MENA Renewables: Selective Investment Key amid Muted Growth

Renewables capacity will account for only a small fraction of electricity generation in the MENA region over BMI Research’s 10-year forecast period due to heavy reliance on accessible and relatively economic gas- and oil-fired generation in major markets. Amid the muted outlook for growth BMI highlights some investment bright spots – specifically the UAE, Morocco and potentially Egypt.

Limited renewables growth in a global context

The Middle East and North Africa (MENA) region will continue to under perform all regional renewables markets – other than Sub Saharan Africa – over the 10-year forecast period. BMI forecasts that total non-hydropower renewables capacity will grow from 6,078 megawatts (MW) in 2016 to more than 20,000MW in 2025 but reiterate that growth will be limited by the small size of some of the national power markets. Growth in renewables will also be stymied by overreliance on relatively cheap – and often subsidized – oil and gas in power generation, which will continue to limit energy mix diversification efforts.

In BMI’s view, the biggest upside risk to renewables stems from falling costs – particularly in the solar sector. Tumbling solar generation costs have, for example, been a major factor in making the UAE one of the outperformers in terms of installed solar capacity within the MENA region and BMI could see greater uptake in other markets as renewables-based electricity becomes more cost competitive with fossil fuelled generation. Electricity subsidy reform, which is occurring gradually in many markets across the region as governments look to cut budgets in the face of lower oil prices, could also help solar reach grid parity more quickly and would boost the outlook for renewables on economic grounds – although this process of reform is likely to take time.

Oil & gas continue to take the shine off renewables

The dominance of fossil fuels in the regional electricity generation mix is clear. BMI forecasts that non-hydropower renewables generation will account for just 2 percent of total electricity generation in 2025. Gas will account for the biggest proportion of the generation mix (69 percent), with oil accounting for 21 percent – in line with BMI’s view that many of the region’s oil exporters will increasingly use gas in electricity generation so as to preserve oil for export. This is largely due to the fact that, although BMI expects selected markets to register significant renewables growth from a low base, large markets like Egypt, Iran and Saudi Arabia will still maintain reliance on domestic fossil fuels as they attempt to build capacity to keep pace with growth in electricity demand.

Saudi Arabia, which is the biggest electricity generator in the MENA region according to BMI’s forecasts, is a case in point. Despite the kingdom’s plans to expand solar capacity so as to cut reliance on oil in domestic power generation, BMI remains cautious based on a number of false starts. The country is currently targeting solar capacity of 9.5GW by 2030 but BMI remains cautious due to a history of delays, the fact the kingdom will have to build up institutional and regulatory capacity and a domestic solar manufacturing base and will have to continue to reform its domestic fuel subsidy systems if renewables are to become more cost-competitive with fossil fuels in power generation.

“… total non-hydropower renewables capacity will grow from 6,078MW in 2016 to more than 20,000MW in 2025”

Selected markets hold promise for investors

Despite limited growth in renewables capacity across the region as a whole, there are certain markets that hold promise and will present opportunities for investment. BMI highlights that the top markets for investment (measured by capacity additions) will be Egypt, Morocco and the UAE. The biggest pull factor for investors in these markets will be the prospect of relative stability and also relatively robust government support for renewables expansion – particularly in the UAE and Morocco.

The UAE remains the most attractive market from a regulatory perspective – and it is set to maintain its position as a Gulf Cooperation Council (GCC) regional hotspot for solar development over the coming decade. To this end, the UAE government is focused on integrating a wider range of fuel sources into its electricity mix and there are a number of supportive mechanisms in place to help encourage investors into the market: public investment and loans, energy production payments, utility quota obligations and capacity targets.

In Morocco, growth in renewables capacity will be supported by the construction of the Noor solar CSP project, which is progressing and will have a total capacity of 580MW once all of the phases are completed in 2020, and also strong growth in wind capacity. BMI highlights that the government has moved to strengthen the regulatory and policy environment for solar and wind power capacity over the last couple of years and adopted ambitious growth targets.

Egypt is BMI’s top market in terms of its forecasts for capacity additions – largely due to the scale of the market and the high levels of pledged investment due to relative political stability under President Abdel Fattah El-Sisi and attractive feed in tariffs (FiTs). BMI does, however, highlight that it has adopted a cautious approach to capacity expansion despite huge pledges of investment. This appears to have been prudent as significant downside risks to BMI’s forecasts have materialized amid reports of delays to signing contracts and Egypt’s insistence on domestic arbitration (as opposed to international arbitration), which have spooked institutional investors and made it harder for foreign companies to access financing.

“The UAE is now one of the few places globally where solar power is cost-competitive with thermal power generation”

The UAE has the strongest project pipeline

Data from BMI’s Key Projects Database (KPD) broadly aligns with its forecasts for growth in renewables capacity – and also supports BMI’s view that regulatory stability in the UAE will boost investment into the county’s solar market. KPD indicates that the UAE has double the amount of capacity that Egypt has in the project pipeline – at almost 5,000MW.

In addition to regulatory clarity and robust government support, BMI emphasizes that other major drivers of investment in UAE solar sector is cost-competitiveness of solar relative to fossil fuels and significant interest amongst international investors. The UAE is now one of the few places globally where solar power is cost-competitive with thermal power generation, with prices for solar-powered electricity having declined by 75 percent over the last five years. The competition for tenders and cheaper solar panels has instigated this downwards price trend – creating added impetus to long-term plans to boost solar capacity. For example, a 2015 tender culminated in ACWA Power (heading a Saudi-led consortium) securing 200 MW of solar capacity – with a PPA of USD0.0584 per kWh, more than three cents lower than the UAE price of gas generation in KWh. Furthermore, prices have continue to drop, as a consortium of Masdar and Fotowatio Renewables Ventures launched a winning bid of USD0.029/kWh in 2016, which entailed a 50.2 percent reduction in the winning bid from the year before.

Solar to dominate but wind gaining traction in certain markets

Solar is clearly the technology of choice within the MENA region based on favorable climactic conditions and low prices. That said, there are markets where wind generation will increasingly gain traction as an attractive source of renewables generation – primarily in Egypt and Morocco but also Iran, Jordan and Tunisia.

Andrew Shepherd
Senior Energy & Infrastructure Analyst – Projects Manager
BMI Research