Year on year, the drawbacks of the energy-intensive development model in the Gulf states are becoming starker. The Gulf Cooperation Council (GCC) countries of Saudi Arabia, the United Arab Emirates (UAE), Kuwait, Oman, Qatar and Bahrain form a formidable consumer of energy – practically all of it oil and gas with no carbon dioxide abatement. The GCC countries, despite their relatively small populations, now consume about as much oil and gas as Indonesia and Japan combined, or more traded energy than the whole of Africa. Demand is growing fast – at an average of 6% over the last 10 years. Electricity demand in Abu Dhabi and Qatar recently registered double-digit growth. This is a troubling trend. If the region’s fuel demand were to continue rising as it has over the last decade, it would double – along with emissions – by 2024.
The situation threatens sustainability on several levels, and is exacerbated by groundwater depletion and an increasing reliance on oil or gas fuelled desalination. Most worrying for the region’s economic planners is the fact that this growth in energy consumption is not generating value for the economy. On the contrary, the pressure it creates on potentially exportable resources, the growing subsidy burden and pollution are depleting national assets as well as health. In terms of levels of energy intensity (units of energy per unit of GDP), the GCC countries are global outliers. As a region their energy intensity is high and rising, indicating the shrinking value of domestic resource use for the economy. With prospects for a downturn in either the market price for oil or the call on OPEC (MEES, 5 April), value creation in the rest of the economy is even more urgent.
In the last few years, several GCC government officials have publicly recognized that current energy consumption patterns are bad for the economy. It has become a recurring topic in the local media, with commentators demanding a response in the form of clear strategy and the beginning of a serious debate on the sanity of keeping energy prices so low relative to incomes and turnovers across the board. Perhaps most pertinent to ordinary citizens is the tag line on a popular Saudi twitter feed (@Save_Wealth) which reads (in Arabic) “Energy efficiency is one of the most important ways of conserving the country’s oil and water resources… so let us take care of them for future generations”. Generational inequity of resources is one of the biggest global challenges and nowhere should it be felt more keenly than in those countries where more than 80% of government revenue comes from depletable resource exports.
In this context, Chatham House worked with partner institutions, policy-makers and technical experts in Saudi Arabia, the UAE, Oman, Qatar and Kuwait to support practical strategies to conserve energy. Between 2011 and 2013, discussions took place at six workshops, including representatives of over 60 relevant local institutions. Given the shared challenges, the final report makes practical stakeholder-led recommendations from a GCC-wide perspective. Here are some of the findings:
CLEAN ENERGY AMBITIONS
Figure 1 shows the targets and proposed targets as of mid-2013 across the region. All GCC countries now have clean energy plans or targets and there are several conservation initiatives. These include Saudi Arabia’s emerging efficiency master plan scheduled for 2013, Abu Dhabi’s comprehensive cooling plan approved in 2012, electricity and water price reform and government ‘lead by example’ measures in Dubai under its integrated energy strategy, innovation in green buildings standards in the UAE and Qatar, and Oman’s work on reducing electricity transmission losses. Comprehensive development strategies that aim at a ‘low carbon pathway’ or ‘green growth’ are also emerging (in Qatar and the UAE).
These are underpinned by several initiatives to draw up national strategy for energy conservation or target efficiency in specific areas, namely electricity generation and buildings.
But in all GCC countries the effectiveness of plans hangs in the balance, chiefly owing to governance challenges, lack of market incentives and unpredictable political support.
The GCC countries have an advantage in their potential for financing efficiency and introducing renewable energy, the relevant infrastructure and communications technology. However, achieving this requires significant shifts in the way governments intervene in and regulate the energy sector. A central challenge is that authority over the energy sector in all GCC member states is fragmented. The responsibility and the capacity to act effectively are scattered between different ministries and regional authorities, particularly on the demand side.
Government leaders are beginning to delegate authority to new or existing institutions to carry out studies and formulate plans for the sector. Often spurred by power crises, coordination in the electricity supply side is more advanced. Abu Dhabi, Saudi Arabia, Oman and Dubai have independent regulators for the power sector. These entities have been instrumental in galvanizing the drive for greater energy conservation. New governance arrangements are also attempting to overcome sectoral barriers. Dubai was the first government to establish an entity for integrated energy policy dealing with both supply and demand side issues and Abu Dhabi has developed a multi-agency ‘Cooling Taskforce’ (although there is as yet no UAE national coordination); Saudi Arabia has a coordinating body for energy efficiency and an agency for making policy on renewable and atomic energy. The progress of these bodies will determine the effectiveness of any plans to save energy.
The message from our discussions in the region was clear:
Where inter-agency coordination, information, a degree of autonomy and resources (invariably conferred through some initial high-level support) have enabled initiatives, there is progress. But where one or more of these factors are missing, good plans are stalled.
Political prioritizing and coordination over strategic energy conservation targets and implementation schemes is even more vital in a context where the job cannot be ‘left to the market’. Graphs 1 and 2 indicate the prices of domestic transport fuels and gas in the GCC. This reveals both their low comparative costs and the wide regional disparity which causes additional losses for some countries through oil smuggling and poses an obstacle to regional trading in gas and electricity that could enhance efficiency.
BALOONING SUBSIDY COSTS
The ballooning costs of subsidies – and in the case of the UAE and Kuwait, gas imports – make a clear business case for government-led efficiency interventions.
Estimates by the International Monetary Fund of the energy subsidy burden on individual governments ranged between 9% and 28% of government revenue in 2011. This is more than is being spent on either health or education, and highlights a missed opportunity to improve the living standards of those who need it most. Even using the Saudi ‘shadow price’ for oil fuel to power generation of $25/B (rather than the real one of under $5/B), a detailed cost benefit analysis of demand side efficiency interventions in the power sector by the Saudi Electricity & Cogeneration Regulatory Authority shows that these would effectively pay back 2-5 times the initial investment between 2012 and 2021.
ENHANCED EFFICIENCY NEEDED
To implement renewable energy ambitions will mean radically enhancing efficiency. Ambitious green growth and clean energy strategies will take time to implement. In the meantime, power and water use is a challenge across the region that should be addressed as a priority.
In fact, demand rationalization in these areas is vital if the vast renewable energy potential of the GCC countries is to be realized. Without it, power demand growth of more than 7% per year will swamp the effect of solar deployment over the next decade.Business models will need to work with or address current energy and water prices, and create jobs for nationals. Most pressingly, the imperatives of conservation must take immediate effect on current and future development plans to avoid locking in resource-wasteful infrastructure.
The size of the prize for coordinated, cross sectoral conservation strategy is significant. Our calculations show that planned clean energy introduction in Saudi Arabia, together with practical technology upgrades, could slow oil and gas demand growth from a conservatively projected 4% to an average of 2.8% per year between now and 2025. Figure 2, shows the results broken down by sector. On our assumptions, the measures would result in savings of between 1.5 and 2 million barrels of oil equivalent (boe) per day – a volume which roughly matches what the country needs to maintain the spare crude capacity so critical to global oil markets. Although the savings would not all be in oil, the sum would be easy enough. If we take a value of $20/boe for gas and $100/b for oil, it would equate to a saving of over $36billion over the course of the year.
Changes to national building codes and air-conditioning standards, if properly enforced, represent the biggest proven savings potential for electricity. The savings potential of the built environment is remarkable. Pilot schemes and practice show that savings of up to 60% of energy demand can result from changes made to existing buildings, and 70% in newbuilds, against the existing average. In addition, urgent attention needs to be paid to transportation planning and addressing the ‘leakage’ of the fuel subsidy through smuggling.
To galvanize and focus action across the energy sector, clear, well-thought-out targets should be introduced. Fossil fuel conservation or CO2 emissions reduction targets and/or a number of per capita consumption reduction targets (Qatar is pursuing these for electricity and water) could be highly effective**.
Cooperation at the regional level would enhance the effectiveness of national strategies. Experience in one country, emirate or city is not necessarily transferred and factored into approaches elsewhere, meaning opportunities to make faster progress are being missed. Alignment and support at the regional level could facilitate standard-setting for buildings, vehicles and appliances as well as standardization of fuel and electricity pricing, thus creating economies of scale, reducing cross border ‘leakage’ and smuggling opportunities and lowering the costs for all.
Key recommendations for cooperation at the regional level include:
• Requesting a detailed sustainable energy strategy with clear practical targets for each country to be submitted at the GCC Secretariat level to enable appropriate regional approaches and goals.
• Centralizing available country energy data on an open source website – this could be maintained by a GCC Secretariat team drawn from each of the countries.
• Sharing studies and methodologies to reveal total energy use in the water life-cycle, the costs of energy resources and the costs to the economy of wasted energy, the environment and human health.
• Developing and setting common appliance efficiency standards – with air conditioning as a priority area.
• Establishing a common progressive average vehicle fuel efficiency standard.
• Establishing a common buildings code and buildings materials standards that will bring step changes in energy and water efficiency (work on this began in late 2012 at the GCC Secretariat level).
• Sharing experience and best practice on standards enforcement and monitoring.
• Hosting an on-going benchmarking programme for industrial efficiency for energy-intensive industries in the region.
• Ramping up joint work on developing, piloting and evaluating low carbon forms of desalination.
• Ensuring the GCC-wide grid is flexible to allow inter-country and potentially inter-regional trading.
• Evaluate the potential to work towards common fuel prices.
• Develop the formula for a common trading price for electricity.
Through these activities, the GCC countries could foster stronger regional integration and raise their international status. Through coordination of existing and scaled-up initiatives and targets, the GCC countries could then punch above their weight with joint CO2 emissions reduction commitments.
GCC COULD BE GLOBAL LEADER
Achievement in setting and meeting sustainable energy goals in the GCC will have global impact. It will affect not only local economies and therefore politics, but also the availability of oil and gas for export and the position of GCC countries in international climate change negotiations. It could also influence the policies of other countries in the region or with similar resource and climatic conditions. For example, in its latest report, the International Energy Agency underscores the dramatic rise in demand for air conditioning that will occur across Africa and the Asia-Pacific region as both incomes and temperatures rise.
In the Gulf, where air-conditioning equipment frequently uses twice as much energy as the best available technology, standards and innovation to cool down using less energy will have global transfer opportunities. The same goes for desalination technology innovation and measures to integrate water demand and supply management.
Likewise, many countries are grappling with the challenge of pricing energy and water efficiently or creating renewables and energy service markets where fossil fuel prices do not reflect costs. If countries in which a tank of petrol currently costs the same as two coffees and electricity bills are negligible can make either energy conservation targets or price reform work, it will inspire others.
*Glada Lahn is Research Fellow in the Energy, Environment & Resources Department at Chatham House. This article is based on the report ‘Saving Oil and Gas in the Gulf’, published in August 2013 and the project on GCC Energy Intensity. The report and more information is available at http://www.chathamhouse.org/research/eedp/current-projects/gcc-energy
**For a more comprehensive discussion of the issues involved in energy target setting in the GCC, see G. Lahn & F. Preston (2013) ‘Targets to Promote Energy Savings in the Gulf Cooperation Council Countries, Energy Strategy Reviews, Vol 2, Issue 1, June. Available at http://dx.doi.org/10.1016/j.esr.2013.03.003