The Role of Renewable Energies in GCC-Japan Relations





The Role of Renewable Energies in GCC-Japan Relations

Noriko Suzuki
Director
Gulf Research Center Foundation Asia
Japan

 

The Riyadh Economic Summit held on 24th January, 2013 included as one of its key agenda points the launching of the "borderless energy initiative" as part of the "Arab Strategy for developing renewable energy applications: 2010-2030." This strategy is based upon the projections of the Arab Ministerial Council of Electricity that the average annual growth in demand for electric power will touch 6 percent during 2010-2020 before falling slightly to 4.5 percent during 2020-2030. The Arab focus on renewable energy will create an environment of healthy competition between global players such as Japanese and western corporations and support the smooth functioning of the market, thus improving its sustainability. Additionally, it will help in raising sufficient domestic financial resources to enable more investment in energy projects, not only in the GCC countries but also in the wider Arab region. Furthermore, it will encourage foreign direct investment (FDI) in th is area.

Following the Fukushima disaster of 2011 and also reflecting its growing sensitivity to global environmental concerns, the debate in Japan over the role of nuclear power has become very active. In conjunction, there is an emphasis in Japan to work to enhance the safety of nuclear power within the Gulf region, as part of Japan's global energy initiative under 'Abenomics'. Despite the Fukushima disaster, Japanese nuclear power technology is still considered to be among the best in the world. In this context, Japan has a substantial opportunity to contribute to the nuclear power industry in Gulf region as well as in the rest of the world. Reflecting this, Japan's renewable energy interests, both nuclear and solar energy, within the Gulf region have substantially increased, with both the Japanese government and Japanese companies keenly focusing on securing such projects.

Japan's nuclear energy related discussions with Saudi Arabia developed during the visit of Japan's Minister of Economic, Trade and Industry (METI), Mr.Toshimitsu Motegi to Riyadh in February 2013. This is a part of Prime Minister Abe's new initiative of enhancing political and energy related relationships between Japan and the GCC countries.

One of Japan's flagship solar projects in the GCC is the electricity generating plant, based on solar power, located on Farasan Island in the Jizan region of Saudi Arabia. Since Saudi Arabia is potentially the biggest solar energy market in the GCC, this project represents a significant step in Japan-Saudi cooperation.When completed, it will represent a 500-kilowatt plant with the objective to save transferring the equivalent of 28,000 barrels of diesel fuel to the island. As such, it is a prime example of the on-going efforts to address the ever-increasing regional demand for electricity. The facility was constructed by Solar Frontier (a joint venture between Showa Shell Sekiyu and Saudi Aramco), following an agreement with Saudi Electricity Company (SEC) to introduce cleaner energy into the Kingdom.

Since 2006, Saudi Arabia's energy demands have registered an annual growth exceeding 7 to 8 percent, and peak loads have jumped from 23,000 to 48,000 megawatts. The same rate of growth is expected to continue throughout the next decade. Solar power will enable the authorities to meet some of this growing demand. Collaboration with countries such as Japan, which is amongst the leaders in this field, together with technical expertise from King Abdullah City for Science and Technology (KACST) and King Abdullah City for Atomic and Renewable Energy (KACARE), can contribute significantly to solar power development in Saudi Arabia.

Apart from Saudi Arabia, MASDAR as UAE's flagship for renewable and future energy projects represents a further important development. Under the UAE's leadership, this project was launched in 2006. At that time, people questioned why such an oil and gas rich country was venturing into renewable energy and deciding to embark upon clean-tech investments. The announcement for MASDAR was thus a first step that positioned Abu Dhabi and the UAE at the center of renewable energy within the GCC and the Middle East. One of the key factors behind this success is the establishment of the MUBADALA Development Fund (UAE's own sovereign fund) in support for MASDAR's continued development. This is a key incentive to further underline the UAE's further investment in renewable energy and sustainable technologies ahead of other GCC countries. At that time, renewable energy, energy efficiency and climate change were very low on the agenda of most countries within the GCC r egion.

Qatar is also keenly assessing the potential advantages of developing renewable energy, especially in order to enhance their capacity to export electricity within GCC countries. The upgrade of Qatar's power grid interconnection, combined with solar power, will expand Qatar's energy export capacities, not only to the GCC but also to Egypt and Europe. According to Fahad bin Mohammed Al-Attiyah, Chairman of Qatar National Food Security Programme (QNFSP), an estimated 80 percent of Qatar's total water desalination process will soon be powered by solar energy. Qatar is planning to produce 1,800 MW from solar power sources from 2014.

Following GCC developments in this area, the Japanese involvement in the field of renewable energy in other GCC countries continues to grow. The Hitachi Plant & Technology's feasibility study, relating to solar cooling facilities in Abu Dhabi and Solar Frontier's involvement in a solar power test project in Abu Dhabi are both noteworthy in this regard.

A look at the solar energy market in Europe, which was once the driving force of such projects in global markets, could be instructive in identifying key issues which are likely to affect the future development of solar energy. One of the critical issues is that initially, due to the boom in solar energy projects in Europe, the pricing of solar panels was set at uncompetitive levels. Secondly, the Power Purchase Agreement (PPA) of solar energy in Europe was set at a higher price than that of traditional, more conventional energy supplies. As a result, solar projects in Spain and Germany have experienced something of a short-term bubble. Such conditions proved unsustainable and have resulted in the failure of a leading solar panel company, Q Cells. In addition to this, the fragile global economic situation, particularly in Europe, has reduced the potential to develop solar energy projects elsewhere in the world. As a result, the potential for the GCC region to further development of solar power projects has grown.

Most Japanese solar companies are subsidiaries of larger conglomerates. This enables them to take a relatively long-term view as regards development projects as well as providing them with substantial resources to develop projects, including within the GCC. A general absence of European and Korean competitors in the area also provides Japan with the opportunity to establish itself as a global player within the solar energy market, using GCC's solar projects as pilot projects.

Within the Gulf States, the cost of renewable energy, especially solar, continues to be high when compared to the price of more traditional energy sources, such as gas turbine power generation, which remains a key source of power supply in the GCC countries. This explains why it has historically been more difficult for these countries to modify their energy mix. Additionally, obtaining long-term PPAs on energy mix projects from the GCC governments has, until now, not been easy. Given the global energy situation, obtaining competitively priced gas allocations in the GCC has increasingly become a significant issue within the region. As a result, new technologies, including solar, will become an increasingly important factor for the GCC countries.

Due to higher global demand for LNG, according the METI of Japan's most recent trial calculation, Japan's purchasing price of LNG from GCC is three times higher than that from the USA, South America and West Africa. The reason behind this is that Japan and the GCC have an established agreement that Japan's purchase price for LNG will be set with reference to the price of crude oil.

Following the impact of "Abenomics" (after the current Japanese Prime Minister), which has driven the Yen exchange rate lower, coupled with higher domestic electricity prices and the expected further development of ties with the USA, Japan is currently reviewing how to diversify its global energy sources. Following Prime Minister Abe's recent meeting with President Obama, the Trans-Pacific Partnership's (TTP) impact on Japan could include the purchase of cheaper supplies of shale gas and oil from the USA, reflecting Japan's position as a close ally of the US within the Asia Pacific Region.

However, Japan will likely remain the largest purchaser of oil from Saudi Arabia, as well as a dominant LNG purchaser from Qatar and the UAE. Having said that, Japan's commitment to joining TPP will open a new pillar of Japan-GCC energy relationships, especially reflecting Japan's growing increase in global environmental concerns.

New energy trends developing within the GCC states include more energy efficient buildings, district cooling, metering and grid interconnection, and these trends will increasingly influence the direction of energy policy. It is likely that multi-billion renewable energy projects will feature in the GCC and other Arab countries during the coming years. For example, during 2013, renewable energy projects worth nearly $17 billion are planned in Saudi Arabia while the UAE and Kuwait have plans for projects worth about $4.2 billion.Table 1 shows the list of renewable energy projects expected to come up in the GCC during 2013.

Japan and the GCC will continue to move forward with renewable energy collaboration, which is likely to increase in both size and scope. The shale gas revolution will ensure heightened public interest in the changing energy landscape and the focus on new sources of energy will increase. Consequently, Japan's further involvement in renewable energy projects in the GCC can be expected. Japan is now at an important juncture in terms of taking greater leadership within Asia and developing its relationships with Saudi Arabia and other Gulf countries, as well as strengthening its ongoing ties with the US. Japan's growing focus on renewable energy in the GCC is likely to lead to an expansion in Japan-GCC relations, which are underpinned not only by political and economic conditions, but also by the industrial ties existing between the two regions.


 














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