GCC plays catch-up with green megaprojects
Attention-grabbing renewable projects continue to be developed across the Middle East, but lower oil prices, Covid-19 and capex cuts may hold back progress
The Gulf Cooperation Council (GCC) member states—accepting that black gold also needs a greener counterpart—have been playing catch-up over the past five years in the hope of sustaining their long-term influence in the global energy markets.
The rapid surge of US shale output over the last decade was also a timely motivator, threatening the region’s role as the historical epicentre of fossil fuels and diluting the impact of its Opec-facilitated powerplays.
The Middle East’s curation of a new energy identity is well underway, but the region still lags most others. Renewables accounted for at least 70pc of total capacity expansion in almost all regions in 2019—other than in the Middle East and Africa. There, they represented 26pc and 52pc of net additions, respectively, according to the UAE-based International Renewable Energy Agency.
“For progress to accelerate like it can—and must—in the Middle East, governments and industry leaders need to work out a firmer policy roadmap soon”
Also consider that the six GCC countries—Saudi Arabia, Kuwait, Oman, Qatar, Bahrain and the UAE—are in the top 14 per capita emitters of CO₂ in the world. Still, as a slew of record-breaking projects illustrates, Gulf nations’ competitive approach to infrastructure construction also extends to renewables.
Once fully operational, the UAE’s Al Dhafra solar photovoltaic (PV) project is set to be the largest solar power plant in the world. It will generate 2GW of electricity, equivalent to powering 160,000 households and removing 470,000 cars (notable in a nation of 10mn people).
In April, UAE utility Emirates Water & Electricity Co. received the world’s lowest solar tariff, at 1.35¢/kWh, for the Al Dhafra project, which is planned for construction 35km south of Abu Dhabi city. This rate is 44pc lower than the tariff set three years ago on the 1.2GW Noor Abu Dhabi project, which was Abu Dhabi’s first large-scale solar PV project and a world record tariff-setter at the time.
Oman’s first utility-scale solar independent power producer (IPP) project began commercial operations in June. The 100MW Amin PV power plant was constructed and commissioned three months ahead of schedule and is the world’s first such development where the sole wholesale power buyer is an oil and gas company—government-led operator Petroleum Development Oman (PDO). Having received one of the lowest tariffs in the history of solar IPPs worldwide, the $94mn project will produce enough energy to power 15,000 homes in the sultanate, which has a population of 5mn.
5.6GW – Capacity of Middle East’s first nuclear power plant
The arrival of wind turbines at Saudi Arabia’s Duba Port in late July is an important milestone for the kingdom’s 400MW Dumat Al Jandal utility-scale wind farm. Saudi Arabia’s first wind farm, which will be the largest in the Middle East when it is completed in early 2022, is being developed by a consortium led by France’s EdF Renewables and UAE-based renewables firm Masdar.
And in January this year, France’s Total and Japan’s Marubeni committed to develop Qatar’s first large-scale solar IPP plant, with 800MW peak capacity. Al Kharsaah will also be Total’s largest solar project to date. The $500mn facility will start supporting the Qatari grid from 2021 with an initial peak capacity of 350MW. It aims to reach full operations in 2022, representing 10pc of the country’s peak electricity demand. The tariff for the $500mn project was $19.90/MWh at financial close, making it the world’s most cost-efficient wind project.
Nevertheless, the GCC is unlikely to claw back a leading role in the solar and wind markets considering the established pre-eminence of China and the US. Both are consolidating their positions as the world’s top two largest onshore wind markets—accounting for more than 60pc of new global capacity in 2019—and show little sign of changing course, according to the Global Wind Energy Council.
By contrast, the potential of hydrogen globally remains relatively untapped, so Middle Eastern nations have a greater opportunity to enter the industry at an early stage. PwC consulting unit Strategy& expects demand for green hydrogen, created using renewable power, to grow significantly in the medium term, to 530mn t. This could potentially displace 10.4bn bl oe by 2050, or 37pc of 2020 global oil production.
“For progress to accelerate like it can—and must—in the Middle East, governments and industry leaders need to work out a firmer policy roadmap soon. This is critical to getting more investors involved and getting this market off the ground quickly,” says John Roper, CEO of the Middle East for energy trader Uniper Global Commodities. One route would be introducing market acceleration programmes into the region, such as Germany’s and EU’s hydrogen strategies.
In Oman, PDO has developed a phased roadmap to drive innovation and identify the technical and commercial viability of low-carbon hydrogen production and potential applications, including using solar-powered electrolysers to make hydrogen for its rigs to replace diesel generators and hydrogen injection into gas pipelines. And in the UAE, Masdar is collaborating with Abu Dhabi’s state-owned oil firm Adnoc, French industrial gases supplier Air Liquide and local Toyota distributor Al-Futtaim Motors to develop hydrogen mobility solutions, including the installation of a solar-powered hydrogen fuelling station.
The GCC has already diversified into other non-hydrocarbon forms of energy generation. The UAE’s Barakah project—the Arab world’s first nuclear power plant—recently started up its first unit. The $24.4bn development is expected to add 5.6GW of capacity to the grid when fully operational, meeting a quarter of the Opec member’s energy needs by 2030.
However, Barakah has been dogged by delays, and it remains to be seen whether the next phase can stay on schedule given pandemic-related economic strain. Nonetheless, the project is a coveted global nod of confidence in the region’s energy management, especially amid the political to-and-fro over northern neighbour Iran’s nuclear power plans.
Saudi Arabia also plans to build two large nuclear power reactors as part of the kingdom’s projected 17GW of nuclear capacity by 2040, potentially providing 15pc of its power, according to the World Nuclear Association. Global support for the kingdom’s plans may waver; it is only a year since the country was caught completely unawares by a drone attack on major oil facilities.
While the outlook for the GCC’s energy transition appears bright, several factors threaten its progress. Most obviously, the economic outlook puts some planned projects in jeopardy just as in many other parts of the world. For example, a new biofuels production project in Kuwait is on hold, a senior official from state-owned KPC confirms.
“Kuwait is not pushing for a quick transition. It is not our plan to suddenly be green and say goodbye to fossil fuels” KPC source
Unsurprisingly, NOCs are making redundancies and trimming capex. Saudi Arabia-based multilateral development bank Apicorp expects total committed and planned energy investments in the Mena region for 2020-24 to be around $792bn, an 18pc decline from the $965bn in last year’s five-year outlook. In this context, petrol pump subsidies remain an expensive contradiction in the energy roadmaps of many countries.
In addition, sentiment on the ground in some state-owned energy firms is still not fully in line with governments’ aggressively proactive rhetoric. This cultural disconnect needs fixing to hit climate goals, especially as the region is intent on bolstering the national composition of its workforce. “Kuwait is not pushing for a quick energy transition. It is not our plan to suddenly be green and say goodbye to fossil fuels,” says the KPC senior official, reflecting well the tension between the old and new positions.
It is naive to think the GCC’s green agenda will be unhindered by lower oil prices given how oil-centric the region’s economies remain, and especially so during a Covid-19-spurred global recession. But equally, one cannot discount the impact of region’s competitive mindset and taste for monumental infrastructure development.