A Time For Regulation

Over the last decade, each market in the Middle East and North Africa has gone its own separate way when it comes to energy market structuring and regulation.

In a unique approach, the UAE has shaped its markets, not just through independent regulation, but also through the creation of privately structured, and government-backed entities such as Masdar and Taqa. These help channel government funds into infrastructure projects through partnerships with the private sector, to deliver “market-making projects and transactions”, according to consultants Ernst & Young.

Saudi Arabia, with oil and gas regulation at its core, has pursued several major IPPs and IWPPs, which are proven to be bankable and have already attracted billions of dollars of domestic and international investment.

The Kingdom is in the early stages of setting up what appears to be a coherent policy framework for clean energy. Earlier this year, the government issued a draft ‘white paper’ and established long-term objectives, which has attracted interest from the international community. New projects will have minimum requirements for local content and the employment of Saudi nationals, according to the King Abdullah City 
for Atomic and Renewable Energy, the government department responsible for the programme. Developers will also be compelled to contribute to a Saudi research and development programme for renewable energy.

Many said this was an important step towards establishing the infrastructure needed for green projects to be converted from exploratory interest into reality.

In Kuwait, through funding from
the government and guidance from
the United Nations Development Programme, the Kuwait Sustainable Environmental Management Program was launched in 2003, lasting until 2005. This included the establishment of an environmental database, and public education into sustainable energy sources and responsible energy use.

As yet though, no dedicated law on sustainable energy use or uptake exists in Kuwait.

Similarly, in Qatar, there is limited legislation to facilitate the development of renewable energy. However, it 
is actively investing in renewables projects and making investments in the development of renewables technologies.

In December, it hosted the UN Climate talks, and announced a
batch of new renewable projects. The minister of industry and energy of Qatar Mohammed Saleh Al Sada said the government is planning to install 1,800 MW of solar power by 2020.

Its overall strategy is to produce more green energy to save burning natural gas in its own power plants, which later can be sold globally for higher price. Desalination plants will also be increasingly solar powered in a bid to move away from the current gas fuelled technology.

If the planned 1,800 MW installation in Qatar comes online, renewable power will account for 16 per cent of the country’s electricity demand, which currently has an installed capacity of 7000MW.

Both solar thermal and PV technology will be utilised for the power generation of the new plant. A venture called QSTec between Qatar Development bank and Solar World AG is expected to provide polysilicon, photovoltaic panels and also installation services.

The Qatari Minister of Industry and Energy said currently the QSTec plant is capable of producing 8,000 metric tonnes per year (MTPY) of polysilicon and has been designed with future expansion in mind. The site is capable of expansion to produce more than 45,000 MTPY as well as having onsite facilities for ingoting, wafer, cell and module production.

Qatar’s neighbour Saudi has plans to meet one third of its electricity demand with solar power by 2032, while Dubai is targeting five per cent of generation by 2030 and Abu Dhabi has set a target of seven per cent from renewable sources by 2020.

Meanwhile, Qatar has also embarked on series of further policy initiatives at global level, for instance, membership of the International Renewable Energy Agency

Part of the underlying problem for these states is that the regulatory framework has not yet been fully developed because the renewable initiatives have been government led or tailor made to specific situations.

One downside is a lack of grassroots cleantech development. Neeraj Chawla, research head at Kuick Research, said: “As of now there exists no structured regulatory landscape across Middle East region for manufacturing and development of new technology for renewable energy. The current focus is on setting up long term renewable energy generation and installation target in order to trim down the rising domestic consumption of hydrocarbons to save export earning of petro dollar.

“The existence of structured regulatory landscape for manufacturing and development of new technology is need of the hour in order to achieve the desired renewable energy targets.”

In the UAE, although both local
and international banks seem to have an appetite to fund renewable energy projects – including BNP Paribas, Société Générale and the National Bank of
Abu Dhabi’s recent financing of the Shams 1 solar project – there is concern for the lack of comprehensive policy agenda and a renewable energy-specific incentive scheme.

The Emirates are reported to be mulling plans to introduce green tariffs that give companies generating energy from renewable resources the right
to feed electricity into public grids,
and obtain fixed rates for each kWh produced. If implemented, this policy will undoubtedly improve the UAE’s overall attractiveness to clean-tech investors.

In general, the UAE is also recognised for its commitment to the global carbon agenda and has planned to reduce its CO2 emissions by 30 per cent by 2030.

According to research by Bloomberg New Energy Finance, because Middle East renewable energy programs are primarily driven by government decree, this simplifies the domestic regulatory landscape for foreign contractors. However, the region’s governments are increasingly concerned about environmental stewardship as well
as public health and safety, so more
are looking to meet best international practices. There’s a chance that many bidding companies could potentially fall short and face exclusion from future contracts as regulations evolve.

Internationally, there are worries over the Middle East’s eligibility for financial support under international programs aimed at capping carbon emissions and slowing climate change. While in the past this may have limited government and international investment in renewables, countries like Saudi, the UAE and Oman are moving ahead regardless as part of impending economic diversification efforts.

Barriers to fostering new technologies in the region also include a lack of a local market for any potential product, and
a general lack of expertise in the sector
in the region. As it stands, Middle East companies do not have the experience that some of their global peers have in the sector and have not shown that they can displace the incumbents.

Meanwhile, oil and gas companies argue that there is great scope to deploy both energy efficient technologies and renewable energies in their existing hydrocarbon industry. Shell, for instance, points to the use of solar generated steam to enhance recovery of heavy oil in PDO’s Amal field in Oman, which reduces the carbon footprint, and frees up natural gas for use elsewhere
in the economy. PDO, Oman’s largest energy firm, said the pilot project last December, which has since started producing steam, has been integrated into existing steam facilities at Amal West. Its performance will be monitored over a 12-month period before a decision is taken to potentially upsize the facility into a full-scale solar-based thermal enhanced oil recovery venture.

Abu Dhabi’s decision that power demand in its onshore oil and gas operations should be supplied by super-efficient large power stations (CCGT technology) connected to the grid also makes the case from a sustainability perspective.

Others are more worried about the favour that traditional hydrocarbons still receive in energy market structuring. For one, Hannes Reinisch, senior manager for renewable energy and sustainability at PwC, said: “Current energy policy
and regulation structures commonly subsidise fossil energy which creates
a distorted playing field favouring the traditional over the new. This hinders new energy investment, which keeps new technology projects and engineering developing in a slowish, piecemeal way.

“Government can (and is working diligently to) change this and enable a thriving market for new technology and renewables in the region. This reform can start with the basics, just making even small solar projects clear and straight forward, from applications processes, permitting to wiring regulation and the legal framework governing electricity payments over time.”

What should be avoided, said Reinisch, is the introduction of local content requirements such as those
seen in India, which while well intentioned, have just served to “completely stop the market in its tracks, with the result that little progress has been made over the past few years in rolling our large scale solar projects.”

A study commissioned by the Friedrich-Ebert-Stiftung Sustainable Energy Programme in the MENA region last year found in stark contrast to subsidies for renewables, fossil
fuel subsidies have overall negative effects and pose a severe barrier to the deployment of renewable energy.

Fossil fuel subsidies made up more than 86 per cent – totalling $409 billion – of global energy subsidies in 2010.
The rationale behind the subsidisation of fossil fuels commonly has a social or political rather than an economic nature. A typical reason is the creation or preservation of jobs in energy-intensive industries by creating a cost-advantage for these industries.

However, despite such good intentions, fossil fuel subsidies have been shown to be an unsuccessful or inefficient means, according to the International Energy Agency.

The Friedrich-Ebert-Stiftung
report said fossil fuel subsidies have many unintended negative effects, including the encouragement of energy overconsumption, the draining of state budgets, or the disproportional privileging of the middle and upper classes.

Instead, there’s a growing argument that until fully competitive, renewable energy markets should themselves be subsidised. Considering the long-term benefits of renewable energy as opposed to fossil fuels, many governments are being urged to consider measures promoting the deployment of renewable energy carriers. Worldwide, subsidies for renewable energy are expected to increase from $66 billion in 2010 up to $250 billion in 2035. The vast wealth and fiscal surpluses in the Middle East could go a long way to contributing to this rise.

Some argue there is little that can be done just yet to design region- wide regulation, simply given the vast structural differences between markets in Mena.

Instead, the Friedrich-Ebert-Stiftung report suggests a focus on the national level. “Here, the introduction of renewables can best be promoted by designing national energy strategies, the implementation of which would be observed by national authorities with all the necessary responsibilities and competences for this task.

“The goal of this endeavour is to shape policies in a way that makes
it rational for both producers and consumers to embrace renewable energy. If renewable energy deployment policies are expected to be successful, it is important that they do not conflict with other (energy) policies,” the report said.

It concluded that the promotion of renewable energy does not so much depend on a particular policy instrument but rather on the stability and predictability of the instrument chosen.

It is therefore important to integrate any renewable energy policy into a broader national energy policy. It said a national authority responsible for coordinating all energy affairs is certainly the most effective way to ensure a coherent overall policy design.

Meanwhile, Chawla from Kuick Research added in reference to the Middle East Renewable Energy Sector Analysis report that: “The future change with respect to development of renewable energy will be existence of local manufacturing infrastructure to support the regional renewable energy market. In the coming years we may see mutual partnership between Middle East region and North African region in development of renewable energy especially solar energy infrastructure.

“There will also be a change in renewable energy landscape in the transition from commercial generation of renewable energy to household (rooftop solar plant) or society (town) level renewable energy projects. There will be tariff support (for generation) or concession in purchase of solar panels for domestic and society level installation of solar plants.”

For Mena governments, supporting
the growth in the renewable industry will take more than just the substantial investment and ground-breaking projects of the past decade.

Shepherding new technology and international partnerships will be key to the long-term success. It will be a hard road ahead from here.