The Greening of the Gulf: Explaining the shift in the region's energy sector

Published January 19th, 2014 - 08:25 GMT
More private companies, as well as public entities are investing in green energy in the Middle East (Shutterstock)
More private companies, as well as public entities are investing in green energy in the Middle East (Shutterstock)

With the Gulf’s energy demand surging on the back of a growing population and steep industrial demand, the region’s energy mix is experiencing a shift.

MENA governments are increasingly turning towards renewables to generate power for the energy hungry population. Not surprisingly, this shift begins with solar – a resource that MENA is abundantly blessed with.

Saudi Arabia, UAE, Turkey and Morocco have set ambitious targets for solar power production. KSA plans to spend $109 billion, including expenditure on its nuclear power, to build 41GW of solar capacity by 2032. The UAE aims to spend almost $102 billion on alternative energy, including solar, by 2020.

Experts say that renewable energy sources are becoming more attractive due to diminishing production costs.

“Today it is pretty well accepted that renewable energy is an economically viable fit into just about any country in this region because until five years ago renewable energy was relatively expensive compared to even fossil fuel-based energy at the market price for fossil fuels,” said Paddy Padmanathan, president and CEO of ACWA Power.

“But everything changed dramatically as the efficiency of actual renewable energy conversion technology improved while the cost of manufacturing, installation and establishment of renewable energy power plants automatically diminished.”

As production costs continue to plunge, international financial institutions are increasingly eyeing the region’s
solar projects.

According to a report published by International Finance Corporation (IFC), a World Bank subsidiary, emerging Europe, Central Asia and MENA have an investment potential of $1 trillion in renewable energy. The international financier signed a $1.5 billion deal earlier this year with Abu Dhabi government’s Masdar to finance its clean energy projects while dedicating $268 billion last year to develop renewable projects globally.

“The region can potentially produce 400,000 megawatts of renewable energy annually through hydro, solar and wind,” said Mouayed Makhlouf, director of IFC, MENA.

However, IFC’s regional head said that MENA has to ramp up its energy policies in order to attract major investment.

“There needs to be lots of regulations from the government’s side, transparency needs to come and more investment needs to come in transmission lines. Even if you invest in renewables itself, unless you address the issue of transmission, you probably won’t address the regional needs,” said Makhlouf.

Despite solar’s potential in the region, Padmanathan cautions that return on investment will be gradual as the technology is continuously evolving while businesses are testing the waters.

But he believes that investment interest from global financiers like IFC lends more credibility to the renewable energy industry in the region.

“When institutions like IFC start investing, it makes it much easier for commercial financing to follow through,” he said.
The majority of the Gulf’s solar and renewable energy schemes are government funded. But for further development to come to fruition, the private sector must play a more active role.

“MENA countries are moving towards the model of placing the responsibility for the development of renewable energy entirely in the hands of the private sector,” said Padmanathan in a report released by World Energy Future Summit and Masdar.

“Private companies will have the opportunity to develop the assets, own it, operate and maintain it and sell
the generated electricity, unlike in the traditional model where governments provided the investment, owned and maintained the assets.”

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