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Will COVID-19 reduce the appetite for renewable energy projects in the GCC?

Marmore Team

10 June 2020

 

The outbreak of COVID-19 has deeply impacted global economies, pushing them into a recession. As health and economic concerns continue to mount, the near-term outlook for renewable energy projects look weak. GCC countries have taken a strong hit in the revenue side of their books due to the sharp fall in oil prices during 2020. The shortfall in revenue and rise in deficits are expected to have a strong near-term impact on project awards in the renewable energy space. GCC countries, which are predominantly dependent on fossil fuel for energy generation, have exhibited their commitment in gravitating towards renewables by laying ambitious targets for the next 10-15 years. However, project awards in recent years has been sluggish, with several of them facing delays. The slump in oil prices since 2014 has weighed in on GCC countries’ capital expenditure, causing the slowdown in awarding new projects. As project activity showed signs of recovery during the start of 2020, the outbreak of coronavirus has turned the tables upside down.

GCC countries had set lofty targets for ramping up their renewable energy capacity in the coming years as part of their long-term visions. For instance, Kuwait and Saudi Arabia have set a target of 15% and 30% of their respective power generation to come from renewable and other clean energy sources by 2030. Their renewable energy share stood at 0.4% and 0.2% respectively as of 2018 end. The crisis triggered by the pandemic is expected to delay the award of projects in the near-term, leaving the already ambitious renewable energy targets of GCC countries much harder to achieve now.

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Potential problem areas in the short term are many. Suppliers for equipment such as low-cost PV (Photo-voltaic) modules, solar cells, turbines, and other equipment are largely based out of China and Europe. Until normalcy resumes in manufacturing and logistics, free movement of components will face disruptions. Another difficulty lies in engaging migrant labour, as restricted movement of workers between countries will pose a significant challenge. New protocols such as social distancing in work environment could also serve up to delay the progress of ongoing projects. Depending on how the pandemic is being handled by governments across the world, the speed of recovery could vary.

Once near-term disruptions wane, renewable projects that were earlier in pipeline would normally be expected to resume. However, there is a risk of renewable projects being side-lined, with other objectives taking precedence. Primary reason to this is that GCC countries have sufficient oil and gas resources, and existing installed capacity for fossil fuel power generation. With generation of power from renewable resources being seen more as a long-term objective, it runs a risk of not being given importance. But there is a pressing need for GCC countries to focus on clean energy. The UN sustainability goals indicates that countries should move towards more affordable and clean energy. GCC lags most developed countries in their transition towards renewables and has a long way to go in order to meet its sustainability goals for power generation. GCC region has higher CO2 and particulate emissions than the global average due to refinement and combustion of fuel, potentially leading to adverse health effects in the long run.

When oil prices are high, there is an inclination to proceed with renewable energy projects as high-priced oil could be a lucrative commodity for export. However, when oil price are low, the incentive to move towards renewable energy is less due to narrower profit margins from export and higher investment costs for renewable projects. But from a long term-perspective, with renewable energy generation cost falling and peak oil demand yet to come, moving towards renewables sooner would free-up more resources for export. With climatic conditions in the GCC favouring solar power generation and projects becoming more cost effective, the case for transition is much stronger now.

The revival of renewable energy projects needs strong government support both from a financial and policy perspective. Near-term shocks emanating from COVID-19 need to be absorbed without deferring capital expenditure. Upcoming renewable infrastructure projects is expected to drive new employment opportunities and save fossil fuel for export purposes. Financial support must be provided to ongoing projects through the easing of lending norms and provision of support through subsidies would help project stakeholders avoid cost overruns. In countries like Germany, the provision of subsidies for a period of 20 years has helped renewable energy operators stay profitable. After the period, margins are lesser. Therefore, GCC countries must look at much more sustainable models of renewable power generation that turns profit after a stage when subsidies are removed.

According to the IEA, global energy investments in the year 2020, which was earlier predicted to grow by 2%, is now poised to see a decline of 20% due to the outbreak of COVID-19. However, the positive news is that renewable energy investments have been much more resilient when compared to those of fossil fuel. Although the near-term trend suggests that the awards for renewable energy project will take a back-seat, there are strong global cues indicating that the push for clean energy will only increase after the crisis. Environmental and health concerns surrounding recent events have presented a strong case for moving towards cleaner sources of energy generation and improving energy efficiency. Investors have also been showing more appetite towards financing sustainable projects, with the green finance market witnessing sharp growth in the past five years. As the global energy landscape prepares itself for a transformation, GCC countries need to ensure that they are not left behind. Although COVID-19 has more or less forced the hand of GCC governments to pause activity in the renewable projects space over the short-term, governments need to prioritize renewable energy investments in the long run and continue to move towards their clean energy goals.

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