Energy, not politics is Gulf’s top challenge

The Gulf's soaring energy demand requires some creative thinking, writes Karim Aly
Energy, not politics is Gulf’s top challenge
Electricity pylon
By Staff writer
Tue 22 Mar 2011 06:46 PM

The six Gulf states are faced with what is arguably one of the greatest challenges in their history; energy demand.

Driven by population growth, heightened standards of living and increased industrialisation, the region’s demand for energy is soaring and a slowdown doesn’t seem to be on the horizon.

Over the past few years, Kuwait, Qatar, Saudi Arabia and the UAE have all witnessed power shortages that have resulted in localised blackouts sometimes spanning several days. Our demand is periodically outstripping available supply, particularly in the summer months when the GCC’s consumption peaks as a result of increased air conditioning use.

In the short-term, this is set to continue. Most experts agree that the current energy supply may not be sufficient to meet future demand and anticipate more outages across the region in the short- to medium-term.

At present, the GCC has about 75 gigawatts of installed capacity for power generation. With energy demand forecasted to grow at more than nine percent per year over the next decade, these countries will need to build an additional 40 to 50 gigawatts of capacity by 2016 to continue meeting demand.

This isn’t a problem unique to the Gulf. Many countries around the world are struggling with the same problem. Over the years, governments across the globe have developed various strategies to address the energy challenge, most of which aim to improve energy efficiency through a concept known as ‘demand side management’. Until now, two of the most common approaches to boosting energy efficiency have been tariff reform and energy efficiency standards.

Tariff reform, which has had varying degrees of success, rests on the theory that as you make energy more expensive, consumers become more frugal about their consumption. Unfortunately (and this is no surprise), the reality is that there is very limited price elasticity when it comes to keeping the lights on and the air conditioner cooling.

Energy efficiency standards, on the other hand, rely on less of a freedom-of-choice approach. The idea here is to establish minimum efficiency standards for electrical products while simultaneously banning the import and sale of inefficient alternatives. The most publicised example of this strategy is the UK’s recent initiative to ban the incandescent light bulb, a hard line move which the US, Canada, Russia, the Philippines and many other countries have now been inspired to implement as well.

There is however another strategy that has proven to be both quick and effective and - in my opinion - has the greatest probability of success; encouraging energy efficiency by rolling out public incentive programmes. These programmes are designed to stimulate the adoption of energy efficient lifestyle changes by minimising the financial burden associated with doing so. The programmes, typically administered by either local governments or utilities companies, subsidise residents’ energy efficient purchases by offering them rebate vouchers or crediting their utility bill.

Say we have a city with a population of about 800,000 people. If each one of these people swapped a single 60 watt traditional light bulb for an energy efficient CFL bulb that consumed only 12 watts (and created the same amount of light), the load reduction for the city’s utility company would amount to about 38.4MW.

The cost of building 1 MW of capacity is around $1.5m, so the 38.4 MW load reduction would save the utility company roughly $57.6m in future expansion costs.

Now that we know the scale of the potential savings, let’s pose another scenario. What if the utility company opted to invest five percent of this amount (equating to $2.9m) into an incentive programme that could turn these hypothetical savings into reality? If paid out proportionally, this would result in a subsidy of $3.60 for each of the city’s residents who can use it to purchase an energy efficient light bulb. (Which, incidentally, costs about that much.)

What that means is that each resident would receive a complimentary energy efficient light bulb, while the city would witness an enormous reduction in its projected infrastructure funding. It’s a win-win scenario for all stakeholders involved – the consumers, utility companies and government. Now imagine if we scaled up the programme twofold, fivefold or even tenfold - that could lead to potential savings of over half a billion dollars.

Other schemes could be designed to promote other areas where energy efficiency opportunities exist, such as home appliances, solar water heating or even hybrid cars. Another advantage of such programmes is that they can have an immediate impact on the energy imbalance, in contrast to the several years it takes to build new power plants.

Incentivising consumer efficiency has been curiously overlooked across the region as we continue to expand our power generation capacity. There is no doubt that the Gulf states would stand to benefit a great deal if they were to implement such incentive programmes in the near future. The only question now is whether they will.

(Karim Aly is co-founder and director of strategy and innovation at Ecobility. The opinions expressed are his own)

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