March 14, 2010

A New Source of Power

Research reveals MENA region offers 45% of world’s total energy potential from renewable resources through solar power generation—enough to generate more than 3X the world’s total current power demand.

The Middle East and North Africa (MENA) region has the potential to become one of the world’s largest producers of renewable energy. Renewable energy industry developments combined with the region’s potential in wind and solar power could create significant advantage for countries that move to capitalize on them, according to a new study by Booz & Company. 


Making the Case for Renewables in the MENA Region

“Renewables in much of the MENA region are underfunded or not funded at all, in part due to the region’s abundant supplies of fossil fuels, said Ibrahim El-Husseini, a partner at Booz & Company. There are at least seven reasons why the MENA region could be a world leader in renewable energy.

1. The region has an advantageous geography and climate: The MENA region has the world’s greatest potential for solar power generation, offering 45 percent of the world’s total energy potential from all renewable sources. If the region achieved this potential, it could generate more than three times the world’s total current power demand. The region also has some potential for large-scale wind farms.

2. The region’s current energy supply may not be sufficient to meet future demand: At present, the MENA region has 146 gigawatts of installed capacity for electricity generation. “With demand forecasted to grow at more than 7 percent per year for the next decade, MENA countries will need to build 80 to 90 gigawatts of new capacity by 2017 to meet demand,” explained Walid Fayad, a principal at Booz & Company. Renewables could play a major role in meeting increasing demand and could complement the region’s unique energy needs.

3. Renewables in the region will help mitigate the global climate change challenge: Many countries in the region rank among the highest greenhouse gas (GHG) emittors in the world on a per capita basis, due mainly to the use of fossil fuels in the majority of power generation and industrial production facilities. Introducing carbon neutral renewable energy into these countries' energy mix will help reduce GHG emissions and mitigate climate change.

4. Renewables could help address the region’s other environmental problems: The region is facing rapidly rising pollution levels with an accompanying high costs and widespread reduction in quality of life. It currently has the world’s second-highest air pollution levels, and the estimated particulate matter (PM) concentration is nearly 50 percent higher than the world average, causing damage costs equivalent to about 0.9 percent of GDP. Clean energy sources that don’t burn fossil fuels and release particulates would significantly improve air quality.

5. Renewables could generate value in their own right, as well as freeing oil and gas for more profitable uses: “If renewable energy sources could replace the oil or gas currently used for power generation, the surpluses created could become available for more profitable downstream applications,” noted Tarek El Sayed, a principal at Booz & Company. Renewable energy sources could also be a strategic export industry.

6. Renewables could enhance the export value of the region’s traditional energy assets: Fossil fuels will remain the dominant source of energy for the foreseeable future. In addition, OPEC’s share of world oil supply is expected to grow from its current figure of 42 percent to 52 percent by 2030, according to the OPEC World Oil Outlook 2008. Renewable energy initiatives will free more oil and gas for export and enhance oil-producing countries’ position as major energy exporters for the world.

7. The renewable energy industry could drive economic diversification and create jobs: The oil and gas sector contributes 47 percent of the GCC’s GDP, but only 1 percent of employment. Countries struggling with high unemployment rates could generate employment opportunities in renewables.


Reviewing Renewable Options

Not all renewable energy technologies will be viable for the region, but wind and solar offer the greatest potential.

Wind
On good sites, onshore wind power is already cost-competitive with fossil-fueled generation. The major limitation on wind is intermittency; the wind does not always blow when electricity is needed. This can be partially mitigated by the dispersal of wind turbines over a large geographic area. “Additionally, planners can capture excess wind-supplied energy by linking wind turbines to hydroelectric plants, which can be used to offset intermittency and absorb wind power surpluses,” commented El-Husseini.

Solar
There are two major forms of solar-generated power. Concentrating solar power (CSP) uses mirrors and lenses to concentrate solar energy within plants that are utility-scale generators. Photovoltaic (PV) solar power directly converts sunlight into electricity using semiconductors, and is often used on a smaller scale. Prevailing desert conditions however result in extreme summer temperatures and high dust levels, both of which have a negative impact on solar energy.

“Both solar technologies could be deployed widely throughout the region. The Masdar Initiative in Abu Dhabi recently commissioned the first large-scale PV installation in the MENA region. Smaller installations are proliferating, mainly in areas far from the grid,” noted Fayad.

Geothermal
Geothermal technologies use underground heat sources to generate either hot water or steam that can be used directly or converted to electricity. Geothermal potential in the MENA region has not been assessed in detail but is likely to be limited, as there are few geologically active zones in the region.

Biomass
Biomass energy is generated by burning plant residues or specially grown energy crops; or fermenting wet biomass to create biogas or liquid fuels. Biomass is unlikely to be a sustainable option in the MENA region, as it can create competition for agricultural lands, and can also have a negative impact on the local environment. Furthermore, the large amount of water necessary to grow energy crops is a concern in the water-constrained MENA region.


Cost Competitiveness of Renewables in MENA Region

In the region, conventional energy is generally cheaper than renewable energy. However, this comparison does not account for the fact that conventional energy is significantly subsidized, and that there are external costs of using fossil fuels for power generation, including pollution and opportunity costs.

Conventional energy subsidies in the MENA region are more substantial than they are elsewhere, and they provide conventional power with a significant unnatural advantage over renewable energy sources. “Subsidizing energy puts an automatic brake on the private sector’s development of renewable energy sources, because such sources need to compete with an energy source that is already very cheap and widely available,” El Sayed explained.

The cost of carbon emissions from fossil fuels should be included in the comparison of different options for power generation and MENA countries could monetize carbon credits through the United Nations’ Clean Development Mechanism. The costs of other emissions are more difficult to value, as they impose an indirect burden on the health and environment of the countries’ citizens. Finally, because subsidies encourage the use of fuel for power generation, this fuel is diverted from being a feedstock for higher value-added products, such as downstream petrochemicals. The potential market value of such products and the positive impact their effective use could have on GDP are not fully factored into the cost of using fuel for power generation.


Renewables Cost Competitiveness Today

Renewables’ cost parity with conventional sources varies according to countries’ resources and existing power sources. In countries where no cheap hydrocarbons are available, the price of wind power can already compete with that of power attained through conventional generation. In terms of solar energy, the price of PV power generation typically compares favorably with that of power generation from diesel generators. This means PV technology can be a cost-effective replacement for generators in remote locations. “The picture looks different for large-scale, grid-connected solar power, however; it cannot currently compete with the region’s fuel of choice, natural gas,” commented El-Husseini.


Renewables Cost Competitiveness in the Future

The cost of solar power continues to drop, thanks to the development of the underlying technology. If historical trends hold, in the coming years annual cost reductions of 3 to 7 percent for PV installation can be expected. As for CSP, it is a much more mature technology, with correspondingly fewer opportunities for optimization. Based on cost assumptions, the unsubsidized cost of solar PV power in the MENA region could become competitive with that of natural gas between 2015 and 2025, depending on gas and carbon prices.


Powering Renewable Energy in MENA Countries: A Call to Action for Governments

“The private sector’s participation in the development of a renewable energy sector in the MENA region is critical for its expertise to ensure cost efficiency,” Fayad stated. The region’s governments must take a leading role if renewable energy is to become viable.

1. Develop a Renewable Energy Strategy
A renewable energy strategy will require a number of considerations. Governments must assess their renewable resources and technical capabilities. They should consider the economic benefits of creating a manufacturing sector capable of supplying renewable energy projects versus importing the parts for such projects. Next, they will need to determine the scope of their ambitions, for example, whether they want a strong renewables sector supported by research institutions, education initiatives, and other efforts, or just act as a technology user.

Regardless of their specific strategy, governments should use technology prototypes and demonstration projects so inevitable errors that occur in new initiatives are not too costly; grow quickly by scaling up as soon as prototypes have proven their reliability and quality; and begin now to gain first-mover advantage and start building infrastructure and human capital.

2. Put in Place the Appropriate Institutional Setting for Renewable Energy
In most MENA countries, there is no clear ownership at the government level of issues related to renewable energy. “Governments must appoint and empower an entity to lead the development of policies and regulations and follow up on their implementation,” noted El Sayed.

3. Develop a Favorable Policy and Regulatory Framework to Promote the Development and Use of Renewable Energy
In most MENA countries, the regulatory environment is such that national utility companies define power generation requirements, which they must meet at the lowest possible cost. Accordingly, their delivery models usually involve private developers under independent water and power producer (IWPP) schemes. This procurement model is geared toward large-scale, conventional power stations who take on complex contracts.

Renewable energy projects cannot be readily integrated into this model. “MENA countries must make substantial changes in the regulatory framework to ensure renewable energy projects can fit the model, and create incentives that would kick-start renewable energy investments,” said El-Husseini.

Regulatory options must be balanced against the needs and specifications of MENA economies, while policies and regulations that promote the development of renewables should not solely address large-scale centralized generation. Governments can promote decentralized renewable growth to consumers, and regulators should consider giving households some autonomy in activities such as installing rooftop solar panels.

4. Enable Technical Grid Integration
Because power production from wind and solar sources is intermittent, these sources must be combined with conventional power generation. “This presents a technical challenge but large shares of renewable power generation have been successfully integrated into the grid in other parts of the world,” commented Fayad.

Addressing technical issues in the MENA region will involve a number of key strategies. Utilities can use older power plants to provide backup power when renewables are not available. They can also use thermal storage at CSP solar plants to store and deliver power even after sunset. Additionally, they can manage cooling loads by using thermal storage in district cooling and manage other power demands through smart grids and smart meters.

5. Develop R&D Capabilities and a Deep Talent Pool
The renewable energy industry needs a skilled workforce of technicians, designers, and engineers. In addition, the renewable energy sector depends heavily on R&D for advancements in materials, technology, and implementation. Pioneers in the renewables sector are often situated in close proximity to world-class research institutions. “The MENA region currently lacks such research institutions, but it is addressing this situation. For example, Abu Dhabi’s Masdar Institute of Science and Technology, a new university focused on renewable energy technologies, welcomed its first class of students in September 2009,” El Sayed noted.

Although some countries in the MENA region have begun renewable energy projects, the region is still rife with potential. There is substantial opportunity for first movers to become global leaders by adopting the requisite policies and launching bold initiatives. Countries that move quickly could build a sizable and sustainable competitive advantage.