As it shifts focus, Middle East energy industry needs new ways of working and funding
Project finance is an early candidate that could do with radical rethink
Energy is the foundation of society, fuelling healthcare, commerce, transport, logistics and other essential industries. It is also a crucial enabler of the UN Sustainable Development Goals, which cannot be achieved without energy and water.
Yet, there are 600 million people without access to electricity in Africa alone. This stark fact is the backdrop for the high-level discussions during Abu Dhabi Sustainability Week and that will be brought to the international stage at COP28 in the UAE later this year.
There has been much discussion about solving the ever-crucial energy ‘trilemma’, or in other words, addressing the conflicting issues of ensuring energy security while providing energy equity and achieving environmental sustainability. Electricity demand is projected to triple by 2050 as sectors of the economy electrify and hydrogen-based fuels increase their market share in line with accelerating decarbonisation efforts.
While renewable generation is projected to reach 80 per cent of the global energy mix by 2050, this will require annual investments in energy supply and production of circa $1.5 trillion by 2035.
The UAE is playing a strong leadership role globally, evidenced by the $100 billion Partnership for Accelerating Clean Energy (PACE) announced between the US and the UAE in October last. Its goal is to catalyse $100 billion in financing and investment to deploy 100 GW of clean energy in the US, the UAE, and emerging economies by 2035.
At Mashreq, we have committed to financing and facilitating $30 billion in sustainable financing by 2030, including in the energy sector.
Solving the energy trilemma and ensuring a smooth energy transition that achieves environmental goals and does not leave anyone behind will require high levels of innovation and technological advancements. Innovation is not just about new technologies. It is also about applying pre-existing solutions into new environments.
Between now and 2035 there is much work to be done, and the role of banks and financiers in facilitating the development and scalation of these solutions cannot be understated.
Energy transition will be digital
Low carbon energy systems cannot exist without coordinated digital technology. Latest generation digital technologies such as cloud, AI and Machine Learning (ML) can make enormous inroads in optimising energy consumption, supply, and arbitrage. The key is to achieve the right application of digital technologies in the right places and in a coordinated way.
The energy transition also requires a focus on decentralisation, distribution, decarbonisation, data, and digitisation, also known as the 5Ds. But there is a caveat - the energy transition does not look the same in all part of the world.
We need to be mindful of the fact that the speed of change and development of technologies available to deliver progress in the energy transition curbs governments’ capacity to develop an adequate regulatory environment. Plans need to be put in place to minimise regulators playing catch up with technology.
Project funding too can do with a tweak
Investment in the energy supply side is, to this day, still the most cost-effective climate solution we have available. This involves developing new infrastructure, especially renewable energy projects, for which it is important that infrastructure providers set out very clearly their investment needs and financing plans.
There is an important role for private banks to play here. If we want to scale renewable energy projects in emerging markets, collaboration and innovative financing solutions must be prioritised. The way these deals and projects are structured is vital to attracting new pockets of liquidity, and we have witnessed some interesting developments. For instance, project bonds offer an alternative for project refinancing and are being increasingly used to refinance clean energy projects.
The next evolution is likely to include using project finance sukuk in the form of refinancing takeouts, where refinancing could take a project finance sukuk, not just conventional bonds. Public listing of energy assets - in particular renewable assets - can allow for tapping public liquidity, thereby allowing for redeployment of sponsor equity and debt.
Get green financing rolling
There are a few challenges in this area that, as an industry, financial institutions must address. The first is, given the rapid pace of technological advancements and their limited track record, there is limited authoritative commentary or guidelines on what should be the way forward.
There is also a lack of clear and detailed international standards, which hampers the bankability of, for example, storage solutions and other related new technologies. Project finance is essential to moving this sector forward, but regulatory and policy improvements must keep pace if project finance benefits are to be fully realised.
In the MENA region, despite these challenges, we are seeing innovation in raising finance for green initiatives, including Egypt’s inaugural $750 million green bond issued in 2020, which was a first in the MENA region. Proceeds from the debt sale were used to finance or refinance green projects in sectors such as transportation, renewable energy, and energy efficiency.
In 2022, the Public Investment Fund (PIF) in Saudi Arabia raised $3 billion with its maiden green bonds, becoming the first sovereign wealth fund to issue green bonds to support a country’s growing investments in sustainable projects. This sort of leadership that we are seeing from governments in the region is crucial to advance the green energy agenda and make progress towards achieving the longer-term sustainability aims in MENA.
Potential of PPPs
A country’s ability to attract capital depends on a multitude of factors, including supportive policy and legal frameworks, stability of the currency and exchange rates, a secure and safe environment, the quality of infrastructure and the availability of the latest technologies.
Action across the board on all these fronts creates momentum for capital to flow into the transformation of the energy system. But the private sector also must play its part by working with government institutions to facilitate the energy transition and contributing to the mobilisation of capital inflows towards renewable energy projects.
Collaboration must also be embraced at an international scale, not only on finance flows but also on policies, regulatory practices, best technical practices, and new business models. This can be reinforced through public-private partnerships.