Several governments in the Middle East have set ambitious targets for the development of renewable energy, which will give rise to large capital requirements in the region, Fitch Ratings said in a recent report.
Between 2006 and 2016, per-capita energy consumption flat-lined in the European Union (EU), while it grew at nearly 3.7 percent across the Middle East. Consumption in a number of countries in the region, while not growing, has been very high for a long time. Underlying causes are the climate, the extensive use of air conditioning and water desalination plants, and a tradition of subsidies for energy use.
Recent tenders in Saudi Arabia set records for the lowest solar PV and onshore wind levelized cost of energy as at end-2018, at 2.32 c/kWh for the 300MW Sakaka solar PV plant (October 2017) and at 2.13 c/kWh for the 400MW Dumat Al Jandal onshore wind farm (July 2018), according to the country's National Renewable Energy Program.
"In our view, this is largely due to a combination of favorable natural resources and the timing of entry into this market when the technology is more mature and significantly cheaper than before. These factors may prove to be the catalysts that accelerate the region's roll out of renewable capacity," Fitch noted.
According to the report, renewables represent a small share of the region's generation mix, with hydropower having the most meaningful presence of about two percent, and a fraction of a percent for other renewables.
"We expect that the increase in per-capita energy consumption and strong population growth will support a large increase in renewables generation in the Middle East. This reflects governments' desire both to add new capacity and diversify away from a historical dependence on hydrocarbons," it said.
The initiatives to broaden the energy mix are likely to be realized largely through the use of solar PV and wind power, which benefit from abundant renewable resources in the region.
However, challenges for both wind and solar PV generation are likely to include the harsh operating environment, such as sand storms, and the ability and suitability of the grid infrastructure to cope with the additional intermittent capacity, Fitch said.
"Furthermore, the contractor capacity in the market to deliver the build-out at the desired pace, scale and cost could be a constraint. Despite there having been ambitious targets for a number of years, progress has varied across the region, and this trend might continue," the ratings agency said.
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