x Abu Dhabi, UAE Thursday 20 July 2017

Should developers of solar power in the Middle East be required to source components locally? It is a complex issue.

Should developers of solar power in the Middle East be required to source components locally?

Guests at the Arabian Water & Power Forum in Dubai last week mostly voted “Yes”. But this is a complex question, involving not only the future of renewable energy in the region, but the whole economic development strategy.

Solar power is increasingly popular and economically viable across the Middle East and North Africa.

Even with progress in Abu Dhabi, Dubai, Morocco and Qatar, the region’s largest plans belong to Saudi Arabia, which wants to build 41 gigawatts of solar power by 2032, about a third of its total generation.

And it’s the Saudi plans that highlight the issue of local content. Successive rounds of renewable procurement will feature increasingly stringent requirements for Saudi-produced components, in the hope of creating 137,000 jobs.

Like the Saudis, many countries view local content requirements as a way to generate domestic employment, create high-tech industries and keep some of the value of renewable investment in-country. They also help to attract public and corporate support for renewable energy programmes.

For instance, India’s National Solar Mission, announced in 2009, requires winners of tenders to use solar cells and modules manufactured in the country.

Elsewhere, the Canadian province of Ontario, and some American states, also have in-state sourcing requirements. Some German companies lobbied for social and environmental standards – disguised protectionism – to keep out Chinese competitors.

However, local content requirements may hurt the solar sector – and the wider economy – more than they help.

The classical liberal case for free trade holds that overall welfare is improved when every country specialises in what it is relatively better at.

But local content restrictions drive up costs and hurt the other parts of the economy – creating visible jobs in solar power at the cost of invisibly destroying jobs elsewhere.

Industries sheltered under such rules are pampered and uncompetitive, and will struggle once the market is opened up.

In May, the World Trade Organization upheld complaints that Ontario’s green-energy programme discriminates against foreign firms.

Local content restrictions actually discourage solar power as they drive up its cost. Solar advocates would do better to push for domestic sourcing rules on conventional power.

Last year, consumers in Washington paid 36 US cents per kilowatt-hour (kWh) for solar power from panels manufactured in their state. But it’s just 18 cents per kWh for systems made in neighbouring Oregon, or in China.

Forty-one gigawatts of Saudi solar power sounds impressive. But that is only what Europe installed in the past two years – nearly all by Germany and Italy – and it is split between two totally different technologies, photovoltaic and solar thermal.

By 2032, the global market will be far larger and more mature. So even the “Saudi Arabia of solar” will not be able to dictate terms to global manufacturers.

Local content rules, however carefully written, lead to distortions. They end up preserving obsolete technologies.

Domestic lobbies, once created, are hard to remove – as we see in the Saudi petrochemical sector’s defence of low gas prices.

And what is local content? A solar panel produced in Riyadh by China’s Suntech Power or one made in Shanghai by Saudi Basic Industries Corporation?

In any case, with solar module costs falling sharply, a majority of project costs will come from components that are naturally provided locally – finance, legal work, engineering, installation, maintenance and electrical components.

As at Masdar, research should be tailored for local conditions – dust, high temperatures and so on.

The drive to use solar power is a separate question from where it is built. Given the Middle East’s massive natural advantage in solar power, it benefits from expanding its use and reducing costs as fast as possible.

Mena countries should concentrate on improving the wider environment for manufacturing all kinds of goods – not artificial markets, but a focus on education, skills, efficient regulation, employee incentives and quality.

Robin Mills is the head of consulting at Manaar Energy, and the author of The Myth of the Oil Crisis and Capturing Carbon.