Commodities 2021: Middle East renewables on rebound after project delays

The Middle East will be back on track for renewables growth in 2021 with hydrogen taking a growing role after a year of delays and cancellations as major oil-exporting nations focused on repairing state budgets due to low oil prices.

The Middle East and North Africa, or MENA, region will add 4.12 GW of renewables capacity in 2021, after only 1.86 GW this year, according to the International Energy Agency. Solar PV will lead the growth, with phase 4 and phase 5 of the giant solar park in Dubai, half of the Ibri II project in Oman and the Siraj Al Kharsaah project in Qatar coming online next year, according to Yasmina Abdelilah, IEA renewable energy analyst. S&P Global Platts Analytics has raised its estimate of Middle East utility-scale solar PV projects over the next five years to some 8 GW from 7 GW earlier this year and wind projects to 1.8 GW from 1.5 GW.

Some hydrocarbon exporting countries shifted their attention from renewables to minimizing the effect of low oil prices on state budgets, the IEA said in a November report. Kuwait canceled its 1.5 GW Al-Dabdaba tender and Saudi Arabia has extended project deadlines due to the coronavirus pandemic.

"We have been cautioning for a while that the ramp up of the renewables program would be slow, as Saudi Arabia has been bringing online a number of heavy fuel oil and gas units, while power demand has been slowing significantly over the past couple of years," said Bruno Brunetti, head of global power planning at Platts Analytics.

"In spite of these short-term setbacks, there have been interesting developments that in perspective will support renewables deployment, in particular the Air Products, ACWA Power, NEOM hydrogen project in Saudi Arabia that will be connected to 4 GW of renewables capacity to produce ammonia for exports."

Hydrogen database

According to a Platts Analytics' hydrogen project database, the Middle East and Africa have multiple renewable-based green hydrogen projects set to come online within the next five years. Besides the massive renewable ammonia project in Saudi Arabia, Oman's Sohar port is also poised to play host to a large-scale renewable hydrogen project.

Renewables delays in the Middle East may stretch into 2021 for financial reasons, not for strategic reasons, according to Audrey Dubois-Hebert, a Middle East oil market analyst at FGE in London. "There may be a temporary dent to investments this year and next year as governments and companies focus their attention on reining in public spending and defending their free cash flow," she said. "But ultimately, the Middle East has a growing appetite to move with the times which is pretty much the key message behind Saudi Arabia's Vision 2030."

Middle East renewables growth hasn't previously been held up by low oil prices. The bigger issues are barriers to new market entrants, a lack of cost-reflective tariffs, lengthy procedures, delayed and rescheduled requests for bids, and long implementation procedures, according to IEA's Abdelilah. Should some of these issues be addressed, growth could be 75% higher than forecast, or 53 GW over 2020-25, she said.

Source: IRENA, S&P Global Platts Analytics, S&P Global Market Intelligence

Decreasing reliance on imported fuels and hedging against price volatility are the main drivers for renewable growth in countries such as Morocco, Egypt, and Jordan, according to the IEA analyst.

For the hydrocarbon (oil and gas) exporting nations, which account for almost two-thirds of the region's PV solar growth forecast for 2020-25, the growth is due to renewables' increasing cost-effectiveness as a source of power generation, she said. Over the last year bids for solar PV in competitive auctions ranged from $13.50/MWh to $16.90/MWh.

While electricity demand globally was reduced by the pandemic, the Middle East is still seeing growth in electricity demand because it's more driven by the residential sector as opposed to government and industry, according to Jessica Obeid, academy associate in energy for Chatham House in London.

The Saudi Electricity Co. said in an Oct. 29 statement that residential consumption in the first nine months of 2020 climbed 8% on the year while commercial and government consumption declined 10%.

"The pandemic has highlighted that dependence on petroleum revenues is costly, but it has also created an opportunity to prioritize diversification on governments' agendas as it can be considered a trip into the future where oil prices stay low and also builds the political will for it on the incentive of 'green is where the funding will be'," she said.

Saudi Arabia considers renewables a strategic opportunity to diversify its economy and create jobs while keeping hydrocarbons as a backbone, according to Alice Gower, director of geopolitics and security at consultancy Azure Strategy.

"The twin shock of low oil prices and COVID-19 has highlighted the vulnerability of the region's oil-dependent states; however, the economic impact of these two developments has meant that there is limited budget to devote towards further developing renewables projects right now."