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The Saudi cabinet approved the general agreement to establish the Pan-Arab ElectricityMarket (PAEM) — joining 11 other Arab countries that have already signed on, including Egypt, the UAE, and Qatar.

About PAEM: The 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.

Where the project stands: 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. The countries that signed the agreement include the UAE, Saudi Arabia, Kuwait, Palestine, Syria, Egypt, Qatar, Libya, Sudan, Yemen, Morocco, and Jordan.

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 of Saudi’s neighbors 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.

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 — one that Saudi is already deeply embedded in.

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.

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.

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.

We are leading operational efforts: The Mashreq Pilot Trade Project — involving Saudi, Jordan, Egypt — is slated to commence trial power exchanges as soon as the Saudi-Egypt High Voltage Direct Current line is operational. In April, technical teams from these countries ironed out rules for the pilot’s next phase. By year end — when the 3 GW Saudi-Egypt interconnector is expected to begin service — the first commercial transactions under the PAEM framework could occur.

What’s in it for Saudi? For the kingdom, PAEM isn’t just a regional integration project — it’s a strategic export play. Saudi Arabia is building out over 130 GW of renewables by 2030. That’s more power than the domestic grid can absorb, especially during midday solar peaks. PAEM offers Riyadh a regional outlet for surplus capacity.

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. A World Bank study (pdf) found that regional electricity trade could eliminate the need for up to 63 GW in new generation capacity by 2035. This means fewer expensive plants and less fiscal pressure on already strained public budgets.

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 — a 4.7x return.

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.

BUT- Infrastructure is a bottleneck: While electricity trade already occurs via bilateral agreements (except the GCC-interconnection), unlocking the full economic benefit of PAEM will require major investments in transmission infrastructure. The World Bank identified 25 priority projects, including expansions to existing interconnectors and the construction of 18.5 GW of new cross-border capacity. Six of these twenty-five projects include electricity lines linking the kingdom to Egypt, Yemen, Jordan, Iraq, Kuwait, and Oman.

Another challenge is financing the massive investment ticket for improving and adding new cross-border transmission infrastructure. While some interconnections already exist (Saudi is already investing in links with Jordan and Iraq), many are underutilized — operating at just 5-7% capacity on average. Fixing that will require market incentives and trust in the trading system.

Uncompetitive pricing models are also holding trade back: One of the biggest roadblocks to expanding electricity trade is the lack of a standardized pricing framework. Many Arab countries 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 banknotes, 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 — including unbundling utilities and paving the way for private players to trade across borders.

Politics is still in the way too…: A unified Arab Grid Code is in development, and new institutions — including a PAEM secretariat and a regulatory committee — are supposed to handle dispute resolution and rule harmonization. For now, they remain loosely defined under the umbrella of the Arab League.

… and political stability is the big unknown: Grid infrastructure requires peace and cooperation to build and operate. Ongoing conflicts mean not all countries can immediately participate to their full capacity. Investments will be cautious unless a minimal level of stability and governance is present.