by Aisha Al-Sarihi
Since mid-2014, global oil prices have plunged by more than 56 percent from a peak of $155 a barrel, albeit a recent rise to $50 a barrel at the end of May 2016. The collapse in oil prices has meant lower exports and government revenues in the Gulf Cooperation Council (GCC). The International Monetary Fund (IMF) estimated that oil-exporting countries in the MENA region lost over $340 billion in revenues last year because of low crude prices, equivalent to 20% of their combined Gross Domestic Product (GDP). The plunge has raised many questions about the economic structure in countries with high reliance on oil export revenues. It has also pushed governments of oil-exporting Gulf countries to rethink their cash flow to help reduce budget deficits.
But what does the plunge in oil prices mean for renewable energy investments in the GCC? A quick response, from a supply and demand perspective, might be: a drop in oil prices enhances more demand for cheap hydrocarbons and a low demand for expensive renewable energy technologies. Following are three implications of the recent plunge in oil prices for renewable energy development in the GCC.
Firstly, the pressure on governmental budgets as a result of the oil price slump has created an opportunity for GCC governments to introduce new reforms in their expenditure patterns, including the cut in fossil fuel subsidies. Fossil fuel subsidies have long been a major barrier to renewable energy deployment in the Middle East and North African countries. Subsidised energy products in the GCC countries are relatively cheap compared with international prices. Average gasoline and diesel prices, natural gas prices, are electricity tariffs are all much lower than the rest of the world. Despite the continuous decline in the cost of renewable energy technologies, the plunge in oil prices may maintain the price gap between expensive renewable energy technologies and subsidised energy products in the GCC. However, developers in Dubai set a new world record for the cost of solar power in May 2016 of as low as $0.03 per kWh for a project size of 800 MW. This is lower than an average electricity tariff in GCC politically fixed to an average of $0.05 per kWh. This suggests that technology cost is no longer a barrier for the development of renewable energy technologies.
Secondly, energy subsidy reform in the GCC implies fluctuations in domestic fuel prices to reflect price changes in the international market. Fluctuations in fuel prices may reduce the attractiveness of investing in fossil fuel-based power generation given the high sensitivity to fuel costs. For example, the cost of fuel for gas-fired power plants ranges from over 20 percent per MWh of the generation cost of Open Cycle Gas Turbine plants (OCGT)to over 45 percent per MWh of the generation cost of Combined Cycle Gas Turbine plants(CCGT). In comparison, power generation from renewable energy technologies is insensitive to fuel cost, as it requires no fuel for their operation. At the recent UN climate talks in Lima, Cristiana Figueres, head of the UN’s Climate Change Secretariat, maintained that the instability of oil prices ‘is exactly one of the main reasons why we must move to renewable energy, which has a completely predictable cost of zero for fuel’. It is important to take this into consideration when it comes to the long-term thinking of enhancing regional energy security. If energy imports became reality, which is already the case for some GCC countries, the fluctuation in oil prices will have a direct impact on the energy bill in the future just as in many net oil-importing countries. Instead, renewables can improve energy availability and enhance the diversity of the national energy supply.
Thirdly, the plunge in oil prices urges strategic development of non-oil revenues in the GCC. Enabling an environment for private investors is key to boosting economic growth. Renewable energy investments could potentially contribute to the economic growth and the creation of new jobs for GCC nationals. The International Renewable Energy Agency (IRENA), in its latest report, estimated a creation of 140,000 direct jobs every year if GCC countries meet their renewable energy targets and plans. According to IRENA, the global renewable energy employment grew by 5 per cent last year, in stark contrast to the steep losses suffered in the oil and gas sector. Furthermore, investments in renewable energy manufacturing industries in the GCC could contribute towards non-oil revenues via the exporting of locally manufactured renewable energy components.
Even though the ongoing economic reforms – driven by the plunge in oil prices – could find solutions to mitigate pressures on government budgets, the development of renewables is timely to bridge the transition to a post-oil future when non-renewable energy resources are exhausted. Yet, renewable energy development in the GCC is not without its challenges. A collective action from all society actors, including public, private, civil and academic, is essential to enable a renewable energy system in the GCC.
Aisha Al-Sarihi is Research Officer at the LSE Middle East Centre, currently working on Climate Change in the GCC. She is also completing her doctoral thesis at the Centre for Environmental Policy, Imperial College London. Her areas of research interest include low-carbon energy transitions in the Middle East and North Africa, renewable energy policies, and climate change policies in the GCC. She tweets at @.