The opportunity for the Gulf’s financial services sector
Financing the future of sustainable energy offers excellent opportunities for the banking sector in the Gulf region.
The opportunities encompass projects that generate energy, that transmit and distribute energy to consumers, and that improve the efficiency of energy use. All of these – especially when combined – will help to address a fundamental requirement for the region: ensuring that supply can continue to meet the growing demand for energy.
At the same time, it can enable the region to move towards greater prominence as a global home of sustainable energy.
The need for a strategic approach to energy finance is driven by the pressures of growth in the region, pressures that are creating the greater demand for energy. As this report will show, there is a large and projected gap between supply and demand for energy in the Gulf, especially in the form of power (electricity). This is driven by growing populations and increasing per capita GDP with associated lifestyle benefits and challenges.
More electricity generation is needed to serve a more energy intensive industrial base, greater use of air conditioning and an urgent scaling up of desalination capacity to meet future water demands. Energy demand in the region is expected to triple during the next fifteen to twenty years. Rising to these challenges will require both substantial new generation capacity and wiser, more efficient, use of that energy.
While the economies of this region have been built on oil and gas production, and that will continue for the foreseeable future, the energy system of the past will not be the same as the energy system for the future. It is clear that renewables will be an established and significant part of the future energy mix, in the region and globally.
The scale of the opportunity is large.
The investment required for power generation, transmission and efficient use of energy is in the order of tens of billions of US dollars per year in the region – and hundreds of billions (possibly a trillion) US dollars per year worldwide. Continued rising demand will ensure a locked in energy demand, which underpins the attractiveness of this area as an investment proposition.
Of the increased generation capacity, a considerable percentage will come from renewables. In 2014 alone, 150 billion US dollars was invested in solar generation globally, and 100 billion US dollars in wind. For the last few years, more than half of the total investment in new electricity generation worldwide has been in renewable energy technologies. The trend has been enabled by continuing reductions in technology costs, rising demand for electricity in developing countries, and a significant drive by Governments to switch to less carbon intensive generation sources to respond to climate concerns.
Renewable energy technologies that can realise these opportunities are proven, cost-effective and available today. They also have the benefit of balancing economic, energy supply, sustainability and social ambitions for consumers, policy makers and investors.
For solar PV and on-shore wind technologies, there is already a track record of successful deployment. Prices have fallen dramatically in the past few years: solar PV falling by 80 per cent in six years, and on-shore wind by 40 per cent.
The speed of this shift towards grid parity with fossil fuels means that, in many instances, perceptions of the role of renewables in the energy mix have not caught up with reality. At the end of 2014, the 200 MW Dubai Electricity and Water Authority (DEWA) bid in Dubai set a new world benchmark for utility scale solar PV costs, showing that photovoltaic technologies are competitive today with oil at US$ 10/barrel and gas at $5/MMBtu.
Investors and developers see a global stage for projects. While the particular characteristics of demand and supply are local, the opportunity for proven technologies and finance packages is global. For example, government ambitions and targets have put solar and wind power at the heart of future energy developments in the Middle East.
Ambitious targets and well developed programmes create the opportunity for the development of significant local markets and experience. Building renewable energy technology supply chains and capacity within the region will also open up the opportunity to export expertise and deliver solutions elsewhere, especially along the West- East Corridor where the requirement to meet new demand and to find nontraditional and innovative solutions is even more pressing.
Realising the opportunity will require collaboration between and financial instructions. Governments all over the world, including in the Gulf region, are setting ambitions and shaping strategies to respond to climate change and decarbonise their economies. Because of the sheer level of investment needed to deliver on those strategies, there is a major role for the private sector, especially the finance sector, to play in enabling Governments to make those policy ambitions a reality.
The traditional models of financing used for large infrastructure projects can be enhanced to support more frequent and fast deployment of renewable technologies. The banking sector has a major part to play, but so too do other financial services actors: insurance companies or global institutions such as the Clean Development Fund. Recent experience in delivering solar PV and on-shore wind projects on the global stage has forged new approaches to financing renewable energy – such as securitisation, aggregation and green bonds - which can usefully be adapted for the Gulf region. Alongside the financial sector, though, Governments have a continued contribution to make, from establishing Power Purchase Agreements or procurement frameworks that enable new technologies to be deployed at scale and drive down costs.