Will Middle East utilities react to disruption, or help create it?

A culture of energy innovation

Over the past decade, several GCC countries have announced ambitious renewable energy targets. With power capacity requirements expected to increase at an annual rate of over 6% until 2022,² GCC countries are moving fast to adapt their energy mix. Renewable energy is gaining momentum, backed by strong support from governments that recognize the urgency of tackling rising demand for energy. Investment is rising in exploring the greater adoption of energy technologies, including solar photovoltaics (PV) and concentrated solar power (CSP). This is attributed to the region’s vast availability of solar resources and access to finance and auction designs that have delivered low prices. The GCC smart grid market is also gaining prominence, with battery storage forming a crucial component in the integration of renewable energy to the grid.

These initiatives also reflect the GCC’s strong track record in innovation and adoption of new technologies — smart meters arrived relatively late to the region, but their speed of deployment and acceptance by customers was much quicker than that seen in other regions. And, anyone who has visited Dubai recently can attest to the fact that electric vehicle (EV) adoption is accelerating fast in the region — a trend that is driven more by consumers’ eagerness for the technology than any economic benefit.

In particular, solar energy has clear potential in the GCC. The region has some of the highest solar exposures in the world, enjoying more than 300 days of sunshine a year. Solar power plants can typically expect around 1,900 hours of operation per year, double the levels typically found in Europe. The added benefit is that solar output tends to match daily variations in demand, especially from high air conditioning use. Meanwhile, the region has plentiful land and a deep talent pool to draw upon. Across GCC countries, investment in new solar is therefore increasing in size and scope:

• Solar prices in the GCC are following the international trend. Large-scale solar PV projects have dropped from 5.98 US cents/kWh in 2014 to 2.4 US cents/kWh in 2018, making it the most cost-effective source of electricity generation in the GCC.
• The UAE has announced a power strategy to achieve 50% clean energy by 2050, with solar power expected to contribute 25% of its generation mix. The Mohammed bin Rashid Al Maktoum Solar Park in the Emirates will generate 1,000 MW by 2020 and 5,000 MW by 2030.
• Bahrain has raised its renewable energy target from 5% to 10% by 2035 and has mandated installation of solar panels on new buildings.
• Rooftop solar installations are gaining in popularity in the UAE following the introduction of net metering schemes. These allow customers to use solar power to generate electricity for their own use, with any excess fed back into the grid.
• Kuwait has set a target of having renewable energy contribute 15% of the total energy mix by 2030.
• Renewables provide an opportunity to reduce water used in power generation by up to 15%, whilst clean energy sources offer a more cost-effective option in water desalination projects.

At the end of 2018, the region had 146 GW of installed power capacity, of which renewable energy accounted for less than 1%.³ Despite the large capacity, significant investment will be needed in additional generation and for transmission and distribution over the coming years.⁴ In the next five years, for example, the region is expected to invest US$55b for an additional 43 GW of generating capacity and US$34b for transmission and distribution to meet rising demand.⁵ From which, renewable energy deployment is expected to accelerate, and nearly 7 GW of renewable capacity is expected online by the early 2020s. Our analysis suggests renewables could contribute one-third of the region’s energy mix by 2050, with solar PV and solar CSP making up 20% of this figure, if investment and regulatory commitment continue.

Can GCC utilities adapt in time?

Change is on its way to the GCC energy sectors, with renewable energy expected to play a vital role in the region’s economic diversification plans. The question is — can the region’s state-owned, vertically integrated utilities adapt in time? Signs are positive. Utilities here are different: they don’t fit the typical stereotype of the slow-moving incumbent utility. They operate within a fast-moving culture that has been shaped by innovation, rapid growth and a willingness to invest in high-quality infrastructure.

Even so, success in a new energy market will require decisive action now from utilities, with support from governments and regulators.

Action points for utilities include:

• Building the right operating and business models:  Reshaping for success in a very different energy world will require similarly transformed models that position utilities for new roles. Time is short to get these in place, especially as tipping point 1 may hit certain customer segments, such as large industry, ahead of others. This presents opportunities for utilities to play a partnering role as big Gulf companies explore self-sufficiency and off-grid options.
• Developing new skills and capabilities: A digitally-enabled, renewables-centered energy market will require utilities to develop an entirely new tranche of skills and capabilities. Some may develop these in-house while others will use strategic collaborations or joint ventures to tap the talent they need. GCC utilities are fortunate to have access to a large pool of high-quality talent and a growing population.
• Becoming customer-focused: Developing a new customer focus may be an even bigger challenge. In some countries, there are indications that energy reforms may include opening the electricity market to private players. This will create an urgent need to put the customer at the center of the business. Developing new ways to create value for different customer segments will be critical to growing revenue and maintaining the continued competitiveness of the region, once cheap fuel is no longer an inherent advantage.
• Reconsidering investment strategies: As the tipping points loom, utilities will need to consider the implications for project payback. Decisions will need to be made about whether to continue existing infrastructure projects as planned, adapt financing models or even delay or discontinue altogether.

Two action points for governments and regulators to enable a smooth energy transition are:

• Broaden the range of funding mechanisms: Over the last two decades, the public-private partnership (PPP) model has become the most attractive financing mechanism for the GCC power market, with the region having the highest level of investment in power infrastructure (public and private) of any group of countries. Governments are increasingly relying on independent power producers (IPPs) to share the burden, adding significant capacity in recent years. With a budgetary shortfall since the oil price decline, governments need to tackle rising demand, while at the same time adopting a more market-oriented structure that encourages the private sector to invest in the reliable supply of competitively priced power. 
• Consider how to introduce competition: As some governments consider opening electricity markets to private investors, policymakers will need to carefully consider how best to introduce competition. Opening markets to private players would accelerate innovation and possibly bring the tipping points closer, but governments will need to make certain that reforms do not jeopardize the ability of incumbent utilities to fulfil their vital role in water desalination.

Bold action needed now

The countdown is on to a new energy market in the GCC — one reshaped by renewables, digital technologies, smart grid infrastructure and changing consumer demands. For the region’s utilities, adapting to very different conditions will require overcoming some significant challenges, as well as supportive policies from government and regulators.