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Middle East utilities vs distributed generation: a losing battle

 

Distributed renewable energy generation offers many opportunities for power sectors in the Middle East, including the ability to increase the resilience of the power system and reduce both the cost of subsidies – which weigh heavily on states’ budgets – and the need for grid expansion. However, state-owned electricity utilities are concerned about losing revenue and their monopoly of the sector. Changes to the business models, tariffs and culture is the best way for utilities to remain relevant.

 

The concept of decentralised power generation has long faced opposition in economies across the region. Private sector engagement in the power sector has been on the rise, but in all markets its share remains marginal compared to that of the state.

Most energy sectors are still dominated by publicly owned electricity utilities which, by subsidising end-user tariffs, have played a key role in the social contract between the state and its citizens.

Although generous subsidies and elevated technical and non-technical losses have resulted in high fiscal deficits, accumulated public debt and underinvestment – especially in grid enhancement – governments have traditionally resisted moves to restructure the power sector because it could weaken political approval and lead to social unrest.

However, as the economic slowdown continues to take its toll – the region’s expected growth for 2019 was recently halved to 1.3% from an initial estimation of 2.5% – governments are increasingly turning to electricity tariff hikes, while encouraging greater adoption of renewable energy generation to reduce the burden of subsidies.

 

New frameworks and incentives promote decentralised renewable energy generation

The potential for distributed generation is significant: The majority of public utilities, which rely on the single-buyer model and subsidies, currently lose money whenever they generate or purchase power. Distributed generation reduces the demand from the utility’s side, thus narrowing the state’s fiscal deficit, and reduces the need for grid expansion, enabling investments to focus instead on grid modernisation.

Several economies have developed frameworks, incentives and financing mechanisms for decentralised generation from renewable sources. Jordan, Lebanon and the UAE have adopted net-metering policies, while Oman’s Sahim scheme has adopted a feed-in tariff to enable financial compensation for power exported to the grid. Dubai’s Shams Solar Programme, which aims to have solar systems on every rooftop by 2030, should include a serious effort to adopt a wheeling policy considering the most of city’s buildings are high rises. Meanwhile, Lebanon’s NEEREA and Jordan’s JREEEF financing mechanisms provide low-interest loans for energy projects, although small and medium-sized enterprises – which constitute more than 93% of businesses – haven’t been able to tap into these funds easily.

While these mechanisms have been slow in building momentum for distributed generation, falling renewable energy prices and increasing utility tariffs are driving up demand:  the number of on-site renewable generation systems increased by 60% from 2012 to 2016 across the Middle East, despite still accounting for a small share of the total installed renewable energy capacity.

 

Decentralised power generation poses risk to utilities’ revenues

Despite these schemes, most utilities in the Gulf still consider distributed generation to be less economically viable than utility scale. On-site generation also poses a threat to utilities’ revenues, as the bulk of their income typically comes from users in high-value energy bands, and these are usually the first to consider distributed renewable energy generation to reduce their electricity bills.

Many governments are opting to significantly hike tariffs on high-paying customers as well as the commercial sector – the second highest electricity user in the region – in an attempt to offset the cost of subsidies, while safeguarding the most vulnerable  and some productive sectors, such as industry. By doing so, they are unintentionally driving consumers to seek distributed renewable energy generation, mostly rooftop solar.

 

Utilities must adopt new business model to reduce costs, increase resilience

Utilities should seek to capitalise on, rather than block, the growth of decentralised renewables generation, considering the potential it has to not only reduce consumer costs and state subsidies, but also increase resilience in an otherwise highly vulnerable electricity sector. Even Saudi Arabia, sitting on the throne of oil exporters and self-sufficient in natural gas, with a 21% reserve capacity margin, suffered an electricity black-out in its southern region in early June, highlighting the need for alternative power generation models.

Middle Eastern economies require a change in culture, whereby the state shifts from being the provider of electricity services to an enabler of a thriving power market and overall economy. The complexities and intermittencies of renewable energy technologies coupled with rapidly increasing electricity demand – which is being fuelled by population growth and adoption of technology – have already killed the old utility model, even if it is still dominant across the region. Some economies may try to resurrect it in order to safeguard power, but that would only lead to further fiscal deficits and loss of revenues in the long run.

Utilities should, therefore, reconsider their business models and find new revenue streams within the distributed renewable energy market. The proliferation of on-site systems could ease the burden of subsidies and lessen the impact of tariff hikes, while enabling an optimal tariff restructure which the utilities drastically need, namely, one that emphasises time-of-use rates, promotes optimal usage of renewable energy and enables better equity.

These measures would not only ensure the survival of the electricity utilities, but also ultimately reduce their costs, enabling investments in a modern grid and a more robust power market.

 

Jessica Obeid is an independent energy consultant and academy associate at Chatham House, where she previously served as resident fellow in the Energy, Environment and Resources Department. Before that, she was chief energy engineer at the United Nations Development Programme in Beirut. She holds a master’s degree in Political Sciences and a bachelor’s degree in Electrical Engineering.

 

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