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How to unlock the potential of Jordan’s renewable energy sector

  • Neil Quilliam

    Associate Fellow, Middle East and North Africa Programme, Chatham House

    زميل مشارك، برنامج الشرق الأوسط و شمال افريقيا

  • Jessica Obeid

    Independent energy policy consultant

    استشارية مستقلة في مجال سياسات الطاقة

Despite Jordan’s great progress in expanding renewable energy capacity, key challenges stand in the way of unleashing the sector’s full potential.

On the face of it, Jordan is in an enviable position when it comes to renewable energy. It has abundant renewable sources in the form of solar, wind, geothermal, hydropower and bioenergy, and one of the most advanced renewable energy laws and frameworks in the region.

What is more, Jordan has almost met its 2030 renewable energy target of 31 per cent. The government is now considering raising this target to 50 per cent and is planning to turn the country into regional hub for green energy production.

But several challenges stand in the way of unlocking the sector’s full potential.

Key challenges and potential bottlenecks

Despite Jordan’s great progress in expanding renewable energy capacity, the road ahead is beset by challenges in infrastructure, investments and affordability, as well as conflicts of interests with the fossil fuel economy and electricity utility.

A reliable infrastructure is at the core of the energy transition. Integrating significant shares of renewable energy requires a large and flexible grid. However, grid expansions and modernization have been lagging in many parts of the world, including Jordan, creating bottlenecks for renewable energy scale-up. Since renewable energy deployment in Jordan has focused on variable sources such as solar and wind energy, the intermittency of power generation can affect grid reliability and stability. Increasingly expensive thermal power has been used to cover peak demand, while there has been a failure to use peak supply in solar power.

To harness that additional renewable power, and thereby reduce reliance on fossil fuels, would require massive energy storage capacity – something Jordan is currently lacking. Energy storage systems, like renewable energy systems, are capital intensive, and in Jordan’s case would be reliant on finance with de-risking measures.

While financing from and cooperation with other countries, especially Gulf Arab states, have contributed to the development of the renewable energy industry in Jordan, securing long-term investments and building a favourable business investment climate remains a challenge due to perceived risks. Aside from political and economic risks, the grid connection, procurement and counterparty risks are significant. In Jordan’s case, the counterparty responsible for purchasing power is the national utility, the National Electric Power Company (NEPCO), which is highly indebted and suffers from weak financial performance.

NEPCO’s debt is often attributed to the high costs of fuel and electricity subsidies, despite Jordan’s notable efforts in eliminating them. Less often discussed is the inadequate cost recovery of electricity, a result of a cross-subsidizing tariff in which commercial costs are high compared to residential ones. Yet renewable energy incentives have enabled many businesses to offset their bills with solar photovoltaics (PV), generated by rooftop and offsite farms. In addition, there is the high price for electricity due to the high-risk premiums and take-or-pay clauses included in Jordan’s power purchase agreements (PPAs).

The acute problem for both the grid and NEPCO is ‘too much’ renewable energy and not enough storage. In 2019, the government imposed a freeze on all renewable energy projects of over 1MW, which was not lifted until 2022.

Distributed renewable energy actually poses a threat to the revenues of utility companies like NEPCO and regional distribution companies, as the latter’s largest consumers – which provide the bulk of the utilities’ income – switch to on- and off-site renewable energy generation.

Competition between renewable energy, the fossil fuel economy and national electricity utilities is by no means unique to Jordan. The fossil fuel industry tends to be represented by a national institution to champion its cause, while there is generally no such institution for the renewable energy sector, meaning the latter can easily drop down the list of government priorities. While Jordan has a business association focused on advancing Jordan’s progress towards a green economy, EDAMA, there are also vested interests in refining and fuel retail and these interests could expand in the near future as Jordan begins shale oil production.

Recommendations: how to move forward

To meet future renewable energy targets, Jordan should execute its plans to upgrade the grid and deploy energy storage systems, and implement power sector and business climate reforms. The World Bank is assisting Jordan with its plans through an electricity sector roadmap and funding for climate responsive investments ($400m) and electricity sector efficiency and supply reliability ($250m).

Jordan can also benefit from efficiency and demand-side management. To help, the regulator introduced a time-of-use tariff in April 2022. The Jordanian government is working with USAID on the development of an energy services company model which could incentivize energy efficiency at scale.
It is also crucial to upgrade the grid and create a framework and financing mechanism for the development of the energy storage industry to ensure the sustainability of renewable energy projects. Rolling out electric mobility will help mop up peak supply and moderate peak demand, while production of green hydrogen and ammonia fertilizers are being explored for the longer term.

But energy transition in the power sector cannot happen in a vacuum and is heavily impacted by the sector’s overall status. Therefore, reforming the power sector, including reducing the overall cost of electricity and restructuring the electricity utility into a new business model (possibly moving away from the single-buyer model) are critical first steps.

Overall, economic reform to attract long-term investors is also necessary. For this to happen, it is vital to reduce vested interests in the fossil fuel sector and ensure a political commitment to the energy transition, especially in light of energy sector developments in gas and oil shale. This is a hard needle to thread.

Jordan has made strides in renewable energy deployment and is at the forefront of the industry in the Middle East. But conflicts of interests with the fossil fuel economy and electricity utility, along with challenges in grid infrastructure, lack of storage capacity, low investments and affordability are key challenges for the sector. To meet renewable energy targets and realise its ambition of turning Jordan into a regional hub for green energy production, the Jordanian government should carry out both infrastructure upgrades and wider power sector and business climate reforms.