Why the rise of 'green money' is good news for the Middle East's energy industry

Changing attitudes across the board – governments, corporates, academia, and society – reflect a deep-rooted strategic change

Men stand in front of solar panels at the Mohammed bin Rashid Al Maktoum Solar Park in Dubai, November 28, 2015. REUTERS/Stringer *** Local Caption ***  GAZ06_EMIRATES-ENER_1128_11.JPG BZ05ap-PG2_SOLAR.jpg

How many fossil fuel operators in the historical epicentre of black gold thought five years ago that they’d be financing so much green energy today? The answer is very, very few.

Even the optimists thought it would take longer for this fundamental switch in energy economics.

But already, this ‘new normal’ is becoming very familiar. Every day, news about ambitious multi-year, multi-investor renewable energy projects or green financings emerge.

Under the new status quo, it is unusual if companies are not involved in the energy transition.

Financial flows

Changing attitudes across the board – governments, corporates, academia, and society – reflect a deep-rooted strategic change.

For one, the solar photovoltaic (PV) industry is expected to generate a $182 billion investment in the renewables market in the Middle East by 2025, according to Frost & Sullivan. This also represents a staggering 18-fold growth in current capacity.

In the short term, the International Energy Agency suggests the Middle East and North Africa will add 4.12 gigawatts of renewables capacity this year, after only 1.86GW in 2020 – more than doubling in just 12 months.

Meanwhile, Kuwait is nearing completion of the region’s biggest import terminal for liquified natural gas – considered the ‘cleanest’ fossil fuel and a vital bridge to a new energy future. What does this tell us? Eager investors with deep pockets who are confident that the massive push for a greener energy marketplace is here to stay.

The same mentality applies to hydrogen – coined the ‘new oil’ of the 21st century – as it experiences a ‘real dawn’ of increased scalability after a few false starts over the last decade.

According to a Platts Analytics' hydrogen project database, the Middle East and Africa has many renewables-based green hydrogen projects set to come online within the next five years.

One such mega-development is the $5bn Neom renewable ammonia project in Saudi Arabia – earmarked as the world’s largest green hydrogen project – and the plan plans to support a large-scale renewable hydrogen project at Oman's Sohar port. Meanwhile, Adnoc, Mubadala and ADQ have signed an agreement to establish the Hydrogen Alliance, helping the UAE’s capital to become a lead producer and exporter.

All this financial appetite really pays off, particularly when it comes to improving economies of scale with manufacturing and market price points.

For example, high cost has long burdened the growth of the hydrogen market. But investors’ growing interest – in large part spurred by broader societal and governmental demand for a greener future – means that low-carbon hydrogen may break even with grey hydrogen as early as 2028, at a cost of about $35-50 per tonne of carbon dioxide equivalent, according to the Hydrogen Council. This is at least two years earlier than the timeline expectations that many stakeholders voiced this time last year.

Balance sheets bruised – temporarily

Of course, energy stakeholders have not emerged from 2020 unscathed by the economic pressure of the pandemic-triggered recession.

The total committed and planned investments in the Mena region from 2020-2024 is expected to be about $792bn – an 18 per cent decline from the $965bn five-year outlook published in 2019, according to Apicorp.

Each country has had to balance their books. For example, Kuwait cancelled its 1.5GW Al-Dabdaba tender and Saudi Arabia has extended project deadlines due to Covid-19. There are many questions that are still unanswered – all of which can significantly impact financial flows in energy.

The jury is still out on whether globalisation 4.0 – which was accelerating before the pandemic – will start to reverse, as cost-cutting measures potentially drive a long-term trend for more regional co-operation.

If so, what impact will this have on energy supply chains, innovation centres and import-export dynamics? Question marks also remain over the US-China relationship, Brexit and instabilities in the Middle East – all of which impact the economic picture for both ‘old’ and ‘new’ energy.

The usual and long-running weak spots still need strengthening, including better support for new market entrants, especially entrepreneurs and small and medium-sized enterprises (SMEs) and fully addressing energy subsidy removals.

Yes, there is a lot of work to do – but the market has good reason to be positive.

Consider that the aforementioned projects are still progressing despite the impact of the most globally disruptive pandemic in a century and the lowest oil prices ever recorded.

Plus, assuming black swans stay clear, oil prices are likely to stay relatively close to the current range of $40-$60 per barrel, again giving energy stakeholders and investors a general goalpost to plan their finances in the year ahead – a coveted hint of certainty in a year that may be as unpredictable as 2020.

Badar Chaudhry is the energy sector head of Mashreq