As the sharp decline in oil prices to $50 a barrel sends jitters through investors in the Gulf region, one sector unlikely to feel the pinch is renewables. Long-term and strategic considerations are set to win out as renewable generation prices steadily decline and hydrocarbons-rich countries attempt to maximise their exports, with an eye on budget discipline.

There are structural problems to be [worked] out; frameworks can’t be directly transplanted from Europe or the US

Laura el-Katiri, Oxford Institute for Energy Studies

The sector is more dependent on government policy than oil price fluctuations, and is looking to feed-in tariffs rather than feedstock prices in markets already distorted by heavy fuel subsidies.

The only worry is that persistently low oil prices could threaten the gains the sector has made in changing attitudes towards renewable energy in the Gulf over the past three years, when oil prices were high.

“Oil prices are the least of our problems, unless it’s a long-term trend,” says Laura el-Katiri, research fellow at the Oxford Institute for Energy Studies in the UK. “There’ll be little effect on new projects planned over the next few years.”

Cost comparison

While oil accounts for only 5 per cent of global electricity production, Saudi Arabia, the region’s biggest market, relies heavily on liquids for generation. The kingdom’s feedstock comprises 10 per cent heavy fuel oil, 15 per cent diesel and 29 per cent crude oil, according to the Saudi Electricity & Cogeneration Regulatory Authority. Oil is supplied to the domestic market at heavily subsidised rates of just $4 a barrel.

Saudi Arabia burnt 900,000 barrels a day of oil for power generation in 2014. With demand forecast to more than double to 120GW by 2030, domestic electricity generation will increasingly cut into the kingdom’s exports.

Kuwait is even more reliant on liquid fuels; power generation is expected to consume more than 20 per cent of oil production by 2030, according to the Electricity & Water Ministry.

Oil inefficient

If opportunity costs are taken into consideration, recent falls in the price of photovoltaic (PV) solar technology mean oil has become extremely inefficient, from a cost as well as resource perspective, despite the plunge in prices.

Even for gas-burning countries such as the UAE, the costs of solar generation are increasingly attractive. In 2012, PV solar power cost $0.15 a kilowatt hour (kWh), and could only compete with gas if prices rose dramatically to $13 a million BTUs. But since then, with gas prices still below $5 a million BTUs, the price of solar has dropped further.

“Even at today’s low oil prices, solar can compete effectively with oil-fired generation, and developers are able to price solar energy significantly below diesel-produced electricity,” says Vahid Fotuhi, president of the UAE-based Middle East Solar Industry Association (Mesia). “And as we have seen from Dubai’s recent 100MW PV solar tender, solar power is already in line with the cost of electricity from a typical advanced combined-cycle natural gas power plant, which is about $0.06 a kWh.”

Solar plans

Given the pressing case to diversify away from fuel oil regardless of fluctuating crude prices, the GCC countries have each planned renewable programmes, although progress has largly been disappointing so far.

Saudi Arabia’s King Abdullah City for Atomic & Renewable Energy (KA-Care), announced the most ambitious programme in the region in 2013, targeting 23.9GW of installed renewables capacity by 2030. However, it is thought the body has since been sidelined by more established energy players. The utility-scale renewables projects in the kingdom, such as the proposed Duba integrated solar combined-cycle (ISCC) project, are now being driven by Saudi Electricity Company. Technical bids for the plant, which will include 40-50MW of solar generation, were received in November 2014.

Meanwhile, Kuwait’s largest renewables project, the 50MW Shagaya concentrated solar power (CSP) plant was retendered in late 2014, after bids were originally submitted in November 2013. The country’s other renewables project, the Al-Abdaliyya ISCC plant, with a 60MW CSP component, is still at the prequalification stage, along with several other independent power projects (IPPs). Kuwait is currently unable to progress public-private partnership (PPP) tenders due to regulatory changes that have yet to be fully issued.

Policy priorities

The project delays that began during a period of record high crude prices and have continued with low oil prices indicate the slow (albeit accelerating) progress with renewables in the Gulf is down to policy and institutional factors rather than market forces.

 “Policies that won’t be affected by oil prices are being planned in the region,” says El-Katari. “But there are structural problems to be straightened out; frameworks can’t be directly transplanted from Europe or the US.”

No Gulf country has yet instituted a feed-in tariff for renewable energy, a measure developers identify as key to the successful renewables programmes in Jordan and Egypt. The structure of Gulf power markets is dominated by the public sector and electricity prices are heavily subsidised for consumers and producers. Without deep-reaching reform in these markets, which is politically unpopular, investors will have to rely on incentives and investment guarantees.

 “As in all regions, it’s a struggle between developers and utility companies that don’t want to invest in renewables,” says David de Lara Chousa, Middle East director of Spanish renewables firm Elecnor. “With the levels of solar irradiation [in the region], there are good opportunities, but not enough projects.”

However, successful projects in the UAE, such as the 100MW Shams 1 CSP plant and the Mohammed bin Rashid al-Maktoum Solar Park (for which bids are now being evaluated for a second 100MW PV solar phase), have a symbolic purpose. The work of Abu Dhabi sustainable developer Abu Dhabi Future Energy Company (Masdar) and similar agencies demonstrates the possibilities of creating a market and its contribution to the country as it looks to diversify its sources of power.

Energy mix

The main driver behind renewables programmes over the past five years has been diversifying energy mixes to reduce domestic consumption of hydrocarbons to free up more for export.

“There’s been a long struggle to make renewables thinkable in the GCC, and the perception changed due to high oil prices,” says El-Katiri. “But governments need to secure the availability of exports regardless of present prices, as part of their long-term strategic planning.”

With both populations and electricity demand growing rapidly, oil-rich countries have to prioritise the use of their finite fossil fuel resources. GCC peak power consumption rose 6.6 per cent in 2012, slowed to 4.2 per cent in 2013 due to cooler weather, and is predicted to remain at about 5 per cent in the coming years.

Exploitation costs are also rising as countries are forced to develop non-conventional oil and gas fields. Burning crude in power plants is its least efficient use, despite subsidy distortions, particularly when countries need to maximise their exports to maintain the level of earnings when prices are volatile.

Future supply

As well as a move towards combined-cycle gas plants and nuclear, the region will need renewables to ensure future supply.

Solar power is much more predictable [than conventional power] as the fuel price is always the same: zero

Vahid Fotuhi, Middle East Solar Industry Association

“Oil is very unpredictable,” says Fotuhi. “Over the past year, oil prices shot up to nearly $120 a barrel, then came crashing down to about $60 a barrel. Power plant operators do not like such vast swings in fuel prices since up to 50 per cent of the cost of a conventional power plant is the expense of the fuel. Solar power is much more predictable as the fuel price is always the same: zero.”

Alternative energy provides a fast answer to these dilemmas, with facilities up and running in less than a year and with few maintenance needs. They fill an important gap in the power sector, as solar complements conventional or nuclear generation, by ramping up production during daytime peaks in demand.

Rooftop opportunities

While utility-scale projects face delays, developers are focusing on rooftop solar opportunities, made feasible by recent subsidy cuts in the UAE.

“The increases in electricity bills are not tied to the cost of oil,” says Chousa. “But companies will now invest in rooftop installations as an efficient solution to reduce their electricity costs.”

Dubai Electricity & Water Authority (Dewa) is finalising plans for net metering – a billing system that credits rooftop generators for the electricity they add to the grid – which is expected to be announced in early 2015. Other emirates and countries are expected to follow Dubai’s lead.

However, clarity on regulations and ownership, as well as mechanisms to encourage uptake, will still be important to the sector. Germany’s success in rooftop solar – it managed to produce 50 per cent of its power needs using solar on certain days in the summer of 2014 – relied on subsidies and public support.

Incentives important

Due to the high levels of subsidies in the electricity market, the renewables sector is forced to rely on its own subsidies and regulatory frameworks, and therefore the political commitment of GCC governments. This is only indirectly related to fluctuations in oil prices. However, a sustained drop in crude, squeezing the budgets of oil producers, does pose a risk.

 “Business as usual is not sustainable over the long term,” says El-Katari. “But if lower oil prices become a long-term trend, there is a danger that renewables will be less of a priority as governments budget for strategic projects.”