Why the World’s Oil Rich are Investing in Renewable Energy

When most people think of the Middle East, especially the countries of the Persian Gulf, they tend to think of oil and gas.  However, earlier this month the Prime Minister of Spain traveled to the United Arab Emirates and visited Masdar City, the world’s first attempt at a carbon neutral city, commending UAE leadership in promoting renewable energy technologies.  Saudi Arabia last year announced the creation of a similar venture, The King Abdullah City for Nuclear and Renewable Energy, to host university research laboratories and private-sector enterprises involved in low-carbon energy.  Saudi officials announced at a conference in Germany that Saudi Arabia intends to eventually export as much solar energy as it does petrol today with some industry analysts predicting Saudi investment of $120 billion over the next 25 years for development of its renewable energy industry.  Why is it that so much innovation in renewable energy is coming out of the most hydrocarbon rich area of the world?

There are a number of explanations for the Gulf countries focus on alternative energy.  First, they have access to large amounts of capital that they have to find investment opportunities for.  Alternative energy is a hot area and it seems only natural that countries housing some of the world’s largest sovereign wealth funds would seek to invest in an area that they have a lot of experience thinking about and that the rest of the world is pouring into.  Large amounts of politically directed capital also allow for investments that make little sense from a strictly business perspective.  Masdar is unlikely to return its initial capital, let alone make a profit.  Gulf countries view these as strategic investments for the day when the oil and gas runs out.

Second, these countries are experiencing rapid population growth and concurrent rapid growth in demand for electricity.  OPEC quotas are for the amount of oil extracted from the ground, not for the amount exported, so the more energy that can be provided from non-hydrocarbon sources the more oil can be sold for export.  According to U.S. data, Saudi Arabia consumed about 2.4 million barrels per day (bpd) of oil in 2008, up 50 per cent since the start of the decade.

A friend of mine working as a consultant on energy projects in the Gulf also noted another important reason for interest in alternative energy in the region, prestige.  According to a World Wildlife Fund report, the UAE and Kuwait rank first and third respectively in terms of global resources used per person (with the two countries separated by the U.S. ranked as having the second most resource intensive lifestyle).  My friend noted that Emiratis are very image conscious and don’t like to be last at anything.  Being publicly viewed as promoting sustainable energy is a way to remove some the stigma of being called out as having the least sustainable lifestyle on the planet.  Similarly, all the countries of the Gulf Cooperation Council would prefer to be seen as on the vanguard of promoting sustainability rather than the rear guard of environmental destruction.

Finally, there are some political dynamics surrounding investments into nuclear energy on the Arabian Peninsula worth noting.  In the last five years, 13 states in the Middle East have expressed interest in nuclear power.  Saudi Arabia and France signed a nuclear agreement in July 2010 and the UAE and U.S. signed a nuclear agreement in December 2009 that was somewhat controversial.  Some view the interest in nuclear technology by Arab states as a hedge against Iranian nuclear capabilities.  On the one hand, countries may be able to eventually create a nuclear breakout capability that would avoid triggering nuclear sanctions while at the same time the technical knowhow might be transitioned to nuclear weapons in case of an emergency.  A more positive spin would be that these countries are demonstrating to Iran how to generate nuclear power capabilities without running afoul of international norms.  It will be interesting to see whether recent events in Japan alter Middle Eastern countries atomic energy plans.

Welcome to Ideas on Energy

Welcome to Ideas on Energy.  This blog will be focusing on the geopolitics of energy, technologies that could transform the ways we produce and consume energy, and energy poverty, i.e. finding ways to provide electricity to the 1.4 billion people around the world who currently lack access to it.  I may touch on issues related to climate change but this will not be a focus area as there are many other blogs that are dedicated to that issue.  The logic behind focusing on this collection of issues is simply that this is what is interesting to me.

It was while working on development issues in Afghanistan a few years ago that I first became truly aware of the critical importance of access to electricity for human progress.  Sitting in Jalalabad, I heard a local professor of agricultural economics complain about how Pakistani traders would buy up much of the agricultural crop from the area, take it to Pakistan for refrigeration, and bring that same produce back during the winter to sell back locally for triple the price.  The professor wanted the U.S. to build cold storage in Jalalabad so they could capture this economic benefit within the province.

After doing more research we discovered that due to the poor energy infrastructure in Afghanistan even if we built the cold storage facilities it would still be cheaper to send the produce to Pakistan for refrigeration because they were working off of a centralized grid and in Afghanistan the cold storage would have to be powered by diesel generators, which are very costly to keep running.  I suddenly realized that until the power issue was resolved in a more systematic way, there were severe limitations on what kind of economic progress was possible in Afghanistan. I decided I wanted to learn more about energy issues when I returned from my overseas assignment.

I look forward to this blog serving as a forum for conversation on critical issues regarding our shared energy future.