The history books state that the Spanish conquistadores of the fifteenth, sixteenth, and seventeenth centuries traveled to the Americas motivated by the Three G’s: God, Gold, and Glory. Had these explorers traveled to the south and east of their homeland, however, they may have found a fourth G that could have raised their legacy to an entirely new level: gas.
For most of modern-day history, the Middle East and North Africa region (MENA) has been known for its immense energy wealth. A study from The Oxford Institute for Energy Studies reported last month that the MENA region currently contains more than half of the planet’s discovered crude oil, in addition to more than a third of Earth’s natural gas reserves. While MENA exports a significant amount of its energy reserves to global demanders, the region’s energy consumption has also increased significantly over the last fifty years. With regionally produced fossil fuels of ample supply and low cost, MENA has transitioned from a peripheral demand market for energy to an industrialized, populated region that has consumed energy faster than almost any other region over the last half century. While the Persian Gulf states’ growth rate in energy demand peaked during the 1970s, aggregate demand amongst Gulf nations (including Iran and Iraq) for primary energy has risen five-fold since the 1980s, which translates to the fastest energy demand growth for any global region.
The rise of oil prices on the world market along with the growing demand for fossil fuels has been an ongoing trend for over a decade. MENA’s position as a rapidly growing energy consumer, therefore, has placed the region in a tight situation. Oil and gas producers are now facing higher opportunity costs for diverting shares of oil and natural gas from high-price international markets to low-price domestic markets, such as the MENA region.
It is with these particular issues in mind that this article explores the vast potential of renewable energy options, such as wind and solar energy, which are valuable alternatives to fossil fuels in satisfying MENA’s energy demands. While oil and natural gas will undoubtedly maintain primacy in the region’s energy dependence, the pursuit of alternative forms of energy has the potential to save MENA, an ever-growing and industrializing region, from rising costs in order to sustain growth and prosperity.
The MENA region includes countries such as Saudi Arabia, Bahrain, Iran, Iraq, Morocco, the UAE, and others. Understanding that renewable energy is to play an increasingly significant role in the economy, these countries have already taken steps to invest in alternative forms of energy, diversifying their interests in the energy sector. According to the Middle East Solar Industry Association, the MENA region could see up to $50 billion investment in solar energy by 2020. Specifically, Saudi Arabia has gained considerable international press in the past month for its investment in the alternative energy sector. Currently, the Kingdom maintains a 576.8 billion USD GDP, eighty percent of which is dependent on oil revenues.
Yet with export supplies dropping and growing internal demands, Saudi Arabian leaders are understanding more and more that they should begin investing in nuclear power and other renewable energy sources. The King Abdullah City for Atomic and Renewable Energy (KACARE) has been assigned by the Kingdom to create plans to produce 54 gigawatts of renewable energy by 2032, with a particular focus on solar energy. This has been regarded as one of the largest programs for solar energy growth in the world, and the Kingdom seems poised to become a regional leader in solar energy production. It is clear that Saudi Arabia has recognized the need for renewable energy investment and has taken significant actions to enter the market and ultimately broaden the scope of the energy sector in the MENA region.
Several companies also see great opportunities for renewable energy investment in the MENA region. In January of this year, Masdar, Abu Dhabi’s leading renewable energy company, announced that it will be collaborating with the European Investment Bank (EIB) to speed up the development of renewable energy projects in the MENA region. The agreement was signed during Abu Dhabi Sustainability Week, one of the largest gatherings on sustainability in the Middle East and a significant venue for cooperation in the region. Having provided more than 70 billion euros in long-term energy investment over the last five years, EIB will most definitely enable Masdar to improve resources and forge ahead with new projects in renewable energy.
Aside from various private investments in the growing trend of renewable energy, funds and investment vehicles that are solely dedicated to alternative energy investment in the region are currently being developed. For instance, in late 2013, Desertec Industrial Initiative (Dii) developed a $40.5 million fund for supporting renewable energy projects in MENA. The goal of the project is to capitalize on and help drive the energy transition to wind and solar power that is beginning to take place. Investment initiatives like these will not only help downsize the risk involved in starting renewable energy projects, but may also help catalyze further private sector involvement in the energy industry of the region.
Essentially, the MENA region has seen a considerable rise in renewable energy investment in the past few years and has very recently set forth projects to increase diversity in the energy sector. The Kingdom of Saudi Arabia hopes to spend $109 billion on solar energy and nuclear power. The United Arab Emirates plans on allocating $102 billion towards solar and alternative energy, and corporations such as Masdar and the European Investment Bank have begun to involve themselves in the surge of alternative energy investment in the MENA region.
The Future of Energy Investment
While recent alternative energy efforts in Saudi Arabia and the UAE are promising, it is important to realize that consumer demand in the domestic market for electricity in MENA is very different from that of Western Europe or North America. Whereas renewable energy development in Europe and the Americas has been catalyzed primarily by a desire to mitigate climate change, the importance of alternative energy investment in MENA can be better understood through an economic lens. In fact, many developing countries in MENA primarily consider alternative energy sources as a mechanism to satisfy their rapidly expanding consumer demand for energy. In Persian Gulf countries, for example, electricity demand regularly peaks in the afternoon, which coincides with the time of maximum sunlight availability. This means that solar energy could help fill in the growing electricity demand gap when it is needed the most – during peak hours. To the extent that non-fossil fuel energy sources are perceived as economic necessities, the future of alternative energy development in the region is bright.
Perhaps the biggest perceived barrier to significant renewable energy development is the overwhelming dominance of fossil-fuel production in the region. However, the characterization of the Middle East and North Africa as an overwhelmingly oil-abundant area only tells part of the story. In reality, for many of the developing countries in MENA, a reliance on oil and natural gas reserves will not be enough to satisfy consumer demand. The International Finance Corporation, a World Bank subsidiary, predicts that the expensive nature of energy subsidies will force importers like Israel, Jordan, Lebanon, Morocco, Palestine, and Tunisia to put energy efficiency at the top of their priority lists. Its estimates put potential investment in the MENA region at $45 billion, with $29 billion coming from solar and $12 billion from wind. Crucially, alternative energy development is also beneficial for countries that are currently net energy exporters. In order to satisfy domestic demand, net exporters like Saudi Arabia and Bahrain are forced to restrict foreign energy exports, which results in lost revenue from selling oil at higher prices to other countries. Thus, by relieving some of the domestic energy demand, an advanced alternative energy private sector in these countries would allow governments to reorient their focus towards profitable oil and gas exports abroad.
However, in order for MENA countries to unlock their immense potential for renewable energy, their political and regulatory conditions must become more business-friendly. In Oman, for example, an intransigent legislative framework is inhibiting solar energy development, which keeps newer technologies out of the market for long periods of time. These restrictions drive costs of renewable energy generation higher. Moreover, the threat of imminent political unrest continues to diminish the incentive for renewable energy investment in places like Libya, Egypt, Algeria, and Iraq. Since the initial capital cost of renewable energy technology is often very high, increased risk due to geopolitical conflicts serves as a major disincentive for potential investors. Despite these significant hurdles, there is reason to believe that business conditions will improve as governments realize that it is in their best interest to allow for the development of alternative energy in the face of rising costs of water subsidies and conventional electricity generation. An aggressive governmental push towards green energy is already noticeable in a place like Saudi Arabia, which currently features close to 1,500 green projects, including several initiatives for ‘green building.’
Aside from the domestic political environment, the level of regional cooperation will be a large determinant in the success or failure of renewable energy in the Middle East. Regional cooperation can take the form of technology transfers or energy trading. In order to make green energy truly viable in the market, countries will have to embrace both. With regard to technology transfers, it is critical that a cooperative framework exists between countries established renewable energy indsutries and newly producing countries. In the intermediate to long run, technology transfers will also allow countries which have recently entered the market to develop domestic manufacturing and R&D capabilities. A 2010 World Bank Study suggests that the creation of a “network” of regional technology transfers could also have positive economic spillover effects in construction, manufacturing, research, and other industries. Moreover, MENA countries must also take advantage of electricity trade as a part of their framework for regional energy cooperation. The Oxford Energy Report argues that this is largely feasible because of already existing infrastructure that has the potential to support this type of inter-grid trade. For instance, Egypt and Saudi Arabia have already agreed on plans to connect power grids that can facilitate trade by taking advantage of differences in peak electricity demand times.
Ultimately, the potential for significant alternative energy development clearly exists in the Middle East. In the coming decades, it is safe to say that fossil fuels will continue to dominate the domestic market, but this does not mean renewable energy will not find its place in the established energy industry. Regardless of whether it is developed in response to economic or environmental concerns, investment in viable green energy sources will go a long way towards satisfying the demands of a rapidly developing region.