Tapping the Sun: Solar Energy in the Middle East

These are prosperous times for the Middle East and the Gulf region, as the demand for oil continues to rise. But like the rest of the world, the region is not immune to the negative impact of fluctuating oil prices, particularly as it consumes the “black gold” for its own air-conditioning, electricity and drinking water. There is an alternative energy solution, however, and it is directly overhead—the sun.

Spurred by the skyrocketing global demand for oil, the economies of many countries in the Middle East and North Africa (MENA) have grown rapidly. According to the International Monetary Fund, the combined economies of the six nations in the Gulf Cooperation Council (GCC) are expected to grow about 8 percent in 2008, more than three times that of Europe and the United States. The flood of money is evident in skyscrapers in Dubai, economic hubs in Saudi Arabia and huge industrial complexes throughout the region.

The boom is also revealing in more ominous ways. The Gulf region is one of the world’s largest consumers of energy. Among independent nations, Qatar, Bahrain, the United Arab Emirates and Kuwait are first, second, fourth and fifth in the world, respectively, in terms of energy use per capita. In Jordan, the water ministry estimates that one-third of its energy is spent on water-desalination plants and that continued demand could have a profound effect on the growth of the economy. In Dubai, the unfinished skyscraper Burj Dubai, a world-record 700 meters tall and rising to well beyond 850 meters, will consume one-tenth the energy of a nuclear reactor. The government, worried about a shortage, has opened its power industry to foreign investors.1 In short, unless there is a rapid change in the way the GCC thinks about energy, the region’s growth could be in serious jeopardy.

A solution to this budding problem is hard to miss, particularly during those blazing desert summers: the sun. While the sun largely increases the need for energy—80 percent of the region’s power is used for air-conditioning—it is also developing into an increasingly reliable energy source. Harnessing the sun’s power dates to the 1800s, but in recent years solar energy has become more viable as governments and companies invest in the technology to make it a mainstream alternative to fossil fuels. As the technology advances, and as the world clamors for a sustainable approach to energy production, solar energy will become cheaper in comparison with traditional energy sources.

Turning the Middle East into an alternative energy leader may seem like an odd suggestion, considering the region houses more than half of the world’s oil reserves. Yet with sunshine almost guaranteed for more than 300 days per year in most locations, the source for solar power is abundant. As the environmental and economic costs of using fossil fuels increase, the vast deserts of the Middle East are ripe for development.

The Need for Power

Although down from the record heights of the summer of 2008, oil prices are still high, and profits continue to pour into the oil-rich Middle East. Even in areas where the oil reserves have either run out or are close to running out, such as Bahrain and Dubai, there is a boom in industrial real estate and population growth as governments seek to expand and diversify their economies away from financial dependence on oil. To do so, they are planning industrial, residential and manufacturing developments, which are drawing in even more people. In the GCC, the population is above 35 million and growing at a rate of more than 3 percent—triple the world average.

The environmental impact of this domestic dependence on oil is vast. According to the United Nations, Qatar, Kuwait and the UAE have the three highest per-capita rates of greenhouse gas emissions, roughly 15 tons higher than that of the United States.2

Power and fuel shortages are beginning to strain the region’s economies. As demonstrated in Bahrain, the consumption of fossil fuels for domestic needs eats into potential revenues. Considering the opportunity costs of not selling electricity or oil on the market, or not producing petrochemicals or aluminum, the real cost of producing electricity is nearly seven times higher than the selling price of electricity, which is 3 cents per kilowatt (see figure 1).

In the UAE, the world’s third largest per-capita consumer of water, drinking water is derived from an expensive and energy-intensive desalination process that relies heavily on gas-powered turbines. If the country were to pursue a renewable energy source to produce drinking water, it could better meet its projected demand—expected to increase another 44 percent by 2025—with limited pressure on electricity production, less impact on the environment and a return of revenues from the sale of carbon credits on the market.3

As a result of these issues, and as governments around the globe consider cheaper energy and sustainability as key issues, the onus is on the Middle East to meet changing needs and tap into the growing alternative energy market.

Energy Provider to the World

In the Middle East’s desert, solar energy is the most natural alternative to fossil fuels. Energy consumption is linked to the availability of sunlight—peaking in summers and during the day, when air-conditioning units battle for stable temperatures in homes and businesses.

In light of rising fossil fuel prices on one hand, and advances in solar technologies on the other, the price of solar energy is decreasing and becoming more attractive (see figure 2). In the long run, this region could export excess capacity in the winter, when the air-conditioning is turned off, or use the power for other energy-intensive products, such as producing aluminum and petrochemical products (see sidebar: Choosing a Solar-Based Technology on page 52).

So far, the majority of the Middle East’s energy projects have focused on fossil fuels. There are new coal plants in Dubai and Oman and a “sour gas” project (using natural gas with high sulfur content) in Abu Dhabi. There is only one major solar energy project under construction, the sprawling Masdar Initiative in Abu Dhabi. Dubbed the Sustainability City, Masdar will rely entirely on renewable energy sources, primarily solar energy plants, with a sustainable, zero-carbon, zero-waste ecology. Additional power will be generated by photovoltaic modules placed on rooftops throughout the city, wind farms and geothermal. When completed in 2014, Masdar will be home to 50,000 residents, 1,500 businesses and one university.

Other MENA countries have already announced plans for solar energy projects. Morocco is currently considering two solar power plants as a first phase in its plan to become an energy provider for Europe. Saudi Arabia has pledged money for renewable energy research, and Dubai has passed a Clean Energy Act and is actively hiring alternative energy researchers.

Why Solar Makes Sense

These projects and a handful of others, however, barely scratch the surface of possibilities. International investors are eager to tap into the opportunity, primarily because among all forms of alternative energy, solar power is perhaps the most advanced in terms of technology and profitability. Compared with standard forms of electricity generation, such as natural gas and nuclear, solar power plants can be built faster. As the technology improves, solar energy costs are also becoming more competitive with traditional methods.

Although solar energy has had a reputation for being overly complex and expensive, more experts are asserting it has a bright future. For instance, scientists in Europe believe that by installing state-of-the-art solar panels in the Sahara Desert, the entire continent of Europe could be powered by the sun.4

The necessary long-distance transmission technologies already exist, and the European power grid is being connected to the Middle East across the Strait of Gibraltar and other sea crossings. At the same time, the countries of the Gulf region are rapidly integrating their power grids to export energy to Europe.

The framework for solar power expansion is already there, and the strategic and economic advantages are clear. The next step is to foster international collaboration and raise the necessary funds to implement a true solar power network.

Investing in a Solar-Power Hub

The Middle East, and in particular the nations of the Gulf region, have extensive experience drawing foreign investment into the area. Bahrain and Dubai have opened their previously closed power industries to foreign investors. Elsewhere, special investment zones and the aforementioned Masdar Initiative have drawn foreign interest and investments.

We expect investors to be drawn to the region as a solar power hub, as the need for sustainability increases around the globe, and as a source of carbon credits, which could then be used as side revenue or to help offset emissions at coal plants in Europe, for example.

The Masdar Initiative is a good illustration of global cooperation and investment. The impetus for advancing the project has come from a wide range of partners and investors—including oil companies such as BP and Royal Dutch Shell, automakers such as Rolls-Royce, technology leaders such as General Electric, and even universities such as the Massachusetts Institute of Technology. Building on a partnership of the oil-rich government of Abu Dhabi and international investors, an environmentally friendly city is close to fruition.

Will this coordinated move for sustainable cities become a trend? Let’s look at the different scenarios.

The Move to Renewable Energy: Three Scenarios

We believe that in the coming years, both governments and industries in the Middle East will face the pressure of environmental worries and power shortages related to oil-based economic growth. As alternative energy projects succeed, they will attract more investors and expand in size and scope. As experience builds, we believe one of three scenarios—or possibly a combination of them—will play out.

In the first scenario, one country, city or project would take the lead as a central hub for innovation. The project could realize roughly 80 percent of the potential economic benefits of solar energy and become an engine for similar projects throughout the region. This scenario would require a few visionaries—people determined to bring change in a noncompetitive environment.

Public-private partnerships. The second scenario involves several governments supporting the move to renewable energy and encouraging their neighbors to join in a collaborative approach. Driven by a network of countries, or an existing governmental organization such as the GCC, and backed by strong private and public investment, we believe this scenario would be the most conducive to economic and environmental success. The public-private partnership would encourage the development of a regional hub of knowledge and would aid in the fair distribution of benefits among countries.

Winner-take-all battle. In the third scenario, private and public investors would launch independent projects, all competing against the other in a “winner-take-all” battle. Some projects might overlap, while others would compete for partnerships with leading foreign corporations. It would be survival of the fittest, with the resulting economic and environmental benefits much lower than desired.

While something similar to the third scenario will bring the most short-term benefits to individual governments, the hope is that once the benefits of the second scenario are better understood, it will prevail. We believe the second scenario offers a collaborative approach that encourages smarter use of resources and investments to achieve better results. It would also require a currently unheard-of level of cooperation among participating nations.

Ultimately, governments need to establish the legal and regulatory framework to encourage the development of the renewable energy industry and do so in a way that convinces both regional and foreign investors and suppliers to participate. The task requires a number of interlocking steps, rather than simply adding solar panels to the roof of buildings. It calls for developing methods to harness the energy, making it useful in many different ways and then transmitting energy across international boundaries.

Prolonging the Prosperity

For the Middle East, reducing domestic dependence on oil and gas requires the right infrastructure and regulations to foster the new and untested renewable energy industry, and fresh approaches to stimulate the development of technologies and transmission systems. While foreign investors and suppliers will be expecting such guidelines, productive technology partnerships also depend on an open exchange of ideas. Knowledge hubs, already cropping up throughout the Middle East, are fostering the exchange of innovations and technology necessary to not only succeed in the domestic renewable energy industry, but also to prolong the current level of prosperity for years to come.

Consulting Authors

ROBERT ZIEGLER is a partner based in the Dubai office.
MATTHIEU DE CLERCQ is a manager based in the Dubai office.
ANGELA ARIATTI is a manager based in the London office.