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High energy intensity in the Middle East

Five reasons why the sands of time are running out!

The Arabian Gulf countries’ economic success is undeniably founded on oil & gas exports, energy intensive industries and lifestyles. Yet, the time is right to take a closer look at energy efficiency. Many decision makers are now seriously embracing efficiency improvements – for good reasons.

As the summer heat kicks off in the Middle East, cooling loads in buildings reach their annual peak levels once again. As 70% of energy demand in Gulf countries typically comes from commercial and residential sectors, this puts a heavy burden on utilities, grid infrastructure and government budgets.

The reality is that the whole region needs to implement energy efficiency improvements now. Here are five main reasons, which explain how energy efficiency is gaining market acceptance in the Middle East:

1.    Energy price increases are inevitable

The Gulf countries’ heavily subsidized energy prices are starting to impact government budgets, while record-high energy intensity threatens economic competitiveness. Take, for example, Abu Dhabi, where an estimated $4 billion were spent last year alone to support low energy prices. The direct subsidy makes up for more than 50% of true electricity costs of end consumers. Next to subsidies, the necessary high investments in generation capacity and grid extensions in order to meet demand are taking their toll.

To escape this Catch-22 situation, governments are looking into price increases for commercial and residential users (Dubai for example introduced a slab tariff with surcharges and Abu Dhabi is piloting a peak-demand pricing scheme). Similarly, energy intensive industrial facilities are exposed to increasing feedstock, electricity and fuel charge markups.

2.    Decision makers recognize energy efficiency benefits

As supply constraints and price incentives turn into reality, productivity improvements become attractive. Apart from reducing their operational costs and enhancing asset life, major players in many sectors embrace efficiency measures because of reputational benefits: Energy efficiency is ‘en vogue’ in the Middle East. Leaders are keen to rebrand their cities as modern commercial hubs with the focus on tourism, trade, transportation and real estate. Not least since mega-events such as the Qatar FIFA World Cup in 2022 and the Dubai World Expo 2020 are attracting international spotlights in order to observe the progress on the green agenda.

Aside from operational excellence and green marketing, energy efficiency is a bare necessity for the region’s less hydrocarbon-rich countries: Jordan, Lebanon, Pakistan and also Egypt are examples where high energy costs and supply shortages are major drivers. Here, efficiency enhancements are an imperative to avoid power cuts during peak hours due to over-stressed grids.

3.    The policy framework is changing

The tendency for early policy roadmaps and pledges to be more vivid on glossy paper than in reality is changing. Research institutes, energy councils and associations are increasingly following through on policy development: Saudi Arabia implemented a national competence center to revise regulations and market mechanisms. Dubai is looking into demand-side programs and energy performance contracts (ESCO) for buildings and Abu Dhabi has an integrated energy efficiency strategy under development.

Green building codes have become mandatory for new constructions in various Gulf markets, while efficiency regulations are also tightened for existing buildings. Minimum efficiency performance standards (MEPS) are being discussed for electrical equipment and are already in place for household air conditioning units. Also, we should not forget that the UAE already ranks third worldwide (behind the U.S and China) with more than 800 registered or certified buildings under the Leadership in Energy and Environmental Design (LEED) benchmark.

4.    Massive efficiency potential

Since Gulf economies experience some of the world’s highest energy and carbon intensity ratios, saving potentials are evidently substantial. Calculations claim possible reductions of almost 30% in total primary energy consumption compared to the baseline for Gulf countries by 2030 – and this is a scenario where only moderate policies and efficiency measures are adopted.

Even though the macroeconomic rationale for energy efficiency is inherent to enhance competitiveness and free up hydrocarbon exports, various barriers preventing a quick adoption still persist: As long as regulation and price incentives are not implemented on all levels, purchasing managers might refrain from opting in on efficient products and systems, as long as there is an alternative with lower upfront costs.

5.    Energy efficiency becomes a purchasing criterion

Times have changed in the design and purchasing departments of Middle Eastern utilities, industrials and developers. As operational cost savings gain importance, customers are developing a deeper understanding of efficiency best-practices and are doing their homework on benchmarking. Progressively, system efficiency turns out to be an important criterion in tender evaluations. Customers also require more advanced commercial terms, such as energy performance contracting with guaranteed savings and shared risks.

Energy management systems are being applied gradually and early adopters have already certified some of their operations with the new ISO 50001 standard. Increasing investments are seen in efficient district cooling, waste heat recovery, flaring reduction, gas turbine and boiler optimization. Efficient variable-speed drive power for pumping applications, fans and compressors is now a standard upgrade with attractive payback times.

There is no doubt that the Middle East has started to move up the efficiency curve. What do you think? Post your opinion in the comments section below!

16 Comments

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  • Philip Lewin

    Interesting blog Samuel! I realize it’s ridiculous to discuss
    global warming in a part of the world where 45° C is not uncommon, but how
    significant is climate change as an investment driver in region?

    As you know government incentives, penalties and mandatory
    reporting for energy intensity are a big part of the game in Europe, Asia and
    the Americas. I think one challenge in improving global energy efficiency is
    that there are widely differing standards and commitments to sustainability – for
    example even the EU member states are having a difficult time reaching a
    consensus climate policy. Many experts say this puts them at a disadvantage to
    countries such as the US or China, who’s businesses can all work with the same assumptions.
    I’m wondering about the influence of this in the Middle East?

    • Samuel Merkli

      Thanks for your interesting remark Philip!
      Climate change is certainly a notable investment driver, as Gulf countries intend to boost their profile in the global climate change debate. Governments aim to drift to renewable energy in order to diversify their energy mix, with substantial renewables targets. While worldwide renewable energy investment was 12% lower in 2012, investment in the sector in the Middle East and North Africa region grew by 40% compared to 2011, reaching almost $ 3 billion!

      Indeed, reaching regional consensus on a common energy efficiency policy framework is close to impossible, as countries and decision makers face widely differing challenges and geopolitical agendas. To harmonize municipal standards on a national level is already hard enough in some cases. One of the Gulf countries’ big advantages is the capability (and culture) to adopt proven best practices that are around internationally, such as EU MEPS, and they do not have to reinvent the wheel.

  • http://www.abb.com/ Jonas Hughes

    Thanks for the informative and encouraging post, Samuel. I was surprised to read that a region with abundant energy resources, which probably won't notice global warming (does a degree or three matter when it's 45 outside?), is actually that aware of the need to save energy. But then I suppose man-made islands and the world's tallest skyscrapers are voracious consumers of energy.

    • ghollings

      Not to mention indoor ski centers and running lush golf courses in the desert!!

    • Samuel Merkli

      Thanks for your comment. Indeed, with such burning temperatures one could believe that a few additional degrees wouldn’t make a difference anymore. Interestingly, global warming is actually noticeable in the region and is a driver for energy efficiency: In Saudi Arabia, the lake Layla, once the largest body of water on the Arabian Peninsula, has dried out. Sandstorms have increased in frequency, obscuring the skies – and seaside mangrove forests are endangered. A sea level rise will threaten many coastal cities and villages in the region. The most pressing problem is however the high dependence on desalinated water (which will aggravate with declining groundwater tables) and food supply security.

  • Mo Farahneh

    Yes I agree and as mentioned different countries have different reasons to seriously implement energy efficient solutions.

    I however believe that the newly experienced regulators will face some challenges along their learning curve, such as the impact of regulating on the economy and the capital cost of starting a new business, consumer awareness and implementation tracking and building know how within specialized energy services companies (if they exist in the first place).

    Yet their greatest challenge would be prompting effective money spending to reap the biggest savings.

    • Samuel Merkli

      Many thanks for your comment Mohammed. I couldn’t agree more, it is going to be a long journey with various roadblocks and delays.
      Yet, the recent drive I experience from government bodies, competence centers and the leading research institutions (King Abdullah University for Science and Technology in Riyadh, Masdar in Abu Dhabi, and the Qatar National Research Fund) makes me see this in a positive light. Also, the UNEP is providing support with initiatives and workshops on policy best practices in the region.

      Most importantly, the private sector (with global leaders such as ABB) will have to play a major role and actively support on policy development, innovative business models and market adoption.

      • Mo Farahneh

        I agree, ABB can be an active player

  • Muhammad Afzal

    Agreed with Mr.Samuel Merkli that A.B.B & its think tank has to play a major role in Middle East.

  • Alex Malouf

    I'd disagree on the first point Samuel. Energy policies in the Gulf are extremely sensitive to public opinion and as such there's little room for price rises - this is especially true in Saudi where SEC has been cautious to rise residential tariffs when faced with mounting public resentment

    However, I'd agree with the overall angle of the article .The GCC has long realized that it has to act to reduce its energy production costs and the usage of valuable gas and oil reserves to generate domestic energy at significant losses. ABB was involved in a key project to help develop the first international grid in the GCC, the GCC Interconnection Grid, to enable sharing of energy at peak times of the year.

    In addition, the region has been pushing for a phasing out of inefficient air-conditioning units, which account for approximately 50 percent of the summer's electricity load. Educational campaigns are a staple of the region's utility providers, particularly in Saudi, Bahrain and the UAE.

    When I was at ABB we led a number of initiatives to reach out to the public sector, including Ventyx roadshows to raise awareness of how smart grids could help better analyze and manage power generation, transmission and distribution. We also engaged with Saudi Arabia's National Energy Efficiency Programme and Kuwait's Ministry of Electricity and Water (MEW) to better understand what we as a private-sector organization do to support their vision of a more efficient grid.

    The drive for energy efficiency isn't being driven by issues of climate change - most people live with air-conditioning all-year round. Instead, it's all about economics. The region is using as much as a quarter of its daily oil and gas output to power its growth at rates that are heavily subsidized. The GCC's governments realize they need to switch to alternative power sources, such as nuclear and renewables, to save on costs and, in the long-term, export energy.

    The challenges these governments face are public apathy and a subsidy system which has been in place for decades. Companies such as ABB have a major role to play, but we need to understand the fundamentals for change, the obstacles, and actively discuss and promote that debate. There are policy-makers in the Gulf who are willing to listen. All that ABB needs to do is engage on a long-term, continuous basis.

  • http://www.twitter.com/yohualli9 Erika Velazquez

    Hi Sam, very interesting post! I agree that climate change - a term that I like much more than global warming- is indeed a driver for taking energy efficiency measures; but the main one I would say has global implications and that would be, alas, using local resources more efficiently, albeit in an economical sense. It makes much more sense to harness the power of renewables, for example solar (sorry, had to pitch it!), where the cost of fuel is zero, to provide local power needs; to then free up oil for exports. Instead of subsidizing this prime fuel for local consumption at very low prices, it can be sold at market prices, effectively increasing revenues, diversifying the power mix and contributing to climate protection. The cut on electricity subsidies in the Emirates is an example of a move in this direction.

    • Samuel Merkli

      Thanks Erika- I absolutely agree with your comments.
      Using local resources more efficiently is a challenge that especially Kuwait, Egypt and the UAE need to address: All three are no longer able to meet increased demand from their gas-fired power generation assets with domestic natural gas and in fact have turned into net gas importers in recent years (what evidently comes with major costs).
      Increased requirements from petrochemical facilities and mature oil fields (gas injection for enhanced oil recovery) aggravate this domestic supply shortage.

  • Paymon Aria

    Cutting energy demand by increasing energy efficiency would actually boost economic output as for the Persian Gulf region's oil producers more crude would be available for export. Similar argument is true for gas consumption particularly for countries with big gas reservoirs like Iran & Qatar.

    While still sensitive public issue there are some determined actions by many countries in the region to increase the energy efficiency and also investing in new source of energy. For example Saudi Arabia is planning to invest heavily on solar and Iran is producing energy from wind since two decade ago. As you suggested the current practice is unsustainable and I am almost certain this will changed in realtively near future.

    • Samuel Merkli

      Many thanks for your interesting additional remarks, Paymon.
      I agree, reducing domestic demand in order to set oil & gas resources aside for exports at world market prices is indeed one of the major macroeconomic arguments for energy efficiency improvements in the region.

  • sadeghi

    persion gulf ; no arabian gulf

  • ali

    this article is not an academic and scientific one. in the very beginning of the article the Spurious wording of Arabian is mentioned. What is that? the Persian gulf for thousands of years has been called Persian golf. the word Persian gulf is used by the UN and all other international organisations. the Persian golf is an internationally recognized term. the well educated people all know about that. It is very important to use perfect terms in international affairs.

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