Pan-Arab Electricity Market: A Unified Pricing Model to Boost Regional Power Trade

The World Bank's report, “Transmission Pricing Methodologies for use in the Pan-Arab Electricity Market,” proposes a unified transmission pricing model aimed at simplifying and enhancing cross-border electricity trade in the Arab region. The report highlights the challenges of limited trade due to the lack of formal pricing regimes and suggests a "postage stamp" tariff approach to ensure fair and transparent transmission costs. By adopting these recommendations, the Pan-Arab Electricity Market (PAEM) can unlock its full potential, fostering greater regional integration and economic cooperation.

In a region historically known for its energy wealth, the Pan-Arab Electricity Market (PAEM) is taking significant strides toward integrating power systems across borders. This ambitious initiative, which has been in the works since the signing of a Memorandum of Understanding (MOU) in 2017, seeks to transform the way electricity is traded between Arab nations. As the region grapples with challenges of limited cross-border electricity trade, the World Bank, in collaboration with the League of Arab States (LAS), has released a comprehensive report titled “Transmission Pricing Methodologies for use in the Pan-Arab Electricity Market.” This report proposes a groundbreaking framework to simplify and unify transmission pricing, aiming to unlock the full potential of regional electricity trade.

The Vision for a Unified Electricity Market

The 2017 MOU laid the foundation for the PAEM, setting out a vision for a fully integrated electricity market across Arab nations. However, progress has been slower than anticipated. The World Bank report highlights that only a fraction of cross-border interconnection capacity—5 to 7 percent—is currently utilized. The lack of a formal transmission pricing regime and unbundling of domestic electricity markets are key factors holding back the region's electricity trade. Without fair and open access to transmission networks, the true potential of cross-border electricity trading remains untapped.

The report underscores the importance of developing a unified transmission pricing methodology to facilitate smoother and more efficient electricity trade. This is where the proposed framework comes into play, offering a simplified approach to pricing that could catalyze increased trade activity.

Simplifying Transmission Pricing: The Postage Stamp Approach

At the heart of the World Bank's proposal is the "postage stamp" tariff design, a model that draws inspiration from global best practices. This approach is simple yet effective: each PAEM member state would develop a uniform tariff based on historical costs, applied equally to both domestic and cross-border transactions. The idea is to create a transparent and straightforward pricing system that reflects the actual cost of transmission in each country.

The report suggests that this postage stamp tariff should be sufficient to incentivize transmission utilities to offer wheeling services—where electricity is transmitted across one or more countries to its final destination—without being prohibitively expensive. By ensuring tariffs are set at the right level, the framework aims to encourage more countries to participate in cross-border electricity trade, ultimately benefiting the entire region.

Moreover, the proposed model addresses key aspects of cost recovery, including infrastructure costs, energy delivery charges, and the handling of balancing costs—ensuring that all expenses associated with maintaining and operating the transmission network are fairly distributed among users.

Overcoming Challenges and Looking Ahead

While the proposed tariff design offers a promising solution, implementing it across the diverse economies of the PAEM member states will be no small feat. The report acknowledges that many member states have not yet developed transmission tariffs or established Transmission System Operators (TSOs), which are crucial for the effective functioning of a unified electricity market.

The concept of "tariff pancaking"—the stacking of multiple transmission charges within a single trade transaction—is also highlighted as a significant barrier to market development. The report advocates for minimizing such practices, as they can stifle trade by making cross-border transactions unnecessarily expensive and complicated.

To address these challenges, the World Bank report recommends that member states begin the process of cost-of-service studies for their transmission systems immediately. These studies are essential for setting tariffs that reflect the true cost of transmission services and are fair to all market participants.

The path forward involves a collaborative effort among PAEM member states, the Pan-Arab Advisory and Regulatory Committee (ARC), and other stakeholders. By adopting the proposed tariff design and addressing the associated challenges, the PAEM can move closer to realizing its vision of a fully integrated and efficient regional electricity market.

A Step Toward Regional Integration

The World Bank's report provides a clear roadmap for the PAEM to overcome the hurdles that have hindered its development thus far. By proposing a unified transmission pricing methodology, the report aims to create an environment conducive to fair and efficient electricity trade across the region. As member states work together to implement these recommendations, the PAEM has the potential to significantly enhance energy security, reduce costs, and foster greater economic cooperation among Arab nations.

In essence, this initiative represents a critical step toward regional integration, with the promise of transforming the energy landscape of the Arab world.