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The Middle East and North Africa (Mena) region has the potential to become one of the world's largest producers of renewable energy.
Renewable energy industry developments combined with the region's potential in wind and solar power could create significant advantage for countries that move to capitalise on them, says a study by Booz & Company.
But how cost competitive are renewables?
In the region, conventional energy is generally cheaper than renewable energy. However, this comparison does not account for the fact that conventional energy is significantly subsidised, and that there are external costs of using fossil fuels for power generation, including pollution and opportunity costs.
Conventional energy subsidies in the Mena region are more substantial than they are elsewhere, and they provide conventional power with a significant unnatural advantage over renewable energy sources.
"Subsidising energy puts an automatic brake on the private sector's development of renewable energy sources, because such sources need to compete with an energy source that is already very cheap and widely available," says Tarek El Sayed, a principal at Booz.
The cost of carbon emissions from fossil fuels should be included in the comparison of different options for power generation and Mena countries could monetise carbon credits through the United Nations' Clean Development Mechanism.
The costs of other emissions are more difficult to value, as they impose an indirect burden on the health and environment of the countries' citizens. Moreover, because subsidies encourage the use of fuel for power generation, this fuel is diverted from being a feedstock for higher value-added products, such as downstream petrochemicals. The potential market value of such products and the positive impact their effective use could have on GDP are not fully factored into the cost of using fuel for power generation.
The cost parity of renewables with conventional sources varies according to countries' resources and existing power sources.
In countries where no cheap hydrocarbons are available, the price of wind power can already compete with that of power attained through conventional generation. In terms of solar energy, the price of PV power generation typically compares favourably with that of power generation from diesel generators. This means PV technology can be a cost-effective replacement for generators in remote locations. "The picture looks different for large-scale, grid-connected solar power, however; it cannot currently compete with the region's fuel of choice, natural gas," comments Ibrahim El Husseini, another principal at Booz.
But, how cost competitive would renewables be in the future?
The cost of solar power continues to drop, thanks to the development of the underlying technology. If historical trends hold, in the coming years annual cost reductions of three to seven per cent for photo voltaic (PV) installation can be expected. As for CSP, it is a much more mature technology, with correspondingly fewer opportunities for optimisation. Based on cost assumptions, the unsubsidised cost of solar PV power in the Mena region could become competitive with that of natural gas between 2015 and 2025, depending on gas and carbon prices.
"The private sector's participation in the development of a renewable energy sector in the Mena region is critical for its expertise to ensure cost efficiency," says Walid Fayad, principal at Booz. The region's governments must take a leading role if renewable energy is to become viable.
They have to develop a renewable energy strategy, put in place the appropriate institutional setting for renewable energy, develop a favourable policy and regulatory framework to promote the development and use of renewable energy, enable technical grid integration and develop R&D capabilities and a deep talent pool.
A renewable energy strategy will require a number of considerations. Governments must assess their renewable resources and technical capabilities. They should consider the economic benefits of creating a manufacturing sector capable of supplying renewable energy projects versus importing the parts for such projects.
In most Mena countries, there is no clear ownership at the government level of issues related to renewable energy. "Governments must appoint and empower an entity to lead the development of policies and regulations and follow up on their implementation," notes El Sayed.
In most Mena countries, the regulatory environment is such that national utility companies define power generation requirements, which they must meet at the lowest possible cost. Accordingly, their delivery models usually involve private developers under independent water and power producer (IWPP) schemes. This procurement model is geared toward large-scale, conventional power stations who take on complex contracts.
Renewable energy projects cannot be readily integrated into this model. "Mena countries must make substantial changes in the regulatory framework to ensure renewable energy projects can fit the model, and create incentives that would kick-start renewable energy investments," says El Husseini.
Because power production from wind and solar sources is intermittent, these sources must be combined with conventional power generation. "This presents a technical challenge but large shares of renewable power generation have been successfully integrated into the grid in other parts of the world," comments Fayad.
