See offer
Return to News Categories

ALL NEWS SECTIONS:
MOST POPULAR SECTIONS:
Cattle - Hogs / Livestock News Currencies News Energy News Grain News Index News Interest Futures News Metals Futures News Reports: Crops, CFTC, etc Soft Commodities News

Futures and Commodity Market News

Middle East renewables programmes to withstand crisis

Mar 26, 2020 (MarketLine via COMTEX) --

The ongoing coronavirus crisis and low oil prices have made the region's oil-exporting economies that have identified tourism, hospitality and logistics as key pillars of their economic diversification programmes especially vulnerable.

The interlocking crisis could also affect the region's nascent renewable energy programmes. Up to 90GW of renewable energy capacity, mainly solar and wind power, is planned across the Middle East and North Africa (MENA) region over the next ten to 20 years.

Of these, an estimated 15GW are under execution, while half of that capacity is under the tendering phase. Egypt, Saudi Arabia, Morocco and the UAE have some of the region's largest renewable energy programmes.

"There is potentially two to three months delay in new project awards and implementation as a result of the ongoing crisis," says Ramses Khalil, general manager for Saudi Arabia and Egypt of Australia-based Worley. "But the renewable energy programmes in the region will continue regardless of the price of oil becauseArenewable energy is a direct substitute for electricity generated from fossil fuels."

Demand growthNotably aAsignificant economic contraction will inevitably reduce demand for electricity and water over the short-term. The scale of the measures being undertaken to mitigate economic risks of a similar outbreak in the future could also dampen long-term demand.

However, a short-term slowdown will not necessarily present a shock to the region's electricity markets, a senior consultant tells MEED.

"On the demand side, tariff reform has already significantly slowed demand growth in the GCC countries," explains Brendan Cronin, management consulting head in the Middle East at consultancy Afry.A"Covid-19 means that an overall fall in demand growth is now highly likely for 2020. Population and economic growth fundamentals will mean that demand growth will return in to 2021 and beyond, but the level of growth depends on the future oil price."

On the supply side, it is understood that the independent power producer (IPP) tender pipeline is driven less by demand growth and more by the potential to reduce gas cost by moving towards low-cost renewables, such as solar PV and wind, and seawater reverse osmosis (SWRO) desalination technology.

"We need to therefore look at what is happening in the gas market and focus on the forward rather than spot prices," Cronin tells MEED, adding that Afry expectsAthe international netback gas price for 2023 to be around $4 a million British thermal unit (MMBtu), which is down $1.5/MMBtu since the start of the year.

"This is still at a level where new renewables and reverse osmosis [projects] can deliver savings to the system so these tenders should proceed," the executive explains. "But uncertainty has certainly increased as offtakers and policymakers take time to re-assess."

Supply chainSimilar to other industries, the energy sector has been implementing major adjustments to mitigate the severe disruption in the global supply chain seen over the past two months.

"We have seen that some developers have been forced to switch away from Chinese components at greater cost to the developer," points out Cronin. "However, the power development supply chain is global and has driven down costs significantly. We do not think that this will fundamentally change."

The current situation has demonstrated that constructing an IPP has risks that cannot always be anticipatedAand, as Conin says, "Covid-19 may lead to increased equity return expectations."

Project funding and finance risksThe ongoing crisis is expected to affect project funding and financing availability. Prior to the crisis, the region, particularly Abu Dhabi, Dubai and Saudi Arabia, led the world in terms of low tariffs for independent power and water projects.

This was made possible primarily by the availability of financing from international and local investment companies, equity funding by state clients, and the rapid reduction in engineering, procurement and construction (EPC) costs as new technologies become available.

However, the global nature of the supply chain means IPPs and independent water projects (IWPs) that are being delayed now could come back to the market simultaneously once the system is restored, potentially limiting the availability of financing for IPPs and IWPs in the region.

"That is a likely scenario that could slow down IPP implementation post-crisis," points out a DIFC-based senior transaction adviser. "Some international investment banks could set up exposure limits by sector or by country."

Cronin also says there is a risk of credit spreads increasing as government offtakers will be seen as less creditworthy in a low oil price and low growth environment.

However, he expects that the impact will be small for most of the GCC states with the exception of Oman. "Oman's budget deficit in combination with low oil prices is going to make project funding challenging in the current market," he said.

Despite these risks, it is expected that fully-fledged IPP projects will have better prospects than energy projects that are being procured on an EPC basis due to the reduction in state budgets. "In countries like Saudi Arabia, the full IPPs will be a little easier [to implement] compared to EPC projects, which could come to a halt," the transaction adviser warns.

This implies thatArenewable energy IPPs such as those being procured under the kingdom's competitive bidding process have a higher likelihood of pushing ahead compared with the schemes being planned through direct negotiations.

"The government revenue is proportional to oil prices," one of the consultants explains. "We make more, we pay more; we make less we pay less, that's inescapable."

This article is published by MEED, the world's leading source of business intelligence about the Middle East. MEED provides exclusive news, data and analysis on the Middle East every day. For access to MEED'S Middle East business intelligence, subscribe here.A

http://www.datamonitor.com
Republication or redistribution, including by framing or similar means,
is expressly prohibited without prior written consent. Datamonitor shall 
not be liable for errors or delays in the content, or for any actions 
taken in reliance thereon

Copyright (C) 2020 Datamonitor. All rights reserved

Please read the End User Agreement.
By accessing this page, you agree to the terms and conditions of the End User Agreement.

News provided by COMTEX.


Extreme Futures: Movers & Shakers

Hottest

Actives

Gainers

Today's Hottest Futures
Market Last Vol % Chg
Loading...

close_icon
open_icon