Prioritizing Renewable Energy in a Time of Fiscal Austerity
Surging population growth, large-scale infrastructure investment, and economic development progress have led to increased energy demand in the GCC states.
Beam Down Pilot project, a joint pilot project of the Masdar Institute of Science and Technology, Japan's Cosmo Oil Company, and the Tokyo Institute of Technology at Masdar City in Abu Dhabi, United Arab Emirates, Jan. 16, 2011. (AP Photo/Kamran Jebreili)
Executive Summary
Surging population growth, large-scale infrastructure investment, and economic development progress have led to increased energy demand in the Gulf Cooperation Council states. Since late 2014, the new normal of low oil prices has necessitated fiscal constraints and at the same time prompted greater interest in renewable energy sources. It is therefore an opportune moment to examine the demand for and supply of renewable energy finance. Making renewable energy work in the GCC states would meet long-standing economic diversification goals. Seizing the moment for change would also take advantage of shifts in global capital markets that have generated new products for infrastructure and energy finance. Asking why now, this paper contextualizes renewable energy investment and production within the current fiscal challenges of the Gulf Arab states.
The decline in oil prices since late 2014 has created a changed policy environment in which structural reforms in the GCC states are both necessary and politically feasible. There is general public acquiescence to the need for economic diversification away from oil revenue as well as for the provision of energy from renewable sources for domestic consumption. The introduction of subsidy reforms and subsequent increase in the price of fuel, electricity, and water across the GCC states has been met, for the most part, with little confrontation.
Regulatory reform within the financial sector could provide incentives for innovative financing of the renewable energy infrastructure. The financing of renewable energy within the Gulf states will require state investment, as well as public-private partnerships including foreign direct investment. The current regulatory framework to encourage partnerships and foreign investment is varied across the Gulf Arab states, leaving many gaps in insolvency and dispute settlement processes.
The short term could be an opportunity for renewable energy finance and innovation, as the global climate for infrastructure investment improves. The risks, however, are many: a steep increase in the global price of oil and gas could derail a diversification effort, while a sharp reduction in government outlays could create recession and worsen the investment climate for infrastructure development.
As Gulf Arab governments adjust to fiscal deficits driven by lower oil prices, the state, traditionally the leader in economic development, is under pressure to utilize available finance from the private sector. In labor markets, the state will need to reassess its role in providing the bulk of job creation for Gulf citizens, as well as question its reliance on low-wage foreign labor. These recalibrations of the Gulf economic development model have been under discussion in the “visions” of national development plans for some time. But the necessity of expeditious structural reforms is now far more pressing. Diversification away from resource-dependent state spending will require changes across the economies, and the societies, of the Gulf Arab countries.
This paper is a part of AGSIW’s Visions of Change series, examining how the Gulf Arab countries are addressing reduced hydrocarbon revenue and responding to pressures to liberalize their economies. This series engages how these efforts are unfolding across the region, by sector and country, to underline the challenges, opportunities, and risks of innovation and economic change.
The views represented herein are the author's or speaker's own and do not necessarily reflect the views of AGSI, its staff, or its board of directors.
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