Gulf governments, in spite of being some of the largest oil and gas producers and exporters in the world, have unveiled major plans to install solar power capabilities. With hydrocarbon resources being finite, and internal demand for power increasing exponentially, renewable energy sources are high on the agenda.
The Gulf solar energy industry is expected to witness between 60 GW and 70 GW of installations over the next 10 years, a Frost & Sullivan analyst told Zawya. "Despite challenges, solar power is an appropriate option to cater to the peak demand issue that the GCC faces, one that is currently being addressed by diesel generators, or gensets," said Abhay Bhargava, head of the consultancy's Energy and Power Systems practice.
Some of the initiatives already announced are:
- The Abu Dhabi Shams and Noor projects for 200 MW (a Shams 1 spokesperson told Zawya that the next step is to operate the plant for the next 25 years as per the power purchase agreement, or PPA, signed between Shams Power Company and Abu Dhabi Water and Electricity Company. Shams 1 was designed and developed by Shams Power Company, a joint venture between Masdar (60%), Total (20%) and Abengoa Solar (20%). It is the largest concentrated solar power plant in the world. It will produce 100 MW of power, sufficient to provide energy to about 20,000 homes.
- The setting up of the pioneering Masdar City, part of the overall Masdar initiative.
- The Mohammed bin Rashid Solar Park in Dubai with a proposed capacity of 1,000 MW by 2030.
- QSTec, Qatar's USD 1.2 billion polysilicon plant, which will contribute to the setup of a localized value chain for producing solar panels. Eventually, the plant can expand to produce 45,000 metric tons per year. Qatar has plans to install 1.8 GW of solar power over the next few years.
"Saudi ranks fourth in the global rankings for gas reserves. We produce almost as much gas as Qatar. Most of the gas is mainly used domestically as feedstock for the petrochemicals industry," said Muhammad Abualsaud, vice president of oilfield services and renewable energy sectors at Khalid Al Turki & Sons. "This lowers the allocation of feedstock for power plants. Therefore, the country has to use oil to generate electricity and there is a huge opportunity lost there. Oil commands a very high price in the international markets whereas gas is relatively cheap. We don't want to burn more liquids to generate electricity. The main hurdle is to find gas allocation; to use gas as a source for conventional power plants. Hence, there is a case for the need to look at solar."
With that vision in mind, the King Abdullah City for Atomic and Renewable Energy, or KACARE, was established in April 2010 with the purpose of transitioning Saudi energy generation towards renewable energy. The organization set a goal of producing 54 GW from renewable energy sources by 2032. Within that goal, the kingdom aims for solar energy to produce 41 GW. Last year, it announced plans to invest USD 109 billion to develop a solar industry capable of meeting a full third of electricity demand by 2032.
According to Bhargava, Saudi Arabia is already investing in alternate energy projects:
- A 3.5 MW power plant by Aramco
- Using solar power for powering control panel devices to fend off pipeline corrosion
- Trials to power a village and a school already under way using solar power
- Upcoming polysilicon production facilities in the country
- The 100 MW Solar Makkah project
- The 600 MW Dibba 1 IPP project, which would be the kingdom's first Concentrated Solar Power (CSP).
The International Energy Agency notes that there are two main kinds of solar energy. Solar photovoltaic (PV) directly converts solar energy into electricity using a PV cell made of a semiconductor material. On the other hand, CSP devices concentrate energy from the sun's rays to heat a receiver to high temperatures. This heat is transformed first into mechanical energy (by turbines or other engines) and then into electricity, called solar thermal electricity (STE).
Sporadic shortages
According to "The GCC in 2020: Resources for the future", a research paper by the Economist Intelligence Unit, the GCC member countries are expected to post robust growth over the next decade both in terms of population and GDP. By 2020, the GCC population is forecast to reach 53.5 million, a 30% increase over the level in 2000. Over the same period, the region's real GDP is expected to grow by 56%. Nominal GDP, which was USD 341.6 billion in 2000, is forecast to soar to over USD 2 trillion in 2020.
"Although the economic forecast is positive, it carries a risk: that un-managed growth will bring negative side-effects such as power shortages and soaring prices, in particular for food. Some GCC states are already experiencing sporadic shortages of electricity and gas. The GCC countries, meanwhile, control 40% of the world's known oil reserves and 23% of proven natural gas reserves. World dependency on GCC energy exports will grow by 2020. In the circumstances, why should the GCC worry about conserving energy resources?" the report states.
"Yet conserve it must--not only because hydrocarbon resources are finite, but because conservation makes financial sense. Demand for electricity, which is typically generated by domestic gas, is already outstripping supply in the GCC. Fast population growth threatens to create acute shortages unless something is done. Moreover, using fossil fuels to generate electricity means having less available for export, which in turn means high opportunity costs."
The shift in perception is also being facilitated by the fact that renewables like wind and solar are becoming more cost effective in their own right, according to a report by the Abu Dhabi based International Renewable Energy Agency, or IRENA. Technological advances are enabling larger output at lower cost, thereby making them more attractive to both public and private investors in the region. The costs of technologies such as PV modules - which have seen a 65%-75% reduction in the last two years - are becoming increasingly competitive.
"It is therefore no surprise that we are seeing a trend for increasingly ambitious renewables projects across the GCC," the IRENA report notes. Besides working with government entities across the region, IRENA is conducting a Renewables Readiness Assessment (RRA) with the government of Oman, with a view to the country devising a 'Renewable Energy Roadmap,' which will lay out the policies and required infrastructure necessary to reach its national renewable targets in the region. In July 2012, the Oman Power and Water Procurement Company announced it was investigating the possibility of building a 200 MW PV and CSP facility.
Challenges ahead
But the road is not easy. Bhargava said: "The GCC solar energy industry is expected to witness between 60 GW and 70 GW of installations in the next 10 years. However, there are a number of challenges that need to be overcome prior to a successful adoption. Foremost amongst these is the justification of financial feasibility for the solar projects. Intermittency, low efficiency rates, and lack of capability to cater to base-load are major aspects that solar power needs to address to attain acceptability."
The industry is not competitive and too expensive when compared to conventional power plants, added Abualsaud. "Then you have to rely on suppliers or companies, which have financial constraints and are even likely to go insolvent or bust. For example, if you were to build a power plant, say 100 MW, you buy panels from a particular company. But what will you do two or three years down the line when you need to replace the panels and that company has ceased to exist?"
Falling prices have virtually erased profits at major manufacturers, such as China's Suntech Power Holdings, Yingli Green Energy Holding, Trina Solar and the US-based First Solar, according to media reports in April 2013. Germany's Q-Cells, once the world's largest solar maker, has filed for insolvency. That followed last year's demise of Solon. Several small US companies have also folded, including Solyndra.
Germany's Solarworld is working on a plan in which current creditors will take over the company almost entirely in a debt-to-equity swap backed by a Qatari investor, another report said. Qatar Solar Technologies (QSTec), an integrated solar company is a joint venture formed between Qatar Solar (a wholly-owned subsidiary of Qatar Foundation), SolarWorld and Qatar Development Bank. The report added that German solar companies, once a showcase of the global renewable energies sector, were hit hard by the rise of Asian competitors that built up massive production capacities over the past few years. The resulting global overcapacities triggered plummeting prices for solar panels that resulted in significant revenue declines for component makers. The pressure on the industry was exacerbated by subsidy cuts across Europe, making solar projects less attractive, it noted.
But the GCC region faces some other issues. Abualsaud said many companies are willing to undertake the construction risk of putting up a solar power plant. "But committing to a long-term 20- to 22-year power purchase agreement is not a lucrative proposition to a group of investors. PPAs promise a modest IRR of 7%-9%."
The trend is to build a power plant and monetize the project by selling it. "The regulations in Saudi Arabia limit the change of hands and asks the initial investors to stay with the business for at least two years (though KACARE has suggested six months). This requires less stringent withholding obligation in joint stock companies as well as 'faster' processing time of company registration information with MoCI and perhaps with SAGIA," he said.
"Another issue with solar is that your capital expenditure is upfront. You have to buy the equipment, panels and assemble it first; your capex is almost 80% of your investment and the rest is your operational expenditure. But in the conventional power plant, it is the other way around. Hence, it will require a change of mindset."
Bhargava also warned that another future issue will be one of supply and construction; owing to a lack of adequate capability in the GCC, both for local supplies as well as for local manpower, to build and maintain solar plants. "Lastly, the regulatory structure in the GCC is still not geared to encourage rapid adoption of solar," he said.
Due to recent advances in technology and manufacturing processes, the cost of solar power is falling dramatically, a Masdar spokesperson told Zawya. "In fact, the price of solar PV panels has fallen by two-thirds in the last two years alone, due in large part to a massive uptick in Chinese solar PV manufacturing. As a result, in many parts of the world, solar power costs the same - or even less than - power from conventional fossil fuel generation," he said.
"But even given current pricing, there are favorable incentive structures and regulatory frameworks that have proven effective in growing renewable energy industry in countries around the world. The UAE will need to develop the most appropriate mix of regulations, policies and incentives to encourage growth in the sector."
Future outlook
The initiatives in the UAE, Saudi Arabia and Qatar are clear reflections that solar has a positive future in the GCC, said Bhargava. "This movement is expected to gain traction over the next two years, based on moves by KACARE in Saudi Arabia. Considering the current global oversupply situation of solar panels, and the downturn across Europe in the wake of changes in regulation, this large demand from the GCC will not face any supply issues, and will surely be met," he said.
"However, localized supply of services is an area of concern that would need to be addressed either by multi-national system integrators or by existing Engineering, Procurement and Construction (EPC) contractors who gear up to cater to this new market. The GCC's commitment to solar energy will lead to a reshaping of the solar industry, with the emergence of new suppliers, and by presenting a challenge to develop newer products that can cater to the high heat, dust and humidity that characterize the GCC."
Added Abualsaud: "Certain projects were built at USD 6 per watt can be constructed today at half or one third the price. Regarding KACARE, the project has been talking of potential developers for a while. This year, it released a detailed white paper, which looks promising and talks about releasing tenders in Q3 2013. We will wait and watch. KACARE together with Sustainable Energy Procurement Company (SEPC), the National Grid Company and other government entities such as ECRA and the unbundled SEC will have to work in harmony to realize the vision on solar."
Added the Masdar spokesperson: "We are very fortunate here in the UAE and GCC in that the solar energy resource is tremendous. As much as half of the world's renewable energy potential lies in the Middle East. Yet we need to figure out the best and most cost-effective ways to harvest it. In the next three to five years, we will likely see unprecedented growth in the solar industry in the UAE as both, Abu Dhabi and Dubai, will work to meet their renewable energy targets."
Abualsaud concluded that while there are skeptics in the regional market, who dispute the ability of solar in dusty or cloudy environments, one must remember that solar is proven. "Solar is an inevitable future. If we do not move into renewables, we will have to import oil in the next 15 to 20 years." The race will continue to get the numero uno position in renewable energy. Whoever wins, the region will benefit.
© Zawya 2013