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1 Introduction
Hisham M. Akhonbay and Marilyn Smith
Ambitious plans to transition to a global low carbon energy system are emerging worldwide, particularly after the rapid ratification of the Paris Agreement, achieved in the context of the 21st Conference of the Parties (COP21) of the United Nations Framework Convention on Climate Change (UNFCCC). Many countries and other actors are forging ahead with their stated commitments, despite the withdrawal of the United States from the Paris Agreement. Also emerging are the associated challenges for low carbon energy, which are perhaps greatest in the region of the Arab Gulf where vast low-cost hydrocarbon resources have underpinned economic and social development in recent decades.
The potential for renewable energy is also vast in the six countries belonging to the Cooperation Council of the Arab States of the Gulf – more commonly known as the Gulf Cooperation Council (GCC), which is how it is identified here – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). The GCC area is well endowed with wind and solar resources. The annual solar potential is the equivalent of 2,000 kilowatt hours per square meter (kWh/sq m) in most areas. Developing just 1 per cent of the suitable area could result in 470 gigawatts (GW) of solar photovoltaic (PV) capacity and 60 GW of wind power (IRENA 2016). Additionally, the region has vast tracts of land that are largely unused, mitigating the challenge of competition for land for other activities. Recognizing that solar is likely to account for the major share of renewable energy development in the region, this publication focuses on the potential for solar energy in power generation.
With due consideration of global aspects, this publication probes the renewables transition within the national and regional dynamics of the GCC, examining the opportunities associated with such a transition and also seeking to identify and address related challenges. It is relatively easy to identify multiple motivations for renewable energy deployment in the GCC. Pursuing a comprehensive and coordinated strategy for renewable energy, and for solar power generation in particular, can reduce dependence on hydrocarbon feedstock, minimize fuel costs, and reduce carbon dioxide (CO2) and other greenhouse gas (GHG) emissions, while also creating new industries and related employment opportunities. The outcome will assist the GCC transition to a more sustainable development path and optimize the value of the resource endowments of member countries.
Across the region, energy demand – particularly for electricity – is being boosted by increasing population and ongoing economic growth. As electricity generation is fueled almost exclusively by oil and gas, switching to renewable sources for domestic consumption is central to charting new pathways in recent visions or strategies published by GCC countries.
In the context of low oil prices on global markets substantially reducing GCC government revenues, the historical practice of providing power and water at below-market prices has become financially unsustainable. Deploying renewable energy for power generation domestically would make larger volumes of hydrocarbons available for export or for other higher value uses, effectively boosting government revenues while still promoting economic development. Stimulating a renewables sector could also satisfy a portion of national aims to diversify economies and stimulate employment of nationals. At the regional level, the existence of the interregional grid represents an untapped opportunity to optimize capacity, generation and transmission and distribution. Finally, all GCC countries are committed to the global objectives of the Paris Agreement, a core element of which is reducing GHG emissions. At present, GCC countries have very high per capita emissions compared with other developed countries; large-scale deployment of renewable energy and low carbon technologies can help to achieve stated goals.
The success of any major transformation or change initiative typically requires a long-term strategic vision, a well defined road map and a clear set of supporting policies. At present, each GCC country has stated goals for renewable energy deployment, either as a percentage of power generation or as a specific generating capacity. On the percentage of capacity side, by 2030 Kuwait aims for 15 per cent, Bahrain for 5 per cent, and Qatar for 20 per cent. The UAE has specified goals for each state, with Abu Dhabi aiming for 7 per cent capacity by 2020 and Dubai planning to install 5 GW of solar PV by 2040. Oman does not have any specific renewables target; rather, it pledged to reduce gas use in power generation by 5 per cent per kWh. Saudi Arabia specified capacity of 9.5 GW by 2023 and 54 GW by 2040.1 This focus on renewables has resulted in $800 (USD) million of investments across the GCC in 2015; with 24 additional renewables projects planned, investment is expected to increase.
Intended as a reference for the many stakeholders that will be involved in deploying renewable energy in the GCC, this publication summarizes the current status of energy supply and demand in the region. It then examines renewable energy development to date, again with a focus on solar power generation. Acknowledging the underlying economic challenges of transitioning from low-cost hydrocarbons to renewable energy sources, the publication examines the macroeconomic benefits that governments could realize. In fact, it makes the case that the current context of fiscal restraint associated with low oil prices creates an unforeseen opportunity to initiate – albeit gradually – large-scale reform across the energy sector. Finally, several authors review the policy environment in the GCC and globally, with an eye toward understanding the instruments and mechanisms that have been shown to spur renewable energy deployment. This entails reviewing the pricing, legal, and regulatory structures with an emphasis on the social aspects, as well as the effectiveness of such measures when executed in a coordinated manner across the GCC states.
Capturing the full potential of solar energy
Demand for electricity in the GCC is projected to double by 2040. Increasing electricity generation to keep pace with rapid population growth and sustain economic growth while also curbing the region’s high CO2 and GHG emissions presents a massive challenge. In Chapter 2, David Wogan, Imtenan Al-Mubarak, Abdullah Al-Badi and Shreekar Pradhan set out the reality of demand growth in the GCC and demonstrate the need for GCC countries to take aggressive action away from oil- and gas-fired power generation. The chapter highlights the complexity of the GCC energy system, but also points to opportunities to make it more efficient through renewables integration and electricity trading. The remainder of the publication is dedicated to exploring different options to achieve the desired outcome by meeting part of the projected demand growth through renewable energy deployment.
The opportunity to capture multiple benefits by deploying renewable energy for power generation in the GCC is clear, yet the underlying economics remain a substantial challenge. In Chapter 3, Amro Elshurafa and Walid Matar analyze the costs and benefits from the perspectives of households – installing rooftop solar photovoltaics (PV) – and utilities, deploying large-scale PV or concentrating solar power (CSP). In both cases, the low rate of current tariffs serves as a strong disincentive for personal or private sector investment. Yet experts estimate that each gigawatt of renewable capacity installed in the GCC will reduce hydrocarbon demand by 3 million barrels (Mbbl) annually, delivering both economic and environmental gains. Shifting to a macroeconomic approach, the authors argue that under GCC economic structures, governments stand to gain the most from a low carbon transition and, hence, they should both lead efforts to deploy solar power and shoulder a large portion of the initial financial investment needed. They can also put in place reforms that will, over time, provide sufficient incentive for private investors also to engage. This premise underpins the analysis of the next set of chapters, and indeed the publication as a whole, which considers policies and mechanisms that can stimulate the transition.
If GCC governments are to take the lead in stimulating renewable energy deployment, it bears asking more precisely what role they could take, what tools they can apply and, indeed, is there any opportunity to gain from the experience of others who have gone before? In Chapter 4, Maha Alsabbagh and Odeh Al-Jayyousi examine the path followed by European Union (EU) countries, which saw wind and solar generation increase from just under 100 terawatt hours (TWh) in 2005 to over 400 TWh in 2015 (Eurostat 2015). Acknowledging several fundamental differences between the EU and GCC contexts, the authors identify parallels that offer opportunities for GCC governments to move more quickly and also to avoid some missteps.
Their research highlights the lessons that characterize the transition in the EU. Most notably, policy formulation began as early as 1990, leading to the two foundational directives: the Renewable Electricity Directive of 2001 and the Renewable Energy Directive of 2009, which set out the specific goals of the Vision 20/20/20 initiative. The EU experience has been successful, in part, because the member states agreed to establish clear policies covering areas such as joint research, development and innovation, and to create common, yet flexible, regulatory measures. The policies coordinated efforts around energy efficiency, renewable energy and climate change mitigation/abatement and adaptation.
The EU-GCC comparative analysis finds that GCC countries can benefit from establishing more robust and comprehensive national and regional policy frameworks and set specific measures to spur renewable energy deployment. The authors offer recommendations appropriate to the GCC context on how to fill the gaps.
The features that are unique to the GCC region, particularly in light of the current downturn in commodity prices, and the economic challenges associated with renewable energy deployment are investigated in Chapter 5 by Karen Young, who asserts that, in a dramatically changing context, governments need to reexamine their roles. Traditionally, GCC governments have been ‘providers’ of essential services including energy; their new role may be more akin to an entity that establishes an environment that allows the private sector to flourish and compete in a more liberalized energy market. As the cost of renewable energy deployment is beyond the capability of most GCC governments, attracting substantial investment from private companies, development banks and foreign direct investment agencies will be critical. Thus, to seize the opportunity of renewable energy, governments will need to implement economic and legal reforms that allow the private sector to participate more efficiently. Recent examples of successful public-private partnerships (PPPs) and independent power producers (IPPs) help build the case for the further opening up of the energy sector while innovations in financing, such as green bonds and sukuks (Islamic bonds), show strong potential for attracting capital.
Attracting financing to renewable energy projects remains a significant challenge in any context: the technologies, business models and prospects for adequate returns remain uncertain, so investment is perceived as having a higher risk than backing conventional energy capacity. As is evident in developing countries, this can drive up the cost of financing renewable energy by as much as 40 per cent against gas-fired plants, for example. Here again, governments can play a vital role. In Chapter 6, Stephen Gitonga and Walid Ali explain how a tool called De-risking Renewable Energy Investment, developed by the United Nations Development Program (UNDP), has helped governments in developing countries assess why renewable energy investment is perceived as high risk, and what regulatory and legal reforms might effectively ‘de-risk’ such investments. A case study from Tunisia demonstrates how the tool can be applied and suggests its potential for the GCC. The GCC will require as much as 72 GW to be installed between 2020 and 2040. While GCC countries have the substantial advantage of being in good financial standing, thus mitigating the risk of default, the private sector continues to perceive risk in non financial elements, including the lack of policies and regulations – for example, lack of transparency in procurement programs, difficulty in acquiring permits, nationally focused real estate laws and emerging labor issues. De-risking investment through policy reform, the authors suggest, could set the stage to make the GCC a low carbon investment hub.
Setting new policy frameworks for renewable energy
Tackling the policy environment is one the most important challenges when initiating large-scale renewable energy deployment. The next chapters investigate the possible policy instruments that could be implemented in order to make the intended plans operational.
Recognizing that renewables have effectively been ‘locked out’ of resource rich countries in the Middle East and North Africa (MENA), not only by low-cost hydrocarbon resources but by perceived risks and uncertainties, lack of necessary institutions and inadequate grid infrastructure, the Oxford Institute for Energy Studies authors (Rahmatallah Poudineh, Anupama Sen and Bassam Fattouh) set out in Chapter 7 how systematic policy reform can create an environment that stimulates deployment. Starting from the realities that large-scale deployment will require private investment, yet no investors will participate without sufficient economic incentive, this chapter addresses the need to enable a renewables market through pricing and subsidy reform across the electricity sector. Faced with the choice of completely eliminating existing price subsidies, which is politically challenging and would have severe economic impacts, or heavily incentivizing renewables to make them cost competitive, GCC countries bear a heavy financial burden either way. The more feasible approach, the authors suggest, is ‘combinatorial’, i.e., it involves partial reform of fossil fuel prices in the medium term, while providing partial government subsidies to renewable energy. The process of price reform would continue in the long term to bring prices across all energy generation technologies closer to economic cost. This will give strong signals to potential investors of the long-term aim to move toward a fully competitive energy market. In parallel, to attract investors, GCC countries will need to enhance grids, strengthen institutions and remove risks in the areas of politics, policy and regulation, technology, currency and liquidity, and creditworthy power off-takers.
Continuing on the theme of setting intermediate goals to achieve the final aim of meeting demand in a reliable, efficient, and sustainable manner, in Chapter 8 Steve Griffiths and Daniah Orkoubi probe the relationship between energy and climate change policy in creating effective market clearing mechanisms. They also examine the effects of explicit and implicit carbon pricing on renewable energy development. The chapter explores several policy instruments that could be applied in the GCC context: competitive supply long-term auctions, net metering, feed-in tariffs, carbon pricing and emissions trading schemes. (Net metering provides credit to customers with solar PV systems, via a special billing arrangement, for the full retail value of the electricity their system generates.)
Equally important is to properly design and execute the distribution mechanisms by which resulting funds could be allocated, such as green spending, green funds, and revenue recycling. Experience in the UAE shows that auctions have been effective in incentivizing the first wave of renewable energy projects in the region. Over the longer term, the most efficient and sustainable way to incentivize renewable energy in the GCC is by creating a market based system that allows supply and demand to interact, likely including measures such as explicit carbon pricing. Ultimately, the authors propose a phased approach to create – and over time strengthen – an integrated energy and climate policy framework. Early steps to promote distributed generation and solar water heating, in parallel with energy pricing reform, can help build a foundation for more aggressive action such as establishing a regional or sub regional emission trading scheme.
Energy system planning and integration to support renewables
Integrating renewable energy into conventional power systems requires substantial planning and strategic action to build up necessary infrastructure and eliminate existing institutional and market barriers. The following section explores innovative approaches to integration and assesses technical and po...
