Category: Economic diversification

 Blog Publications Reports

First published in:

Cornish, C. (2024, June 26). Strategic interests galvanise Gulf’s renewables spending. The Financial Times. https://www.ft.com/content/275ad801-0862-4123-8028-158ec18205f0

Strategic interests galvanise Gulf’s renewables spending

It looks like an image from science fiction: a 262m-tall lighthouse-style tower rising from the centre of hundreds of concentric circles of shining panels. But, if all goes to plan, these ambitious design renderings will become science fact, as the fourth development phase of Dubai’s colossal $14bn solar power park.

In the fossil fuel-rich Gulf, however, the Mohammed bin Rashid al-Maktoum Solar Park, as it is known — which was begun in 2013 and is largely up and running — remains an outlier. Overall, the region’s renewable energy investments have lagged behind China, the US and Europe.

In its 2024 report on energy investment, published this month, the International Energy Agency said the broader Middle East, including countries such as Iran and Iraq, was allocating just 20 cents to renewable energy investment for every dollar spent on fossil fuels — or one-tenth of the global average. The IEA added that, of the $175bn the region was expected to invest in energy projects this year, just 15 per cent would go to clean energy.

The oil and gas reserves sitting below the Gulf states have previously discouraged any rapid development of renewables. “The Gulf countries are blessed with a vast amount of resources of oil and gas,” notes Aisha al-Sarihi, research fellow at the National University of Singapore’s Middle East Institute. “That has made access to energy very affordable … and eliminated the need for alternatives.”

Electricity was previously powered by oil in large part. But downward pressure on oil prices from increased US shale oil triggered a shift in the mid-2010s, making gas and renewables more viable as more oil supplies were reserved for export, says Karen Young, chair of the Economics and Energy Program Advisory Council at the Washington, DC-based Middle East Institute.

During that period there was a “ramping-up of the kind of fiscal-side reforms on spending”, says Young, and the “beginning of talking about reduction of subsidies of gasoline, of electricity prices, water prices”.

Even as the wealthy Gulf nations have become more aware of the need to decouple their economies from oil, the United Arab Emirates’ hosting of the COP28 climate meeting last year encapsulated the paradoxes that surround the Gulf states’ role in the energy transition.

On the one hand, the Dubai COP ensured that producer countries were at the centre of the negotiations, with oil-rich emirate Abu Dhabi — the UAE’s capital and centre of political power — wanting to expand fossil fuel production. On the other, Dubai, for the first time, secured a deal to transition away from fossil fuels, and the UAE set aside $30bn for a “catalytic climate investment fund”.

Although the transition from fossil fuels in many industries could theoretically reduce demand for crude oil, the Gulf states do not view this as an existential threat to their revenues.

“The producers in the Gulf see a different scenario — and particularly a lifeline through petrochemicals — [in which] there will be sustained demand for their product for at least the next 20 years,” says Young.

The Gulf states “believe they will be the last man standing because they will sell the lowest carbon intensity fuel in the future”, adds al-Sarihi, on the basis that compared with other sources of oil, those in the region require the least amount of energy to extract.

However, at the same time, economics and strategic interests are galvanising petrodollar-financed renewable energy investments by the Gulf. This spending is led by the UAE and Saudi Arabia, which are actively working to diversify their economies and reduce their dependence on fossil fuels.

The Gulf states have a “dual approach” to the energy transition, according to al-Sarihi. “One is to continue with the fossil fuel industry and … invest in clean energy technologies and other resources like hydrogen,” she says.

“The Gulf states are taking advantage of the international arena when it comes to the energy transition,” adds al-Sarihi. “They use it as a platform to exert their energy diplomacy and influence in a way that makes the energy transition serve their interest … they try to secure a market for their energy supplies. They are now pivoting to Asia because it is becoming the centre of demand for energy.”

But the autocratic states are not investing very widely across the energy transition, points out Robin Mills, Dubai-based chief executive of consultancy Qamar Energy. There has been scant movement towards decarbonising in transport or industrial sectors, for example. “The real investments have been around the power sector — solar and nuclear,” Mills says.

For example, the UAE’s Barakah nuclear plant will meet up to a quarter of the country’s electricity needs by the time all four of its reactors are fully operational. And, in Saudi Arabia, while just 0.2 per cent of the electricity was generated by renewables in 2022, according to US government statistics, solar power plants have been built, including the 1.5GW capacity Sudair.

The Gulf states are also investing in clean power in other countries, from central Asia to central Africa. Young highlights Masdar, Abu Dhabi’s renewable energy investment vehicle, and Saudi’s national champion ACWA Power as “two of the most important power developers in emerging markets in the world”.

“They’re competing and partnering with the biggest infrastructure investors in the world, she observes. “They’re doing this in ways that I think have enormous soft power, political influence.”