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Solar charge

The Middle East may finally be ready for investment in solar power.

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Are the GCC's utilities finally set to release solar plant tenders?
Are the GCC's utilities finally set to release solar plant tenders?
Fotuhi: Subsidies do not help the solar cause.
Fotuhi: Subsidies do not help the solar cause.
Nada: Solar provides a hedge against fluctuations in oil prices.
Nada: Solar provides a hedge against fluctuations in oil prices.
Rockwell: Movement in KSA will kickstart the entire regional solar market.
Rockwell: Movement in KSA will kickstart the entire regional solar market.

MORE ON SOLAR: Financing solar projects in the Middle EastGrids a key challenge for regional solar industryEnviromena: First mover advantage

With the finest natural conditions anywhere on earth, you might expect the Middle East to be leading the world in the development of solar power projects. Yet it lags far behind countries like Germany, the world’s largest solar market, where the sun can’t always be relied upon to shine.

A recent report by the Middle East Solar Industry Association (Mesia) highlights the potential of the region. The Middle East and North Africa (MENA) could see more than $50 bn worth of investments in solar power over the next two decades, it says.

Saudi Arabia alone plans to install 41 GW of solar power by 2032, equivalent to the power produced by 41 nuclear power plants. However solar currently contributes just 0.271 GW of the 16 GW of installed renewable energy capacity in the Middle East, with hydroelectric power plants providing almost all of the rest.

So why does the industry appear to have made such limited progress in getting projects off the drawing board and what will it take to get things moving?

Jordan powers ahead
Jordan has no utility scale installed solar power capacity but the country is forging ahead with plans to add 600 MW in the coming years. So far, the government has awarded 200 MW of capacity with a further 200 MW tendered through round two and 200 MW are at the expressions of interest stage for round three. 

Unlike its neighbours, Jordan is not blessed with an abundance of natural energy resources and the country depends on imports to meet almost all of its energy needs. Energy dependence combined with the disruption of piped gas supplies from Egypt has now made the development of renewable energy projects, particularly wind and solar power, an economic imperative for Jordan.

The cost gap is narrowing
The same cannot be said of other countries in the Middle East which meet fast growing local power demand with indigenous hydrocarbon production. 

As ever, the main issue remains one of cost and whether solar can compete with conventional sources of power generation. Saudi Electricity Company CEO Zeyad Al-Shiha said earlier this year that solar energy is too costly to replace traditional methods of energy production.

But industry players say there is clear evidence that technological developments have narrowed the gap significantly and that solar is now in a position to compete. That message came across loud and clear at the recent Menasol 2014 conference in Dubai where Vahid Fotuhi, head of the Middle East Solar Industry Association (Mesia), called for the industry to get its point across.

“The potential for solar [in the region] is huge and we as an industry should work together to show the policy makers that the current understanding is flawed and that solar is a lot more attractive than they think,” he told the audience.

Sami Khoreibi, CEO of Enviromena which developed Masdar’s 10 MW project in Abu Dhabi, believes solar’s time has come. “The solar power plant we built in 2008 was 10MW for $50 million. Today, you could build an identical plant very comfortably for $15 million,” he said.

“What this has done is make solar competitive with a number of other sources of energy that are part of regional girds.”

Khoreibi points to Jordan where the average production cost of electricity is higher using existing technologies (a lot of it is oil fired) compared to solar technology. “With solar today, you can produce very comfortably for $0.14 per Kw/h and the average production cost I believe, in Jordan, is $0.19 per Kw/h.”

He added: “The production cost will vary depending on your cost of financing. We can confidently say solar can be done at 15 cents and below in virtually any country in the region.”

Resource rich countries in the region may be able to produce power at a lower cost but the gap with solar is narrowing. As the technology advances, the price of producing solar power is only going to go one way while the same cannot be said for other sources, Khoreibi says.

“We wouldn’t expect continued declines with conventionals. Over the next 20 years, are oil and coal fired plants likely to be cheaper than they are today?”

Ahmed S. Nada, vice president, Middle East, of US company First Solar, the developer of the first phase of Dubai’s Sheikh Mohammed Bin Rashid Solar Park, says the company sees a wealth of opportunities and tremendous potential for solar to become a key component in the region’s energy generation portfolio.

“Solar offers a cost-competitive supplement to traditional carbon-based fuels, while also providing a hedge against fuel-price fluctuations,” says Nada. “Also, with the spate of innovations in solar technology over the past years, solar power has never been as economical or reliable as it is today.”

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Subsidies: The wrong signals
Government fuel subsidies are also cited as a major barrier to solar’s ability to compete as they allow conventional power plants to produce electricity at a lower cost. The lack of transparency in the pricing has made solar look more expensive and dissuaded utilities and governments from embracing solar power, says Fotuhi. 

“Solar has made little progress so far because across the Middle East prices have historically been subsidised, which means that the price that we pay as consumers is not reflected in the cost of generation,” he explains.

“Governments have had to bear the burden of the subsidy and as demand has gone up so has the burden on the government to the point where increasingly they are feeling uncomfortable to bear all the cost and are slowly passing it on to end users.”

However, there are signs that the tide may be turning in some parts of the region.

“In Dubai a few years ago they introduced a slab system, which effectively means that consumers are now responsible for the full price of the power they consume and this has done two things,” says Fotuhi. “Firstly it has introduced efficiencies and more rational consumption and secondly it has made renewable energy a lot more commercially viable.

“So now you’re comparing apples to apples. You’re comparing the cost of generating conventional power versus the cost of renewables, which today, thanks to the drop in the cost of solar, has become a lot more attractive.”

But cutting subsidies can be a political minefield for governments. Egypt, for example, spends 20% of its national budget on energy subsidies, or a staggering $16bn per year. This is more than is spent on health and education combined, Frank Wouters, deputy director general of the Abu Dhabi-based International Renewable Energy Agency (IRENA), says.

“It doesn’t make much sense, it doesn’t achieve what they want it to achieve, but at the same time it’s incredibly difficult to do away with,” he told the Menasol conference.

“We’ve seen examples in Jordan and Iran where they have to some extent successfully done away with energy subsidies.

“But in effect the wrong pricing signals are a blocking mechanism for renewables and this is something that the countries realise.

“They want to tackle it but it’s also extremely complex. There are all kinds of lobbies in the transport sector and any unpopular measure will make you not get re-elected.”

In tandem with price transparency, the implementation of adequate regulations will be an essential step in driving the development of solar energy, industry players say.

The lack of clear policies and administrative framework to implement solar has hindered the private sector from developing a pipeline of business, says Browning Rockwell, executive director of the Saudi Arabia Solar Industry Association (Sasia).

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Saudi Arabia the impetus
While Jordan is setting an example to its neighbours, its market is unique and is unlikely to provide the catalyst for solar power development in the region.

Instead, observers are looking to Saudi Arabia, as the largest regional market, to lead the way.

“The tipping point will be when Saudi Arabia finally wakes up and embraces solar and puts policies in place,” says Fotuhi. 

“Saudi Arabia will be a multi gigawatt market, it will be one of the largest markets in the world and when they finally put in place the framework and the regulations that enable solar to flow smoothly then you will see the market reach a different stage of development.” Rockwell concurs and says it would be encouraging if the Saudi government could provide an update on its solar power plans.

The King Abdullah Centre for Atomic and Renewable Energy (K.A. CARE) issued a White Paper on solar last year, but there has been little news or sign of progress since then.

“When Saudi Arabia issues the first large scale RFPs (Requests for Proposals) for solar development we will see a sea change in the attitude of the industry regarding the solar market,” Rockwell says. “The industry is a little fatigued by the long gestation period for the solar market in the region.

“They have been to more solar conferences and exhibitions during the past year than there have been projects to pursue. This period of hopeful anticipation and frustration will soon be forgotten once there are clear signs that the Saudi market is taking off.

“If Saudi is successful with solar, then funds will flow from Saudi Arabia to other markets in the region,” he adds.

“The business of solar needs to be clearly understood and executed in Saudi before large scale adoption will take place in the region.

“Solar is already gaining traction in other markets, but Saudi has the potential to be the largest market in the region with potential to export parts of the solar supply chain to the GCC/MENA region.”

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Outlook bright for solar?
Despite the challenges faced the industry appears optimistic that a breakthrough is on the horizon. While the number of physical solar power plants constructed remains very small, there has been a turning point in the acceptance and knowledge of solar energy in the region, Rockwell says.

“Most solar projects to date have been no more than “trophy” projects based on the typical construction business model. 

“We are slowly beginning to see the development of proposed business models that will ignite solar project development.

“While K.A.CARE, Masdar and others caught the attention of the world several years ago with their large solar program announcements, it has taken most markets 4-6 years to reach a scaleable solar model. The EU, US and other markets followed similar growth patterns,” he says.

“The challenge with the Middle East market is managing the expectations of the industry.”

Enviromena says recent signs have been very encouraging. In the past twelve months the company has had more bids on projects than the last six years combined.

“We’re seeing that once the market turns on, it really does just take off,” Khoreibi says.

“Once that inflection point is hit, where the economics make sense, it can happen very quickly and does happen very quickly, as we’ve seen in parts of Europe and the United States and we expect to see that in the MENA region in the next 12-18 months.”

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