Carbon targets deter Middle East power project developers

Aapimage via Reuters Connect

• Developers cautious about Middle East power infrastructure projects
• Saudi Arabia alone needs to replace 40GW of power generation
• Renewable electricity provided just 4% of GCC’s needs in 2022

Developers are becoming increasingly wary of bidding for long-term infrastructure deals in the Middle East because the terms go beyond their own carbon neutral targets.

According to industry sources they are particularly struggling to be able to work on projects involving thermal power plants without carbon capture and storage (CCS) because the terms can stretch to as long as 35 years.

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Jim Krane, energy research fellow at Rice University’s Baker Institute for Public Policy, told AGBI that the fact that the power sector builds such long-term infrastructure means that carbon emission targets are a particular challenge. 

“To the extent that a developer or utility has a net zero goal, any project that casts doubt on the credibility of that goal will demand a lot more scrutiny,” said Krane. 

“I’ve seen some utilities building coal or gas plants and describing them as ‘CCS ready’,” Krane said, citing Dubai’s Hassyan station as one such plant.

“Every plant with a smokestack anywhere in the world is theoretically CCS ready. It’s almost meaningless.”

The likelihood is that the growing scrutiny will result in a reduced appetite to work on such projects, an industry source said.  

“This poses a complication for the Middle East as there’s going to be a significantly reduced pool of developers bidding for the development of these assets without a clear decarbonisation program put in place,” they said. 

They added that Saudi Arabia needs to replace around 40 gigawatts of power generation capacity “in the near future” and that this “just simply can’t be done with renewables alone”.

They said that given the Gulf has historically been heavily reliant on thermal power, changing that reliance to a base load in renewable generation power will take time and considerable effort and cost. 

Krane was also circumspect about the speed at which the Gulf can reduce thermal power in its energy mix. 

“I don’t think it’s going to be possible to replace a major portion of the GCC’s thermal generation with renewables so soon, given that power demand is still growing,” he said.

“The best-case scenario would be to use renewables and storage to replace the oil-fired plants first, and then eventually capture the emissions from the gas-fired plants, and/or relegate them to a backup role before phase-out.” 

A steep climb ahead

In 2019, thermal power generated through liquid fuel and gas-fired power stations accounted for 98.7 percent of the GCC’s installed power generation capacity – natural gas accounted for 63 percent and liquid fuel for 37 percent, according to a report published by General Electric in 2021. 

The total installed power generation capacity in the GCC as of 2022 was 170 gigawatts (GW), with most GCC electricity generated by combusting natural gas and oil products, according to research from the Rice University’s Baker Institute for Public Policy.

Renewable electricity provided up to four percent of the total GCC demand, from an installed capacity of 5GW, mainly in Saudi Arabia and the UAE.

Each country in the region has announced its own separate target for increasing the renewable share in the energy mix.

Saudi Arabia has set the most aggressive target in the Gulf, with the aim of having renewable energy generate 50 percent of electricity by 2030, followed by the UAE, which has set a 27 percent clean energy target by 2021 and a 44 percent target by 2050.

However, the region has a steep climb ahead in achieving this.

The Middle East’s renewable generation capacity stands at only 29GW or about 1 percent of the global total. The region is the worst-performing worldwide for investment into renewable electricity sources, according to research published last month.

In 2021, only 0.2 percent of Saudi Arabia’s electricity came from renewables. The GlobalData consultancy forecast that its renewables capacity will be just 1.5GW by the end of 2023.