How the GCC can benefit from the great energy shift

Gulf countries are in a perfect position to take advantage of a historic change
How the GCC can benefit from the great energy shift
By Bernd Debusmann Jr
Tue 20 Feb 2018 02:33 PM

Despite a slow start, the UAE and the rest of the GCC are well positioned to take advantage of the seismic shift that the world energy landscape is currently undergoing, according to industry analysts.

A new report called The Great Energy Shift from global strategic management consultants AT Kearney, for example, notes that the world’s energy markets are currently experiencing “a massive realignment that no other commodity seems to be experiencing” as new technologies are increasingly implemented; namely renewable energy.

Historical perspective

As the report notes, the last time such a dramatic shift took place in the global energy mix was when oil rose to prominence on a global level, overtaking coal as the world’s foremost energy source by the mid-1960s.

The emergence of oil, however, was notably different from that of the sources of energy that came before it. “The key difference between the oil age and the period in which coal or wood was developing, was the market concentration. The supply of coal was a lot more fragmented, and wood was everywhere,” explains Eduard Gracia, an oil and gas strategy specialist at AT Kearney. “The sources of supply [in the age of oil] were more concentrated, both geographically and through the investments needed. There was a barrier to entry.”

This concentration worked to the GCC’s benefit, but in the shift towards renewables it left them behind much of the rest of the world. “They have an abundance of hydrocarbon resources, so there was less pressure to move into renewables,” Gracia added. “They had a very powerful position.”

There is plenty of evidence to reveal the relative marginalisation of renewables in this region. For example, in 2016 the entire GCC generated less photovoltaic power (0.44 terawatt hours) than Slovakia (0.53 terawatt hours), despite the European country having a tenth of the GCC’s population and a considerably lower solar irradiance per square metre.

Opportunities around the corner

Despite a slow start, the GCC has a number of distinct advantages that it can take advantage of when it comes to renewable energy creation. For one, irradiation in the GCC is significantly higher than in the rest of the world, and countries generally have much larger uninhabited areas to support large solar parks, particularly when compared to Europe or parts of the US.

Just as importantly, the GCC can count on its strategic position in the world to attract investment and find markets for renewable energies, as well as clean energies such as gas – which it has in abundance. “Wherever you put your industry, you want to have a market. The advantage of this region is that [it] can balance three different markets,” Gracia said. “You have Europe, which is a very big market and a good place to export stuff. There’s Asia, and that’s growing very fast, while Africa is picking up and could grow like Asia.”

It is this geographical advantage that will allow the Middle East to hedge its bets with regards to potential customers. “You will always have a market with three ways to go,” Gracia added. “You can also attract talent, and if you manage to attract that talent, you’re in a good position.”

An innovation hub?

Rudolph Lohmeyer, vice president of AT Kearney’s Global Business Policy Council, noted that the GCC workforce must be prepared to innovate in order to take advantage of the shift in its energy mix. “The Fourth Industrial Revolution requires a ‘cluster logic’ of innovation, a critical mass,” he said.

The GCC, however, is well placed in this regard, he added. “This migration of skills is a rich domain in science, technology and engineering. And countries of this region have a baseline level of knowledge,” he said, adding that this doesn’t change the scale of re-skilling for workforces of the future. “They have a foundation on which to build a cluster, but these evolve over decades so you have to start building them now. It takes 30 years for a cluster to form – look at Silicon Valley.”

Future scenarios

The AT Kearney report outlines three distinct potential macro-level scenarios that the Middle East might have to adapt to in the future. Each of these has its own impact on the energy market.

The first – globalisation 3.0 – envisions an open global economy characterised by growth and powerful private sector actors that dominate government decisions.

A second scenario is that the world will increasingly divide into regional blocs that compete on economic and technological levels.

The third, and most pessimistic scenario – which AT Kearney terms as “islandisation” – envisions a future in which financial crises, intense regional conflicts and nation-state competition are regular occurrences.

“The right answer to the challenges of the upcoming energy transition is not just spending cash across the board and hoping it will bring a return. GCC governments must ensure that all their investments make economic sense, particularly now that their oil revenues are much smaller than three years ago,” the report notes.

The report calls for GCC governments to focus investments on opportunities that leverage cheap energy sources – including solar power – an educated workforce, and their geographic position.

“Others have made the transition before,” the report concludes, citing Norway, Canada and Australia as examples. “There is no reason why the GCC could not follow the same path to navigate the upcoming energy transition.”

Regional initiatives

The Ministry of Electricity and Water Affairs wants 10 percent of energy consumption to be met by renewable sources by 2035. The government plans to construct a 100MW solar plant that will provide six percent of the country’s needs by 2025.

The government will spend $22bn over the next five years, with DEWA aiming for 75 percent of all energy to be from renewable sources by 2050. In 2014, Dubai launched the Mohammed bin Rashid Al Maktoum Solar Park, while Abu Dhabi is building the world’s largest solar plant at Sweihan, at around $870m, and plans to build a second solar park in order to ramp up output.

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