Renewables to underpin power sector recovery

30 December 2020
The ongoing Covid-19 pandemic and low oil prices should strengthen government resolve to pursue energy sector diversification efforts

This package also includes:

> Water security trends upwards in region
Weak economic growth looks set to persist
Narrative advances for Gulf unconventional energy

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The transition to clean energy will remain the key theme for the Middle East and North Africa (Mena) region’s power sector in 2021, even as governments and utilities come to grips with the long-term impact of the Covid-19 pandemic, low oil prices and the renewed call for decarbonisation.

The first 11 months of 2020 – with curfews imposed in many cities between March and May in an effort to combat the pandemic – highlighted the role of utilities as a critical sector requiring thousands of personnel to be on site to ensure undisrupted service. Travel constraints on personnel and equipment also led to delays, particularly for projects under execution or undergoing commissioning, and to deferments of new contract awards and tenders for new capacity.

In certain countries, particularly Jordan, Egypt and Morocco, factors such as surplus capacity, a weak electricity grid or a review of priorities led utilities to hold or cancel tenders for additional renewables capacity.

Decreased value

Across the Mena region, the value of power generation and transmission contracts awarded in the first 11 months of 2020, at $10.2bn, is down by about 29 per cent compared with the value of contracts awarded over the same period in 2019, according to regional projects tracker MEED Projects.

Notably, the contract award value for transmission and distribution (T&D) projects rose by 37 per cent during this period. However, this was unable to counter the steep 46 per cent drop in power generation deals signed, which accounted for 60 per cent of the total value.

Despite a slow year for contract awards, projects across the GCC continued to break world records for unsubsidised solar photovoltaic (PV) production tariffs. In November 2019, a team of France’s EDF and China’s Jinko Solar offered a levelised cost of electricity (LCOE) of 1.35 $cents a kilowatt hour for the 2GW Al-Dhafra solar independent power project (IPP) in Abu Dhabi. This is 20 per cent lower than the price offered by a consortium led by Saudi Arabia’s Acwa Power for phase 5 of Dubai’s Mohammed bin Rashid solar park just a few months earlier.

Cheaper tariffs

The scale of solar PV projects across the GCC, in particular, ensures record-breaking tariffs will continue, together with the rapid drop in technology and engineering, procurement and construction costs. For example, the commercial operation of Abu Dhabi’s 1,177MW solar plant in Sweihan and the 300MW Sakaka solar IPP in Saudi Arabia helped the GCC triple its renewable energy installed capacity in 2019 to 2,446MW compared with 2018, according to the International Renewable Energy Agency (Irena).

This trend is expected to continue as the Mena region plans to build between 90GW and 100GW of renewables capacity over the long term, with more than half of this capacity due to be delivered – primarily by Saudi Arabia – by 2030.

Saudi Arabia has the largest renewables capacity-building programme across the Mena region. A mere 700MW of solar and wind IPPs have so far been awarded, which is a very tiny portion of the 58.7GW installed capacity targeted by 2030. This target is shared between the Public Investment Fund (PIF), which will develop 70 per cent of this target through direct negotiations, and the Energy Ministry’s Renewable Energy Project Development Office (Repdo), which will oversee the development of the remaining 30 per cent through a competitive tendering process.

Repdo has held back from awarding contracts for the 1.47GW second round of the National Renewable Energy Programme this year, although sources say the body is still working to award some if not all of the six contracts by year-end. If this does not materialise then it leaves Repdo with the task of awarding these and the 1.2GW third-round contracts in 2021. 

Significant solar PV IPP opportunities also exist in other countries such as Oman, Abu Dhabi, Kuwait and Morocco as they strive to meet ambitious targets to generate as much as 30 per cent of their electricity from renewable sources between 2025 and 2030.

Hydrogen plants 

Developing alternative energy-based hydrogen is also becoming an important agenda for the region. Envisaged to be supported by 4GW of renewable energy, the $5bn clean hydrogen plant in Neom is one of the earliest – and boldest – plans to explore developing hydrogen for transport fuel applications. The timeline of the project is no less ambitious, with commercial operations expected in 2025. 

In Oman, Sohar Port & Freezone aspires to turn the industrial port into a hub for lower-cost hydrogen, replacing hydrocarbons, and plans to develop up to 3.5GW of solar power capacity.

Similarly, there is a tangible interest to develop waste-to-energy (WTE) plants across the region, in line with government commitments to decrease waste that goes to landfills. The GCC’s first utility-scale WTE plant, which has a 30MW power generation capacity, is expected to be completed next year in Sharjah in the UAE. Dubai is in the process of reaching financial close for its first major WTE plant, which has a planned capacity of 171MW, and Abu Dhabi is planning to tender the contract for two WTE plants in Mussafah and Al-Ain next year. The rest of the GCC states are looking at similar schemes.

Privatisation plans

The planned privatisation of existing power and water plants, such as the Ras al-Khair plant in Saudi Arabia, offers an opportunity for private developers to further expand their market shares and compensate for slowing projects activity.

Schemes that are being put on sale include the North Shuaiba power plant in Kuwait and the power and water cluster in Saudi Arabia’s Yanbu region. There are clear indications clients plan to do more of these transactions in line with the efficiency and privatisation drives that are playing a key role in every country’s long-term economic vision.

The privatisation of electricity T&D infrastructure, which began in 2019, when Oman’s Nama Holding divested its 49 per cent share in Oman Electricity Transmission Company to State Grid Corporation of China, is expected to continue into 2021. The sultanate plans to divest up to 70 per cent shareholding in four other T&D entities, raising much-needed capital while at the same time cutting electricity subsidies.

While privatisation of operational assets is starting to take shape, the deals for an estimated 3GW of private power capacities in Oman and Abu Dhabi are expiring between 2021 and 2022. This offers opportunities and challenges as parties explore and renegotiate options.

Under construction

Notably, at least 25GW of private and public power generation capacity – using conventional or renewable energy sources – is under construction in the GCC alone, excluding the completed four nuclear reactors in Abu Dhabi. Two-thirds of this capacity is expected to come online on or before 2022.

Some experts say this fact, along with slower electricity demand growth, due to demand-side management programmes to curb consumption on one hand and the unexpected impact of the Covid-19 pandemic on the other, could force clients to review and delay their next capacity procurement decisions.

However, statistics such as Dubai’s 6.6 per cent peak demand growth in 2020 and the marginal 5 per cent decline in power demand in Abu Dhabi compared with forecasts at the height of the pandemic, indicate a probable return to projects activity growth sooner than later. 

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