Oil producers must push on with painful reform

It will not be easy, writes Richard Thompson – but in the long-term, reform will pay off

Among the deals signed by Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces, during his visit to India in February was an agreement to cooperate on the development of renewable energy.

Through initiatives such as Masdar City, Abu Dhabi has led regional efforts to tackle climate change and develop renewables. The fall in oil prices has given new impetus to energy reform in the region and the UAE-India agreement to collaborate on renewables projects is a sign that this issue is being driven by the highest levels of government.

Abu Dhabi is not alone. Governments around the region are rethinking their energy policies.

Oil prices have fallen sharply since 2014 and the region must adapt to a new economic reality. Oil producers can no longer fall back on surpluses to avoid taking the sometimes painful economic reforms that are required.

It is a moment of immense opportunity for the region to come together to deliver real and lasting change. But it will not be plain sailing.

A key element of the new energy policy is to diversify the mix of energy sources used for electricity generation away from oil and gas. Governments are targeting nuclear and even coal-fired power to meet the growing demand for electricity.

But it is renewables that promise the most rapid change and the key reason is economics. The cost of installing the photovoltaic (PV) solar technology in the Mena region fell 79 per cent between 2007 and 2014.

The potential for renewables to meet cost parity was highlighted last year in Dubai, when Saudi Arabia’s Acwa Power won the contract to develop a solar plant with a world-record low tariff of 5.85 US cents a kilowatt hour.

Following the award, Dubai has ramped up its targets for alternative energy from 5 to 25 per cent by 2030, and has since set the ambitious goal for 75 per cent of its energy to be provided by clean sources by 2050.

In 2015, the value of deals for renewable energy projects in the Mena region soared by 450 per cent, reaching $7.7 billion (Dh28.3bn).

In Saudi Arabia and Kuwait, however, the heavily subsidised cost of fuel and electricity has made it difficult for renewables projects to prosper.

Saudi Arabia wants to create a sustainable electricity and desalination industry and in 2013, set out targets for one of the most ambitious renewable energy programmes in the world. But the kingdom has yet to deliver any major schemes.

A major factor in this is due to renewable power having to compete with heavily subsidised oil fuel. In the kingdom, crude oil, heavy fuel oil and diesel accounted for 56 per cent of the total fuel consumed in the kingdom in 2014. Much of the fuel oil is provided to power generation companies at only $4 a barrel.

Faced with some of the highest growth rates for electricity and water consumption in the region, Riyadh is working on the challenge using subsidy cuts and new tariffs to change the way people consume energy, as well as looking for greater efficiencies.

The subsidies that allow water, electricity and fuel to be consumed almost for free have resulted in a carefree attitude to energy that is unsustainable.

Major reform of fuel and electricity subsidies is imperative.

With Egypt simultaneously cutting fuel subsidies and launching a five-year plan to overhaul electricity tariffs in 2014, and Abu Dhabi and Saudi Arabia making initial reforms to tariffs in 2015, the process has already started.

The long term benefits of these reforms far outweigh the short term challenges, but it will not be straightforward.

Richard Thompson is a business analyst and editorial director at MEED magazine