF Middle East and Central Asia Department, July 2014.
45. End-user prices for electricity often do not reflect the real cost of generation due to energy subsidies: in Morocco for example, the electricity price is as low as 10 cents/KWh.