The GCC countries are undergoing a profound economic paradigm shift. The central objective of this transformation is a productivity-led growth model, where the role of hydrocarbons and government spending, while important, will no longer underpin development in the way it did during the emergence of the region as a major economic block. Indeed, the energy sector itself will be central to the ongoing overhaul.
In keeping with the policy focus on diversification, energy diversification has emerged as an important theme in a region known above all for its abundance of hydrocarbons. The potential opportunity has been recognised for a long time, not least because of the ample availability of solar radiation. However, its perceived urgency has grown in recent years because of rapidly rising domestic energy consumption, a process accelerated by the traditional regime of universal subsidies. This has diverted resources from exports and added value creation through downstream activities.
But it is only relatively recently that the ‘winning formula’ for renewable energy in the GCC has come together in a way that can lay the foundation for sustainable progress.
Three factors in particular account for this change. Firstly, technological evolution in the renewables space has reached a point where the growth of the sector is no longer reliant on government subsidies. Such support typically drove the initial growth of the sector in countries where environmental sustainability considerations provided the main economic rationale for renewables. Innovation in this space is continuing and bringing down costs further, which will continue to strengthen an already compelling economic case for renewables.
Cost gap reversed
Secondly, the ongoing fiscal overhaul in the GCC region is scaling back the long-standing regime of universal energy subsidies, which led to hydrocarbons-based energy being sold well below international market prices. This not only engendered waste and rapid consumption growth, but also undermined the competitiveness of unsubsidised renewable energy.
With domestic energy prices increasingly converging with the global market norm, the cost gap that once disadvantaged renewables has not only closed, but is in fact being reversed. In other words, renewable energy is no longer a ‘nice thing to have’, but a rational economic investment that can benefit the region further through increased energy security and more effective resource management.
One of the structural challenges with fossil fuel-based power generation in the region is a large, climate-linked gap between peak and average capacity. Renewables can, among other things, help bridge that to an extent.
Thirdly, renewables are a real possibility because of regulatory reform and the emergence of a local industry of renewables experts. This has relaxed the old national monopolies on power generation, allowed net metering or feed-off tariffs, and permitted solar parks, wind farms and distributed solar.
Moreover, all regional economies have now set renewable targets and strategies. The GCC, partly thanks to its natural advantages for solar, has helped break one global cost record after another and has become one of the most dynamic markets for this transformative industry.
Commercial and even individual users are waking up to the advantages of solar, which can, with appropriate rooftop space, and even with no costly storage, help them shave off peaks and reduce their annual power consumption by a third or more. This in turn is beginning to attract capital into the sector.
To give the process even greater potential and sustainability, all regional economies have now set clear renewable targets and strategies, with initiatives such as the SoftBank Vision Fund, Masdar City and King Abdullah City for Atomic & Renewable Energy driving innovation.
Indeed, during the recent Gateway Gulf conference held in Bahrain, the kingdom reiterated its commitment to the goal of achieving 250MW of renewable energy by 2025.
The GCC now has a number of major renewable energy developments. These include the Mohammed bin Rashid al-Maktoum solar park in Seih al-Dahal in Dubai, of which two phases with a total capacity of 213MW have been commissioned. The total capacity is expected to reach 5,000MW.
Bahrain is developing a new 100MW solar facility on a landfill site.
While the region has made great strides away from its historic reliance on traditional energies, there remains an important place for hydrocarbon-based energies in the GCC, as part of a comprehensive strategy to ensure energy security. Innovation and new methods of funding are already opening the sector up to renewed development.
New funding methods
The increased participation of the private sector in the traditional energies space, previously controlled by regional governments, is a major driver of progress in the sector, allowing for the much-needed emergence of new funding methods.
Further efforts to support this momentum were clear to see at the Gateway Gulf conference, where the kingdom announced the launch of the $1bn Bahrain Energy Fund. The fund will be the first of its kind in the GCC and will be unique in providing institutional investors with access to local energy assets.
Critically, the introduction of private capital will help fund major infrastructure in Bahrain and enhance development of vital energy projects, breathing life into the sector.
Energy digitalisation will also play a vital role in improving efficiency and injecting data-led improvements across the value chain, as the industrial internet of things gains momentum. Amazon Web Services has estimated that 10,000 data solution architects will be needed across the region in the next five years, to keep pace with the rate of technological transformation.
The future contours of the GCC energy sector remain difficult to discern, but it is obvious that profound changes are now well underway. The benefits of renewable energies are indisputable, offering an increasingly cost-effective answer for energy security in the region. At the same time, they are freeing up hydrocarbons for exports as well as economic diversification.
Exciting developments are underway in producing oil-based petrochemicals, for instance – a process that could have a profound impact on shaping the future of the oil industry. Alongside this, innovation and increased private sector participation in traditional energy is driving the potential of the sector.
The strong momentum to date, underpinned by unrelenting technological innovation and a clear commitment at the level of regional governments, will serve as a catalyst for further growth.
In a region that has been pursuing economic diversification as a key objective for decades, a major driver for the process is, perhaps somewhat paradoxically, emerging in the energy sector. Not only is power generation itself being transformed, but hydrocarbons are now driving diversification across the economy. The old funding models are giving way to greater diversity, supporting the development of new products, solutions and, ultimately, industries.
About the author
Jarmo Kotilaine is chief economist at the Bahrain Economic Development Board
|This article has been unlocked to allow non-subscribers to sample MEED’s content for FREE. MEED provides exclusive news, data and analysis about the Middle East every day. Subscribe to MEED to have full access to Middle East business intelligence. Click here|