How a strong state-industry partnership can help the GCC move to green energy
Contributed by Dr. Raed Kombargi
The ongoing energy transition from fossil fuels to renewable energy requires that governments and the corporate sector collaborate in new ways. Compared to other regions, the Gulf Cooperation Council — comprised of Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman — has an advantage because its energy industry has long been built around close government support for the corporate sector. Indeed, governments have controlling stakes in most of the region’s largest oil companies. However, the challenge will be to make fast progress during the energy transition, particularly given the region’s entrenched processes and corporate cultures that relate to fossil fuels. The right government-industry relationship will be crucial because the energy transition will be complicated and the future uncertain.
Although oil, coal, and natural gas still account for the vast majority of energy needs in the world, their share is declining each year. As new technologies emerge, a rising proportion of green molecules will account for a greater share of production. Already, 21% of private companies and 61% of national governments have set ambitious decarbonization or net-zero targets. According to the International Energy Agency, by 2040, renewables, thanks to strong growth in wind and solar, will account for about 47% of the global electricity market, up from 29% today. By 2050, renewables will account for more than 90% of all energy production, and fossil fuels will account for less than 10%.
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The challenge is reaching these levels—an effort that calls for significant investment amid rapidly changing technologies. Transforming the energy industry will require strong state orchestration, at least in the early stages during the development of markets and strategic infrastructure. Neither the government nor the corporate sector can move to net-zero emissions and the new energy system alone. The transition is simply too complex and too uncertain, and getting the outcome right is too important. What is needed is a collective response—with the government and corporate sector cooperating in new ways.
Around the world, governments are seeking the right level of market intervention. One option is for the government to serve primarily as a policy driver—setting the high-level vision for the energy system and establishing policies (such as subsidies, taxes, and regulation) that can incentivize market players to make good decisions on their own. Such an approach is difficult because it places the onus on the corporate sector to invest at the right time and in the right assets.
A second option is for the government to become a strategic infrastructure investor. In this approach, the government exerts direct control over critical infrastructure, such as distribution networks and potentially even power generation. Infrastructure investment requires significant government oversight and expertise. However, that means that the government forgoes the efficiency and insights of the corporate sector.
A third approach is the co-investor model, which is an ideal middle ground between the previous two. In this model, the government either has a direct stake in the key players and their commercial activities or acts as co-investor for riskier and more uncertain ventures. The government provides capital, and may also underwrite pricing, thereby generating confidence and attracting further investment.
For the transition away from fossil fuels, the co-investor model is the most viable approach, because it enables governments and energy players to capitalize on their specific strengths in complementary ways. In the GCC, this has long been the approach that governments have used to oversee and grow the conventional energy sector. In that manner, the GCC has an advantage over other regions as it already possesses a solid governance model, with the government and corporate sector working in tandem.
However, GCC countries may struggle in the energy transition because their institutions are wedded to conventional energy production, with deeply entrenched processes and mindsets. For these reasons, they could face challenges in decarbonizing at a sufficient pace to meet ambitious national agendas. Many transition metrics—such as CO2 emission per capita or the share of renewables in the overall energy mix, to name a few—can be improved significantly with the right mindset.
Several measures can lead to accelerated progress. First, governments should designate national champions such as national oil companies to lead the transition—a single, unambiguous role that can serve as the main catalyst for change. Second, governments need significant changes to the regulatory regime to accompany the transition. These will apply in areas such as ambitious targets, compelling incentives, and sometimes explicit mandates.
The transition is underway. If the GCC is to successfully decarbonize, government and industry must build on the strong relationship already in place.
About the author:
Dr. Raed Kombargi is a partner with Strategy&, part of the PwC network, and the leader of the firm’s energy, chemicals, and utilities practice in the Middle East.
Source: Renewable Energy