Subsidy cuts will be the game changer
Perhaps the biggest sign that the GCC governments recognize that their region’s energy markets must change are the solid commitments from many to cut the subsides that have kept energy prices artificially low, demand high and put the brakes on true progress in renewables. In one example, electricity bills for residential consumers in Saudi Arabia increased about three-fold from 1 January 2018 after the introduction of cost-reflective tariffs, as well as value-added tax. In Bahrain, household and business electricity and water prices are being increased for businesses in a multiyear plan, while Kuwait and Oman increased electricity prices for businesses and other big consumers in 2017.
While removing subsidies risks public backlash against higher prices, the economic burden of subsidies — which cost the region as much as US$105b in 2015 — mean governments may be prepared to address the disquiet in exchange for boosted revenues. In 2016, the UAE’s energy minister, Suhail Al Mazrouei, told the World Economic Forum in Davos that the UAE population could be persuaded to accept increased electricity prices: “If you have a good story and tell it to local people, they will be convinced. The majority of the population is young and they’re different from past generations … We are redirecting the subsidy as an opportunity to invest in other parts of the economy, like building schools and hospitals. It’s a convincing story. It’s not so difficult to understand.”
This will be a critical issue to watch — the removal of subsidies will be a big determining factor in just when the tipping points will arrive. In fact, EY analysis found that if subsides are cut, grid parity will arrive as early as 2032 — nine years earlier than if subsidies continue. And, without subsidies, electric vehicles will reach price and performance parity with traditional vehicles between 2025 and 2029. (The timing of the arrival of the third tipping point is the same, whether subsidies remain or are removed.)