November 5, 2015

Market Watch: Why Renewable Energy Makes Sense for the UAE

The major drivers behind the UAE’s commitment to renewable energy are both political and economic in nature.

The drivers include a commitment to economic diversification, which is fiscally prudent but also politically salient to both domestic actors and to international allies and investors. Economic reform measures acknowledge that the status quo of the traditional rentier Gulf economy does not work in the 21st century, because of drastic changes in demographics, including rapid national and expatriate population growth, joined with the finite supply of oil and the instability of global demand. Electricity generation quintupled between 1991 and 2010 in the UAE with an average growth of 8.5 percent per year. A policy commitment to renewable energy production is a true reform (and economic growth) agenda.

Signals of political commitment also include the hosting of the International Renewable Energy Agency (IRENA), firmly establishing the UAE as a leader of an international organization and boosting the state’s global brand and industry leadership. Abu Dhabi’s Masdar City and Shams 1 are symbolic of a political commitment and an effort to lead an industry, as Shams 1 is the largest concentrated solar power power plant in the world.

Other motivations for renewables are perhaps more complex. More than 90 percent of the electricity produced currently in the UAE is generated by coal or gas fired plants. The landscape of power plants, a massive infrastructure investment, is different in the UAE than in neighboring Kuwait and Saudi Arabia, which are able to use oil produced domestically to generate as much as half of their electricity. The UAE imports nearly all of its natural gas supply from Qatar in long-term contracts. Energy independence, at least from Qatari natural gas, might be seen as both a political and economic objective.

Meanwhile, renewable, especially solar, energy has become less expensive to produce, in both solar photovoltaic (PV) and concentrated solar power (CSP). Solar technology is now produced for a global market at comparable prices to traditional electricity plants, as the recent pricing of the new 100 megawatt solar PV plant in Dubai by ACWA power at 5.98 U.S. cents per kilowatt-hour proves; it is also true that at the time of constructing Shams 1 in Abu Dhabi, the economics of solar production at that scale were not cost-saving. Thus, expanding solar power electricity generation, at least now, makes both political and economic sense.

The rationale for solar power intensifies inside the UAE because of the structure of the federation and the individual emirate ownership of utilities. Abu Dhabi holds and produces as much as 94 percent the country’s oil and 90 percent of its natural gas, representing eight percent and 3.5 percent of global reserves, respectively. The UAE became a net importer of natural gas in 2008, because of the high demand for gas in oil production, electricity generation, and the difficult (high sulfur) composition of domestic gas. Dubai has had an increased incentive to develop renewable energy sources that require neither costly imported gas or dirty emission coal. Dubai’s reliance on trade and industry to drive its economic model, rather than the export of oil, means that electricity generation (and sale to consumers) is central to its ability to grow.

The structure of the UAE federation has created some impediments to efficient electricity distribution. The northern emirates, especially Sharjah, rely on an electric grid that is managed from Abu Dhabi. There are often electricity shortages in Sharjah in the summer months, though there is not necessarily a correlated problem in generation in Abu Dhabi. Solar energy production will require investment in connecting to the distribution grid and a better efficiency of distribution between emirates, but that problem exists with the current supply as well.

Renewable energy targets vary by emirate in the UAE. These targets are ambitious. As of 2013, Dubai aimed for five percent of renewable product by 2020, but has since committed to as much as seven percent, matching Abu Dhabi’s 2020 target. Challenges to meeting these targets will depend on government commitment to infrastructure investment, building new electricity plants and purchasing solar technology.

Ironically, a continued downward trend in the price of oil could discourage government spending in all kinds of infrastructure investment, including solar power. At present, however, the political incentives for a renewable energy commitment are as compelling as the economic case . The more difficult targets will be standardizing distribution of electricity throughout the federation, which should be a shared goal of economic diversification and generating economic growth.

Karen E. Young is a senior resident scholar at the Arab Gulf States Institute in Washington.