Governments are forging ahead with renewable energy programmes, fuelled by the rapid fall in the cost of developing solar and wind power.
Despite a slowdown in the value of contract awards in the Middle East and North Africa (Mena) power sector in 2019, the transition towards alternative and cleaner forms of energy will be the prominent theme in the region’s electricity sector in 2020.
For the first ten months of 2019, the $12.2bn-worth of contract awards for power projects in the Mena region was significantly down on the $20.2bn awarded for the same period in 2018. A combination of reduced peak demand growth for electricity across the GCC – a result of muted economic growth and energy efficiency measures being undertaken by utilities – and the completion of construction work on major power plants can largely account for the drop in new projects activity over the past year.
The new year should record a pick-up in awards for power generation projects as several large utility-scale schemes move through bid submission and evaluation on to award. Moving further into 2020, it will be the region’s burgeoning renewable energy sector that should offer the most opportunities for investors and energy companies seeking to boost order books.
The latest milestone in the region’s transition towards new sources of energy was passed in October, with the submission of record tariffs for the fifth phase of the Mohammed bin Rashid (MBR) solar park in Dubai.
The tariff price of 1.652 cents a kilowatt-hour (¢/kWh) submitted by Saudi developer Acwa Power smashed previous records for unsubsidised photovoltaic (PV) solar production, and marks the fifth time in less than five years that a GCC country has broken the world record for solar energy tariffs.
The rapid fall in the cost of developing PV solar and wind energy has facilitated the drive from many of the region’s utilities to launch ambitious clean energy programmes. According to the International Renewable Energy Agency, the levelised cost of electricity (LCOE) has fallen 73% since 2010 and is expected to fall further as technology improves and competition increases.
While the Mena renewables market is still at a nascent stage, with installed solar and wind capacity having reached 2,350MW and 434MW respectively by early 2018, the ambitious targets set across the region for clean energy development clearly show the region’s utilities have now fully embraced the virtues of renewable energy.
Morocco has set the most ambitious target, with 52% of its total generation slated to come from alternative power by 2030, while Dubai is aiming for 75% clean energy by 2050. However, the largest programme of planned projects belongs to Saudi Arabia. In January 2019, the kingdom set an ambitious target of developing 58.7GW of renewables capacity by 2030, from a current installed capacity of less than 100MW.
Having concluded the contract award for the 400MW Dumat al-Jandal wind project in early 2019, which is the second and final scheme under the first round of the kingdom’s National Renewable Energy Programme, the Renewable Energy Project Development Office issued tender documents for six PV solar schemes with a total capacity of 1.4GW in July. The project owner is planning to follow the submission of bids for the second round in December with the issue of tender documents for the 1.6GW third round. The third round will include five PV solar projects and one 850MW wind power scheme.
The Public Investment Fund (PIF), the Saudi sovereign wealth fund, is also expected to finalise agreements for the first of its directly negotiated solar projects by the first quarter of 2020. The PIF is expected to oversee the development of 70% of the 58.7GW target, with large-scale projects of 2-3GW to be awarded to developers through bilateral negotiation.
Localisation of manufacturing services and key clean energy components will form a critical part of the PIF’s programme, with the wealth fund in negotiations with some of the world’s largest PV panel manufacturers about setting up production facilities in the kingdom. The ramp-up in the region’s power industry supply capacity and related job creation will become an increasingly prominent theme in the energy sector in the coming years.
Following the commissioning of the world’s largest PV solar project in March 2019, Abu Dhabi will remain another market of focus for investors and clean energy firms in 2020. With bids due in the first quarter for the planned 2GW Al-Dhafra PV independent power project (IPP), the emirate is already working on site selection for its third major PV scheme, which is likely to have a capacity of 1.5GW when it comes to market.
The sharp fall in the cost of renewables and a drop in peak demand growth has also led to a significant slowdown in the development of new traditional thermal power plants across most of the region. This is set to continue into 2020, with Saudi Arabia being among the few GCC states set to receive proposals for hydrocarbons-fueled IPP schemes in the new year. Abu Dhabi received proposals for its planned 2-2.4GW F3 gas-fired IPP in October.
The main exception to this shift towards clean energy is Iraq, which awarded multibillion-dollar contracts to Germany’s Siemens and the US’ GE in early 2019 to expand existing gas-fired power plants and build new ones. The projects form part of Baghdad’s programme to develop fast-track electricity capacity, with many areas of the country suffering from power shortages.
While the cheaper cost of producing electricity through renewables has been welcomed, the shift towards clean energy will create new challenges for the public and private sectors. For governments, the addition of significant peak-load renewables to the grid will require adequate investment into networks to ensure stable and balanced power supplies. The importance of balancing grids has also risen with the increasing decoupling of power generation and desalination production. In addition, utilities will be required to adapt medium-to-long-term planning to make sure appropriate baseload power or additional gas-fired peaking power is available to meet demand peaks.
For developers, the move towards clean energy has led to new resource risks in developing projects under concession agreements. Investors will need to ensure contracts are structured within the new risk parameters and appropriate financing structures are adopted.
While the region’s utilities have undertaken a wholesale shift towards embracing public-private partnerships (PPPs) to develop major new power plants, governments are keen to further increase the integration of the private sector in utilities with the privatisation and monetisation of existing state assets.
In Saudi Arabia, state electricity provider Saudi Electricity Company and desalination company Saline Water Conversion Corporation are set to sell off operational power and water assets.
Although the kingdom launched programmes to privatise the ownership of utility assets more than a decade ago, the plans were given fresh impetus following the launch of Vision 2030 in 2016. After a number of steps were taken in 2017 to lay the foundations for unbundling and selling power and water plants, little progress has been made since.
Riyadh insists, however, that it is committed to the asset sales, and the sale of the Ras al-Khair power and water cogeneration plant has been included in the 2020 privatisation roadmap. A sustained period of lower oil prices is likely to elevate the process of privatising existing assets in the priorities of governments across the region.