DIFC seeks $200bn green future

Calls for Gulf states to cut fuel subsidies or lose golden chance

A worker cleans solar panels in Masdar City. Abu Dhabi plans to generate 7 per cent of electricity from renewable sources by 2020.

The Dubai International Financial Centre (DIFC) could become the centre for an estimated US$200 billion (Dh734.6bn) of investments into GCC clean energy projects this decade, but only if regional governments remove subsidies for fossil fuels, bankers said yesterday. A shortage of natural gas, rocketing energy consumption and ample sunshine have created the right conditions for renewables but GCC governments continue to set prices for electricity, gas and oil-based fuels far below market rates.

That makes renewable energy less economically viable in the region than almost anywhere else in the world. "A major subsidy reform is going to be required across the Middle East, North Africa and south Asia, otherwise renewable energy will just be a showcase," Dr Nasser Saidi, the chief economist of the DIFC, told a Dubai energy conference yesterday. "Instead of helping renewable energy grow, we're subsidising carbon-based technology and consumption."

With changes to government policy, the DIFC could become a "cluster" for financing for renewable energy, Dr Saidi said, and possibly a platform for trading carbon credits. He estimated the carbon credit trade in the region could eventually become an $8bn industry but like renewables, its growth is based on the premise of policy changes. By 2020, GCC countries will invest in between 14 and 20 major clean energy projects - including solar panel arrays, geothermal energy and nuclear power plants - worth $200bn, said Karim Nassif, an associate director for infrastructure finance at the ratings agency Standard & Poor's.

"The forecasts are completely contingent on whether there is a regulatory change or not," Mr Nassif noted. S&P surveys of clean energy companies show most think energy policy reform will become a priority only if western countries increase pressure on the region's governments to reduce carbon emissions, he said. In spite of their high income levels, GCC states are classified as "developing countries" under the existing Kyoto Protocol on global warming, which means they face no binding commitment to reduce emissions of greenhouse gases.

In recent UN climate talks, GCC negotiators successfully buried efforts to reclassify them as developed countries with set targets. Even if subsidies for fossil fuels were fully eliminated, electricity from renewable energy projects still costs more than conventional sources and requires its own subsidy to be financially viable. The GCC's first commercial-scale clean energy project, a solar power plant with capacity of 100 megawatts led by Masdar, the Abu Dhabi Government's clean energy company, will rely on a direct subsidy from the Abu Dhabi Government to the electricity utility that buys the plant's power, under a fixed power-purchase agreement.

An alternative model proposed for the region is the feed-in tariff, a scheme in which any certified clean energy project is paid a fixed price for its electricity that is well above the price for power from conventional power plants. The choice of financial support mechanisms will determine the speed with which renewable energy is adopted around the region, said Frank Beckers, the global co-head for project and capital advisory at Deutsche Bank.

"From the financial point of view, having a feed-in tariff or a power purchase agreement doesn't make a lot of difference but from the point of view of how much renewable energy you develop in the country, it makes a lot of difference," Mr Beckers said. The feed-in tariff has greater potential to bring a large pool of investors into the sector, with projects of all sizes, he said, but left little room for the government to tailor the level of support to each investment.

But direct subsidies under individual power purchase agreements slow down the sector's development, Mr Beckers said. The Abu Dhabi Government has not detailed how it plans to support clean energy investments in the emirate in the future but has set a goal of generating 7 per cent of electricity from renewable sources by 2020. Other GCC governments have been slower to announce policy changes. If a clean energy industry takes off in the region Dubai, as the financial centre, stands to benefit, said Aaron Bielenberg, a Dubai-based lawyer at Latham and Watkins.

"I can see the DIFC leading the way for the first green sukuk or the first carbon exchange in this part of the world," Mr Bielenberg said. [e-mail]