With electricity demand growing by the year, the emirate's Supreme Council of Energy has set targets and is on the lookout for ways it can diversify its sources.
Dubai seeks renewable power sources for the future
Dubai's meteoric rise to an international trading and tourism hub is attributable in large part to the emirate's ability to spot an opportunity and act on it.
So it is not surprising that the rise of renewable energy has not gone unnoticed. Quick to search out a profit, Dubai is also no slouch when it comes to finding savings. Alternative energies, not so long ago considered the preserve of palm tree-hugging environmentalists, now feature high in the thinking of Dubai's Supreme Council of Energy (SCE).
Following Abu Dhabi's lead in setting a renewable energy target, the SCE on January 9 announced its own clean energy plans. By 2030, a 48 square kilometre solar park is scheduled to produce 1,000 megawatts of electricity, and 5 per cent of all electricity consumed in Dubai will come from clean sources. This vision is set to become reality at a cost of Dh120 billion (US$32.67bn), the SCE projects.
Dubai's rapid growth, coupled with a lack of energy conservation measures, has led to rocketing demand for electricity. Demand was 9.6 per cent higher in July 2010 compared with the same period a year earlier.
The Dubai Electricity and Water Authority (Dewa) has drafted in the private sector in its efforts to keep power generation abreast with supply. The contract for Dubai's first independent power project, a 1,600MW power plant at Hassyan, is likely to be awarded to a private operator by the end of next month.
But innovation in the ownership model of the power infrastructure does nothing to curb the costs of the fuel needed run the plants.
Dubai's power plants, concentrated in the Jebel Ali industrial zone, use natural gas to produce electricity from their turbines. Whereas the gas needs in the region were once easily covered by associated gas produced as a side product to crude, spiralling demand for electricity has turned a surplus to a shortage in most GCC countries, forcing them to look to alternative supplies.
The UAE is a recipient of gas from Qatar, the world's largest exporter of liquefied natural gas (LNG), via the Dolphin gas pipeline, a joint venture between Mubadala Development, Total and Occidental. Mubadala is a strategic investment company owned by the Abu Dhabi Government.
The gas is bought at $1.5 per million British thermal units (mmBtu), a fraction of the usual going rate for gas in the international markets. Yet it is not sufficient to satisfy the growing needs of either Abu Dhabi or Dubai. While the former is increasing its supply by tapping sour gas reserves in the emirate, which requires an expensive de-sulphurisation process, Dubai's paucity in hydrocarbons does not allow for a domestic solution.
The emirate has instead resorted to importing LNG, and has moored a floating LNG terminal off its coast to this end. This exposes it to the international market, where LNG can be sold for as much as $16 mmBtu.
Such prices are prohibitively expensive for a utility that is experiencing strong growth in demand, and which sells its electricity and water at subsidised rates.
Fortunately, rising electricity use and a scramble for natural gas were not the only issues to hit the regional utility sector, as another country's renewable energy target started changing the price equation.
China, the worlds biggest exporter of manufactured goods, is experiencing its own runaway demand for power and is seeking to mitigate the consequences by working towards an 11.4 per cent share for alternative energy in the generation mix by 2015.
The resulting growth of the manufacturing base in China has resulted in prices for solar panels, called photovoltaic (PV) panels, plummeting, with prices halving in the past year.
A study by PricewaterhouseCoopers (PwC) released this month shows that if LNG is above $13 per mmBtu, PV projects are commercially viable without the need for subsidies. This breakeven price will fall further as solar power costs continue to drop.
Dubai could benefit from this development, said PwC.
"Key target markets include countries that are reliant on imported oil for power [such as Jordan, Morocco], that burn large amounts of domestic oil for power [such as Saudi Arabia, Kuwait] or that import LNG (Dubai and Kuwait)," the report said.
Solar is particularly useful as an energy source in the region during the peak demand period. The use of air conditioning drives up power consumption in the middle of the day in the summer months, which coincides with the daytime hours during which solar panels are operational. Currently, peak demand often met with plants that run on diesel or crude oil, the most expensive of all feedstocks.
While the commercial case for Dubai's solar park is clear, questions remain over its financing. The Government is funding a 10MW PV array, but no other projects have so far been announced and it is uncertain who will pay for them.
Dewa is about to award the contract for its first public-private partnership (PPP), the Hassyan gas-fired power plant, and it is likely that Dewa will choose PPPs for future solar projects. So-called independent power projects replace the upfront costs of constructing vast solar arrays with paying private operators at a rate that makes their involvement commercially viable.
"For future projects, to reach 1 gigawatt, we are working on many fronts," says Nejib Zaafrani, the secretary general and chief executive of the SCE.
To encourage power operators to run solar plants, tariffs that pay producers above the market rate for green electricity are being considered, says Saeed Mohammad Al Tayer, Dewa's chief executive.
While the cost of solar energy is falling, a significant scale-up in the near term can only be achieved with supportive tariffs, experts say.
"If you're going to attract sufficient private sector involvement for longer-term applications, I don't think you can install solar applications on a larger basis and be profitable with that at the moment," says Bob Bryniak, of the Golden Sands consultancy.
"From an economic point of view, solar energy needs a contribution," Mr Zaafrani says.
While there is little detail on how Dubai's latest vision is to become a reality, the SCE's approach works in favour of the project. Solar technology has not yet reached a stage where it can be scaled-up without difficulties, and most projects do not exceed a few hundred megawatts.
A step-by-step development of the park will give investors the opportunity to get involved at a scale that allows them to participate.
"There is the potential to break the project down into smaller fields and get some of them running quite quickly," says Gus Schellekens, the director for sustainability and climate change at PwC.
It also allows a scaling down of plans should the need arise. The planned addition of nuclear power in Abu Dhabi from 2017, and the increasing opportunities for energy trading via the GCC Interconnection Grid will add to Dubai's options. These inflows may prove cheaper than installing solar arrays.
"Once the nuclear output starts flowing, and the GCC grid shapes up for interconnectivity, and tariffs are decided between the various countries, we will know what the commitment to renewables is," says Abhay Bhargava, an energy expert at Frost & Sullivan.