Regulations on Middle East renewable energy industry starting to take shape

May 2023 Al-Monitor PRO Trend Report 

4,173 words

Introduction 

In January 2023, the World Bank released a report on the state of energy policies and regulations globally. The Regulatory Indicators for Sustainable Energy (RISE) report ranks countries out of 100 depending on how advanced their renewable energy regulatory frameworks are.

The World Bank report ranks Oman as the first in the MENA region — and sixth globally — when it comes to regulatory indicators. Oman achieves the maximum score of 100 for its renewable energy legal framework and the maximum for renewable energy expansion. The country also achieves a high score of 94 for incentives and regulatory support for electricity, and 92 for financial and regulatory incentives.

While Oman has clearly made strong progress in developing its legal frameworks for the regulation of renewables, many Middle Eastern countries have not taken similarly strong steps. After all, the renewable energy industry remains at a relatively early stage of growth in most Middle Eastern countries, with only 7% of the region’s power generation capacity attributed to renewables, according to the Middle East Economic Digest (MEED). That said, some countries have had some success. In Dubai, for example, renewables now account for 14% of Dubai’s total energy capacity. More than 20% of Jordan’s national grid is powered by renewable sources. 

The nascency of the renewables industry is reflected in the regulatory frameworks — or lack thereof — that exist in the Middle East and North Africa (MENA). “Regulatory frameworks play a crucial role in encouraging growth in MENA’s renewable energy sector by providing a clear, stable and predictable legal and policy environment that helps to attract investment, spur innovation and promote the deployment of renewable energy technologies,” Jeffrey Beyer, founder and director of Zest Associates, a sustainability-focused consultancy firm based in Dubai, told Al-Monitor. A formal set of laws “helps to reduce regulatory risk and provides a level of confidence for investors, developers and the supply chain.” 

Jamil Wyne, founder of the Climate Tech Bootcamp and adjunct professor at George Washington University, argued that regulatory frameworks also have the effect of demonstrating “to the market that the government is taking the sector more seriously and trying to promote growth within it.” 

The majority of Middle East countries have made progress in developing a regulatory framework for their renewables sector in recent years, although there is still much to be done. In broad terms, there is a split in the region when it comes to how advanced the regulations are at this stage. The richer countries of the Gulf Cooperation Council (GCC) tend to have less formalized regulations in place, because projects are largely funded by public authorities and not foreign investors. Non-GCC countries are more reliant on foreign investment to promote the growth of their renewables sector and have therefore taken more concrete steps to create the necessary regulatory environment. However, across the Middle East, there is undoubtedly a general trend toward increased regulation of the renewables space as the industry continues to develop and grow.

1. State of Play: Renewable Energy Regulation in the Middle East 

In August 2017, the government of Israel amended the Electricity Sector Law of 1996 to enshrine in law its renewable energy goals. These targets were increased in October 2020, with the government now aiming to generate 30% of the country’s electricity through renewable energy by 2030. The Electricity Authority has made moves toward liberalizing the market and incentivizing the private sector — such as in April 2022 when it decided that tariffs for renewable energies would be determined in the market — but several regulatory issues remain. Wind farms, for example, continue to face difficulties in terms of surmounting planning laws and security restrictions.

In 2015, Palestine passed a decree aimed at encouraging the growth of the renewable energy sector. The regulation granted powers to the Energy and Natural Resources Authority to try and increase investment into the sector. However, Palestine has struggled to make progress on renewable projects, partly because of the conflict with Israel and Israel’s partial or complete control of areas of land in the West Bank has hindered the authorities’ ability to develop infrastructure and develop initiatives on a political and regulatory level.

Lebanon has seen even less progress. A proposed law was introduced to its parliament in 2002 that was expected to liberalize the sale of electricity and establish a functioning free energy market, but it has been stuck in parliament for over 20 years. There is therefore no basic legal framework for renewable energy production.

Yemen set a national strategy for renewable energy in 2010, but with less than half of the population having access to electricity of any kind amidst the conflict, this has inevitably been deprioritized. Meriam Hamdi, a technical adviser specializing in renewable energies at GIZ in Rabat, told Al-Monitor that “in MENA countries scarred by war, such as Yemen and Syria, you see some projects related to renewable energy, but they are small — mainly solar installations that are not connected to the grid.”

Given comprehensive sanctions on its energy sector, Iran has struggled to develop its renewable industry. That said, in January 2022, the Iranian Energy Ministry announced plans to add 10GW of renewable capacity by the end of 2026 and introduced several regulatory incentives for private investors such as exempting construction equipment for renewable plants from custom duty. A basic regulatory framework does exist — stipulating that the minister of energy can purchase renewable energy from nongovernmental producers under long-term contracts with guaranteed tariffs — but the potential for foreign investor involvement is highly limited under the existing sanctions regime.

Jordan is widely considered to be one of MENA’s leading countries for renewable energy adoption, with more than 20% of the national grid already powered by renewable sources. In April 2012, regulations on renewable energies and energy efficiency were passed, which made the Ministry of Energy responsible for identifying “Renewable Energy Development Zones” to increase the productivity of future projects. Under this piece of regulation, qualified applicants, including both foreign and domestic enterprises, are encouraged to bid in a competitive process. The law also set up the Jordan Renewable Energy and Energy Efficiency Fund, which receives funding from national and international institutions to subsidize renewable energy facilities and guarantee easier credit access. This financial support, as well as the competitive regulatory environment, is designed to encourage the role of the private sector in the renewables space.

Oman is similarly deemed to be a regional leader in this field, although there is no statutory definition for what constitutes a “renewable” energy in Oman. The government of Oman has followed a similar strategy to Jordan in terms of encouraging private sector involvement, but it has gone further, with the explicit goal of privatizing all electricity production (See "Case Study: Oman"). 

Like Jordan, Syria also has a Renewable Energy Fund, which was established in 2021. The fund provides interest-free or subsidized loans to encourage a shift toward renewables. Syria has an Electricity Law from 2010 that aims to encourage the use of renewable energy. Work is reportedly ongoing to update the law, define the regulatory framework for renewables more specifically and make the regime more flexible for the involvement of private actors.

Turkey had a Renewable Energy Law as early as 2005. Since then, the government has introduced several initiatives to renewable energy generation facilities, such as 85% discounts on the use of land relating to renewables, for the first 10 years of the company’s license. The Ministry of Energy and Natural Resources (MENR) is also responsible for renewable energy zones, with competitive and open public tenders taking place between applications for the right to use the zone. Electricity generated from renewable sources is purchased by the national grid at a pre-determined price, as established during the tender process. The Turkish electricity market has undergone major restructuring in light of the increased emphasis placed on renewables — restructurings designed to improve the legal environment, and create a more stable and competitive market.

As part of its Vision 2030 program, Saudi Arabia aims to increase the share of renewable energy to 50% by 2030. The Vision particularly emphasizes the potential of clean hydrogen to help diversify Saudi’s energy requirements away from fossil fuels. However, there are not yet any specific regulations or policies regarding clean hydrogen in the kingdom. A regulatory framework for renewable energy systems for self-consumption was announced in November 2022. There are several public authorities responsible for licensing producers, such as the Water and Electricity Regulatory Authority (WERA), but there is no regulatory framework currently in place specifically for renewable energies.

In the United Arab Emirates (UAE), each individual emirate retains autonomy over the regulation of its energy resources. Like Saudi Arabia, the UAE has set ambitious climate targets that include significantly expanding its renewable energy capacities; however, regulatory frameworks are still under development. The transmission and distribution of electricity, including from renewable sources, is state-owned and controlled. 

The situation is similar in Qatar: There are no specific government regulations or incentives to promote renewable energy. Qatar’s National Vision 2030 includes aims to diversity into renewables but sets out no specific targets. The lack of a regulatory framework, combined with the fact that renewable energy tends to be more expensive than Qatari-produced natural gas, means the industry is limited in Qatar.

Bahrain is at a relatively early stage of developing a regulatory framework for renewables too but has made some important steps. In 2019, Bahrain established a net-metering system as part of the National Renewable Energy Action Plan. This allows private individuals and small companies to install renewable energy systems on their property to generate their own electricity, with surplus energy being sold to the national grid.

Kuwait is targeting 15% of its energy mix from renewable sources by 2030, although there is skepticism that this will be achieved. There appears to be little political appetite for a comprehensive framework and Kuwait is lagging behind in renewable projects, although it was a very early adopter of solar power over 40 years ago.

2. Regional Breakdown

The regulatory frameworks differ significantly across the MENA region. As Wyne explained to Al-Monitor, “Both the policy situation, as well as investment opportunity set, can look quite different from country to country in the region. The need and utility of renewables regulation may look different in the Gulf compared to the Levant and compared to North Africa.” The biggest differences are between richer countries that can fund renewable projects themselves and poorer countries that rely on foreign investment.

The former, which includes several members of the GCC, largely have less developed regulatory frameworks. Instead, funding and licenses tend to be granted by the relevant public authorities on a case-by-case basis. Sarah Kadhum, associate in the Corporate and Commercial division at international law firm Charles Russell Speechlys LLP in Dubai, told Al-Monitor, “I think in the UAE in particular, the culture is that you can’t really get into a space unless it’s explicitly permitted by the relevant regulator. So unless there is a regulatory framework that permits a certain activity, there’s a lot of reluctance on the part of foreign and international players to get into the space.” For wealthier nations, such as the UAE, this is not necessarily an issue given the sizeable amount of government-led and domestic investment that is available.

Indeed, in May 2022, the government of the UAE announced that it would be investing $160 billion in clean and renewable energy over the next three decades. This is a top-down, governmental strategy and is not driven by the private sector or foreign investors. While there are no figures available to highlight the extent to which the renewables industry in the GCC is dependent on domestic sources of investment, many of the biggest investors in the Gulf are state-owned companies.

The dominant player in the UAE is Masdar, for example, which is a government-owned renewables company based in Abu Dhabi. Masdar has already backed $30 billion worth of renewable projects and aims to amass a portfolio of 100GW. Mubadala Investment Company, Abu Dhabi’s sovereign wealth fund, has also become one of the most prominent investors in clean energy, not only in the UAE but in the world, having invested over $20 billion in clean energy projects since 2006.

In Saudi Arabia, perhaps the most significant player in the renewables space is ACWA Power, which is a private company but owned by a variety of Saudi conglomerates and public institutions, such as the Public Investment Fund (PIF), which owns a 44% stake. In 2021, ACWA announced that it would develop $30 billion worth of renewable projects by 2030 in partnership with PIF and Aramco, Saudi’s state-owned oil company. ACWA and Aramco also joined forces to finance and develop a $900 million solar “giga-project,” one of the Middle East’s largest solar initiatives.

The international law firm Squire Sanders has noted that foreign investment in the GCC’s renewables sector has been limited by “the lack of clear regulatory guidance [and] the requirement or need to involve local partners,” as well as “the usual myriad of other issues that may affect any investment, such as the ability to expatriate monies, licensing, tax and permitting, to name just a few.” There are some exceptions, of course, including Oman (see "Case Study: Oman"). 

Countries whose development is more reliant on foreign investment have, by contrast, developed more extensive regulatory frameworks to try and encourage external and private sector investment.  Jordan, which is considered to have one of the most sophisticated frameworks for renewables, has succeeded in attracting substantial amounts of foreign direct investment (FDI) in the country’s renewables sector. The London School of Economics estimated that, as of 2020, 89% of the developers of large-scale solar and wind projects in Jordan were “small or large foreign independent power producers.” The largest solar project in Jordan, Baynouna, launched in February 2023 and was entirely financed by two foreign investors, Abu Dhabi’s Masdar and the Finnish investment group Taaleri. Turkey, which requires up to $7 billion a year until 2030 to finance its energy transition, has also had success in attracting FDI from major players in both Europe and China.

3. 2023 Outlook

• Director-General of IRENA Francesco La Camera believes that the COP28 summit, which is being held later this year in Dubai, could be a significant moment for the Middle East’s renewable energy space. He told Al-Monitor, “We see strong political will and commitment in many MENA countries for the energy transition and achieving net-zero emissions in accordance with the Paris Agreement. Countries in the region are experiencing for themselves the devastating impact of climate change and there are increasing instances of extreme weather events. But we are in danger of losing the climate action race. Progress in terms of investments, policy and regulation is not keeping pace with the action needed to achieve these commitments. COP28 offers MENA countries the opportunity to make bolder commitments and show evidence of action. The eyes of the world will be on the region during November-December of this year.”

• COP28 could prompt GCC powers such as the UAE and Saudi Arabia to apply their deep knowledge of the energy sector to the renewables space, Wyne thinks. Given how economically successful oil and gas enterprises in the region have been, Wyne suggests the countries could consider how best to encourage similar successes in new industries, including through regulation. “The legacy of fossil fuel industries has provided major oil producers with a body of technical know-how that could be repurposed in certain sectors that mitigate the effects of climate change. Take Saudi Arabia as an example. Hydrogen production and carbon capture requires processes, infrastructure, as well as technical skills that can be derived from fossil fuel production. Hydrogen can be important to decarbonizing heavy industry, and if Saudi Arabia already possesses some of the requisite know-how, then why couldn’t they be a leader in this area, rather than just a follower? COP28 could help in spurring action and attention in this arena, positioning MENA as more than just a host but also a region that’s ready to help lead.”

• Kadhum says there is a “race” ongoing between the UAE and Saudi Arabia “to be the most innovative player in renewable energy and to launch projects on as grand a scale as possible. I wouldn’t be surprised if there were a few big projects that launch around the time of COP28, as well as other initiatives that will hopefully propel matters forward.”

• Jasem Alanizy, a senior lawyer in Dubai who advises on renewable energy projects across the Middle East, is optimistic that the UAE could make strides in developing its legal environment this year. “This year is supposed to be the year of sustainability in the UAE,” he told Al-Monitor. The year 2023 is dedicated by the UAE to sustainability, under the theme Today for Tomorrow, he told Al-Monitor. “I think that will manifest in a significant drive in the UAE to work toward and build on existing sustainability goals. COP28 being hosted by the UAE will be the UAE’s most important event this year and is likely to be a catalyst for the introduction of new declarations, treaties, goals and initiatives at a domestic, regional and global level. I think the general outcomes of this year will focus on the progress being made around the energy transition through the introduction of new policies, initiatives and commitments by governments and multinational corporates.”

4. Case Study: Oman 

Since 2019, the World Bank has published an annual report called the Regulatory Indicators for Sustainable Energy (RISE). This report is described as providing “a set of indicators intended for use in comparing the policy and regulatory frameworks that countries have put in place” to support “universal access to clean and modern energy.” The report analyzes the standard of global energy industries by looking at 30 indicators and 85 subindicators that cover four different pillars, one of which is renewable energy. The RISE indicators are then scored on a scale between 0 and 100 and cover 140 economies around the world.

The latest report notes that, globally, “Renewable energy policy and regulation has been increasing at a slower pace and the period from 2019 to 2021 experienced 33 percent less average annual growth than the 2017-19 period.” That said, since 2020, MENA countries have improved their RISE renewable energy scores by an average of six points, partly driven by Saudi Arabia’s rapid 30-point improvement since 2019.

The most recent report ranks Oman as the first in the MENA for renewable energy regulation, with Oman achieving the maximum score of 100 for its renewable energy legal framework. Oman’s renewables sector has grown substantially in the last few years, with its renewable energy generation capacity standing at around 159MW in 2020. However, with several major plants currently under construction, such as a 50MW wind farm in the Dhofar governorate, the first industrial-scale wind farm in the Middle East, this capacity will grow further. In 2021, the Omani government announced plans to have 30% of the country’s electricity demands produced through renewables by 2030. It is expected that solar power will account for over 66% of this, with the remainder covered by wind power and waste-to-energy projects. Approximately $600 million in private sector investment has already been committed in renewable energy projects launched by Oman’s Power and Water Procurement Company (OPWPC).

In pursuit of such aims, the Omani government has followed a highly successful strategy of encouraging private sector involvement in this space. Indeed, renewable energy generation facilities are entirely owned by private developers in Oman, many of whom are foreign investors. Data from 2019 highlighted that Oman had seen around $10 billion worth of FDI in its electricity generation and water desalination sectors. British investors have been particularly active, with 47% of all FDI into Oman coming from the UK. In January 2022, British Petroleum (BP) and Oman announced a “strategic partnership” to advance the country’s renewables industry.

What is notable, given Oman’s success, is that there is no specific renewable energy legislation. Instead, renewable energy regulations are based on the principles of the Royal Decree 78/2004, otherwise known as the Law for the Regulation and Privatization of the Electricity and Related Water Sector, which establishes in law the ambition to privatize the sector completely. The current system for opening renewable energy operations works by domestic and international private sector participants bidding through a competitive public tender process for the rights to build and own renewable energy facilities. In a sign of how genuinely free and competitive the process is, foreign companies have often been awarded major renewable projects. For example, the Oman Power and Water Procurement Company (OPWP) awarded the Ibri 2 solar project, which started operating in January 2022, to a consortium of Saudi and Kuwaiti firms.

The regulators have also taken positive steps to promote the sector’s development. The Authority for Public Services Regulation (APSR), for example, recently announced an initiative to enable households and small businesses to install solar panels on their premises. They can then sell the electricity generated back to the national grid and be compensated for it.

Legislation relating to renewable energy does exist in the form of health and safety rules, with the Authority for Electricity Regulation (AER) having the mandate to ensure safe development of the sector. Companies that hold licenses to operate renewable energy facilities are subject to regular audits and can face criminal charges for any safety-related incidents.

While the Omani government has promoted private sector enterprise in renewable energy, it is also not afraid to use the power and finance of the state to boost the industry. Energy Development Oman (EDO), the country’s national energy company, is responsible for deploying government finances and investing in renewable energy projects and resources. The government has announced several major projects, such as the construction of a $20 billion 14GW green hydrogen facility powered by wind and solar energy. This has been backed by international oil companies, such as Shell, although construction is not scheduled to start until 2028, with the plant running at full capacity by 2038.

A liberalized, competitive and free renewables market combined with strong governmental support has perhaps been the main driver of Oman’s success in this field.

5. Key Takeaways

➡  La Camera argues that it is vital for Middle Eastern countries to work on improving regional interconnection by streamlining infrastructure and regulation. In the GCC, this has happened with the infrastructure but not yet the regulation. La Camera said that “one measure to enhance the integration of variable renewable energy, like solar and wind, into the grid is to increase interconnections. MENA countries can intensify the number of energy exchanges in the region through existing and planned electrical interconnections. In the GCC, this has already been established through a GCC Interconnection Grid connecting six countries, making the region’s infrastructure well prepared to support its ambitious renewable energy targets.”

➡  Kadhum argues that one of the key regulatory challenges for firms in the Gulf and across MENA is to keep up with rapidly developing technology in the renewables field. “Countries are trying very hard to make sure that the regulations are up to date, especially with all the technology that’s developing in the area — solar panels are an especially big one here. But there are also things from a financial and fintech perspective; things are developing with regards to the issuance of renewable energy certificates, for example. It’s essential that regulations aren’t left behind.”

➡  Kadhum believes the solar panel industry could be of particular interest in the UAE and the Gulf, with Dubai especially having major incentives to develop the regulatory framework. “There’s a lot of work happening in the solar panel space. Historically, there used to be a lot of focus on wind farms, which is great, but I think the UAE, with the climate we have here, has a huge resource to tap into in terms of solar energy. I think it’s especially relevant for Dubai, which isn’t oil dependent to the same extent that Abu Dhabi and some of the other emirates are,” Kadhum said.

➡  While renewable energy remains a relatively under-regulated industry in several Gulf countries, including the UAE and Saudi Arabia, Alanizy believes this is bound to change with time. “There’s obviously quite detailed regulations around the ownership, operation and distribution of oil and gas in the Middle East, because that’s part and parcel of the government’s income,” he said. As renewables come to play a larger role in national economies in the Gulf, the same could become true of them. “The same is not yet true for renewables, but with the energy transition, I suspect that will change,” Alanizy predicted, believing that Saudi Arabia could prove this soon. “Ambitious solar power projects are being implemented in Saudi Arabia, and I think it’s just a matter of time until more detailed and bespoke regulations around renewable electricity generation, transmission and distribution are issued and implemented.”