Rend Stephan is a partner and managing director of the Boston Consulting Group in Dubai. BCG’s Eduardo Neto, a project leader, and ChristianSchwaerzler, a consultant, contributed to this report
The Middle East is home to one of the world’s largestreserves of fossil fuel, primarily used for what is considered “conventionalenergy.” It also has strong natural advantages in renewable sources of energysuch as solar power. The region may also be well positioned in the climatechange debate through its potential ability to inject carbon gas emissions intooil fields. But the road ahead is not easy — far from it. Both public andprivate sector players need to choose their positioning and investmentstrategies wisely, for the region to play a leading role in this space.
Renewable energy – a global view
The unprecedented interest in alternative energy during thelast decade was driven by two major factors: the increased reliance onfossil-fuel-generated energy with its related political concern over energysecurity, and the drive to curb carbon emissions to combat climate change.Looking ahead, we expect an even more rapid adoption in the next decade thanhas been widely foreseen thus far, especially for solar and to some extent, forwind. But at the same time, we acknowledge that many economic and structuralhurdles stand in the way of a truly smooth growth story.
Over the next decade, few renewable technologies will beable to match traditional energy sources on the cost side, known as “reachinggrid parity.” Photovoltaic (PV) will continue its cost improvement trend, sothat it will reach grid parity in high-priced markets such as California andSpain. New pilot technologies in Concentrated Solar Power (CSP) may also havesome potential. On-shore wind is largely mature and very close to grid parityon the best sites, but growth can be limited by the availability of prime sites(with regular strong winds). Offshore wind is nascent, with high investment andmaintenance costs due to remote locations, and is unlikely to exit thesubsidy-driven phase by 2020.
In addition, the expected improvement in storagetechnologies (such as thermal storage, batteries), and the development of moreflexible grid systems do not seem groundbreaking enough to alleviate theintermittent nature of solar and wind. On the structural side, slow regulatoryframework changes, “subsidy fatigue” and hesitant global climate policies alsopose hindrances to their development. But all in all, the combined share ofsolar and wind energy may reach 20 to 25 percent of the total power generationmix globally in 2020.
A leading role for the Middle East?
Against this backdrop, it is important to explore what rolethe Middle East could play. While wind has some potential here, it is really insolar — where the region has large areas of cheap and available land with highirradiation — that a potential global competitive advantage could be built. Butthree very careful choices have to be made.
The first choice relates to local solar energy productionfor local consumption. Such energy sources will find it more difficult to reachgrid parity, given the direct and cheap availability of fossil fuels in theregion, as well as the existence of substantial power generation subsidies.However, this is an incomplete, simplistic and misleading view, since theopportunity cost of making fossil fuel available for exports needs dramaticallychanges the picture.
Countries in the region with fossil fuel reserves understandthis position and some are starting to investigate and invest in local solarenergy production (plus some nuclear) for local consumption and to preservefossil fuels. This trend has to be articulated, encouraged and sustained.
The second choice relates to solar energy exports. Therecent developments in long distance electricity transmission and the relativeproximity of large solar prime sites to high energy demand areas make solarenergy exports a worthwhile option to investigate. Projects such as theDesertec initiative (North Africa solar energy production for consumptionprimarily in Europe) illustrate this point well. From the “Western”perspective, these projects face many hurdles related to political stabilityand investment risks, as well as governance. Yet they constitute a tremendousopportunity for many of the Middle East countries to position themselves assolar energy exporters, substituting for the inevitable decline in fossil fuelavailability and, hence exports, in the long run.
A well-articulated strategy to position the region in thisspace and to make such solar energy exports a reality has to be defined andinitiated.
The third choice involves local investments in solartechnology or manufacturing — namely, the undertaking of related, value-chaininvestments — has to be generally discouraged, at least initially. Suchinvestments are typically not yet attractive in the broad economic sense, andwould have to compete with research and development (R&D) technology centersin the developed world on the one hand, and production facilities in low-costcountries, on the other.
It is true that while building local solar energyproduction, some related value-chain investments could prove attractive;however, these need to be considered very cautiously and selectively and not asa “grand-scheme” plan. This position may change in the long run if/when theregion can create a sustainable solar energy export market — one that hasenough scale to allow further attractive positioning in the adjacent parts ofthe value chain.
Beyond solar, the Middle East’s strategic pre-occupationwith fossil fuels could promote an emerging alternative energy topic: carboncapture and storage for enhanced oil recovery (CCS–EOR). This complex namerefers to capturing carbon gas emissions from power plants and injecting theminto oil fields. This enhances the recovery of oil reserves while at the sametime reducing carbon emissions and hence climate change impact — a doubleadvantage not to be overlooked. Our research has shown that the proximity ofcarbon emitting plants to suitable and large oil fields in parts of the regioncan make such investments economically viable.
This unique advantage of the region could position it as anincubator of CCS-EOR technology development and use. We estimate the region tobe able to quickly capture more than 20 percent of global market share, plus a‘first-mover’ advantage position.
The future for alternative energy is closer than commonlyassumed and stakeholders in the Middle East should move sooner rather thanlater. The recommendation is simple: get back to basics, and relentlessly focuson the region’s competitive advantages in this space.
In essence that means: Invest in local solar energy productionfor local consumption where it increases the longevity of current fossil fuelreserves and/or fossil fuel exports, but shy away from making grand-schemeplans to play in technology or manufacturing in the short-to-medium term.Actively position the region for solar energy exports, a critical long-termsubstitute for fossil fuel exports, and align other policy decisionsaccordingly. If done well, and on a large enough scale, this could well openthe option of technology and even manufacturing leadership in themedium-to-long term.
A ‘first mover’ advantage in CCS-EOR should be pursued andefforts should be made to ensure that the potentially conflicting interests ofmultiple players do not distract the region from such a unique leadershipposition.
This strategy is urgent but selective, and needs rapiddetailed articulation of each country’s choices, and a relentless alignment ofleadership, policies, regulations and incentives in energy and other sectorsaccordingly. The private sector and incumbent utilities, as well as nationaloil companies (NOCs), will need to understand and align themselves to thesepriorities while being careful, if not dismissive, about risky ventures thatare not aligned with the overarching strategy.
A lot can be done at a country level in the short-to-mediumterm (such as local solar investments and CCS–EOR), but the maximum potentialfor the region (solar energy exports, leadership in technology andmanufacturing) can only be attained in the medium-to-long term with strong cooperationand alignment between countries .
There is work to do today and tomorrow and no excuse forprocrastination. In the end, it is not a question of if alternative energieswill disrupt our ways of life and doing business, but when, and how can the MiddleEast capture the leadership opportunities available to it.