Despite the abundance of sun in the region and the regular expressions of desire to roll out solar generation programs on both a micro and utility scale, the most we could reasonably say to date is that we have seen "green shoots" for the solar sector in the Middle East and North Africa (MENA). While North Africa (particularly Morocco) seems to be moving forward at pace, there has been little sign of significant development in the Gulf Cooperation Council (GCC)1 countries or even the Levant area. We can point to the success of the 100MW Shams 1 CSP project in the Emirate of Abu Dhabi, which is nearing completion, and smaller 10MW plants in Abu Dhabi and the Kingdom of Saudi Arabia, but there is little else in terms of significant movement on installed solar capacity in the region. On the positive side, there is new capacity in the pipeline. Masdar is currently working on the development of its next 100MW project, the Noor 1 PV project, which Vinson & Elkins is delighted to be advising on, and the general speed of regional project implementation appears to be about to ramp up with the announcement of two new formal renewable energy programs in the United Arab Emirates and Saudi Arabia.
We have also been privileged to represent the King Abdullah City for Atomic and Renewable Energy (K.A.CARE) Saudi Arabia in connection with the establishment of a legal and regulatory framework for a renewable and civil atomic energy sector in Saudi Arabia. K.A.CARE recently announced plans to generate 41GW solar energy over the next ten years at an estimated cost of US$109 billion. In Dubai, the development of a new 48 square kilometre solar park was recently announced, which will boast 1GW of capacity at an estimated cost of US$3.27 billion. The park is to be named after His Highness Sheikh Mohammed bin Rashid Al Maktoum, the ruler of Dubai, and Vice President and Prime Minister of the UAE. These are both very significant programs in terms of size-not just by Middle East standards, but also in comparison to global solar developments to date.
So What's Changed?
The rapid increase in the demand for power throughout the MENA region has been driven largely by population growth, expanding economies, and the development of energy intensive industries-three factors that have put a strain on the region's conventional fuel sources in recent years. This demand is forecasted to continue to grow at more than 7 percent per year for the foreseeable future which will require an additional 80 to 90GW of new capacity by 2017.2
Taking Saudi Arabia as an example, the country's 2009 domestic consumption of oil and gas was 69 percent higher than in 1999, but its 2011 consumption of crude oil for power jumped an estimated 340 percent in the last five years alone.3
In addition, political and commercial issues have prevented the development of planned gas pipeline interconnections in many other regional jurisdictions, such as the proposed pipelines from Qatar to Bahrain and Kuwait, and from Iran to Sharjah and Oman. This suggests the Middle East is running out of time to introduce significant renewable energy into its generation mix.
Why is Solar the Answer?
Solar irradiance levels in the MENA region are very well matched to meet the midday summer demand peak. It is the opposite of Europe or many parts of North America. Here in the Middle East, the middle of the day in summer represents the time that everyone turns on their air-conditioning and power demand spikes to a peak. Those of us who are involved in the renewable energy business know the capital cost per unit of power output is comparatively expensive. It is unlikely the capital costs will ever reduce to the low levels enjoyed by gas-fired combined-cycle power generation. But that is the key. Solar is not trying to compete there-its true value is represented by "shaving the peak." Peak power in the Middle East currently costs a lot of money to generate and solar competes with it already in many places where expensive peak pricing of fuel stock (e.g., diesel, spot LNG) comes into play. Grid parity is already upon us to a significant degree. When relying on conventional fossil fuels alone, the summer demand of about 10.8GW is met with baseload combined-cycle turbines running on cheap legacy gas, together with expensive imported LNG. If 3.5GW of solar PV capacity is introduced, the optimal generation mix changes and the need to "top up" the power supply during peak hours by using expensive LNG-run open-cycle turbines can be almost entirely eliminated.4
With oil prices above US$13 per MMBtu (about US$80 per barrel oil), solar PV projects become commercially viable in the generation mix without the need for subsidies. As imported gas and/or oil prices continue to increase, this break-even point will continue to drop and solar power will become increasingly more cost effective. This is without factoring in any economic benefit to be obtained through emissions trading schemes, which appear to be growing in influence around the world.
What are the Other Drivers?
The Arab Spring and Diversification of Economies
The Arab Spring has clearly identified the need to respond to the demands and aspirations of the region's population. Many GCC countries have very young populations which will soon be entering the workforce and seeking new job opportunities. For example, 60 percent of the population of Saudi Arabia is currently under the age of 25. According to the European Photovoltaic Technology Platform, every megawatt of solar power installed creates about 50 jobs in research, manufacturing, installation, and distribution activities. Research has shown that for every 100MW of solar power installed, US$600 million of GDP growth is generated. These factors have lead to a strong push by regional governments towards clean technology and renewable energy innovation as a source of job creation.
Many MENA countries have recognized the importance of diversifying their economies and moving away from the traditional reliance on fossil fuel generated income. For example, the Abu Dhabi government, in an effort to encourage the transition towards knowledge-based and export-orientated industries such as renewable energy, has announced a commitment to making renewable energy sources account for at least seven percent of the Emirate's total power generation capacity by 2020.5 Almost all of this new capacity will come from solar energy. The Shams and Noor projects represent a good step forward in meeting those targets. The decision will contribute to the ongoing diversification of the Emirate's economy and it is estimated that this commitment will create a renewable energy market valued at more than US$6 billion over the next 10 years.
On the other hand, some commentators believe that the future lies in creating a large manufacturing base of solar panels in each of the Middle East countries looking to implement solar programs. That concept may not hold true and probably warrants further examination. We accept that if Saudi Arabia implements its program in full, there may well be an economic incentive to install significant manufacturing capacity as a result of the scale of that program. Nonetheless, we remain to be convinced that this would apply across other jurisdictions. More likely, governments would have to fabricate such a market by specifying local content requirements in their programs.
If governments are to roll out solar programs in a competitive bid scenario with a local content requirement, then this will lead to paying higher than necessary electricity costs as opposed to allowing the market to choose a cheaper source of product (whether it be from China or elsewhere). Should this happen (and setting aside the wails of discontent from electricity regulators in the region), the governments would just be funding another form of subsidy for renewable energy. Is that where regional governments want to end up? A solar program can create jobs in research and development, and based on location, will also necessarily create jobs in maintenance and some manufacturing. After all, some 60 percent of the cost of a solar PV plant is not related to panels-it relates to the balance of the plant (concrete/steel foundations, the inverter and transformer pads, high voltage wiring etc). But one needs to be realistic about the aspiration of hosting an entire solar value chain in each country in the region. We must remember that many governments in Europe and elsewhere have also claimed the blossoming renewable energy market as their answer to increased job creation and promotion of economic growth in these difficult financial times. It is not an approach that is exclusive to the Middle East.
It is now established wisdom that burning crude oil and its derivatives releases harmful greenhouse gases. The MENA region is facing rapidly rising pollution levels and the accompanying high costs and widespread reduction in quality of life. The region currently has the world's second-highest air pollution levels (behind South Asia), and the estimated particulate matter concentration is nearly 50 percent higher than the global average.6 It is estimated that damage costs due to particulate matter emissions in MENA countries are equivalent to about 0.9 percent of GDP-nearly double the world average of 0.5 percent.7 Clean energy sources that do not burn fossil fuels and release particulates would significantly improve air quality.
Lost Opportunity Cost
As well as meeting increasing power demands, renewable energy also has the potential to reduce the domestic consumption of valuable fossil fuels which can then be sold at market prices in the international market. In Saudi Arabia, oil supplied to power plants domestically at the subsidized price of US$4 per barrel is oil that could otherwise be sold on international markets at a much higher price. The Saudi Electricity and Co-Generation Regulatory Agency estimates that by 2030 the country could burn 850 million barrels of oil a year (30% of its crude output) to generate electricity domestically rather than exporting it at world market prices.8 In those countries where oil resources are being consumed for domestic power generation (and that does not apply to every country in the region), solar power generation makes economic sense.
What are the Barriers?
Lack of Single Point Responsibility
The renewable energy industry needs a focus for its efforts to engage in the development of a renewable energy program. In most countries in the MENA region, there is no clear ownership at the government level of issues related to renewable energy. This position is beginning to change however as various institutions are being mandated to secure the growth of renewable energy in a country (e.g., MASEN in Morocco, K.A.CARE in Saudi Arabia). Allocating responsibility to one central body allows the industry to engage meaningfully with a country's goals and targets.
In most MENA countries, the regulatory environment is structured such that national utility companies define power generation requirements which they are mandated to meet at the lowest possible cost. For this reason, the models for procuring and developing the power sector usually involve private developers under independent power producer (IPP) schemes and at a utility scale only. This procurement model is geared toward largescale, conventional power stations, which are able to meet specific generation/dispatchability requirements. Again, this position is changing as the traditional IPP model is adapted to suit renewable energy plants on a case by case basis. For example, the Shams 1, 100MW CSP plant adopts a modified form of the Abu Dhabi IPP model such that the power purchase agreement has been extensively modified to take into account the "take-or-pay"/nondispatchable nature of a solar plant.
However, procurement of renewable energy on a projectby- project basis (regulation by contract) is time-consuming. To implement wide scale use of solar technology in the shortest time, governments must consider alternatives and this does not necessarily require the implementation of a "feed-in tariff." There are some examples of positive changes in the regulatory environment. Jordan has enacted a renewable energy law designed to kick start the implementation of renewable energy projects on a broad basis but to date its government has failed to get behind any significant development. However, the process of developing a regulatory framework which identifies clear policies to govern the installation and distribution of solar power is now underway in several other key markets such as the UAE and Saudi Arabia. As these programs come online and result in development of generation capacity, it is hoped that more and more countries in the region will start adopting policies which will gradually make the MENA region a global hub for solar power.
Lack of Funding Sources
The economic crisis has also led to a global lack of liquidity which has in turn made financing of renewable projects more costly. Bank lending is a precious commodity in the international markets and the Middle East is no exception. Major project development across the region competes for those sources of funding and the smallerscale renewable energy projects are still seen as getting less "bang for the buck." However, the nature of solar generation projects (particularly in the PV space) could turn this to their advantage. As the capital cost of PV panels drops, so does the capital cost of funding these projects, ensuring less demand for lending. It will be easier to cover funding gaps on smaller projects than multibillion dollar projects in other sectors. Further, solar PV is modular. It can grow over time, allowing the possibility to structure lending on a similarly modular basis as plant is brought online and the construction and related performance risk is removed. Lending becomes less risky and could therefore attract more risk-averse lending institutions.
Local Law Requirements
Many countries in the Middle East have complex local law requirements which can prove difficult to navigate for new entrants to the market. Local ownership obligations and complex licensing arrangements require more attention to local law regulation than is commonly the case in the U.S. or European countries. Many new businesses fall afoul of the strict terms upon which a business can operate in the region (licenses do not necessarily cover all activities a business may wish pursue in the field). These and the foreign ownership restrictions may potentially discourage, or at least make it difficult to attract, some investors, but each can be successfully navigated with the appropriate guidance. This is something that we do on a regular basis for clients in the renewable energy sector.
It is now clear that major governments in the region are serious about the implementation of a renewable energy program. It will take time to roll out the programs announced by K.A.CARE and the Dubai government. The devil is always in the detail and it would be foolish if each country did not take its time to ensure that implementation of these programs is tailored to the varying specific requirements or individual jurisdictions. A mere reproduction of what has gone before in the U.S. or Europe would inevitably result in unnecessary difficulties and significant delays. However, the formal commitment of a country to a program and the setting of goals is a very positive step and, for that reason, we are excited by some of the previously mentioned announcements by regional governments looking to expand renewable and alternative energy production and look forward to the next stages of solar energy development in the region.
The GCC consists of the United Arab Emirates, the Kingdom of Bahrain, The Kingdom of Saudi Arabia, The Sultanate of Oman, Qatar, and Kuwait. See The Cooperation Council for the Arab States of the Gulf Secretariat General, http://www.gcc-sg.org/eng/indexc64c.html?action=GCC.
Ibrahim El-Husseini et al., A New Source of Power: The Potential for Renewable Energy in the MENA Region, Booz & Co. 5 (2009), available at http://www.booz.com/ media/file/A_New_Source_of_Power-FINAL.pdf [hereinafter Booz & Co.]
Saudi Arabia's Coming Oil and Fiscal Challenge, Jadwa Investment (July 30, 2011), http://www.susris.com/2011/07/30/saudi-arabias-coming-oil-and-fiscal-challenge/
Sunrise in the Desert: Solar Becomes Commercially Viable in MENA, Emirates Solar Indus. Ass'n &PricewaterhouseCoopers Int'l Ltd. (January 2012), available at http://www.pwc.com/en_M1/m1/publications/sunrise-in-the-desert-incollaboration- with-emirates-solar-industry-association.pdf .
Joanna Hartley, Abu Dhabi Pledges 7% Renewable Energy by 2020, Arabian Bus., Jan. 19, 2009, http://www.arabianbusiness.com/abu-dhabi-pledges-7-renewableenergy- by-2020-81231.html .
Booz & Co., supra note 2, at 6.
Rhys Clay, Saudi Arabia to Unleash Solar by Investing $109 Billion, The Energy Collective, May 14, 2012, http://theenergycollective.com/node/84828.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Mr Jon Nash
Vinson & Elkins LLP
First City Tower
Copyright 2012 Mondaq Ltd. All Rights Reserved.
(Originally published June 21, 2012, in Mondaq Business Briefing.)