x Abu Dhabi, UAEMonday 22 January 2018

For renewables to work, first cut energy subsidies

All the talk about renewable energy won't get us very far as long as fossil fuel is so cheap. But there is a way to move ahead.

The World Future Energy Summit this week is a glamorous stage for the latest green technology, solar energy and renewables - a lot of it pushed by companies and countries looking to sell into the cash-rich Gulf market.

While renewables should someday make a strong contribution in this relentlessly sunny region, GCC policymakers should not be fooled: there are more effective paths to energy efficiency. And the methods I have in mind would actually raise government revenues, rather than handing money over to foreign contractors.

This is about energy conservation, particularly involving the reform of energy subsidies in the six GCC countries. In this part of the world, electricity is usually sold for less than the actual cost of providing it.

For instance, Kuwaitis pay less than 1 US cent (about 2.6 UAE fils) for a kilowatt of electricity that costs some 18 US cents to generate and deliver. Likewise, Omanis pay 3 US cents for electricity that costs the government 10 cents. UAE citizens, on average, pay around 15 fils per kWh (often much less) for power that costs the government around 37 fils to generate, transmit and distribute. Qatari citizens, of course, get unlimited free electricity.

Cheap energy is a major cause of the wasteful consumption that has branded UAE residents with the ignominious distinction of making the largest ecological footprint on Earth. Qataris and Kuwaitis are not far behind, and the rest of the GCC is closing in.

Energy subsidies in the UAE are worth $2,500 (Dh9,200) per resident, per year, according to recent figures from the International Energy Agency. The subsidy figure for UAE nationals, who pay a third of the tariffs charged to expatriates, is higher still. In 2010, the UAE's energy subsidy reached $18 billion, equal to 6 per cent of GDP, a larger overall burden than those in oil-producing countries with far larger populations, like Indonesia and Mexico.

In Kuwait, electricity and fuel subsidies reached $2,800 per capita. And in Saudi Arabia, the government fritters away the equivalent of 10 per cent of GDP - $44 billion - to provide residents with some of the world's lowest petrol and electricity prices.

Numerous studies have shown the behavioural effects of higher energy prices: when bills rise, consumers pay attention to consumption. Rather than leaving the home air conditioner running while I'm at work - or on holiday - I'll switch it off. Rather than leaving the lights and TV blazing in unoccupied rooms, I switch these off, too.

Compared with solar panels and wind turbines, energy conservation is boring. There are no ribbon-cutting ceremonies, no bonuses for investors or bankers. And perhaps most difficult, removing subsidy is the government's way of shifting a bit of its burden onto consumers. Governments may have sterling intentions when raising prices to cut waste; but there is, of course, a risk that citizens won't see it that way.

Nigerians who rioted over fuel price hikes this month certainly didn't believe President Goodluck Jonathan had their best interests in mind.

And Mr Jonathan probably didn't have his citizens' best interests in mind when he relented and reinstated some of the subsidy. He was more worried about the impending end of his political career. But the Nigerian president didn't sell his subsidy reforms very hard. In fact, he surprised his people with them.

There are better ways to raise prices. A good example lies across the Gulf in Iran, where the government last year rolled back some $60 billion in energy subsidies with very few consumer complaints.

While embarking on a media campaign focusing on the waste, Iran opened bank accounts for each Iranian family, and began depositing $40 monthly dividends in each. The cash handouts were roughly calculated to offset the new prices. The government assured people that the price hikes weren't being made because the government needed the revenue, but because it wanted to cut waste. Iranians were told they could only access the accounts after prices were raised. This created popular support.

And, as initial reports have shown, Iranians have been pocketing some of the dividends by adopting less wasteful habits.

The GCC countries could adopt similar measures. Instead of giving people cheap energy, raise prices and give the subsidy in cash. That way, people can choose how to spend their share of the country's resource bounty, rather than simply being allocated a share of "in kind" energy.

As far as renewables go, an energy-reformed GCC makes an ideal market. There is a strong argument for diversifying an electricity supply that is dominated by increasingly tight supplies of natural gas. And guaranteed year-round sunshine is a fabulous resource, even if there are kinks to be worked out in terms of reduced effectiveness from haze and dust, and the requirements of water to clean the panels.

But it makes little sense to move into renewables, which generate electricity at anywhere from double to as much as five times the cost of natural gas, before the issues of waste and price are tackled.

Why bother paying for some of the world's most expensive generating systems if people aren't even going to shut their windows when the AC is on?

Right now, the "off" switch is the GCC's best green technology.


Jim Krane is a resident scholar at Qatar University and the author of Dubai: The Story of the World's Fastest City, also published as City of Gold: Dubai and the Dream of Capitalism