Green light: Renewable energy goals present both challenges and opportunities

Although traditionally seen as a region of high carbon emissions, the Middle East is gradually taking steps toward change, pushing for greater use of renewable energy. Saudi Arabia is among those governments in the region that are setting ambitious targets for renewable energy use – in early 2012 the Kingdom, along with Kuwait, and Oman, announced plans to produce at least 10% of its energy from sustainable sources by 2020.

For private sector businesses in the renewable energy and clean-tech fields, this points to significant opportunities in the near and long term. In the case of the Kingdom, the stated aim of producing 10% of its energy from solar energy by 2020 means that more than 5000 MW of additional capacity will be required in the coming eight years. This would mean the need for more than 600 MW of new solar capacity each year, or the equivalent of six large PV or CSP projects per year. Such a requirement may sound ambitious, but cannot be deemed impossible: Germany, for example, added 7500 MW of solar capacity in 2011 alone. However, given Saudi Arabia’s position as a country in the early stages of implementing solar capacity, the Kingdom’s renewable energy ambitions are not without challenges.

There is certainly a compelling economic case for the push for renewable energy. Conservative estimates say the Kingdom is diverting 800,000 barrels of its daily oil production to oil-burning power plants. Based on recent market prices of $120 per barrel, this means up to $35bn in oil revenue is lost annually as a result of not selling oil to foreign markets. Additionally, it must be considered that electricity consumption is projected to dramatically rise in the coming decades. More production will require larger amounts of oil, thereby increasing the opportunity cost of lost oil revenues to the country.

Toward Market Liberalisation

In the medium term we see that this situation is likely to be addressed by the gradual removal of oil input subsidies in favour of a free market mechanism. Although there is a risk of social backlash associated with any governmental move that negatively affects oil subsidies, it would seem inevitable that a gradual increase in the price of oil sold to domestic electricity producers (in the direction of a more accurate reflection of market value) will take place.

Creating Business Benefits

Among the challenges to achieving Saudi Arabia’s renewable energy aims is the lack of demand-side policies in place to stimulate the private sector. These include tax benefits or feed-in tariffs for renewable electricity generation. This dearth of such policies is something shared by other countries in the region.

Defying The Desert

When it comes to solar energy, the Middle East has an abundance of natural sunlight. However, it is worth noting that current solar energy technology still needs to be adapted for desert conditions to enable more efficient harnessing of this energy. For private sector businesses this could represent an opportunity. By developing technologies that can withstand the desert elements of dust, sand, wind, high temperatures and low water levels, companies may create obvious advantages that will encourage mass adoption later on.

Looking Forward

We expect to see more governmental policy announcements related to renewable energy production in the near term, which should translate into further good news for largescale renewable energy producers. The benefits should also move to other actors across the value chain, such as material suppliers, manufacturers and venture capital investors in these companies. Should renewable energy production be stimulated and take off, this may also entice large multinational renewable energy companies and component manufacturers to consider establishing a presence in the region.