Since 2000, many political and business leaders have shifted their focus from lowering energy costs to diversifying their energy supply, in part through the introduction of renewable energy. This change was triggered by concerns over security of supply, fuel cost volatility, climate change and fast-growing demand from emerging countries. Gulf Cooperation Council (GCC) countries were able to defer this discussion by several years, thanks to their domestic oil and gas resources, but have recently undertaken a number of initiatives to introduce new energy sources.
In the process, they have generated some skepticism: Why should a region that contains almost half of the world’s remaining oil and gas reserves adopt renewable energy?
Actually, in many respects, the case for renewable energy is stronger in the GCC than in many other places in the world. Cost is one driver in developing the rationale for renewables. Some technologies, such as wind, already reaching grid parity, and others, such as solar, are projected to become cost competitive with power generation from conventional fuels in the coming years. But beyond renewables’ overall cost competitiveness, the GCC region in particular is uniquely suited to some types of renewable energy: the region has very high levels of solar irradiance, coupled with limited cloud cover; these factors place the GCC among the top regions in the world in terms of technological potential for solar power generation.
Renewables will also become increasingly necessary as a complement to fossil fuels in the region, despite some critics’ alarm over renewables’ competition with the oil and gas industry. Even under the most optimistic forecasts for renewables, fossil fuels will remain the dominant source of global energy for the foreseeable future. In addition, according to the Organization of Petroleum Exporting Countries (OPEC) World Oil Outlook 2008, OPEC’s share of world oil supply is expected to grow from 42 percent in 2006 to 52 percent by 2030. The burden of this
The Masdar Initiative
The Abu Dhabi Future Energy Company (ADFEC) launched the Masdar Initiative in April 2006 to establish an entirely new economic sector dedicated to alternative and sustainable energy. There are five key components to this entity:
- The property development unit is responsible for developing Masdar City, the first zero-emissions city in the world.
- The utilities and asset-management unit is building a portfolio of operating assets and strategic investments in renewable energy.
- The industries unit will invest in production assets and develop Masdar’s high-tech solar cluster.
- The carbon management unit is developing a portfolio of clean development mechanism projects and a carbon capture and storage network in Abu Dhabi.
- The Masdar Institute is a graduate level scientific and engineering institution focused on education and research in renewable energy and sustainable technology.
growth will be concentrated on a handful of suppliers, who will be responsible for providing significant additional capacity every year.
If the oil and gas currently used to generate electricity can be partially replaced by renewable sources, then new volumes of fossil fuels become available for export (or more profitable downstream applications, such as petrochemicals). By supplementing — rather than replacing — oil and gas, renewable energy could help maintain the GCC’s position as a major energy exporter for the world if the technology is developed early and competitively.
There are a host of other benefits to be realized if the GCC is an early adopter of renewable energy. For instance, its use would help the region manage its rapidly rising pollution levels and associated costs. Countries in the region have some of the highest per-capita carbon footprints in the world. In 2007, Qatar emitted — on a per capita basis — three times more CO2 than the US.
Renewable energy would not only improve the region’s own environment, but create opportunities for revenue. Under the Kyoto Protocol, developing countries can realize financial benefits from reducing their CO2 emissions and selling carbon credits to developed countries that need these credits to fulfill their emission reduction obligations.
Renewable energy also offers advantages that directly address the specific energy needs of the GCC. For instance, countries could use certain renewable technologies, such as solar photovoltaic and small-scale wind power, to provide energy to sparsely populated areas. Because such technologies function in distributed mode, they can replace expensive fuel-fired generators and eliminate the need for governments to make costly investments in extending grid infrastructure.
To take another example, about two-thirds of the electricity consumption in the GCC is used for cooling purposes; the use of solar energy for cooling could offer significant opportunities to address the large excess capacity required to meet electricity demand driven by cooling loads. This energy could be either converted into electricity to be used in traditional cooling systems, or used in direct thermal cooling applications, potentially offering higher conversion efficiencies and cheaper means of storage.
Finally, a local renewables sector and a substantial global presence in this industry would foster the development of a sustainable knowledge-based economy and create employment opportunities. The creation of such a sector would leverage the wealth generated by hydrocarbons and use it to diversify GCC economies and reduce their dependence on oil.
But in developing renewable energy, GCC countries will face many challenges. First, these countries will have to master a wider array of complex, cutting-edge technologies. They will have to develop their workforce to harness the capabilities required by investors. They should also create a regulatory framework that will attract investors and developers with the technological know-how, capital and project-development expertise to build the sector.
In the short term, GCC countries need to build the requisite financial systems to support the sector. Implementing technology specific feed-in tariffs is widely considered to be the most effective way to do so, especially when they are accompanied by efficient planning and registration procedures. Under the terms of these tariffs, utility companies are required to support the development of new technologies by purchasing electricity from renewable generators at a fixed price defined by public authorities. However, tariffs are not the only option; other regulatory models and incentive schemes include capital expenditure subsidies, grants for research and develoment, mandatory grid connection, tax incentives and renewable energy portfolio standards. Each country should review all of its options before selecting a model that meets its unique needs.
Competitive positions in the renewables sector are not yet set, and there is substantial opportunity for first movers to become global leaders by adopting the requisite policies and launching bold initiatives. Countries that move quickly, such as the United Arab Emirates, with its unique Masdar Initiative and its bid to host the International Renewable Energy Agency headquarters, could build a sizable and sustainable competitive advantage.
Tarek El Sayed is a senior associate and Walid Fayad a principal at Booz & Company