Renewable Energy in the Middle East: A revolution in the making
|The UAE, the 6th largest oil producer in the world was the first leading Middle East energy producer to host the Climate Conference of the Parties COP28. The global summit, attended by over 160 word leaders, was not only successful in bringing the decision makers together, but also succeeded in advancing 2050 NetZero negotiations (a near future with zero carbon emission). The UAE leadership is resulting in stronger climate mitigation actions and investment from energy producers. This new leadership is also based on a clearer understanding of the climate risk in the region, as MENA is one of the world’s regions most affected by climate change and variability (IAE 2023), both in terms of GDP losses and loss of competitiveness. This positive change is based in oil and gas rich Arab countries' visions documents, aiming to diversify their economies away from hydrocarbons.
To illustrate the positive cleantech investment momentum further, investments by private equity, governments and investors in clean energy and technologies have surpassed investment in fossil fuels, as demonstrated in the IEA Energy Outlook 2023. With over US$ 3 trillion invested globally in energy in 2023, more than USD 1.8 trillion was invested in clean technologies, including renewables, electric vehicles, efficient grids, storage, low-emission fuels, and heat pumps (IEA 2023).
What about the Middle East? While the Middle East is still known as an oil and gas reliant region (in 2019 MENA 98% of energy supply was made up of oil and gas), MENA is fast becoming a leader in Renewable Energy. Renewable energy is set to account for about 15% of the region's power mix by 2030, creating thousands of solar jobs in the process (Petroplan). Saudi Arabia and the UAE, the two most ambitious investors in renewable energy, aim to respectively produce 50% of their energy by clean sources by 2030 and by 2050. Solar energy will play the largest role in KSA as the country and international investors invest heavily in this competitive segment of renewable energy. One of the key manifestations of this investment trend in KSA, is the development of NEOM, the $500 billion smart city to be powered entirely by solar, wind and other forms of renewable energy.
It is important to understand that the MENA renewable energy transformation is influenced by global policy changes. The most important being the Biden Inflation Reduction ACT (IRA), the 360-billion-dollar climate mitigation investment packages approved in 2022. The IRA, through its subsidies enabled private infrastructure fund investment in the energy transition in MENA. These subsidies are getting private capital allocated to the green growth transition, particularly from private equity funds, and asset managers which want to secure market shares in renewable energy in the MENA region.
In value terms, private equity investments in Middle East and Africa increased by 144% in Q4 2023 compared with the previous quarter’s total of $171 m and rose by 62% as compared to Q4 2022 (Power Technology). According to the same source, in the power industry, there were 3 private equity deals announced in Q4 2023, worth a total value of $419 m. A $400m investment for instance, was done by Black Rock in the Dubai decarbonization PositiveZero company (Reuters).
Private capital is flowing into MENA through Public Private Partnerships (PPP) which are often initiated by GCC Sovereign Wealth Funds (SWF) such as PIF and Mubadala, which act as the guarantors, risk proofing these investments. According to the IAE, up to 70 per cent of capital needs will come from investment funds, and these will come faster if SWF takes the lead. While data is scarce, initial assessment shows that big investments are happening all around these three segments, wind, solar and carbon capture and storage.
A clear demonstration of the positive momentum in 2023, is PIF agreement with U.S. asset manager BlackRock (BlackRock had $9.4 trillion in assets under management in 2023) to jointly invest in renewable and infrastructure energy projects in the region over the coming five years.
China is also looking to gain a strategic position in the region through some of its leading private equity firms particularly in the electric vehicle (EV) sectors as well as in solar power, as the region quickly emerges as a land of opportunities. Hermitage Capital, for instance, a Shanghai-based investment firm with US$1.5 billion in assets is in advanced discussion with several GCC SWFs, including PIF to invest in energy infrastructure across the Middle East.
The most striking trend is that international investment funds are no longer coming to the Middle East to raise capital, but they are coming to deploy existing capital as the broader MENA region presents lucrative investment opportunities. PE and Asset Managers are making these investments as accelerating clean tech adoption grows with the shift from economic dependence on fossil fuels to more sustainable practices. In the venture space, out-bund clean tech investments increased in 2023, in part influenced by the conflict between Israel and Palestine. More specifically, Middle East investors tripled their funding of climate tech in 2023, to US$5 billion, supporting early-stage investments in the United States, China and Europe. On the other hand, locally bound clean tech investment declined (PWC 2023).
Final Thoughts. Two trends will underpin the growth of private capital investment in cleantech and renewable energy in MENA. Number one, the region's transition to clean energy is happening, supported by strong US, and EU clean energy policies. Following this trend, GCC SWF will take the lead to work to transition their economies away from hydrocarbons to make their economies more diversified and more climate resilient. Number two, the regional conflict and geopolitical tension between the US and China will make MENA an even more attractive market for the cash rich global investors which will partner with local investors such as PIF and Mubadala to risk proof their investment while gaining a strategic advantage in the lucrative MENA clean energy transition.
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