Insights: The green energy incentive race

Green energy attracted more than $1tn in investment last year and global competition is heating up. Individually, each of the GCC states faces a win-win scenario in green energy production. The question is, by coming together, can they do it cheaper, faster, and better?

The need for a shift towards greener and cleaner energy has long dominated government and corporate agendas. Now, after much talk, that transition is well underway, and the race is on to gain advantage in a green sector that attracted $1.1tn in investment last year.

Accounting for just under half of that figure, China is the undisputed frontrunner, but the pie is growing bigger by the day and presenting tantalising opportunities for those with the appetite to bite.

In 2021, the renewables energy market was worth more than $856 billion, rising to an estimated $1 trillion this year – and by 2030, that sum is expected to double . Meanwhile, industries helping the world shift to net zero emissions could be worth $10.3 trillion to the global economy by 2050, according to the International Energy Agency (IEA).

In step with the growing market, competition is heating up too. In recent years, China has leapfrogged other global heavyweights, setting up green manufacturing facilities capable of meeting burgeoning domestic demand and of serving the wider international market down the line. It is a development that is unnerving economies around the world, prompting them to ramp up their own clean energy efforts.

For players such as the United States and the European Union, the response to rising competition has come in the form of incentive packages designed to encourage green energy manufacturers to set up within their borders – and stay there.

In the US, 79 per cent of the country’s $467bn Inflation Reduction Act (IRA) is earmarked for driving energy security and climate change initiatives along 10 categories. Among the key focus areas are clean energy, green banks, carbon capture and storage, and sectors such as agriculture, forestry, and oil and gas. As a consequence of IRA incentives, over $200bn in investments have been already announced by companies headquartered inside and outside the US.

For its part, the European Commission has introduced a $270bn Green Deal Industrial Plan to counteract the competition presented by the IRA and China.

The urgency surrounding the localisation of clean energy production is warranted, with efforts already yielding financial rewards. The domestic production of biofuels, for instance, resulted in a $90bn saving on oil import costs globally last year, up 70 per cent from 2021, according to the IEA.

But in the race to the top, collaboration is as much a feature as competition. Just as competitors on Earth often collaborate in space, the enormity of the green energy challenge demands international cooperation of the highest order.

The Gulf

It is here, at the crossroads of collaboration and competition, that things get interesting for the GCC. The region has been a critical cog in the energy wheel for more than a century, and despite potential of waning demand for hydrocarbons in the future, that status looks set to continue. Countries from Saudi Arabia to the Sultanate of Oman are pursuing ambitious plans for economic diversification and they have a comparative advantage when it comes to the energy transition: Nowhere does the Sun shine brighter or longer, enabling the region to produce the cheapest solar energy in the world.

This is not a new revelation; the GCC has been realising its solar power for some years. In June 2016, Dubai Energy and Water Authority (DEWA) won a bid to build an 800MW photovoltaic plant, recording a world record of $2.99 cents per kW/h. Since then, the region has been setting new records with the lowest bids for solar power plants. And it has another advantage too: many of the components required for clean energy production are themselves energy-intensive to make, but the low cost of energy across the Gulf gives it a clear edge.

Combined, these factors make the GCC well placed to play a lead role in the green energy transition. But competing on cost and solar alone will not be enough for long-term success. In the face of stiff competition from global behemoths and clusters, the region must do more to localise its clean energy ecosystem, and in that campaign, collaboration will be mission critical.

Individually, Saudi Arabia and the UAE are large economies with giant ambitions, but in combination with the visions and capabilities of neighboring Qatar, Oman, Kuwait, and Bahrain, they can be formidable global contenders in the new-look energy sector. To secure their spot alongside Asian, American, and European powerhouses, the GCC countries must put on a united front and develop a regional package of plans and policies for ‘greening up’.

Operating as one won’t just involve the alignment of national visions, it will require the Gulf nations to slice up the clean energy pie – and here, focus is vital. Simply put, the sector is so big and so diverse that pursuing everything can be as good as going after nothing at all. To an extent, seizing the right opportunities will be a process of natural selection, with countries leaning on their respective strengths, be they developing the nuclear value chain, electrolyser manufacturing, tech innovation, or engineering.

What might sound like a gargantuan task could in fact be relatively easy to achieve. Elements of the green energy transition are already occurring in parallel across the region, and when it comes to cooperation, the precedent was set long ago – through OPEC, GCC countries have been collaborating for decades.

Stepping up their much-needed collaboration, GCC states could further harness their comparative advantage by launching unified strategies and funding, with the principle of reciprocity proportionate to the contribution from each country – similar to the concept in the European Space Agency. Subsidy packages in the region would also enhance synergies and complementarity across different countries, fostering green energy localisation and attracting investments at scale.

The clean, green energy transition is well underway, and the GCC is on the verge of great things. Equipped with a wealth of natural, financial, and technical resources, the task now at hand is for the region to ensure its collective appeal. Individually, each of the GCC states faces a win-win scenario in green energy production. The question is, by coming together, can they do it cheaper, faster, and better? And the answer, undoubtedly, is yes.

Adnan Merhaba is the senior partner and Energy and Utilities practice lead at Arthur D Little Middle East

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