The Mediterranean is the only region on Earth where three continents meet. Mediterranean countries account for 7% of world population and they consume about 8% of the world’s primary energy demand. Primary energy demand in the Mediterranean is expected to grow substantially over the next 25 years spurred by sustained population (+105 million compared to 2013) and economic (+2.3% per year on average) growth in the region.

While the Mediterranean region displays a great diversity of population, languages and cultures, it is as well a place of convergence. The economic and financial partnership between European Union and Southern Mediterranean countries has been constantly developed. In this context, energy has been recognized as a pivotal aspect of the Euro-Mediterranean regional cooperation. The Barcelona Declaration specifically referred to increasing cross- border investments in the regional energy markets in order to support the development of Mediterranean national economies, as well as strengthen cooperation and intensify exchange of experiences among Mediterranean countries.

The Mediterranean energy sector has a high degree of interdependence, both for electricity and gas. Constant contacts and strong cooperation among Mediterranean countries is therefore necessary to ensure countries with proper flows of energy, both for commercial use and to guarantee proper security of supply. Currently, several cross-border interconnections exist in the region. As for electricity, the three Maghreb countries (Algeria, Morocco and Tunisia) are interconnected and further linked with the European Union. As for the Eastern side of the Mediterranean, the interconnected grids of Jordan and Egypt form the South East Pool. The main gas interconnections of the region lay on the South shore – North shore axis. It is foreseeable that diversification of supply will pave the way for more intense transport infrastructures along the East-West corridor.

Current interconnections are not sufficient to guarantee a proper development of the region. Electricity and gas interconnections around the Mediterranean region need to be substantially improved in order to allow an effective and well integrated regional energy market. It should also be considered that investments in energy grids and generation facilities require a medium-to-long term commitment on the part of companies, regulator and the political power, so to create a stable and well governed environment where payback is guaranteed in due time.

Moreover, Mediterranean national energy markets are today at very different degrees of maturity. In the Southern shore utilities are state-owned and operate either based on vertically integrated service providers or using a single buyer model. Most of these utilities are running at high degree of subsidies, which do not provide a right price signal for private investors. Therefore, most of the investments are financed by the state. However, states face increasing difficulties in keeping the current level of subsidies. Reform of the electricity and gas sectors are being discussed in various Southern countries. Egypt, for example, is currently designing a substantial reform of its electricity sector. The presence of independent regulators is pivotal to guarantee that the reform balances between the needs of investors and consumers, and to subsequently provide investors with a clear framework of rules.

Several initiatives are active in the region to increase investments in the energy sector and enlarge their scope: governments, regulators (MEDREG), TSOs (Med-TSO), operators (Observatoire Méditerranéen de l’Energie, – OME, Res4Med, Medgrid, Desertec – Dii and others), as well as international financial institutions (IFIs). In addition,, the EU implements a program of financial and technical assistance to the region, called the European Neighborhood and Partnership Instrument (ENPI).

In particular, international financial institutions (such as the European Bank for Reconstruction and Development – EBRD, the European Investment Bank – EIB, the African Development Bank – AfDB and the World Bank – WB) are today in a key position to support energy investments, notably in infrastructure, provided that appropriate cooperation takes place among the different actors involved. Regulators are among those actors.

Indeed, regulators should dedicate increasing attention to enhance the level of efficiency interoperability and the quality of planning of energy infrastructure. Cross- border infrastructures are crucial to boost the upgrade of internal grids and overcome the actual fragmentation of the Mediterranean energy system. The creation of adequate, integrated and reliable energy networks is a prerequisite to deliver a properly functioning energy market that will enhance security of supply, integration of renewable energy sources, energy efficiency and will enable consumers to benefit from new technologies and a smart use of energy. Currently, Mediterranean countries are mainly concerned with two priority corridors: the North-South electricity corridor and the Southern gas corridor. These projects should also take into account future energy demand, which is expected to substantially rise.

The successful infrastructure management and investments in the energy sector require effective cooperation, mainly between regulators and TSOs. Secure interconnections would allow cross-border energy exchange between market players in neighboring countries. For electricity, they would also guarantee the secure operation of the power system, allowing generation reserves to be pooled to deal with unexpected outages affecting generation and transmission facilities, or sudden fluctuations in electricity demand. For gas, improved interconnections would support the deployment of increased security of supply. In several non-EU Mediterranean countries there is no sufficient installed capacity to cover the domestic need for energy, and consequently not much is left for cross- border trade. In 2012, the WB estimated that countries in the MENA region would need to spend more than $30 billion in five years to develop a grid capacity that can support their relevant capacity expansion plans, including renewables. These calculations do not take into account the additional money necessary to develop mechanisms in support of energy balancing and the deployment of smart grid systems to integrate RES with conventional sources of power.

The great and growing level of investment involving renewable energy sources is dramatically changing electricity markets. During the last twenty years, Southern Mediterranean countries have elaborated different institutional schemes with the aim to promote the usage of renewable energy sources (RES). While every country has developed its own approach, most of them have raised the bar of their objectives concerning generation and development of RES. Almost all the countries have passed or are discussing legislation regulating the sector. However, incentive measures tend to be limited and only a few of these regulations foresee the use of feed-in tariffs as a means of support. In most cases, the use of authorization procedures or tax exemptions is preferred. Countries currently allowing third party access are Algeria, Israel, Morocco, and Tunisia. New regulatory regimes (e.g. balancing) are necessary to integrate RES in the electricity grids. Power systems will be deeply impacted by technology innovation, which is subject to a complex interplay between the public sector, private market actors and the surrounding institutional environment. Regulators should put in place a solid knowledge in order to transfer this value to final customers (e.g., smart grids). Indeed, their role is crucial up to assure energy provision to consumers, quality of service and technical safety, for the sale of an interconnected Mediterranean energy-consuming society.