Study: Middle Eastern Countries Would Save Money by Ditching Fossil Fuels in Power Mix
More renewables and transmission lines would save MENA countries money. (Credit: Total)
Abandoning fossil fuels for electricity generation by 2030 would save money for countries in the Middle East and North Africa (MENA), according to new research into renewable energy in the area.
A feasibility study of 100 percent renewable electricity systems across MENA found that relinquishing fossil fuels in favor of generation based mainly on solar and wind could help cut costs by between 55 percent and 69 percent compared to a business-as-usual scenario. The study, published last month in Energy Strategy Reviews, is believed to be the first to look at how renewable energy generation might meet hourly loads across MENA.
The study looks at several scenarios, including establishing fully renewable electricity grids independently in most MENA countries, or having the whole area interconnected by high voltage DC transmission links.
A third scenario looks at the effect of adding loads from seawater desalination and the industrial gas sector onto a MENA-wide interconnected electricity system.
The researchers estimated the levelized cost of energy (LCOE) arising from fully renewable electricity systems would vary between €40.30 and €52.80 ($43.53 and $57.04) per megawatt-hour, depending on the scenario. The estimated business-as-usual LCOE is €118.60 per megawatt-hour, and that’s without including the cost of greenhouse gas emissions.
Unsurprisingly, the most expensive scenario was the one without interconnections between countries. Evening out supply and demand with a MENA-wide transmission network would cut LCOE from €52.80 down to €48.30 ($52.16) per megawatt-hour, the study found.
Importantly, though, the research also showed that coupling the desalination and industrial gas sectors to renewable energy generation could cut LCOE even further, reducing it by 17 percent compared to simply having an interconnected grid.
The integration would be achieved using power-to-gas technology, with 90 percent of electrical energy generation coming from onshore wind and large-scale PV.
“Power-to-gas technology not only functions as a seasonal storage by storing surplus electricity produced mainly from wind power and partially from solar PV but provides also the required gas for the non-energetic industrial gas sector,” said the study.
Middle East solar energy prices continue to fall
The research poses interesting questions for MENA policymakers. While the lowest LCOE can be achieved by interlinking nations and integrating their industrial operations, going down this route could be challenging in practice given the fragile geopolitics of the region.
It would also require by far the highest level of capital investment: almost €1.9 trillion ($2 trillion), compared to €908 billion ($981 billion) for a MENA-wide electrical grid and €962 billion ($1 trillion) for each country to have its own renewable energy supply.
Based on International Monetary Fund data, this investment would equate to 60 percent, 29 percent and 31 percent of total MENA gross domestic product (GDP) in 2019, respectively.
However, said lead author Arman Aghahosseini, of Lappeenranta-Lahti University of Technology in Finland, given an average energy infrastructure lifetime of around 30 years the annual capital expenditure required under any scenario would likely be only 1 percent or 2 percent of GDP.
This “seems to be very well affordable,” said Aghahosseini. “Of course, we agree that tackling the geopolitical issues is not so easy and implementing such a project [with full integration] requires significant cooperation and solidarity between the countries.”
The study’s LCOE figures do not seem far-fetched in view of pricing seen in recent MENA solar auctions.
Four countries in the area were already seeing solar bids of less than $25 per megawatt-hour last year before Dubai attracted a $17-per-megawatt-hour bid for the next phase of its Mohammed bin Rashid Al Maktoum Solar Park.
And in January, Qatar claimed to have gone even lower, without disclosing figures. Despite this, some observers remain cautious about accepting studies that claim to show how regions can achieve full decarbonization of the electricity system.
Noting that many places, including a growing number of U.S. states, now have 100 percent renewable targets for the electricity sector, Menlo Energy Economics president Fereidoon Sioshansi said: “I think you start getting into problems at 50 percent.”
A study last year by Energy and Environmental Economics for Calpine Corporation in the U.S. had shown that balancing variable loads with intermittent renewable energy supplies became prohibitively challenging and expensive at penetrations beyond 85 percent, Sioshansi said.
“Moving towards 100 percent is a good idea, but getting to actual 100 percent doesn’t really make sense,” he said.
MENA sovereign wealth funds are set to yank billions from stock markets, with the cash needed back home reportedAlison Tahmizian Meuse in an article Gulf faces recession as oil deluge meets COVID-19 in an Asian Times article dated March 30, 2020. It is said elsewhere notably in the local media that these sovereign funds could shed something like $300 billion.
Middle East oil exporters are bracing for recession and the lowest growth rates since the 1990s, with economists warning that the “twin shocks” of Covid-19 and plummeting oil prices will have a knock-on effect across the region.
“Quarantines, disruption in supply chains, the crash in oil prices in light of the breakdown of OPEC+, travel restrictions, and business closings point to a recession in the MENA region, the first in three decades,” the Institute of International Finance warned this week.
Oil exporters in the Gulf and North Africa are projected to see growth levels drop to 0.8%, IIF said, based on an average price per barrel of $40. At the time of publication on Monday, crude was hovering at cents above $20 per barrel.
Petro-titans like Saudi Arabia, which have shifted major resources toward sovereign wealth funds in recent years, are expected to recall funds back home as their collective surplus of $65 billion is flipped inside out to a deficit of the same amount or more.
These sovereign wealth funds could shed up to $75 billion in stocks in the coming period, Reuters on Sunday quoted JPMorgan’s Nikolaos Panigirtzoglou as saying.
Saudi Arabia’s Public Investment Fund currently holds significant shares in everything from ride-hailing app Uber to Japan’s SoftBank.
Such funds have likely already offloaded as much as $150 billion-worth of stock in the month of March, said Panigirtzoglou.
How did we get here?
Saudi Arabia earlier this month launched an oil price war, flooding the market with crude in a game of chicken against Russia after the latter refused to collaborate on production cuts.
Moscow, which desired lower prices to compete with US shale, did not blink.
The result has been, Bloomberg reports, a “cascade” of oil surplus, with some landlocked producers literally paying buyers to relieve them of supplies they cannot store.
From Saudi Arabia to Algeria, MENA exporters are expected to see hydrocarbon earnings fall by nearly $200 billion this year, according to the Institute of International Finance report, resulting in a loss of more than 10% of GDP in this sector alone.
As the price war was launched, the novel coronavirus began spreading through the Gulf, shattering hopes of diversifying toward tourism in the near future.
Saudi Arabia, with approximately 1,300 confirmed cases as of Monday, has shuttered the gates of Mecca over fears it could become the new virus epicenter after Iran.
The religious pilgrimage to Islam’s holiest sites, mandatory for every Muslim, nets Saudi Arabia billions of dollars each year.
The financial troubles in the Gulf do not stop at the Persian Gulf, but are slated to have a painful knock-on effect across the Middle East region.
Young people from Lebanon, Jordan, and Egypt – with its population of 100 million, have for decades turned to the Gulf Arab states for jobs after graduation, doing everything from running restaurants in Riyadh to working in banks in Dubai.
Such positions have become even more crucial in a time of heightened visa restrictions in the United States and Europe.
A recession in the Gulf, thus spells an even worse outlook for already struggling economies in the Levant, which often look to the oil producers for help during hard times.
“A global recession will lead to a reduction in trade, foreign direct investment, tourism flows, and remittances to Egypt, Jordan, Morocco, and Lebanon,” IIF said.
Egypt, the report notes, is expected to see a “significant drop” in critical Suez Canal transit revenues, as global trade suffers.
The Egyptian government earlier this month revoked the press credentials of Guardian correspondent Ruth Michaelson after she reported on a researcher’s findings that Egypt was seeing a higher number of Covid-19 cases than reported.
Saudi Arabia abruptly altered its oil production strategy in early March and began to flood the market with cheap oil. Financial markets worldwide haemorrhaged value at the prospect of a protracted and painful price war, and American oil firms immediately cut back spending and dividend payments as the price for their primary product halved. As of this morning, WTI Crude (a pricing benchmark tied to U.S. supply) was barely north of $20/bbl, prices not seen since 2002.
This sudden tumult represents an opportunity for the renewable energy sector. At first glance, this may sound counterintuitive. After all, oil prices seem largely unrelated to the prospects of wind, solar, and other renewables in the electricity generation sector, because in the United States the primary fossil source of electricity is natural gas. Natural gas prices have been largely uncorrelated with the price of oil since 2007, when large-scale domestic shale-gas production began to come online (see chart). In other parts of the world, coal drives electricity generation, which is similarly decoupled. Virtually nobody uses oil as a primary electricity source, except in certain very specific locations, such as Hawaii, where the demands of unique geography and supply logistics align to make oil the best bet for power production.
Oil’s link to renewables instead comes through competition in the financing marketplace. As new projects are developed and financing is sought, the infrastructure funds that provide capital to enable these developments naturally prefer projects that promise the most attractive financial returns. With relatively high prices over the last decade and unmatched value as a transportation fuel, oil exploration has beaten out renewable project development on the financial metrics time after time.Today In: Energy
The oil shocks over the last weeks could dramatically alter that calculus. Revenues for potential oil projects have suddenly dropped by over 50%, and futures contracts currently show only a modest improvement in prices by year’s end. The market is already pricing in the expectation that oil prices remain below $40/bbl for the foreseeable future, a dramatic change from the $55+/bbl that has been the norm for the last few years.
Even if prices do recover, the sudden volatility will still weigh on the minds of project investors. Oil markets haven’t resembled a purely competitive market since the mid-1960s, and since that time prices have been regularly impacted by sudden and unforeseen changes in supply by OPEC producers, primarily Saudi Arabia. The rise in shale-oil in the U.S. in the last decade has effectively put a cap on prices and provided a counterweight to OPEC’s pricing power. But the muscle being flexed now shows that the OPEC nations and Russia still maintain substantial influence over the fate of American oil producers. This ‘stroke of the pen’ risk, now that it has again bared its head, maybe unlikely to be forgotten in the near future.
Renewables, by contrast, have no supply risk whatsoever, and are primarily exposed to fluctuations in the price of electricity. Insomuch as this relates to the price of natural gas, investors in the U.S. will take comfort knowing gas is essentially a local market, with U.S. prices driven by supply and demand within North America; there is little ability to arbitrage against global markets due to limited export capacity. Therefore, as oil prices come down, project financiers should start to turn more of their attention to the new safe bets that offer more durable returns: wind, solar, and the like.
This isn’t to say that renewables don’t face headwinds in the current environment. Cheap oil also competes with renewables in the transportation sector. Electric Vehicles will be less competitive with their gasoline-powered cousins as the price for gasoline at the pump drops, lowering demand for new grid capacity and forcing renewables to wait for retirements of current assets. The price for natural gas in the U.S. is dropping as well, driven primarily by the sudden decrease in demand due to the shuttering of entire industries. These drops make fossil power from natural gas more competitive with their renewable counterparts.
Futures markets, however, are currently pricing in a full rebound of natural gas prices by year’s end, with the futures contract for Henry Hub for December 2020 currently priced above market levels at the end of 2019. This suggests that the drop in prices of natural gas will be temporary, and investors making long-term bets do not view the current situation as durable. Further, natural gas prices are just one component of the price paid by utilities to power producers, and so a drop in natural gas prices doesn’t necessarily imply a similar fall in the rates negotiated in new power purchase agreements. So the drop in natural gas prices evident in the market now looks to be temporary, and unlikely to dramatically alter the widespread conclusion that renewables are now the cheapest power source to build.
Altogether, the oil market has changed dramatically in the last three weeks, in ways unforeseen just a few short months ago. But despite the headlines and worrying drops across financial markets, opportunity lies in these disruptions. Renewables are well positioned to capitalize.
Brentan Alexander‘s words: I am the Chief Science Officer and Chief Commercial Officer at New Energy Risk, where I lead the detailed diligence of novel technologies and business models across the energy landscape. I have devoted my career to advancing solutions to the climate crisis and use my experience to help technology companies assemble everything they need to reach the market faster. I hold a PhD in Mechanical Engineering from Stanford University, where I studied gasification, thermochemistry, and electrochemistry, and Masters and Bachelors degrees in Mechanical Engineering from the Massachusetts Institute of Technology. When I’m not in the office, you can find me hiking the hills outside Oakland, California, or turning wood in the shop. All of my articles reflect my personal views and not those of my employer nor the volunteer initiatives that I am involved in. You can find out more about me via my website (brentanalexander.com) or follow me on Twitter or LinkedIn.
Nation will be able to finance current account deficit for 35 years even with prices this low
The UAE is best-positioned among GCC economies to weather the decline in oil prices as it can finance its current account deficit longer than any of its regional peers, says a new report.
According to Capital Economics, the UAE can finance its current account deficit for 35 years if oil prices stay at $25 a barrel. Kuwait comes second followed by Qatar, Saudi Arabia, Bahrain and Oman.
“In the four largest Gulf economies – Saudi Arabia, the UAE, Kuwait and Qatar – current account deficits could be financed through a drawdown of large foreign exchange savings for a considerable amount of time. Saudi Arabia could do so for around a decade and the other three countries for even longer,” said Jason Tuvey, senior emerging markets economist at
Capital Economics. The report said the UAE still runs a current account surplus at $30 a barrel.
Brent crude was trading down $3.37, or 12 per cent, at $25.35 a barrel by 1720GMT after dropping as low as $25.23, its weakest since 2003. US crude was down $5.19, or 19 per cent, at $21.76. The session low was the lowest since March 2002.
Data showed that UAE-based sovereign wealth funds held over $1.21 trillion worth of assets in August 2019 compared to $825.76 billion by Saudi Arabia, $592 billion by Kuwait, $320 billion by Qatar and $22.14 billion by Kuwait.
Oil prices have plummeted over the last few weeks, firstly due to coronavirus and then the collapse of Opec+ talks on production cuts. Brent has dropped 45 per cent in the past month from $57.60 a barrel on February 17 to $31.60 on March 17.
Tuvey noted that large foreign exchange savings provide substantial buffers and the likes of Bahrain and Oman, which are most vulnerable to a period of low oil prices, and can probably rely on financial support from their neighbours to avert devaluations.
He said dollar pegs in Bahrain and Oman are more vulnerable, with foreign exchange savings only able to cover current account shortfalls for a couple of years at most. Bahrain secured a $10 billion financing package from its neighbours in mid-2018.
In recent days, GCC governments have stepped up fiscal support in order to mitigate the economic hit from efforts to contain the virus. “If oil prices stay low even after the virus fears have subsided, austerity will come on to the agenda and this means that an eventual recovery in non-oil sectors will be slow-going,” he said.
Khatija Haque, head of Mena research at Emirates NBD, has said that the UAE posted a budget surplus of Dh37 billion ($10 billion) in 2019 and is well-positioned to withstand lower oil prices in 2020.
“If we strip out volatile oil revenues, we estimate the UAE’s non-oil budget deficit narrowed to just under 20 per cent of non-oil GDP, down from 27 per cent of non-oil GDP in 2015, and pointing to a tightening of fiscal policy in recent years,” Haque said.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, said the sharp fall in oil prices and the outlook for a price war adds significant downside risks to the economic outlooks of GCC countries.
“We estimate that all GCC countries will realise a significant fiscal deficit at the current oil price of $37 per barrel, with Oman and Saudi Arabia seeing particularly significant shortfalls relative to GDP. A weaker oil revenue backdrop will require a meaningful pull-back in government spending, as was the case in 2015 and 2016, to limit the size of the fiscal deficit,” Malik said.
She sees a forecasted increase in output from Saudi and Russia and the changing dynamics of oil market fundamentals will likely bolster global oil stocks significantly in 2020. A number of oil-importing countries are also likely to accumulate inventories at the current low price levels, which in turn would lower oil demand during second-half of 2020.
Furthermore, the outlook for inventories beyond 2020 will depend on global demand and coronavirus-related developments in the coming months, she added.
Edward Bell, commodity analyst at Emirates NBD Research, has said that dust has not entirely settled yet caused by travel restrictions and lockdowns due to coronavirus.
OPINION: The epic oil price slump, if prolonged, is bound to prove calamitous for the upstream sector of the financially strapped Middle Eastern and North African producers and those with high production costs.
The consequences will go beyond the energy sector for the more populous nations, where autocratic governments have long used oil windfalls to shield themselves from social unrest through generous handouts and subsidies.
World Bank warning
“As the world struggles with the fear of recession, the Middle East and North Africa could be the hardest hit by what is arguably a perfect storm: the coronavirus spreads to the region and oil prices collapse,” the World Bank says.
“If the decline in oil prices persists, it will erode the fragile macroeconomic and social stability of countries, especially in the Middle East and North Africa, that have been hit by the novel coronavirus.”
Only the wealthy Persian Gulf producers with small populations — such as Qatar, Kuwait and the United Arab Emirates — can be expected to weather a prolonged storm thanks to their enviable financial position.
Iran position precarious
The major losers will primarily be Iran as well as Iraq, Libya Algeria, Oman, and Saudi Arabia.
Iran, whose economy is being seriously squeezed by unprecedented US sanctions against its vital oil sector, will find itself struggling to pay for basic imports as the price collapse will further reduce income from the crude sales achieved through circumventing the stifling sanctions.
Iran’s exports have fallen to a fraction of the 2.5 million barrels per day that the Islamic Republic used to export before May 2018, when US President Donald Trump tore up the landmark 2015 nuclear agreement and imposed draconian punitive measures against the country.
The Iranian Central Bank has just put out an international distress call amid rising cases of the coronavirus outbreak by asking the International Monetary Fund (IMF) for $5 billion in emergency funds to cope with containment.
Iran is fast becoming the global epicentre of the endemic, with more than 500 dead and 11,000 afflicted.
Severe economic problems have led to widespread unrest in the past two years, with the clerical leadership employing heavy-handed tactics to quell dissent.
Iraq set to suffer
Neighbouring Iraq is in the grip of growing political unrest with protesters demanding jobs and end to endemic corruption.
Iraq, Opec’s second-biggest producer, has been without a functioning government for months, disrupting planning and delaying major upstream projects.
Rising tensions between the US and Iran — both of which are fighting for influence in Iraq — have added to the security and political woes.
Algeria, often seen as a hostile destination for international oil companies, will find it difficult to attract fresh investment in the face of the price collapse and social unrest.
Algeria’s Prime Minister Abdelaziz Djerad said the North African country is faced with an unprecedented “multi-dimensional crisis”, while also urging the public to make fewer demands of the government and reduce their presence on the streets.
Libya’s civil war, which has crippled the oil industry, is showing no signs of ending.
Oman has so far been spared social unrest but the future remains bleak since the Persian Gulf sultanate has the highest production costs among regional producers because the bulk of its oil production is ultra-heavy heavy, which needs robust commodity prices in order to compete with other blends.
The oil price rout, arising from the collapse earlier this month of Opec+ talks to persuade Russia to agree to new production curbs, is also a real threat to Saudi maverick ruler Crown Prince Mohammed bin Salman, who has pinned his success as the future king on delivering on an ambitious economic diversification scheme funded by oil money.
Energy generation through renewable sources is improving exponentially and is something that is no longer simply better for the planet but also for investors. Nevertheless, the oil industry has no intention of voting itself out of office and will continue extracting and exploiting the planet’s oil reserves. We don’t have time to wait for investors to tire of these companies. The much-needed end of the oil industry should be brought about not by its profitability or otherwise, because it could linger on for decades, but instead through political decisions guided by scientific evidence, links to which can be found throughout this article. The writing is on the wall, and has been for years; when will we bother to read it? Follow me on Twitter or LinkedIn. Check out my website.
Enrique Dans Teaching Innovation at IE Business School since 1990, and now, hacking education as Senior Advisor for Digital Transformation at IE University. BSc (Universidade de Santiago de Compostela), MBA (Instituto de Empresa) and Ph.D. in Management Information Systems (UCLA).
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