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Renewable Energies in the Middle East and North Africa

Policies to Support Private Investment

image of Renewable Energies in the Middle East and North Africa

The combined effects of the economic crisis and the recent popular uprisings in parts of the Middle East and North Africa have brought social and economic challenges back to the centre of attention of policy makers. For governments searching to create jobs, to satisfy the growing energy demand of their populations and to diversify their economies, the appeal of renewable energies is strong. However, the right policy framework and support need to be put in place if the region wants to attract private investment in the sector and reap the benefits of its favourable resource endowment, especially as regards solar and wind energy.

This report makes the case for a stronger deployment of renewables in the Middle East and North Africa and identifies the appropriate support policies required to stimulate the necessary private investment. An assessment of existing policy frameworks in the region and examples from OECD good practice are used as pointers to help guide policy makers in their choices.  

The analysis contained in this report suggests that support policies targeting the life cycle of renewable energy projects such as feed-in tariffs and power purchase agreements are more effective and less distortive than policies subsidising the initial investment, such as cost reductions. The optimal incentive scheme provides investors with stability through a guaranteed but declining minimum return while imposing enough market risk to foster technological progress.

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Helping to remove barriers: The rationale for support measures

Investors usually encounter several barriers to investment in renewable energy in the MENA region and elsewhere; governments can help overcome them by using various support measures. Key barriers include a lack of profitability (due to the high cost of the technology used, and government subsidy of utilities), the high risks associated with long-term investment, such as client risk, political and regulatory risks, market risks and the risks of new technology, capital market barriers, and existing policy instruments which favour fossil fuels. The lack of access to finance by potential investors can be attributed to the long-term nature of projects and the high up-front payment and risks associated with them. Barriers can be removed through regulatory, financial or fiscal incentives. However, policy makers need to be aware of the negative externalities associated with the use of certain support measures if they are not carefully targeted.

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