The countries of the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) are facing a serious energy crisis due to their excessive reliance on fossil fuels. This may seem paradoxical at first sight, as these countries also are the most important providers of oil and increasingly important providers of natural gas to the rest of the world. Nevertheless, their efforts at economic diversification, and their specific climatic conditions determine very high rate of increase in energy consumption – notably in electricity consumption – so that these economies have some of the highest energy intensities in the world.
The looming problem has long been recognized by experts, but the public discourse of the GCC governments remained predominantly focused on the defense of fossil fuels, oil first and foremost, and viewed alternative technologies and sources of energy as primarily a threat. Very little priority was attributed to diversification of energy sources.
This attitude changed quite radically around the middle of the first decade of the current century. As oil prices started climbing, progressively moving from the 18 $/b territory they had occupied throughout the 1990s to the 65-75 $/b level which the Saudi oil Minister, Ali al Naimi, several times described as “ideal” in 2009-10, the cost of exclusive and excessive reliance on domestically produced fossil fuels became evident.
This led to a 180° change in attitude and public discourse, with all GCC countries simultaneously expressing strong interest in nuclear energy and renewable sources.
The policy turnaround has attracted considerable international attention primarily because of the ongoing crisis opposing Iran to the international community, due to the former’ program of uranium enrichment and fear that this might be a prelude to the acquisition of nuclear weapons. At the same time, in particular the government of the United Arab Emirates signaled its new interest in nuclear and renewable sources of energy through a series of spectacular initiatives, aimed at positioning the country in the forefront of energy diversification and decarbonisation. Hence the UAE launched the project of establishing Masdar City, aimed at creating the first zero carbon urban environment in the world; launched a nuclear energy program; successfully bid to host the seat of the newly established International Renewable Energy Agency (IRENA); launched a yearly gathering dubbed the World Future Energy Summit; invested in renewable energy technology companies abroad; announced carbon capture and sequestration projects, and promoted the inclusion of CCS in the CDM mechanism.
Other GCC governments have also announced important initiatives, but at a less frantic pace. In particular, the King of Saudi Arabia established in May 2010 a new institution called the King Abdullah City for Atomic and Renewable Energy (KA-CARE) and appointed the experienced and internationally well reputed former Minister of Industry and Electricity, Dr. Hashim Yamani, as its head.
How much of this change is for real? Not surprisingly, the implementation of new policies takes time and is fraught with numerous contradictions: is the new attitude just a public relations effort aimed at countering the image of greedy autocrats conspiring to boycott the industrial countries’ effort to free themselves from their dependence on dirty oil? The rest of this article will look at the structural determinants of the new interest in non fossil fuel energy sources, arguing that this is indeed a clear national priority for the GCC countries, not purely a tactical shift. I will then focus on the obstacles to implementation, which are both technical and of a political economy nature. The conclusion offers some hypotheses about future developments.
As already mentioned, the GCC countries display a very high level of energy intensity, whether measured per capita or per unit of GDP. This is oftentimes interpreted as a sign of inefficiency or profligacy, and the implicit or explicit conclusion then is these countries should aim at curbing demand, not increasing supply indefinitely. Indeed, simple extrapolation into the future of current trends in energy consumption growth leads to paradoxical conclusions.
This point of view is reinforced considering that energy prices to domestic consumers and large users are indeed extremely low by international comparison. Liquid fuels for transportation are essentially available at cost and in some cases below (Iran being an especially notable case until the beginning of 2011); the mere industrial cost, which excludes the rent that the government extracts from international sales, is of course extremely low. Electricity is available for free in Qatar, while the other countries apply tariffs, which are highest in the UAE and Oman. Nowhere revenues from sales are sufficient to generate funds required for investing in increased capacity or maintaining a technically adequate reserve.
Any casual visitor to the region will easily recognize that very little effort is made by consumers to limit their energy footprint. The low cost of energy has become embedded in sprawling urban agglomerations spread out over large surfaces – obliging residents to cover significant distances on a daily basis; in the almost complete absence of public transportation, and reliance on the individual car; and in the large size of cars in circulation, also facilitated by huge urban motorways. In the residential sector, preference for single family detached homes with little or no insulation (to reduce construction costs) coupled with the extreme climate conditions leads to very high electricity consumption for air conditioning; in addition, the AC equipment is frequently inefficient (again, because it is cheaper) and temperatures are set much lower than would be necessary for comfort.
While all of these traits are undeniable, it is also important to recognize structural factors of energy intensity, which are inherent in the relative specialization, which the GCC countries are acquiring in the context of their economic diversification.
A first trait of the economic diversification efforts of the GCC countries is that it is based on leveraging the abundance of hydrocarbons. The GCC countries are sparsely populated and have very limited industrial labor supply, so that their economic diversification must necessarily be focused on capital intensive industries, which are frequently also energy intensive.
The abundance of oil and gas is an obvious opportunity for developing industries that are based on these. Gas especially is difficult and very expensive to transport over long distances, creating an obvious incentive for the maximization of local use. Hence:
Oil too is increasingly refined locally and exported as products rather than crude.
The oil exporting countries had frequently accused the international oil companies of confining them to the role of exporters of crude oil, because most refining capacity was located in proximity of markets in the industrial countries. However, after a first wave of new refinery was launched in the 1970s and completed in the early 1980s, the emphasis on expanding domestic refining diminished greatly. This was due to market circumstances which saw refining margins depressed and a slack market for crude oil: exporting countries felt that had they insisted on exporting refined products rather than crude, their market share may have diminished further.
Such circumstances however were temporary and the turn of the century has seen a clear revival in the interest for developing domestic refining. This stands to reason as refining is the first step to allow further transformation into higher value added products, i.e. economic diversification. Numerous grassroots refinery projects were announced, whose implementation is in some cases proceeding rather slowly: nevertheless the direction for the future is clear.
On the back of availability of natural gas and, more recently, of naphtha feedstock from refineries, the petrochemical industry has been growing at breakneck pace throughout the region, in particular in Saudi Arabia and Qatar. It is a foregone conclusion that, barring a collapse of the globalization process and return to protectionism, the GCC’s relative specialization in petrochemicals will be further accentuated.
I will not discuss the details of this process here: suffice it to say that all processes for the transformation of hydrocarbons are highly energy intensive – indeed some of the most energy intensive processes in industry. Hence, high energy intensity is a structural feature of GCC economic diversification.
Cement and steel are other examples of highly energy intensive industrial activities, which have significantly developed in the GCC – although primarily in view of the regional market rather than with the global orientation of petrochemicals.
Finally, a special word should be said about aluminum smelting. This industrial process is highly energy intensive and specifically highly electricity intensive. The GCC countries (with the exception of Saudi Arabia, whose future aluminum project will be based on domestically available bauxite) have developed a highly successful aluminum smelting industry based on imported raw materials and low-cost electricity. Smelting capacity is rapidly increasing, reflecting the financial success of early ventures and the continuing favorable expected return on new projects. However, all such projects will further contribute to extraordinarily rapid electricity demand growth.
So much for diversification in the direction of manufacturing industry: but diversification efforts have also taken the shape of developing the region as a global logistic and services hub. Emphasis on large transportation infrastructure, aggressive investment in air and shipping fleets, optimization of intermodal logistic facilities are a major component of the diversification strategy. Global (export orientated) services are promoted through the establishment of dynamic metropolises in which successive specialized real estate development projects aim at attracting specific clusters of services (Internet City, Media City, Education City, Energy City, Financial City, and more of the same kind – a path pioneered by Dubai but now replicated everywhere in the region). The urban environment, which is generated by this strategy – affluent, technology-intensive, globally interconnected –, is also inevitably highly energy intensive.
In short, while surely considerable potential exists for rationalization in the use of energy, and priority to reducing waste is a must, nevertheless it should be recognized and accepted that GCC economic diversification inevitably entails high energy intensity, and is a structural phenomenon.
Domestic hydrocarbon consumption goes into transportation, power generation, and other industrial uses as either feedstock or fuel. It is necessary to distinguish between these different uses, as the potential for substitution and rationalization is vastly different.
Hydrocarbons are very difficult to substitute for in transportation. We are barely at the dawn of development of electric cars, and heavy road transport has little or no chance of being electrified. In this area, a slow down of domestic consumption growth is only possible through improved mileage and shortening of distances covered on a daily basis – both objectives that are not easy to reach. If we look at the pattern of personal vehicle preference in the affluent industrial countries, where SUVs account for a large share of the market notwithstanding the high price of fuel, it is unrealistic to expect that GCC consumers will turn to smaller, less fuel thirsty vehicles.
Hydrocarbons can be substituted for with other sources of heat – generally through use of electricity – in industrial uses; but they cannot be substituted for as feedstock. This applies not just to petrochemicals, but also, for example, to direct reduction iron.
The greatest potential for substitution exists in power generation. Electricity consumption is the fastest growth component of total energy demand, and alternative sources of energy (nuclear and renewables) are primarily geared to power generation.
Presently, power generation in the GCC countries is entirely dependent of hydrocarbons. Two of the GCC countries – Saudi Arabia and Kuwait – rely primarily on petroleum products (either residual fuel oil or straight crude; some diesel in remote areas); another two – Qatar and Bahrain – rely exclusively on gas; the remaining two – UAE and Oman – rely predominantly on gas.
Availability of gas in the region has become constrained in all countries, except Qatar. The opportunity cost of using gas in power generation has increased due to the success of the development of the petrochemical industry. The latter will increasingly rely on the cracking of LPG or naphtha, but this will increase its production costs.
The opportunity cost of using residual fuel oil or crude in power generation used to be very low. Throughout the late 1980s and the entire 1990s the Gulf producers had significant non-utilized capacity and saw their crude oil exports limited by OPEC quotas. In these conditions, they could figure that the marginal barrel of oil had no opportunity cost except its direct extraction cost, which is minimal. If it were not produced, that barrel would have been extracted 50 of more years later, and its discounted value could be considered to be close to zero.
With respect to fuel oil, the region had several unsophisticated refineries with limited conversion capacity, which produced a large stream of residual. Global demand for fuel oil has constantly decreased, due to tightening environmental regulation around the world - meaning that the product has had little or no market. Burning it in power plants was an obvious option.
But the situation has radically changed in both respects. GCC countries all aim at increasing their crude oil production capacities, and have engaged in massive investment projects to achieve this objective. Under the new conditions, the marginal barrel has a high cost, and the perspective of a growing share of total oil production being absorbed by domestic power generation is very worrisome for the national oil companies.
At the same time, massive investment has gone into improving the quality of existing refineries, with the addition of substantial conversion capacity and reorientation towards production of petrochemical feedstock. New refineries are specifically being built to minimize or altogether eliminate residual, and maximize the production of middle distillates and naphtha. In short, the abundant supply of residual is simply fading away. This means that Saudi Arabia and Kuwait in particular will increasingly have to burn their most valuable light crude in power generation plants previously using unwanted residual.
Thus it is clear that the shift in sentiment, and especially the loudly voiced preoccupations of oil ministers and national oil companies are not just for public relations purposes: they indeed are a response to some very challenging times ahead.
Alternative, non-fossil sources for power generation have vastly different technical characteristics, which greatly influence their potential uptake.
The key distinction concerns availability: some technologies are potentially always or almost always available, while others may be available at some times and not at other times, and their availability is not always easily predictable. Another important distinction is based on the relative incidence of fixed and variable costs: some technologies have high initial investment costs and lower operating costs; while other technologies offer much lower initial investment costs, but have higher operating costs.
The point is that electricity demand is not constant in time, and electricity must be generated in real time when it is demanded, as storage solutions are very limited.
Demand varies in accordance to two main cycles: a daily cycle and a seasonal cycle. The shape of the demand curve in time is location specific, but in the Gulf, where a considerable share of electricity is used for ambient cooling, the peak daily demand is generally reached between the early hours of the afternoon and until 10-11 at night. Seasonal fluctuations are especially significant in the region, and the peak of consumption is reached in the hottest summer months, when power shortages and blackouts have been frequent.
Dealing with highly variable electricity demand adds to the average cost of electricity, because capacity needs to be installed which will be used only a few hours in the year, in coincidence with the peaks. In conditions prevailing in the Gulf, flattening of the load is a crucial priority, because satisfying a constant demand (the so-called “base load”) is proportionately much cheaper than satisfying demand peaks.
In the context of rationalization of energy demand, reducing the variability of electricity demand is as important as containing total electricity demand. Several strategies may be adopted to flatten demand over time, and the potential for implementation in the Gulf are very significant.
From the supply side, some technologies are more adapted to meeting base load – i.e. to be producing constantly over many hours in the year – while others are more adapted to meeting peak load. Highly capital-intensive technologies – such as nuclear or coal-fired power plants, only make economic sense if they can be used for a very large number of hours in the year; in other words, they are especially adapted to meeting base load. Meeting peak load requires technologies that are highly flexible, i.e. that can be called to contribute to the grid’s supply at short notice; and preferably requiring less initial investment, so that the financial burden of the extended idle time will not be excessive. In countries that have the potential to exploit it, hydro power can be a solution for efficiently meeting peak load - indeed even for storing power (which, when in excess supply, is used to pump water upwards into the reservoir) – but this is not a relevant solution for the arid Gulf countries. Alternatively, gas based technologies, i.e. either open cycle gas turbines, or combined cycle gas and steam turbines, are the best solution to provide flexibility.
From this point of view, the GCC power generation fleet might be expected to enjoy great flexibility, as it is largely gas based. However, power plants in the region are very frequently coupled to desalination plants – indeed the synergy between power generation and water desalination is a key source of efficiency in the region. Yet, the other side of the coin of this highly desirable combination of power generation and water desalination is that the need for desalinated water mandates operating the plant even when electricity is not needed. In other words, the number of hours in operation is not dictated by demand for electricity; it is rather dictated by the demand for desalinated water. Thus, gas based power plants are also used for meeting base load.
This discussion is crucially important for understanding the challenge of increasing the use of renewable sources of energy in the region. In fact, the two most important renewable sources that are relevant for the region – solar and wind – are intermittent and we do not control the timing of their availability. This is not equally true for other renewable sources, such as hydro or biomass, but these are not available in the region.
The intermittency of power generated from renewable sources adds to the challenge of flexibility. Power from renewable sources should be given priority access to the grid when it is available, but that means that the rest of the generation fleet will need to accommodate greater variability (and, especially in the case of wind, unpredictability) of demand. Thus a strategy for rationalization of electricity production an consumption in the region requires on the one hand management of demand to reduce as much as possible its natural cyclicality, and on the other hand enhancing the flexibility of the fleet for compensating the intermittent availability of renewable sources.
The outcome depends crucially on whether renewable sources may be expected to be available in coincidence with demand peaks. If this were the case, then renewable sources could contribute to meeting peak demand, and facilitate the task of the rest of the fleet.
In the case of solar energy, the prognosis is probably different for concentrated solar power (CSP) as opposed to photovoltaic power (PV). The latter is strictly proportional to the intensity of light, meaning that it follows a daily cycle, while the daily demand cycle is a few hours lagged. CSP, in contrast, may allow for better overlap with the daily demand cycle, because the medium that is used to convert solar light into steam and power needs to heat up and potentially may conserve sufficient heat for some hours even after sundown. The weakness of CSP is that it has significant water requirements, a fact that has slowed down its uptake in the arid zones of the western United States.
A further important point to be considered is that the intensity of irradiation in the Arabian Peninsula is higher in winter than in the summer months, because in summer the sky is frequently veiled by high-altitude clouds. This again is in contrast with the fact that demand is much higher in the summer than in winter.
Thus, it is a fallacy that the GCC countries, because they are exposed to some very high levels of solar radiation, and have large expanses of uninhabited land, which could be used for solar power, can depend solely on the latter. At least until a satisfactory technology will have been developed to store electricity in large amounts[1] , a lot of the potential solar power may be available when it is not needed, and too little may be available when it is needed.
In this respect, it is also a mistake to view solar power as an alternative to nuclear: rather than competing, these two sources are complementary and support each other.
Nuclear power is ideal for meeting base load and providing for water desalination. Combining nuclear power and water desalination offers the opportunity of targeting more of the gas-fired component to meeting the flexibility requirements, hence making penetration of solar and wind renewable power much easier. Direct solar water desalination (i.e. without passing through power generation) is also potentially very important for the uptake of renewable sources in the region. Indeed, the interrelationship between power generation and water desalination is absolutely crucial for designing a rational strategy for optimization of the regionfs electricity generation fleet.
Profound differences exist between the various alternatives to fossil fuels also from the point of view of political economy.
Starting from the economic aspect, the question is frequently asked whether nuclear power is a cost efficient way of meeting the region’s electricity demand.
The answer to this question crucially depends on the assumptions that are formulated.
Whether in the end nuclear power effectively competes with fossil fuel generated power obviously depends on the assumptions concerning prices of fossil fuel. A gas power plant has much lower capital costs, but the fuel is considerably expensive in market conditions prevailing in the OECD countries. However, if it is assumed that the gas is sold to the power plants at very low prices, nuclear power may in fact not be competitive. Yet, our starting consideration has been that the availability of gas in the region has now become seriously constrained, and burning it for power generation has a considerable opportunity cost.
All solutions based on renewable sources are presently more expensive than either nuclear or natural gas. However, a group of students of Cambridge University’s Judge School recently demonstrated that it might be possible to finance a CSP plant in Oman on the basis of receiving gas volumes available for export, equivalent to the gas that might be saved thanks to the solar power. (This assumption was made in order to cut through the Gordian knot of price structures not reflecting opportunity costs.) This conclusion appears to indicate that it may be possible to set up win-win deals that would encourage private investment in solar energy.
Another set of political economy arguments relates to the decision making process. Nuclear energy is normally available in large power plants, and points to a highly concentrated generation model. Typically, several large power plants are clustered together in nuclear power parks, which constitute a significant share of total generation capacity. In contrast, solar energy, and especially PV, can be highly decentralized: the decision whether to install panels on the roof needs to be made by each individual household, and each final consumer must be allowed to sell power to the grid as well as buying from it. CSP represents an intermediate case, in which individual plants are relatively small when compared to full size thermal plants, but can nevertheless potentially satisfy thousands of consumers.
It is my opinion that in conditions prevailing in the Arab Gulf countries centralization of decisions is an advantage. The decision to launch a nuclear power program is one that can and would be made at the top level of the political hierarchy, and would be based on strategic consideration in addition to maximization of short-term returns. In contrast, promoting the uptake of solar energy on the part of private investors requires the establishment of a complex regulatory framework, more challenging network management, and market incentives to stimulate the response of potential investors. I have little doubt that this would be a much more difficult challenge for the GCC governments.
The United Arab Emirates, and in particular Abu Dhabi, have jumped at the forefront of energy sources diversification in the region, simultaneously launching an ambitious nuclear power program and setting ambitious goals for increased reliance on renewable sources.
The nuclear power program has led to the conclusion of a major supply contract with South Korean companies, while at the same time international agreements have been signed and the required domestic institutions put in place. The first power plant within this program is scheduled to enter in operation in 2017.
Meeting this ambitious target would mean that the UAE has succeeded in having access to nuclear power in exactly ten years since first formulating the intention of doing so, which would be a significant accomplishment.
Progress on the front of renewable sources appears to be slower. Although most observers believe that the UAE will succeed in meeting its target of providing 7% of total energy from renewable sources by 2020, nevertheless further progress might not be altogether easy. The shift from experimental implementation of a few flagship projects to implementation of a large number of projects such as would be necessary to make a bigger dent in fossil fuel consumption, and in the context of rapidly growing demand, may prove a major challenge.
Elsewhere in the region, progress is slower. The creation of KA-CARE in Saudi Arabia is a step forward inasmuch it clearly identifies an agency whose exclusive mandate is to promote nuclear and renewable sources of energy. However this agency is just established and may require some time before it defines its detailed strategy and is able to award a major contract for nuclear energy implementation like the UAE has done. Other countries are even less advanced.
It is to be expected that, as demand increases and reliance on fossil fuels becomes more and more of a problem, a sense of urgency will come to the fore, and the diversification of sources of electricity will gain ground. But it may be decades before a desirable balance is reached of approximately 1/3 nuclear, 1/3 renewable sources and 1/3 of continued reliance on fossil fuels (possibly with carbon capture and sequestration, although this tends to considerably reduce efficiency).
[1]
Alternatively, the outcome of the use of electricity could be stored. For example it has been suggested that air cooling might be based on accumulated ice (or any appropriate medium for storing cold) hence delinking in time the demand for electricity from the demand for air cooling.
http://www.apec.org.au/docs//currents0906/currents0906.html#StoryFour
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