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Gulf needs to be cautious in developing renewable energy

UAE officials look from a balcony at the Shams 1 concentrated solar power plant on the outskirts of Abu Dhabi, on March 17, 2013, during the inauguration of the facility. Many Gulf states are looking to invest in similar renewable energy projects. AFP PHOTO/MARWAN NAAMANI
UAE officials look from a balcony at the Shams 1 concentrated solar power plant on the outskirts of Abu Dhabi, on March 17, 2013, during the inauguration of the facility. Many Gulf states are looking to invest in similar renewable energy projects. AFP PHOTO/MARWAN NAAMANI
UAE officials look from a balcony at the Shams 1 concentrated solar power plant on the outskirts of Abu Dhabi, on March 17, 2013, during the inauguration of the facility. Many Gulf states are looking to invest in similar renewable energy projects. AFP PHOTO/MARWAN NAAMANI

by Andrés Cala

Abu Dhabi inaugurated the world’s largest solar thermal plant to great fanfare and loud applause from global officials and the renewable energy industry, in the latest illustration of Middle Eastern countries’ support for alternative energy sources. But some of the world’s most aggressive and more imminent renewable energy expansion plans are likely overly ambitious. The ultimate challenge is weighing the benefits to the risks, economic and political, which are specific to each country and region. Or to put it even more simply, how much renewable energy can be rolled out without imposing a heavy economic burden on public expenditure before subsidy cuts become inevitable?

“I don’t know if target will be met,” says Glada Lahn, a research fellow at London’s Chatham House and an expert in the transition towards energy sustainability in the region. “I assume it’s in planning, because it will depend on procurements, grid and additional infrastructure, and the legislative and regulatory frameworks. It’s a relatively new and it’s very ambitious.”

There are a myriad of contradictory narratives and a dance of numbers, but as the Middle East prepares to dive into this process, it should look to Europe—especially in sunny Spain—for lessons in avoiding some of the same mistakes that are now ballooning into Cyprus-sized annual deficits to pay for renewable energy.

“Even though there have been so many announcements in the renewable energy space, these stated aims may be overly ambitious in the timeframes indicated,” Deloitte said in a 2012 research report. Still, the renewable fever appears solid, even if it will very likely cool off and result in target revisions once more comprehensive energy strategies are drafted and implemented.

Renewable Energy Boom

Renewable energy developments in the Middle East are expected to drive the global green power industry this decade. China and Japan will also invest heavily in the sector, but these markets are mostly self-sustaining. Other regions have scaled back initial plans as a result of the 2008 economic crisis. That explains the huge expectations created by the region’s green ambitions.

There are certainly powerful incentives to increase renewable energy capacity in the Middle East. There is a lot of sun and wind, and money and credit are easily available and aligned with soaring demand for energy. In a region where there is an urgent need for power generation diversification, energy security would improve. The economic burden is also blunted, because oil-producing countries would free up more valuable crude for export instead of burning it domestically.

Wind power has already proven itself able to compete with conventional power alternatives, but the case for solar energy—which will contribute the bulk of the region’s plans—has not. Currently, the price at which generated electricity must be sold for the project to break even over the lifetime of solar plants are between two and five times higher than for wind power facilities.

The region does have unparalleled solar potential despite technical challenges like dust and overheating. Peak demand in summer also makes it a better alternative than in other regions, both because peak demand coincides with the sunniest season and because it could be more cost-effective than in other regions. Costs are also falling, while fossil alternatives and their capital costs are rising, which will eventually alter the equation even further.

Saudi Arabia wants to install 54 gigawatts (GW) of renewable energy capacity by 2032, 41 GW of it in solar, 16GW as photovoltaic, which directly transforms sunlight into power, and 25GW as solar thermal, which concentrates solar radiation to heat up water to then generate power. It is in the process of procuring USD 100 billion to launch the program. It is the most ambitious green program in the region—and the most likely to gain, footing because it is the most exposed to power constraints in the future as a result of soaring demand and limited alternatives.

Abu Dhabi wants 7% of its power demand covered by renewable sources by 2020, although it is unclear what technologies it will use. In March, it launched Sham 1 power plant, which, with its 100 megawatt capacity, is among the largest concentrated solar power stations in the world. Its construction was motivated by concerns over energy security, as most of Abu Dhabi’s power needs are currently met with imported gas.

….or bust?

The cost of generating electricity with renewable energy—especially solar energy—is not cheap or without its perils. “How do you make it commercially viable? You want to avoid situation where the government has to pay for it, so you have to encourage companies to invest,” Dr. Lahn, the Chatham House expert, said.

Europe can certainly attest to the costs and risks associated with developing renewable energy. Its experience can illustrate how overly ambitious plans can lead to trouble. For years, European countries, to different degrees, have been subsidizing renewable power expansion through very costly feed-in tariffs. The expenditure on these programs has been so high that many countries, including Spain, the UK and Germany, have considered or introduced measures to reduce or eliminate the tariffs completely. Some countries are better able to recover the costs, but inevitably a big part of the money comes from taxpayers. The most blatant case of mismanagement, and for several reasons perhaps the closest case to contrast Middle Eastern plans, is Spain.

In Spain, more than EUR 900 million went to solar thermal plants as feed-in tariffs in 2012, although they only generated 0.6% of the country’s power output. Another EUR 2.6 billion went to photovoltaic power subsidies, and they contributed only 1.7% of the country’s power. That contrasts with EUR 1.8 billion spent on wind power, which contributed 23% of power output. The total bill of more than EUR 8 billion had increased 24% over 2011; in 2013, it will rise again. The accumulated annual tariff exceed EUR 25 billion. As a result, the government has been backtracking for several years on its policy-driven support, especially for solar power. It went as far as to temporarily suspending the tariffs in early 2012, in order to plan extensive reforms to the subsidy system that sought to relieve Spain’s energy-sector deficit.

In the Middle East, regulatory frameworks are still under development, and up-front private investment will be difficult to attract without significant public funds as a result of heavily subsidized consumer prices.

Similar to their broader economic and political policies, Gulf countries lack comprehensive energy plans that would promote investment and finally address increasingly unsustainable energy sectors ruled by uncertainty and contradictory targets. Costly parallel infrastructure in grids and additional fossil fuel generation will also have to be built. The uncertainty permeates the energy sectors across the Gulf, as most countries also have parallel ambitions to develop shale and sour natural gas, nuclear programs and clean coal.

“Coordination is a huge problem, with no overall policy and incoherent policy slowing a move toward a more sustainable path,” Dr. Lahn told The Majalla. Experts also warn that economically, freeing up more oil will not necessarily translate into higher export revenues and decreased deficits. It will more likely constitute something like a subsidy transfer, meaning that the extra oil revenue will have to pay for producing expensive electricity and selling it for basically nothing.

“You have these governments with mounting subsidy bills that are costing a hell of a lot. If you can start using renewables to meet peak demand, then you’re able to save those very valuable barrels of oil,” Dr. Lahn said. “You can make an argument for transferring those costs to renewable subsidies, which in the long term will be a winner.”

*Andrés Cala is a Madrid-based freelance journalist specializing in Middle Eastern and European policy, as well as global energy issues.

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