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The Journey of Renewable Energy in the MENA Region

  • Middle East
  • Energy and infrastructure - Clean energy

18-04-2016

Article from The Electrical Energy Storage Magazine (ees) 01 2016 Issue 08

ees International and Eversheds renewable energy experts Clint Dempsey, Jonathan Cohen and Laura Shortall have explored the investment potentials for energy storage in the MENA region and drawn a picture of future potentials.

ees: What are the hot investment sectors for energy storage in the MENA region?

Dempsey: Energy storage is an extremely hot topic in the MENA region. Effective energy storage is essential to the introduction and development of renewables to the region. Coupled together, renewables and energy storage allow for the development of a low-carbon electricity system whereby energy supply and demand are balanced and power networks are more resilient and efficient.

Energy storage provides a solution to intermittent and unpredictable renewable energy sources by allowing for troughs in renewable energy supply to be anticipated and satisfied. In addition, investment in energy storage can stabilise market prices for electricity due to better management of distribution networks, improving efficiency and deferring network upgrade or reinforcement.

Energy storage is potentially a game changer to the energy sector in the MENA region – high technology cost was once a barrier to its deployment but now a number of storage solutions are established in the wider market and so their associated costs are now falling.

From a global perspective, pumped hydro storage systems represent almost 99% of current worldwide storage capacity (around 140GW).

In the MENA region, the trend is towards electrochemical batteries and it is thought that these will be the most popular storage solution going forward, given their versatility in main- taining efficient transmission and distribution in the region’s power balance. The trend in the MENA region is to combine hybrid power plants with such types of energy storage, for example, combining solar power plants with battery storage, in order to increase the availability of solar power and meet medium to long term energy demands. However, there are also other business models emerging in Europe and the US including:

1. grid support models, for example, network upgrade deferral, transmission congestion relief and ancillary services such as frequency response, reactive power and blackstart;

2. and consumer support models, for example, storage with distributed solar and micro wind at the residential level or storage to large commercial energy users.

ees: Many countries all over the MENA region are currently discussing subsidy reforms and gas price reforms. How are governments addressing these topics and what will be the impact on clean energy investments?

Cohen: In the MENA region, energy subsidies account for large proportion of total government subsidies. Around $119.3 billion is related to petroleum products and $62 billion to electricity.

However, as a result of falling oil prices and a general decline in government revenues subsidy and gas price reforms are currently being addressed across the region. For example, the UAE has announced an urgent need to cut regional energy subsidies and as a result, has announced its expectation to spend US$ 25 billion on non-hydrocarbon electricity generation projects by 2020. Saudi Arabia, Bahrain and other countries have also revived plans to reduce energy subsidies, and many are looking at a phased approach to cutting subsidies, which for some, will result in subsidies being eliminated in four years.

Deregulation of petrol and diesel prices has also been announced by the UAE, with other Gulf countries likely to follow suit, on the understanding that cheap oil prices eats into the budgets of MENA governments. In most MENA countries, fuel prices are low by international comparisons, particularly in those oil-exporting countries in the region.

There is a general consensus that by reducing their reliance on subsidies and deregulating gas prices, MENA countries will see a more susta- inable impact on, not only government finances, but also, clean energy investments, in that such subsidies can be said to disincentivize the pursuit of energy efficiency. So much so in fact, that the estimated annual cost of energy subsidies in the MENA region is thought to be greater than the total cost of meeting regional 2020 renewable energy markets. By cutting subsidies, clean energy investments will have to achieve grid parity to be cost competitive.

ees: How are falling oil prices influencing net exporting countries, and vice versa, net importing countries?

Shortall: The sharp decline in oil prices has had a huge impact on net exporting countries such as Iraq, Algeria, Sudan, Qatar and Saudi Arabia. In Iraq, the country depends on oil for 95% of its budget and the decline has threatened its ability to pay salaries of security forces and public workers, which of course, is all the more pertinent due to its ongoing struggle against ISIS and the cost of its national security.

Saudi Arabia is also showing signs of economic strain. For example, Riyadh is now planning cuts to construction projects and introducing new takes to sustain its social welfare system.

For net oil importing countries, a fall in oil prices means a reduction in the cost of living. Oil related transport costs will directly fall, leading to a lower inflation rate and leaving consumers with more discretionary income, which could, in theory, lead to higher spending on other goods and services and add to that country’s GDP. Similarly, the fall should increase overall economic activity as the cost of production decreases for businesses, particularly those who are heavily dependent on oil imports, all of which can allow net oil importing governments more fiscal flexibility to pursue structural reforms.

ees: How will low oil prices impact clean energy investment?

Cohen: Global clean energy investments increased by 17% in 2014, reaching $270 billion – the fall in oil prices does not in itself impact clean energy investment. Oil is predominately used for transport, renewables, in contrast, are largely used to create electricity. According to the International Energy Agency, diesel and other petroleum-based fuels account for only 5% of global power generation today.

Electricity costs continue to remain relatively high and so the corresponding position of renewables remains.

Even with its 5% input into global power generation, solar energy can be significantly priced below diesel produced electricity and so the costs of a barrel of oil would have to drop even substantially lower than what they are in the current market, to even come close to having an impact on solar energy. Clean energy investment continues to be strengthened year on year by regulatory supports, such as portfolio standards and feed in tariffs, and similarly, by improvements in renewable technologies, including storage technologies, and as such, costs of its production continue to drop as more and more clean energy investors enter the established market. However, it remains to be seen whether this trend will continue given that governments are cutting renewable subsidies, as discussed above.

ees: What is the role of financiers and what is the role of policy makers in facilitating the development of clean energy invest- ments in the MENA region?

Dempsey: For clean energy to prosper in the re- gion, developers need to have clear access to renewable energy financing. Currently, a large number of local MENA banks are not able to lend for prolonged periods of maturity due to their own balance sheet constraints and so project sponsors usually have to rely on external financing from multilateral development banks. The performance of existing financers needs to be improved to support more frequent and speedier arrangement of renewable technologies, and more additional financers need to be encouraged to join the market to reduce the risks premiums and cost of capital for projects.

The lack of supportive policy frameworks hinders the development of clean energy investments. Without putting into place supportive policy frameworks which are transparent, stable and predictable, containing clear tariff and off take mechanisms, MENA governments do little to remove the regulatory challenges that developers face. Governments need to assist developers with authorizations in respect of land and company ownership, tax requirements and grid connections/tariffs, and be supportive in putting into place laws which serve to encourage the development of such clean energy investments in the region.

ees: What are applicable models for financing commercial and industrial solar PV plants in connection with energy storage?

Shortall: The typical models we see in the MENA region are the SPV non-recourse models whereby project sponsors assets are preserved from the liabilities of the project and each sponsor’s debt capacity. The project risk is maintained to the SPV and similarly, so are the country’s political or economic risks. However, the model’s benefits come at a high transaction cost, with higher interest rates and insurance coverage.

Aside from SPV non-recourse models, the growing Sukuk market is also suited for funding renewable energy projects such as solar PV plants and energy storage. Sukuks in particular are familiar to the MENA region and these types of ”bonds” allow investors to approach capital markets to raise significant sums of capital over long tenures, avoiding the higher costs of bank funding. However, there may be ”bankability” challenges that lenders will need to get comfortable with in relation to incorporating energy storage into solar PV projects. Some of these challenges include technology risks, project economics and a lack of a clear classification of the regulatory treatment of storage assets, for example, are they generation or supply assets?

ees: What is the role of local banks and multi-lateral banks in project finance and models for collaboration in project finance?

Dempsey: Financing is one of the largest barriers to the development of sustainable energy in some of the MENA countries, as such projects continue to be viewed as higher risk investments. If project potential is not clear/feasible and regulatory and operational frameworks continue to be underdeveloped and uncertain, financers perceive high investment risks and are not encouraged to fund the high up-front costs of such projects.

Roles are available for international multilateral funding, regional development, bilateral agencies, government banks and private sector finance, in the renewable arena.

International multilateral banks can lend for much longer tenures and are prime placed for promoting climate finance and helping countries mitigate and adapt to the challenges of climate change. The World Bank, for example, acknowledged how it was ”in the business of using its balance sheets to demonstrate how low-carbon growth can take hold, how private finance can be mobilized and how climate finance can be deployed to maximum impact.” Multilateral institutions can provide technical assistance to borrowers, concessional loans to local banks and guarantees, which help mitigate the perceived risks associated with renewable technologies.

As multilateral institutions help set the financing conditions, other investors and commercial financers can then plan their investments in these sectors. Multilateral loans can be combined with regional and local bank involvement, and these forms of financing can be packaged together to reduce the risk of the investment and make project developments more feasible for the borrower, with credit lines being provided at lower interest rates than normal.

ees: How will the new ambitious targets of the Dubai Rooftop Solar Program influence the potentials for energy storage in the city?

Cohen: Dubai has announced that by 2030, it will make rooftop solar panels mandatory for all buildings under the Dubai Clean Energy Strategy, with a view to providing 7% of the city’s energy from clean energy resources by 2020.

It is expected that other markets for rooftop solar will follow suit in Jordan and Egypt, where there is a similar demand for centralized power.

Although energy storage was not mentioned in the Dubai announcement, with a goal to become the city with the smallest carbon footprint in the world by 2050, it makes sense for Dubai to encourage the development of energy storage to steady the supply of energy production.

The Dubai government will establish a $27 billion fund to provide low cost loans for investors in the clean energy sector – with an additional focus on research into areas such as integration of smart power grids and energy efficiency, this will obviously lead the way to huge potentials for energy storage in the city. Energy storage improves the management of distribution networks and improves efficiency, and it will be the higher security of energy transmission and supply that Dubai will need to focus on if it is to achieve such ambitious targets.

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