The Gulf Goes Green

In the last few years, the global energy outlook has been transformed. The rise of populist politics and a growing sense of urgency about climate change have roiled debates about energy policy in wealthy countries, generating a dizzying mix of new industrial policies. The COVID-19 pandemic made it far harder to predict fuel prices and consumption patterns and forced many countries to confront their connections to fragile multistate supply chains and legacy petrostates. Russia’s 2022 invasion of Ukraine shattered any remaining fantasies of self-reliance, pushing Europe to reconsider its dependence on Russian resources and forcing the United States to acknowledge the Gulf’s persisting leverage in energy markets.

Throughout this tumult, however, the role of Gulf states, rich with oil and gas, seemed to change little. Many analysts assumed these relatively inflexible autocracies would experience a slow decline as the growth in renewable energy rendered them dinosaurs dependent on declining hydrocarbon revenues and unable to diversify or reform their economies without risking popular unrest. But that position, too, is softening. Gulf states are now presenting themselves as drivers of a global clean energy transition. At home, they are modeling a new, statist framework for a shift toward cleaner energy, challenging 50 years of conventional wisdom that aggressive government intervention in an energy sector doesn’t work. Abroad, they are seeking new energy partnerships with environmentally conscious developed countries and investing in clean energy in emerging economies in the Middle East and beyond.

The idea of Gulf states as clean energy leaders is an alluring prospect. It takes some pressure off the United States and Europe to coordinate, often uncomfortably, with China on clean energy targets, particularly in developing countries. But the appeal goes beyond that. If the Gulf states—unsentimental, pragmatic, and agnostic toward Western ideals such as democratic responsiveness—begin to pursue clean energy, that suggests a far greater range of actors such as corporations, fragile emerging markets, and nonaligned states could seek to pursue it, too.

Yet it would be a mistake to take too rosy a view. The Gulf states are not dinosaurs, but they aren’t saviors, either. Their limitations are both practical and institutional. No matter how important Gulf actors become in the clean energy business, they will insist that oil and gas continue to play a starring role. The degree to which their clean energy approach relies on state authority and revenue makes their model, especially in the other countries where it might be deployed, vulnerable, too. These states—namely Saudi Arabia, the United Arab Emirates (UAE) and Qatar—seem to have what everyone needs, but they will also leave an institutional footprint where they engage. Ultimately, the world must not segregate climate change mitigation from the enduring bases of sustainable development: governance and accountability—not in the West, not in the global South, and not in the Gulf.

OIL CHANGE

Domestic power production is changing across the Arabian Peninsula, in part to allow more oil and gas for export instead of burning it in power plants to generate electricity, but also to reconfigure the carbon footprint of extractive industry. Just a decade ago, Dubai set a low-price record for a purchase agreement for solar power from an independent producer, making the case for regional clean power deployment.  Today, Saudi Arabia’s $33 billion nuclear power program aims to provide a large part of new planned power generation. The kingdom has set a broader goal to generate 50 percent of its national power supply from renewable sources by 2030, some of it from the world’s largest single-site solar power plant, in Mecca Province, which has a generation capacity of 2,060 megawatts.

A green shift in power production also encourages new investments in Gulf industrial firms and their products to be classified as sustainable and carbon free. This is a two-part goal in the UAE: to build an energy-rich industrial base for the production of carbon-intensive products such as aluminum and to create a mechanism to issue debt and financial products that attract environmentally conscious investors. The onshore facilities of ADNOC, the UAE’s state oil company, are now supplied by nuclear and solar energy, significantly lowering their carbon intensity. Some parts of ADNOC’s business, from pipelines to refineries, can be sold or borrowed against, and their future values could increase as their carbon intensity diminishes. Emirates Global Aluminum plans to manufacture “green aluminum” powered by solar and nuclear energy; its first customer is Germany’s BMW, which will buy aluminum made from recycled materials, smelted by clean power.

The Gulf states are not only attracting investment in clean energy but also seeking to become development players themselves, using their sovereign funds to invest aggressively in both renewable energy and carbon-intensive projects in the region and beyond. The funding gap between need and investment in clean energy in the developing world is massive. A 2021 report from the Grantham Research Institute on Climate Change and the Environment estimated that around $3 trillion in annual investments would be needed to make the transition to a low-carbon global economy, three quarters of which must be directed outside the world’s seven largest developed economies.

Gulf states are positioning themselves to help fill that gap. Gulf states typically invest in high-growth, high-population areas that will likely need more energy from the Gulf in the future—not only oil and gas but also electricity. At a cost of $1.8 billion, Saudi Arabia is now building a high-voltage direct current interconnector that will eventually send 3,000 megawatts of electricity to Egypt. A similar interconnector will begin supplying Iraq with electricity from the Gulf Cooperation Council states next year. The Saudi company ACWA Power, in which the country’s Public Investment Fund is a 50 percent stakeholder, is developing solar power plants in Azerbaijan, Ethiopia, Iraq, and Uzbekistan. In 2022, Masdar, an energy company fully owned by the UAE, announced that it will spearhead renewable energy projects in Angola, Azerbaijan, Kyrgyzstan, Romania, Tanzania, and Uganda.

STICKING POINTS

In their domestic projects and international investments in clean energy, Gulf states have set ambitious targets. But they have a long way to go to reach their goals. All but one of the six Gulf Cooperation Council states say that they intend to achieve net-zero emissions by 2060 or sooner. But by the end of 2020, renewable energy sources accounted for less than three percent of those countries’ total installed power capacity. Of those countries, the UAE has gone the furthest toward diversifying its energy sector, and now generates about 20 percent of its installed power from renewable sources. But even the UAE is unlikely to meet its targets. Saudi Arabia is much further behind, generating only 0.05 percent of its power from renewables in 2022. And the Gulf states’ net-zero targets take only domestic consumption into account, not how their fuels are used once exported.

Despite all the lofty aims and high-flown rhetoric regarding clean energy, it is by no means a given that the Gulf states’ generous foreign aid and investment budgets, plumped by recent windfall earnings from surging oil prices, will persist. The World Bank expects GDP per capita growth across the Middle East to drop sharply this year and next, even in oil-exporting countries with pegged exchange rates. As inflation and interest rates remain high, it will become more expensive for governments to finance new projects, and those costs will be passed on to consumers. Citizens will find themselves paying more for power, fuel, and utilities—price hikes that tend to inflame political instability and drive authoritarian crackdowns. Egypt’s struggle with high food price inflation is a bellwether for the region at large as citizens brace for another year of belt-tightening.

It remains unclear whether the restructuring of energy production in the Middle East and North Africa will be linked to job creation. The construction of new power plants owned by Gulf investors will not necessarily bring well-paying jobs or worker protections or change the structure of the local utilities that purchase those plants’ power. And even as the Gulf states currently act as economic lifelines, the economic performance of states that receive Gulf investment is not always promising. For example, Gulf investments in both Sudan and Ethiopia since 2018 have done little to promote peace and stability or to further economic liberalization, instead entrenching elites that show more appetite for violence than for state building and growing their economies.  

DOING GOOD BY DIGGING WELLS

By investing at home and abroad in clean energy, the Gulf states assert that they are trying to do well by doing good. But their primary aim is a return on investment, either financially or in terms of political access and influence. In all cases, their own security and economic interests come first. When those interests conflict with global goals relating to climate change or the needs of other countries, the Gulf states, like states everywhere, will look to protect themselves.

The Gulf states’ newfound pragmatism on clean energy is welcome. But it also poses real dangers. These states risk being called on to act as development finance institutions or even humanitarian agencies, yet they are neither. They cannot be seen as rescue boats for the developing world because it is not in their own economic or strategic interests to intervene everywhere or at all costs.

As the wider Middle East becomes more and more reliant on investment and financial intervention from the Gulf states, a distorted energy transition may emerge. Controlling a country’s power production is a mighty—and durable—political tool, as typical power projects are financed for as long as 30 years. Transitioning to renewable energy can lower the price of reliable electricity, allowing people and commerce to thrive as long as investors ensure that the projects they back meet standards of transparency and accountability. But ensuring that has not reliably been a top priority for the Gulf states.

The Gulf states’ moves to establish themselves as prime actors in clean energy, especially their efforts to capture and store carbon emissions, are cause for cautious optimism. Expertise in energy delivery is abundant in these states. So is a deep understanding of global energy demand. They may increasingly be willing to invest and engage politically in places Western countries will not.

But clean energy advocates have always hoped that a transition toward renewables would ameliorate, or at least not exacerbate, political and economic instability in developing economies. This is not only a humanitarian wish. One of the fundamental motives for pursuing a clean energy transition is a desire to mitigate future economic and global instability. It is important not to lose sight of this goal when considering how best to partner with the Gulf states for the clean energy infrastructure the world needs.