Globally, solar energy continues to gain traction as an alternative source of energy with high potential. Originally reserved for developed countries such as the US and those in Western Europe, solar energy is fast becoming a preferred choice for the growing energy demands of emerging countries. The most important driver for this trend is the rapid decline of prices in solar generation costs.
The costs of solar photovoltaic (PV) modules and systems have declined by 65–70% in the last half-decade, reducing solar PV’s levelized cost of electricity (LCoE) dramatically. This has improved solar energy’s competitiveness, making it far more affordable for emerging countries such as the Gulf Cooperation Council (GCC) to develop their markets without resorting to costly subsidies.
The GCC – a case of lost momentum?
With one of the highest rates of insolation, the GCC has ample resource potential to develop solar power as a primary energy source. With the need to find alternative energy sources to reduce the opportunity cost of burning indigenous fossil fuel resources, as well as the need to drive economic development, employment and technology industries, the solar industry is a sector few regions can afford not to develop.
However, despite major plans announced in the past by the region’s governments to kick-start the sector, actual deployment is still in its nascent stage, and the share of the GCC’s solar energy capacity remains paltry - less than 0.5% of the installed generation capacity in the GCC in 2014.
Almost all GCC countries have announced plans to deploy significant volumes of solar power generation capacity within the next decade. Saudi Arabia intends to be the single most important market in solar power generation, with its target of deploying 41 GW of solar energy in the long term – which translates into approximately 86% of the GCC market share. Thus, Saudi Arabia’s market development efforts will drive the pulse of the GCC solar market in the coming decade.
But when it comes to actual deployment, Saudi Arabia’s report card has not been remarkable. Since the announcement of its ambitions in 2012, no major projects have been approved or started construction. In fact, the country recently announced plans to extend its solar energy deployment milestone by eight years. This suggests that aggressive national ambitions do not necessarily translate into aggressive market development.
Solar projects have been successfully deployed in countries such as the UAE (e.g. Abu Dhabi’s 100 MW Shams 1 CSP power project, launched in 2013). However, the solar ambitions of countries outside Saudi Arabia remain relatively small and limiting to creation of a long term sustainable solar industry value chain and economy in the region.
The GCC’s solar industry report card
1. Policy support
A clear policy framework is imperative for market development. However, not a single country in the GCC has rolled out its own set of solar policies since the announcement of plans to develop a strong solar energy market. Most of the deployment to date has been state sponsored, which does not require policy support.
However, going forward, if the GCC is serious about developing a thriving solar-energy market that draws significant investment from the private sector, then a clear and transparent solar-energy policy needs to be communicated to build market confidence in the industry. Unlike in the past, when policies were mainly directed towards subsidizing the high costs of solar energy, certain countries have been pushing for a “non-subsidy” solar-policy paradigm. he GCC can learn valuable lessons from assessing new policy initiatives from emerging countries that have faced similar issues.
For example, instead of providing expensive direct subsidies, countries are now focusing on providing structured and ample financing to solar projects, either through national banks or by collaborating with international development banks. This is because priorities have shifted from providing subsidies (due to reduction in deployment cost) towards development of attractive financing options (to ensure bankability of long-term projects).
2. Implementation vehicles -
Different GCC countries have identified different implementation agencies – in some cases, multiple agencies – to execute their solar development strategies. The agencies range from dedicated implementing agencies (MASDAR, K.A. CARE) to state-owned utility players (DEWA) and research institutes (KISR). Creating an effective implementation agency is critical.
Besides being given a clear mandate and equipped with the right capabilities, the government-backed agency must have the influence to drive national stakeholders to overcome implementation challenges. A case in point is India’s National Solar Mission, in which the government realized that developing a nationwide market for solar energy could happen only with concerted effort from all key stakeholders.
3. Industrial strategy -
Development of a robust national solar strategy must be articulated in terms of the target value-chain segments the GCC wishes to develop (e.g. power generation, components manufacturing, polysilicon manufacturing, rooftop installations), the technology pathways it wants to follow (PV versus CSP, c-Si versus thin-film, parabolic trough versus central tower), the deployment model (utility scale, distributed generation, co-generation), and a clear investment and policy roadmap.
The strategy must also delineate between other economic development objectives, such as employment generation and R&D, as well as the implementation plan by which the nation wishes to achieve these objectives. In the GCC, the majority of countries have yet to develop clear visions for developing the domestic and regional solar sector industry chain that are necessary to support local value-add from solar-energy investments. Saudi Arabia, the most important market, has not yet come out with its strategy to achieve its ambitious targets.
A draft document of a competitive procurement process (CPP) by K.A. CARE, a quasi-government agency dedicated to implementing alternative energy, gave the industry a preview of the strategy, but fell short of expectations and has not been finalized. However, analyzing the solar-energy initiatives of certain GCC nations throws light on the underlying strategic themes of the region.
For example, Masdar’s effort to diversify in all three mainstream solar technologies – CSP, c-Si and thin-films – in order to reduce technology risks indicates the hesitation of the region to bet on a single technology as yet. Qatar’s foray into manufacturing confirms the suitability of the GCC to develop a manufacturing sector.
4. The importance of private sector participation -
The private sector is expected to contribute to the manufacturing and EPC space in the short to medium term. In the long run, the GCC will throw opportunities in the energy generation value chain to the private sector as well. In fact, DEWA’s awarding of a 100 MW IPP model solar project to ACWA Power is a major development towards that. However, the long term feasibility of a thriving private sector requires high and sustainable regional demand, which can only emerge if Saudi Arabia is able to foster its own solar-energy programs.
The implicit subsidy in the energy and electricity sector is a major deterrent to this. With global energy prices going below KSA’s break-even point, the government is facing higher pressure to reduce these subsidies. This may mean an increase in electricity prices and a more attractive business case for private players to enter the solar market.
5. R&D, human capital development and investment funding -
The development of a long-term sustainable-energy ecosystem requires strong R&D support and robust human capital development. In the short term, R&D in the GCC should focus on obtaining accurate local data on the solar-energy potential to support the developers in deploying cost-efficient and reliable projects; developing solar-energy technologies, design and construction techniques suited to the harsh operating conditions of the Gulf region; and sponsoring innovation in solar technologies for thermal applications (e.g. desalination, district cooling, enhanced oil recovery).
Such initiatives are already being taken up in the GCC, such as the Renewable Resource Atlas by K.A. CARE, which provides pre-project data on solar patterns, dust levels and other meteorological data. This will provide optimal information to developers and investors during project planning. Strategic partnerships between international communities and local R&D centers are yet another method for propelling technology development. Existing R&D centers in the GCC, such as the Solar & Photovoltaics Engineering Research Center, Masdar (Masdar institute of Science and Technology) and KISR (Energy & Building Research Center) have all been active in conducting R&D activities in the renewable energy sector and will be an integral part of progress going forward.
Renewing the lost momentum
Saudi Arabia has been guiltier than others in terms of ambitions not having been supported with effective actions. The country could renew this lost momentum by clarifying the role of each stakeholder in the solar energy ecosystem, developing policies to foster industry participation, and encouraging large-scale capability building. It goes without saying that tough political policy decisions such as reduction of energy subsidies and increase in consumer incentives will point the Kingdom towards making the optimal trade-offs in terms of energy mix and usage.
Additionally, it is imperative for solar energy to emerge as a key focus area in government narrative and communication. For any sector to emerge, political will and government backing are essential. Re-energizing the renewable energy narrative will give a new lease on life to the solar energy industry in the GCC.
About the Authors
Dr. Jaap Kalkman is Global Head Energy & Utilities Arthur D. Little; Sameer Anees is Principal at Arthur D. Little MESEA, Adnan Merhaba is Manager at Arthur D. Little MESEA and Samrat Bose is Consultant at Arthur D. Little MESEA.
For further information see the Arthur. D Little website.