Diversifying for a Green Future: The Case of the United Arab Emirates

Shams Power Company, Abu Dhabi, September 13, 2012

Muhammed Y. Idris is a research fellow at the Middle East Initiative within the Belfer Center of Science and International Affairs at the Harvard Kennedy School of Government, where his research focuses on the political economy of the Middle East and North Africa. Joelle Thomas is a Master in Public Policy candidate at the Harvard Kennedy School. This article appeared in JMEPP’s Spring 2015 print edition.

                           

Introduction

The United Arab Emirates (UAE) is unlike any other Middle Eastern country in its vision for a clean energy future. Its status as a top oil producer has not enticed the UAE to rest on its resource-rich laurels. Instead, its creative public/private partnerships for power generation, attractive regulations for foreign investment, and ambitious renewable energy initiative are hallmarks of national strategy to carve a global competitive position for the national economy in a setting where oil dominates the economic and political landscape. The UAE government generates 80 percent of its revenue from hydrocarbons, and the country has one of the highest rates of per capita energy consumption in the world. Yet rapid economic and demographic growth over the past decade continue to strain the country’s electricity grid, partly run on imported natural gas. Furthermore, heavy dependence on oil exports and costly public subsidy programs threaten the stability of Federal government revenues. This context creates an environment in which a diversification of energy sources is critical for the UAE’s energy security and economic outlook, to which the UAE’s alternative energy program offers promising solutions.

This paper explores the factors that have contributed to the UAE’s successful and burgeoning alternative energy movement. What factors have contributed to the progression of the UAE into a hub for renewable energy growth in the region? First, we explore the opportunities presented by its natural resource wealth for promoting domestic development in key sectors, including energy. Second, we consider the role of leadership and vision, notably by the late Sheikh Zayed bin Sultan al Nayhan and his descendants, in translating the vision into action. Lastly, we examine elements of an enabling environment that has attracted investment into the renewable energy sector, including human capital, institutions and government-led public private partnerships, with special attention to Masdar and its parent, Mubadala Development Company.

Natural Resource Wealth

Like other states in the Gulf, the United Arab Emirates is a key player on the world energy scene. It accounts for over seven percent of the world’s proven oil reserves, making it the fifth largest oil producer in the Middle East and third in the Gulf Cooperation Council (GCC).i It also accounts for three percent of the planet’s natural gas reserves putting it in the top five natural gas suppliers in the region. Conservative estimates suggest that over 85 percent of domestic economic activity in the UAE can be attributed to oil exports and over 80 percent of the government’s revenue comes from hydrocarbon sector.ii These natural resource endowments allow the UAE to remain a tax-free jurisdiction, which attracts a high quality expatriate work-force as well as international firms that contribute to development. Moreover, the UAE’s capital endowments are sufficient enough to allow it to maintain a long-term investment horizon, a prerequisite for the development of renewable energy technologies and projects.

While many would argue that natural resource wealth allows for such an aggressive diversification strategy, existing frameworks allow the UAE to triumph in its energy ambitions in spite of its resource endowments. One needs to look no further than its GCC neighbors to see that while many states have similar endowments, few have significantly contributed to the promotion of renewable energy at a global scale. Saudi Arabia, for example, accounts for 15.9 percent of world oil reserves and over 90 percent of government revenues are from hydrocarbons.iii Despite announcing a move to build over 50 gigawatts of nuclear and solar energy capacity in 2012, the projects continue to be delayed and no nuclear power plants have been constructed.iii

As the development of alternative energies attenuates the value of traditional hydrocarbons on which MENA states are largely dependent, this is a rational response. Furthermore, the abundance of natural resources tends to be associated with a decline in economic competitiveness and corrupt institutions designed to funnel revenue from endowments into the elite coffers—a phenomenon commonly referred to as the “resource curse.”

That the UAE has seen significant growth in its relatively short history. This growth has been coupled with the development of world-class institutions and suggests that there are other factors that are important to consider when thinking about UAE leadership on the renewable energy front.

Leadership and Vision

The visionary late Sheikh Zayed bin Sultan al Nayhan understood that diversification of government revenue sources beyond oil rents would be essential for long run development when he helped found the country in 1971. He was cognizant that his country’s energy sources were finite and understood that diversification of government revenue sources beyond oil rents would be essential for long run development. He established investment funds for oil rents, earmarking money for domestic investments in education, healthcare, transportation and infrastructure, but also sought to maximize gains by investing abroad. From a nation of less than 500,000 people, he encouraged the robust growth of manufacturing and services sectors, making energy sources and capital readily available, reducing barriers to trade and establishing free economic zones. Keeping true to his vision for serving the people of the UAE, he encouraged socially-responsible growth. “Every factory small or big must serve the Union. Every project should be directed to the welfare of society. If this is achieved, the community will experience happiness for the synergy accomplished among each other.”iv This leadership is also manifested in the promotion of women in leadership, especially on the environment and sustainability fronts, and can be found in policies that aim to promote private sector innovation.

An Enabling Environment

The abundance of capital from natural resources, coupled with the vision of political leadership in the UAE, creates an enabling environment where policies for sustainable diversification away from hydrocarbons can be debated, codified, and implemented. These programs focus on investments in human capital and providing an institutional context designed to incentivize innovation through public-private partnerships for research and development. In what follows we examine focus on policies and projects that have allowed the UAE to successfully attract private investments in renewable energy during a period of high oil prices and regional political instability.

Human Capital Development

For the UAE to meet and exceed their renewable energy targets, they must be able to identify, train, and attract the human capital necessary for research and development as well as management of advanced technologies, systems, and facilities. By some estimates this will include 25 thousand jobs requiring technical experience in the sciences, engineering and mathematics by 2030.v As this growing need has been acknowledged by analysts and pundits, the political leadership within the UAE has made a concerted effort to address any shortfall in qualified human capital at all levels.

At the highest level, this includes the establishment of various forums and exhibitions related to renewable energy such as the World Future Energy Summit (WFES), the largest conference of its kind on renewable energy, water, and sustainability through which public and private sector firms and institutions discuss, debate, and showcase cutting-edge solutions in the renewable energy space. For example, this year’s summit included over 32,000 attendees from 170 countries and 900 energy companies from 47 countries.vi Venues like WFES showcase the UAE as a world leader in renewable energy and offers opportunities to attract established high quality professionals to renewable energy. Moreover, the UAE has made investments in establishing energy-related research and development centers with specialized graduate degree programs to build domestic human capital. One good example of this is the Masdar Institute, a joint venture between the Massachusetts Institute of Technology and Masdar.

Institutional Context

Above and beyond its investments in human capital, public and private sector actors also recognize the need for an institutional context that spurs innovation in renewable energy. In the UAE this includes, among other things, the creation of enabling institutions and laws, including the establishment of specialized entities, to incentivize research and development in both the public and private sector. One good example of this effort at work in the public space is the institutionalization of innovative practices and tools, by requiring government entities to reduce spending and dedicate savings to research and development. This mandate is broad by design, and it funds internal and external programs such as national training programs and innovation incubators.

The UAE has further institutionalized their vision for a clean energy future by creating designated institutions for carrying out the vision. Masdar is entirely devoted to the development of sustainable low-carbon energy projects, and manages the Masdar Initiative—the UAE’s hallmark multi-billion dollar investment in renewable and alternative energy and clean technology. Masdar supports innovations in clean energy technologies from research and development to commercialization and scale-up, by housing laboratories for new technology research and financing new solutions. With an initial focus on concentrating solar power, Masdar will continue to support projects in solar photovoltaic, wind, waste-to-energy and solar cooling.

Masdar is perhaps best known for its headquarters at Masdar City, the world’s first zero-carbon, zero-waste, car-free city, which uses 20 percent of the energy used by a city fueled on conventional energy of the same size. The City has the potential to house 1,500 clean-tech businesses—creating a renewable energy research hub of universities and research facilities developing, piloting and commercializing new renewable technologies. While there are many other initiatives for promoting private sector involvement within the UAE, we conclude our case study of the UAE’s energy diversification policy by focusing on the creative public private partnerships that have enabled the state to pursue its ambitious renewable energy targets with support of the private sector.

Public-Private Partnerships

In an approach that is differs from many other MENA countries, the UAE has shaped its energy sector through the involvement of the private sector. Even in traditional oil and gas exploration and production, the UAE has a history of partnering with International Oil Companies including BP, Oxy, Shell and Total, for the riskiest stages of oil development, representing the government’s ability to anticipate and manage risk, work effectively with external partners and galvanize international expertise. Similarly, in conventional electricity generation and water desalination, the UAE has partnered with international power project developers including GDF Suez (France), SembCorp (Singapore), KEPCO (Korea), Tokyo Electric Power (Japan), to attract over $17 billion of foreign investment and assume the risks of operating and maintaining the power plants.

Policies to encourage foreign investment and involvement have propelled the country’s ranking on the World Bank of Doing Business Index to 33 out of 183 for 2012. For example, in Dubai companies incorporated in free economic zones enjoy 100 percent foreign ownership and expatriation of capital and profits, full exemption from import, export income and corporate taxes, and low cost operations coupled with a one-stop shop service that eliminates red tape and facilitates quick and easy business registration. Equally interesting work is being done to encourage innovation within the private sector. One policy that promotes innovation is the designation of innovation zones governed by special rules and regulations, including foreign ownership, tax exemptions, and labor assistance. These terms have made the UAE a very attractive destination for establishing their headquarters for research and development operations.

These services are particularly salient for renewable energy developers interested in benefiting from the laboratory research and development facilities in Masdar City, which simultaneously serves as an incubator of new technologies. Commercial banks are also attracted by the UAE’s renewable energy projects; the 100 MW Shams 1 concentrated solar power plant benefited from financing from a syndicate of international commercial banks which included BNP Paribas, Societe Generale alongside the National Bank of Abu Dhabi, and is supported in partnership with developers Abengoa Solar and Total.

Despite the attractive investment opportunities for private firms at Masdar, the lion’s share of renewable energy development is financed by the UAE’s four investment companies—all majority-owned by the state. These government-backed entities include the Mubadala Development Company, the International Petroleum Investment Company, the Abu Dhabi Investment Council, and the Abu Dhabi Investment Authority. The Abu Dhabi Investment Authority is one of the world’s largest sovereign wealth funds, with $627 billion in assets invested in infrastructure and development projects within the UAE and abroad, including in conventional and renewable energy projects. The investment groups are able to channel government funds into infrastructure projects through effective partnering with the private sector at the global level. For example, Masdar Power, a Masdar subsidiary, has established a joint venture with Spanish-based engineering firm SENER to develop, demonstrate and deploy next generation concentrating solar power technologies.

Although these public funds drive investment into the UAE’s burgeoning renewable energy sector, having the government as the main driver of alternative energy investment comes with disadvantages. Government control of bidding processes are often plagued by special interests leading to economically inefficient outcomes. For example, project developers bidding on construction projects of solar generation plants are required to use Masdar-developed technology instead of their own, leading firms to invest more in politics than innovation. Oil and gas developers with existing relationships with the state are also cautious, forgoing opportunities to bid on solar projects in favor of maintaining a relationship with Abu Dhabi and access to the energy sources.

Despite these challenges, the UAE’s pivot towards green energy would not have been possible without government support. New renewable technologies have high initial costs and a long time is needed to recover the investment, and therefore require regulatory and financial support from government at the initial phases. Government support will be necessary to take new products through development and decrease the cost as a result of economies of scale.viii

Finally, in order to promote a real pivot towards a green energy future, the UAE must roll back subsidies on power and water. This will give citizens the impression that both are abundant resources, and promoting overconsumption as opposed to environmental conscientiousness and conservation. Currently, the UAE spends about $2500 per person in subsidies for fossil-fuel consumption, making it the 8th country in the world with the largest subsidies.ix Low oil prices in early 2015 present an opportunity to reduce subsidies, which is both good policy and send a message to the public that conservation is critical for a green energy future.

 

Works Cited

i “United Arab Emirates Profile.” US Energy Information Agency, accessed January 2015. (www.eai.gov)

ii “BP Statistical Review of World Energy.” British Petroleum (BP). June 2013 (www.bp.com/statisticalreview)

iii “Saudi Arabia Profile”. US Energy Information Agency, accessed January 2015. (www.eai.gov)

iii “Saudi Nuclear Energy.” Reuters, January 15, 2015. Accessed March 23, 2015. (http://www.reuters.com/article/2015/01/19/saudi-nuclear-energy-idUSL6N0UY2LS20150119)

iv “Thirteen Power Quotes from UAE’s Innovative Leaders.” Elan. December 2, 2014. Accessed February 23, 2015. (http://www.elanthemag.com/uae-national-day-12-powerful-quotes-uaes-innovative-leaders/)

v Sooriyaarachchi, Thilanka et al. “UAE’s renewable energy goals depend on skilled workforce.” The National. June 29, 2014. Accessed February 22, 2015.

(http://www.thenational.ae/uae/science/uaex2019s-renewable-energy-goals-depend-on-skilled-workforce)

vi “Leading the Debate on Future Energy and Sustainability 2015.” Abu Dhabi Sustainability Week Report. 2015. (http://www.worldfutureenergysummit.com/Portal/Content/Documents/ADSW-Brochure-2015.pdf)

vii “Masdar Initiative Supports Clean Energy.” Embassy of the United Arab Emirates. Accessed February 23, 2015 (http://www.uae-embassy.org/uae/featured-stories/masdar-initiative-supports-clean-energy)

viii Amedi, Zoheir. “Energy Transition in Rentier States A Multi-Level Perspective,” in The Political Economy of Energy Reform: The Clean Energy-Fossil Fuel Balance in the Gulf States, ed. Giacomo Luciani and Rabia Ferroukhi. (London: Gerlach, 2014), 109. (http://www.amazon.com/Political-Economy-Energy-Reform-Energy-Fossil/dp/3940924407)

ix Theeyattuparampil et al. “Clean Energy Solution Choices for the Power Industry in the GCC,” in The Political Economy of Energy Reform: The Clean Energy-Fossil Fuel Balance in the Gulf States, ed. Giacomo Luciani and Rabia Ferroukhi. (London: Gerlach, 2014), 215. (http://www.amazon.com/Political-Economy-Energy-Reform-Energy-Fossil/dp/3940924407)

You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *