The world saw a dramatic fall in oil prices in 2014 as OPEC held firm on its quotas in the face of increased production elsewhere. Whilst prices have rebounded in 2015, they are a long way from the recently sustained highs of over $100 a barrel.
So what impact, if any, lower oil prices will have on the growing renewable energy industry in the Middle East?
With the cost of hydrocarbon extraction relatively low in the Middle East, gaining support for renewable energy projects has been challenging, and with continuing lower oil and gas prices it would be logical to assume that these challenges would continue.
In addition to lower oil and gas prices, renewable energies face a number of challenges, including technological ones: the wind doesn’t blow continuously; the sun doesn’t shine 24 hours per day; and some renewable technology is compromised by atmospheric conditions. For instance, it is necessary to wash solar panels to limit the impact of sand and heat on them, and wind turbines face similar issues. In addition, getting renewable power to market requires that transmission infrastructure (the grid) be upgraded, which adds extra cost to projects.
Recently, there has been a boom in the implementation of renewable projects in the Middle East, including the UAE.
DEWA has recently announced a 200MW solar project in the Mohammed bin Rashid Al Maktoum Solar Park, capable of powering hundreds of thousands of households. It also requested an advisory tender for an unprecedented additional capacity of 800MW.
There are projects currently under construction in Jordan. And, in 2014 Egypt announced a regulatory framework for renewable projects of even greater capacities.
Examination of the current renewables market in the GCC shows increasing competitiveness of the price of renewable energy. For example, DEWA will pay the cheapest price in the world to date for solar power, prices comparable to the cost of Liquefied Natural Gas (LNG), which the UAE imports.
Unlike oil and gas, the cost of renewable energy decreases with demand because of economies of scale. Atmospheric and technical challenges posed in the region by sand, heat and haze are becoming better understood and overcome with assistance from the world class research facilities, such as Masdar in the UAE and the KAUST research center in Saudi Arabia.
It is worth addressing these challenges because of the natural abundance of available sunlight.
The renewable energy sector provides opportunities in the region for commerce and employment, as evidenced by dedicated free zones like Dubai Silicon Oasis which are already attracting large overseas equipment manufacturers.
Renewable energy is flexible and allows for “off-grid” generation of power in remote areas, for communities and, for example, construction or mining projects. Solar power is even currently being trialed in the region as a power source for EOR systems (through steam generation). Furthermore, renewable energy projects are scalable and can have a footprint of square kilometers, or be small enough to fit on the roofs of hotels or households.
It is also worth noting the intrinsic value in diversification of power sources. Encouraging the growth of the renewable energy industry in the region need not be to the detriment of the oil industry. In many countries in the Middle East energy prices are subsidized.
Where renewable energy replaces oil and gas demand, those resources may be freed up and used as feedstock for industry, thus creating jobs, or they may be sold on the international marketplace for its full value.
With regard to this last point, there are differing options available to oil producing countries for valuing hydrocarbons when evaluating the utility of renewable energy. Instead of international market value, hydrocarbons may be valued at the cost of extraction, which is considerably lower.
The scope of this evaluation may be restricted to evaluating renewable energy alone, i.e. not in the context of an overall state budget. Countries in the Middle East, that rely on hydrocarbons exports, for example Iraq, provide a breakeven price of oil (in US$/bbl) for their national budgets.
This breakeven price factors in the domestic subsidies for fuel and power, ironically leading to a higher breakeven price. Solar panels on rooftops may now provide power to households in Dubai thanks to the recent resolution No. (46) for 2014 issued by Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, Crown Prince of Dubai. This is a prime example of legislation which facilitates renewable energy projects.
Other countries in the region, notably Jordan and Egypt, have recently enacted legislation which provides a framework for renewable energy projects.
This legislation provides a layer of governmental support for large scale renewable energy projects, including guaranteed tariffs for generated power and government guarantees for project developers.
This has led to projects that have been financed successfully by commercial banks and international institutions such as the World Bank. The Middle East is ideally positioned to develop its natural resources and incentivise renewable energy concurrently.
There are recognised benefits in diversifying energy sources to improve energy security and reduce overdependence on oil and gas. The target of Expo 2020 for Dubai to generate 50% of the energy requirements from renewable sources on-site is yet another opportunity for the nascent renewable energy sector in the Middle East to be showcased.
About the author:
Gerry Rogers is a senior associate at Galadari Advocates & Legal Consultants
