Will falling oil and gas prices affect long-term investments in renewable energy, in the GCC region, known for its highest per capita energy consumption and carbon emission rates, and lowest rates of deployment of renewables? Apparently they will not.
Experts point out that the prices of different types of renewables have dropped significantly over the past few years – solar PV (Photovoltaic) falling by 80 percent in six years, and on-shore wind by 40 percent, the cost of energy storage is expected to drop from USD 250 to USD 100 per kWh (kilowatt hour) in the next five years, while the prices of LED lights have already dropped by 85 percent. This shows renewables, especially solar energy, can compete effectively with “conventional” energy sources.
“While the price of oil fell dramatically in 2014, that price has always fallen and risen. By contrast, the costs of renewables – especially solar PV and on-shore wind – have been declining steadily and rapidly. This decline will continue, especially at the module and systems level for solar PV, due to ‘learning-by-doing’ enabling continued process improvements in the sector and the entry of large-scale technology providers such as China and the US into the global market.
With much of the region suitable for vast arrays of solar PV to deliver electricity at scale, this could herald an era of increased focus on solar PV as the future generation technology of choice to tackle the challenge of how best to meet current daytime peaks in demand,” states recent report ‘Financing the Future of Energy – The opportunity for the Gulf’s financial services sector’, prepared for the National Bank of Abu Dhabi by the University of Cambridge and London-based consulting company PwC.
According to the report, energy demand in the MENA region – which currently has the highest energy intensity (energy use per unit of GDP) and carbon intensity (carbon
dioxide emissions per unit of GDP) in the world – is expected to triple during the next 15 to 20 years.
In order to meet domestic energy needs by 2030, the Middle East region will need to commit three percent of its GDP to energy infrastructure compared to a global average of one percent. In shorter period, MENA energy demand is expected to grow by 8.3 percent per year by 2019 – more than three times the global average, while in the GCC region alone over 170 GW of additional capacity will be required to meet the demand of the growing economy and population.
Explaining the impact of dropping oil prices on investments in renewable energy, Dr. Rabia Ferroukhi, senior programme officer – Policy Advice, International Renewable Energy Agency (IRENA), says the latest developments in some GCC and MENA countries clearly indicate that visionary thinking, well-coordinated institutional frameworks and the increasing competitiveness of renewables can create excellent conditions for renewable energy finance and investment.
“In January, the tender for the second phase of Mohammed bin Rashid Solar Park in Dubai was awarded for less than USD 6 cents per kilowatt hour for a 25-year fixed contract. This is the lowest solar price ever achieved worldwide and is equivalent to electricity production at an oil price of around USD 15/barrel or at a gas price of USD 5/MMBtu (million British thermal units) – and all of it was done so in the context of low oil prices.
“Furthermore, it is in the same backdrop of falling oil prices that Dubai has doubled their target for renewable energy deployment to 10 percent by 2030; Abu Dhabi is revitalizing its plans for a 100 MW solar PV; Morocco has just awarded 300 MW of concentrated solar power plant; and Egypt is making strong strides to add 2.3 GW of solar and 2 GW of wind in its power system.
In fact, globally, investment in new renewable energy capacity has exceeded investment in new fossil fuel-based power generation capacity for three years running, topping USD 260 billion in 2014. This global shift is due to the growing business case for renewable energy, which has never been stronger,” says Dr. Ferroukhi. IRENA, based in Abu Dhabi Masdar City was established in 2011 to help promote renewable energy and to diffuse technologies throughout the world.
Solar, particularly, is gaining global momentum and growth in renewables is expected to reach 39 percent by 2019. In 2013, global investments in clean energy were USD 251 billion compared to USD 60 billion in 2004, while installed solar technology capacity in the last four years rose from 45 GW to 140 GW.
More than 50 percent of investment in new generation capacity worldwide is in renewables, while the green bond issues to pay for low-carbon energy projects reached USD36.6 billion in 2014, more than triple that of the previous year. Green energy will receive almost 60 percent of the USD 5 trillion expected to be invested in new power plants over the next decade, says the International Energy Agency (IEA) and estimates that USD 40 trillion are needed for “decarburizing” future electricity production by 2035.
Renewables today account for about 5 percent of the electricity generated globally, and the goal is 12 percent by 2040. Before the oil slump, investment in clean energy was growing rapidly: in the first nine months of 2014, USD 175 billion went to renewable energy projects, according to Bloomberg New Energy Finance.
Gulf countries, whose current production is around 416 billion kWh electricity per year, are in constant need of more energy – transport, cooling and water production (which represents between 25 percent and 50 percent of both energy demand and carbon emissions), consume oil and gas reserves rapidly, and the governments are trying to switch to less carbon intensive sources.
But despite ample financing, availability of renewable resources like sun and wind, and growing demand, cleantech growth in the GCC is slow – for now, total installed capacity in the region is around 90 GW, and according to US consulting company I.H.S.
GCC countries will need to invest USD 350 billion by 2030 in order to meet the region’s power demand.
In 2013, GCC countries allocated USD 32 billion to water and renewable energy projects.
Currently, solar contributes just 0.271 GW of the 16 GW of installed renewable energy capacity in the Middle East. The biggest energy consumer in the region – Saudi Arabia which uses 1.5 million barrels of oil a day on average for desalination – plans to invest USD 110 billion in 41 GW of solar capacity by 2032.
The second largest energy consumer – UAE, spends USD 3 billion every year on desalination, according to the data from the Centre for Strategic and International Studies. It is expected that the region will import 40 billion cubic metres of gas annually by 2025, and the amount is to double by 2035. Gas represents a major part of the current energy infrastructure, especially in Qatar, Kuwait, UAE and Oman, where – with the exception of Qatar – gas imports are growing.
Solar cheaper that oil
Renewable energy projects are much needed across the region and the good news is the technology is becoming less expensive. “Renewable generation capacity, once built, has no variable fuel cost to account for. That makes renewables an attractive option for developers. In addition, especially where it involves solar PV or on-shore wind, renewable production can be brought into operation quickly, in 12-18 months, and provides a flexible option for places where there are currently no grids,” reveals the Abu Dhabi National Bank report.
The region has one of the highest solar insolation values of anywhere in the world – direct radiation exceeding six kWh per square metre per day, and according to the report, investment costs are in the range of USD 2000/kW for large solar arrays (10 to 100 MW), although significantly lower values have recently been obtained for specific projects such as the one in Dubai.
Furthermore, the EI New Energy report from February, states that the new build generation on-shore wind and solar PV remain cheaper than a new oil project in the Middle East. The agency’s calculations suggest it would be cheaper to develop on-shore wind or utility scale solar PV capacity than to build a conventional oil-fired plant in the region at oil price above USD 20-30/bbl over the 25-30 year lifetime of a new project.
“The use of oil as a fuel for power generation has decreased substantially over the past decades. Today, it accounts for under 5 percent of the global electricity supply (down from 25 percent in 1973). Still, in the GCC, gas is the preferred and dominant fuel for power generation in most countries (Qatar, UAE, Oman and Bahrain) and accounts for 63 percent of the overall power generation in the region.
Hence, a decrease in oil prices does not substantially alter renewable energy competitiveness within the power sector. There are specific contexts, such as remote islands or rural communities, where oil-powered (or diesel-based) generation is the primary source of electricity.
“In these contexts, the economics of renewable energy may shift but not enough to impact the business case. As such, even though natural gas and LNG prices in long-term (take or pay) contracts are indexed to oil prices, possibly influencing some investments decisions, IRENA doesn’t believe that falling oil prices represent a serious, long-term risk to the growth of renewables for power generation,” concludes Dr. Ferroukhi.