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UAE tariff quest: Thoughts on a possible incentive scheme

31. May 2012 By:  Michael Krämer, Taylor Wessing

Michael Krämer, senior associate and energy specialist at international law firm, Taylor Wessing, Dubai, considers the various solar incentive possibilities for the United Arab Emirates (UAE). He argues that introducing an incentive scheme is key to developing the Gulf's solar industry.

Solar energy has not yet reached grid parity in most jurisdictions and the UAE is no exception. Being a country that consists mostly of desert areas, it should really be a paradise for everything solar and yet, it is not.

Admittedly, some fairly large projects are either on the way, or in the planning phases. Most notably, there is "Shams 1", a 100 megawatt (MW) concentrated solar power (CSP) plant in the Emirate of Abu Dhabi, close to the Saudi Arabian border, which is expected to be fully operational by the end of 2012. Then there is "Noor 1", a 100 MW photovoltaic power plant, also in Abu Dhabi, which is currently in the tendering phase; and, of course, the Mohamed Bin Rashid Al Maktoum Solar Park in Dubai, which is expected to reach a final capacity of one gigawatt (GW) using various kinds of solar technologies when completed in 2030.

These projects are very nice to have, but are unlikely to prompt the breakthrough of solar technologies in the UAE, or even generally in the Gulf region. Examples in other jurisdictions around the globe have demonstrated that a real breakthrough is achievable only if private investors are encouraged to invest into renewable (solar) energy generation. 

Private investments

A multitude of private investments do not only split the cost burden among many, but are also able to create a critical mass capable of generating a significant amount of installed capacity. By way of comparison, in December 2011, newly installed solar capacity in Germany alone accounted for around three GW. Hence, private investors in Germany have installed, in just one month, more than double the capacity the UAE is planning to bring online in the next 18 years! The comparison might not be absolutely fair, given that Germany’s population is around 16 times bigger than that of the UAE, but it does demonstrate what private investments are capable of achieving, nevertheless.

Suggestions have repeatedly been made to replicate an incentive scheme that has been successful in one country and apply it in the UAE as well. Whether or not this is a promising approach is the subject of this article.

Key parameters that need to be considered

The UAE, as any other jurisdiction, is unique in various ways. Any incentive scheme that is supposed to "work" in the region by encouraging private investors to spend their money on installing solar capacity will have to take these unique parameters into account. In our view, the most important parameters in the UAE are the following: (i) very low cost of electricity; (ii) a high and steady increase of electricity consumption; (iii) very high solar irradiation levels; (iv) significant concerns regarding grid stability; and (v) unique demographics.

Cost of electricity

The cost of electricity in the UAE is very low compared to most other regions. It is artificially low, however, since the costs are highly subsidized, as is the case in most other Arab nations. In Abu Dhabi, for example, the cost of electricity is as low as AED 0.03 per kilowatt hour (/kWh[1]) for farms, which is not even US$ 0.01/kWh[2]. By way of comparison, one kWh of electricity in Germany costs roughly AED 1 (approximately $0.25/kWh).

Such low electricity prices are only possible, because somebody else picks up the tab. In Abu Dhabi, it is both the Abu Dhabi government and, somewhat surprisingly, the State of Qatar. The Abu Dhabi government keeps the electricity prices in the Emirate at pre-determined levels and pays any difference between "true cost" and cost actually charged to residents[3]. The State of Qatar assists by supplying Abu Dhabi with natural gas, which accounts for the largest part of the UAE’s power generation, at far-below market prices[4]. Needless to say that such artificially low electricity prices do not help making the case for solar energy.

Energy consumption

UAE residents consume large amounts of electricity. The average annual consumption of a normal household in the Emirate of Abu Dhabi, for example, is 41,000 kWh. By way of comparison, annual consumption in the U.K. is in the region of 4,000 kWh. To be fair, electricity required for cooling purposes accounts for a large part of these 41,000 kWh[5], while the 4,000 kWh[6] consumption in the U.K. do not take energy required for heating purposes into account.

However, making matters worse, electricity demand has increased rather dramatically in recent years and is expected to continue increasing at a high rate in the future. It has been estimated that the UAE alone will have to invest close to $1 trillion until 2019, in order to keep up with rising demand[7].

High irradiation levels

With approximately 2,200 kWh/m²[8], the annual solar irradiation levels in the UAE are about twice those in Central Europe. In fact, they are amongst the highest in the world. This is a virtually perpetual and yet almost untapped source of energy. It also means that solar technology will be able to produce about twice the amount of electricity in the UAE compared to what the same technology would be capable of producing in Germany, for example[9].

Grid stability

One of the UAE utility companies’ main concern is the effect privately generated solar energy may have on the public grid, if such energy is fed into it. This, in principle, is a valid concern. Large amounts of renewable energy can have a negative effect on the grid, if the amount supplied exceeds certain levels. Given the extremely high energy consumption of private households in the UAE, however, the question is whether there is actually a need to feed any self-generated electricity into the public grid. I will examine this in more detail further down.

Demographics

Around 81 percent of the UAE’s overall population are expats[10]. Most expats tend to stay in the UAE for a limited period of time and then either move on or move back home. Incentive schemes require a couple of years to pay off and will, therefore, not be of interest to a large part of the UAE population. Then again, only homeowners are likely to invest in solar roofs and it can be assumed that many of those who purchase property in the UAE intend to stay for a longer period of time.

Existing incentive scheme models

There are mainly four different types of incentive scheme that are in operation around the world: feed-in tariffs, net-metering schemes, subsidy schemes and tax-exemption schemes.

Feed-in tariffs

Feed-in tariff (FIT) schemes have been successful in many countries around the globe. Such schemes are based on private power producers feeding all electricity they generate into the public grid against payment of a pre-determined price that is guaranteed for a set period of time.

A FIT has the potential to work very well in the UAE. However, local utility companies are concerned that a large amount of privately generated renewable energy could have a negative impact on the grid. Taking the extremely high energy consumption in the UAE into account, there is no need to feed any self-generated electricity back into the grid. It makes more sense for households to themselves use the generated energy.

Instead of providing incentives for energy being fed into the grid, it therefore makes more sense to incentivize self-consumption of self-generated electricity.

Net-metering

Net-metering schemes work on the basis of self-consumption. The return on investment is generated by investors using self-generated electricity instead of purchasing such electricity from utility companies.

This scheme will work only if private investors are actually able to generate electricity at lower cost than they would pay to the utility companies. Hence, with the current cost structure in the UAE Net-Metering Schemes do not provide any incentive.

Metering self-generated and self-consumed electricity, however, and paying a tariff for such electricity, makes the investment worthwhile for private investors.

Subsidies

Subsidy schemes work by someone, usually a government authority, paying for parts of the system that is supposed to be installed. This lowers the cost for the private investor and thus makes it possible for such investors to recoup their investment.

Subsidy schemes require a fair amount of administration, however, and usually keep system costs at artificially high levels, which is why a subsidy scheme is unlikely to be the best solution for the UAE either.

Tax exemptions

Tax exemption schemes, as the name suggests, provide investors with tax incentives if the investor decides to invest into renewable energy generation. This may well provide an incentive for private investors in countries where taxes are actually applied. Luckily, however, there is no real tax regime in place in the UAE. UAE residents do not pay any taxes anyway, which is why Tax Exemption Schemes would not have any effect for obvious reasons. 

Customized incentive schem

So what are we left with, if none of the typical incentive schemes appears to work in the UAE? Developing a custom solution is the answer.

As mentioned earlier in this article, the high consumption of electricity in individual households makes it unnecessary for any self-generated energy to be fed back into the public grid. Hence, the promotion of self-consumption is a more promising approach and takes care of any grid stability concerns of local utilities.

Self-consumption does not provide any incentive to any homeowner to generate his own electricity, however, unless doing so results in some kind of benefit for such home owner.

In the UAE, it is impossible to self-generate solar energy at prices that could compete with the cost of energy that is charged by local utility companies. Hence, there is no incentive for private investors to install any solar capacity. This would change, however, if a tariff is being paid for self-generated and self-consumed electricity.

If such tariff is being paid, homeowners benefits twice. They do not have to pay anything for electricity that they are not supplied with by the local utility company. In addition, the homeowner is being paid an amount, X, for any self-generated and self-consumed kWh. These double savings, combined with the extremely high energy yield that investors are likely to achieve with solar installations in the UAE, make it possible to significantly reduce the payback time of any installed system. In our calculations, applying a tariff of US$ 0.19/kWh would result in a payback time of around six years.

At the same time, paying only for self-generated and self-consumed electricity puts a natural ceiling on solar capacity building. Installing capacity that one cannot consume oneself means installing capacity that does not generate any income. Hence, the "natural" ceiling on any solar investment in the UAE would be the capacity the particular homeowner is able to consume in the lowest consuming months (in the UAE usually December and January).

The prevailing consumption patterns in the UAE – comparatively modest consumption in winter, extremely high consumption in summer – make it possible to deduct any payments due to the individual investor from such person’s electricity bill. In winter, the bill may well be negative and the generated credit could be rolled over to the next month until the amount payable exceeds the applicable credit. Such approach would simplify the administration of the suggested incentive scheme even further.

The above described incentive scheme is just one option, of course. However, we believe it has many advantages. It is very simple, hardly requires any infrastructure update and is easy to administer for utility companies. At the same time, it provides an incentive for individuals to invest in solar energy generation. With tariffs set at levels comparable to those in Germany, investors would be breaking even after just over four years of operation. Even at lower tariff levels, breaking even would occur significantly earlier than in most other parts of the world.

The UAE, as well as all other Gulf countries, has an enormous solar potential that so far remains virtually untapped. Yet, it makes sense to establish a solar market in a place where the sun does actually shine. Introducing an incentive scheme, such as the one described in this article, may just be the spark needed for the establishment of a viable solar market in the Gulf and may be the key to a solar industry developing.

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References

1. www.rsb.gov.ae/uploads/InfoElecTariffsLargeUsersNov09.pdf
2. The AED is pegged to the US$ and the official conversion rate is US$ 1 = AED 3.6725
3. www.rsb.gov.ae/uploads/InfoElecTariffsLargeUsersNov09.pdf
4. harvard.academia.edu/JustinDargin/Papers/247073/Addressing_the_UAE_Natural_Gas_Crisis_Strategies_for_a_Rational_Energy_Policy
5. www.rsb.gov.ae/PDFs/pub108.pdf
6. www.esru.strath.ac.uk/EandE/Web_sites/01-02/RE_info/hec.htm
7. gulfnews.com/business/general/uae-expects-71-increase-in-primary-energy-demand-1.758979
8. www.uaeinteract.com/docs/Dubai_to_harness_sun_and_wind_to_meet_power_needs/24609.htm
9. 1 kWp in Germany is likely to generate around 850 kWh annually while 1 kWp in the UAE is more likely to generate 1,650 to 1,700 kWh per year.
10. https://www.cia.gov/library/publications/the-world-factbook/geos/ae.html

Dr. Michael Krämer is a qualified lawyer, having studied and practiced law in Germany, Australia and the US. Since 2005, he has been practicing in Dubai, the United Arab Emirates.

Taylor Wessing is an international law firm with offices in Europe, the Middle East and Asia. One of the firm’s core competencies is providing advice on matters related to renewable energy. Drawing from this experience, Michael is actively promoting the development of a sustainable solar market in the United Arab Emirates and the wider Gulf region.

He has published extensively on the development of legal frameworks on the basis of which viable solar markets can be established and is a frequent speaker at events related to the generation and use of renewable energy (particularly solar). He is a member of the board and legal counsel to the Emirates Solar Industry Association (ESIA).

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Disclaimer: The views and opinions expressed in this article are the authors own, and do not necessarily reflect those held by pv magazine.