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Gulf renewables push finds fresh ballast

GCC states are rethinking their approach to energy pricing, as the solar PV revolution shatters old preconceptions

Hindsight can be a wonderful thing. In 2006, when the UAE authorities first conceived the plan to build a four-reactor, 5.6-gigawatt capacity nuclear power plant at Barakahdue for commissioning this year—this appeared the most cost-effective means of meeting rapidly escalating domestic power consumption.

Given the then outlook for natural gas prices and an annual electricity demand growth of upwards of 6-7%, nuclear seemed an efficient means of ensuring security of supply.

Fast-forward 10 years, and nuclear's attraction is being rapidly eclipsed by the surge in solar power. Abu Dhabi is expecting to add 5-6 GW of new solar energy capacity by 2025, with a new 1-GW solar plant due to begin service in 2019 (building on the UAE's current base of just 110 megawatts).

The rapid uptake for solar PV technologies is being mimicked by Saudi Arabia, where the King Abdullah City for Atomic and Renewable Energy is investing more than $100bn to produce 54 GW of renewables and nuclear power up to 2032. The strategy is largely predicated on the plummeting cost of solar PV projects, secured via a series of competitive auctions.

These were kick-started in the UAE in 2015 with a solar PV bid from Saudi-based ACWA at $0.06 per kilowatt hour, for the 200 MW phase II Dubai Solar Park. Aggressive bidding has subsequently ground the price down further still. In 2017, Dubai and Abu Dhabi were attracting bid prices of below $0.03/kWh; the 1.18 GW Sweihan solar PV project in Abu Dhabi attracted $0.02/kWh from Japan's Marubeni and JinkoSolar.

If they were to take the decision now, Emirati officials might think twice about committing to the $30bn cost of the Barakah plant.

UAE policymakers have recently undergone a quiet revolution in the way they view energy pricing. Rather than offering natural gas as a gratis side-benefit for domestic industries, they have come around to the view that energy prices should reflect the true cost to the country as a whole. That marks a break from the preference for keeping domestic gas prices low in order to help beneficiaries such as downstream petrochemicals players.

This volte-face has in turn exerted a dramatic impact on the relative cost advantage of solar PV compared to other fuel sources, accentuating renewables' appeal.

Oman got the ball rolling on gas reform in 2014, doubling the domestic price to $3 per million British thermal units—the sultanate's (before the 2017 start-up of the giant Khazzan gasfield) stagnant gas output requiring a higher price to incentivise production growth. "Oman was facing more significant issues than the UAE or Saudi Arabia, in keeping up its LNG export commitments and supplying its domestic industrial sectors with enough gas. That triggered the gas price reform," says Justin Dargin, a Middle East energy expert at Oxford University.

Saudi Arabia followed suit in early 2016, hiking the domestic price of natural gas by 67%, albeit from a low base of $0.75/m Btu, to $1.25/m Btu. The price of ethane, used by the petrochemicals sector, rose from $1.25/m Btu to $1.57/m Btu.

The kingdom's ambitious subsidy reform programme also yields substantial savings: it has reduced 2016 subsidy outlays by at least $7bn, notes Jim Krane, a fellow at Rice University's Center for Energy Studies. There is a political pay-off too. "Saudi Arabia has led the way in tearing down these ruinous subsidies on energy. These giveaways have outlasted their usefulness by decades," says Krane. "Ruling families now need to find alternate ways to gain legitimacy for their rule, preferably by means that don't involve wasteful use of climate-damaging fossil fuels."

The UAE hasn't made public its own gas price changes, but it's understood that the internal contracted price of gas was hiked in January 2017, from just $1/m Btu to $4/m btu. The Abu Dhabi government has accepted that the reference gas price against which the cost of gas-fired power generation should be compared, ought to be based on the economic value to Abu Dhabi—rather than an internal accounting price between a national energy company and a government utility.

With rapid increases in solar capacity underway in the Gulf, renewables and natural gas-fired power are working in lockstep. The UAE's long-term 2015 target envisages 44% of its energy sourced from renewables, but with 38% still coming from gas in 32 years' time, the mantra is complementarity rather than replacement. For policymakers that still leaves a big ask in managing an increasingly diverse energy mix that stretches from zero-carbon options such as solar PV through nuclear, natural gas to dirtier fuels. 

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