Efforts to integrate electricity markets across the Arab world are gaining traction through the Pan-Arab Electricity Market (PAEM), a decades-in-the-making initiative that aims to facilitate regional power trade and improve energy security. Backed by the Arab League, the World Bank, and the Arab Fund for Economic and Social Development, PAEM seeks to unlock shared economic and financial benefits by connecting national grids and establishing a formalized regional electricity market.

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PAEM aims to solve a real regional issue: The push to establish a regional electricity market comes amid growing fiscal pressures and structural challenges in the energy sector. Historically, many Arab countries — especially Egypt — have heavily subsidized electricity, straining public finances and limiting the capacity for new investments. The pandemic and subsequent oil price collapse further exacerbated funding constraints, delaying power generation projects across the region.

As governments face tighter budgets, PAEM offers an alternative path — leveraging electricity trade as a means of improving grid efficiency, attracting private investment, and ensuring energy security.

How it will work: Plans for a unified Arab electricity market aim to connect and harmonize the energy systems of 22 Arab countries by 2038, with phased implementation starting in 2025. The market is expected to operate on a commercial mechanism, enabling energy exchange by utilizing surplus electricity from member states. It also could draw on the Gulf electricity interconnection project as a model.

WHERE THE PROJECT STANDS-

The project is gaining momentum: The Arab League inked key agreements for the mechanisms and framework for the common Arab electricity market during the Arab Ministerial Council for Electricity held in Egypt in December. And here at home, the Egyptian cabinet approved a draft presidential decree last week to establish the Arab common electricity market and the Arab common electricity market agreement.

Who’s on board? The countries that signed the agreement include the UAE, Saudi Arabia, Kuwait, Palestine, Syria, Egypt, Qatar, Libya, Sudan, Yemen, Morocco, and Jordan.

The PAEM transition follows a structured roadmap laid out in a 2017 MoU signed by 16 Arab countries. The initiative is being developed in several phases, with a focus on establishing key governance, institutional, and regulatory frameworks to enable cross-border electricity trading, according to the PAEM website.

The plan calls for slow but steady implementation: International experience has shown that regional energy markets require time to mature, with gradual progress toward fully independent regional institutions. In the initial stages, PAEM’s governing bodies will operate under the Arab League and partner organizations before eventually evolving into standalone regulatory entities. The long-term goal is to create a fully interconnected and synchronized Arab electricity network by 2038, enabling seamless cross-border energy trade with multiple buyers and sellers.

The foundation stage has already been completed: A preparatory stage focusing on establishing governance and institutional frameworks was already completed, setting the groundwork for formal electricity trade at the sub-regional level. This phase laid the legal and regulatory foundation for cross-border electricity exchanges and established the necessary institutional mechanisms to oversee market operations.

Moving forward, PAEM will progress through two additional transitional stages before reaching its ultimate goal of a fully liberalized electricity market with wholesale and retail competition across the Arab world. The final phase — expected to be completed by 2038 — will see the full synchronization of electricity networks across Arab countries, a balancing market, and day-ahead spot markets that allow for seamless and competitive energy trading across borders.

PAEM OFFERS SIGNIFICANT SAVINGS RELATIVE TO INVESTMENT-

A game-changer for energy security and cost savings: PAEM is not just about connecting national grids; it presents a massive economic window for participating countries by unlocking bns of USD in cost savings and investment potential. A World Bankstudy (pdf) analyzing various policy and market scenarios found that regional electricity trade would reduce the need for new power generation investments, lower system costs, and optimize energy resources across borders.

Power sharing can reduce the need for unnecessary power plants: By leveraging existing surplus electricity and pooling reserves, PAEM could significantly cut down the region’s need for new power generation capacity. The World Bank study found that regional electricity trade could eliminate the need for up to 63 GW in new generation capacity by 2035. This would allow governments to postpone or even avoid costly investments in additional power plants, directing resources toward modernizing infrastructure and expanding grid efficiency instead.

A multi-bn-USD cost-saving chance: One of the biggest advantages of PAEM is its potential to bring down the overall cost of electricity across the region. The study found that in a scenario in which gas prices are liberalized, carbon caps are introduced, and regional grid interconnections come into full effect, costs could decline by up to USD 196 bn — a 13% reduction compared to a scenario without electricity trade. Even conservative estimates suggest that regional integration would cut costs by at least USD 107 bn, primarily through fuel savings and optimized generation capacity. Indeed, increasing cross-border transmission projects through investments of just USD 7.5 bn could save USD 35 bn in system costs — meaning that every USD 1 spent on regional grid expansion would generate nearly USD 4.7 in savings.

More renewables, lower emissions: PAEM will also be instrumental in scaling up renewable energy across the region. With more interconnected grids, countries can trade surplus renewable energy, ensuring a more stable and efficient use of solar and wind power. The study found that by 2035, the share of renewables in total installed capacity could increase to somewhere between 14.5-32.7% — up from just 1.4% in 2018 — under certain policy frameworks. At the same time, electricity trade could help reduce carbon emissions by allowing gas-dependent economies to transition toward cleaner energy sources.

Cross-border transmission infrastructure investments are the next step: While electricity trade already occurs via bilateral agreements, unlocking the full economic benefits of PAEM will require major investments in transmission infrastructure. The World Bank study identified 25 priority projects, including expansions to existing interconnectors and the construction of 18.5 GW of new cross-border capacity. Five of these twenty-five projects include electricity lines linking Egypt to Saudi Arabia, Libya, Jordan, Sudan, and the Gaza Strip.

CHALLENGES-

Roadblocks on the path to full integration: While PAEM presents a major economic window, the region faces significant hurdles before it can fully realize the benefits of cross-border electricity trade. Despite existing interconnection capacity, only 2% of electricity produced in the MENA region is currently traded — a stark contrast to the potential savings and efficiency gains PAEM could unlock. Several structural, regulatory, and financial barriers continue to limit trade volumes and slow progress.

Uncompetitive pricing models are holding trade back: One of the biggest roadblocks to expanding electricity trade is the lack of a standardized pricing framework. Many Arab countries — including Egypt — still heavily subsidize electricity production, leading to distorted market prices that make regional electricity trading financially unviable. As a result, most cross-border electricity exchanges in the region occur in-kind — meaning electricity is traded for electricity rather than cash, and mainly in cases of emergency. To resolve this, countries will need to gradually phase out domestic fuel subsidies and adopt a commercial pricing model for electricity trade, according to the World Bank. An interim solution could be to apply international fuel prices to cross-border transactions, even as subsidies remain for domestic consumption. However, for PAEM to fully unlock its potential, governments must expedite the shift toward market-based pricing mechanisms.

Financing the infrastructure gap: Another key challenge is financing the massive investment ticket for improving and adding new cross-border transmission infrastructure. While some interconnections already exist, many are underutilized — operating at just 5-7% capacity on average. Expanding and modernizing transmission networks will be crucial to ensuring a reliable and efficient electricity trade system, which requires significant investments.

Weak institutional and regulatory frameworks: The success of PAEM also hinges on strong regional institutions that can coordinate policies, set clear trade regulations, and enforce technical standards. However, a lack of harmonized regulations remains a major challenge. Each country operates under its own market structure and regulatory framework, making it difficult to establish a unified electricity trading mechanism.

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