Viewpoint from Dr Nasser Saidi ADSW Advisory Council

10 AUG 2017

LCOE has reached its limits 

We regularly read about new record lows for the Levelized Cost of Energy (LCOE); such as US$ 1.79 ct/kWh for solar photovoltaic (PV) projects in the Kingdom of Saudi Arabia or US$ 1.97 ct/kWh in India. Those who are more familiar with the subject know that these numbers sometimes represent the levelized cost of energy, and at other times they indicate the anticipated levelized revenues for the energy sold under the terms of an auction. If you dig deeper, you start to understand that this number is based on multiple assumptions: not only about Capex and Opex but also debt and equity levels, the cost and term of financing, the life time of the asset, availability, wind speed and solar irradiation, the period and method of depreciation, residual value, and the exchange rate. Where the number represents levelized revenues, you also need to factor in assumptions about how the offtake agreement is adjusted over time and what the market price for energy will be after this agreement expires.

With all these considerations in mind, you may wonder what the value is of an LCOE? Can you rely on the figure; or should you only trust LCOEs when they come from one source, because then at least you can compare one LCOE with another? Or is the LCOE about as insightful as the typical statement in a press release where the new owners proudly announce that their project will supply so and so many households with electricity?

Let’s take a step back and ask ourselves if cost per kWh is the right number to look at? Is the underlying assumption that every kWh has the same value correct? Can I use the LCOE index in a world where storage is becoming more and more prevalent? Batteries typically increase the LCOE, but perhaps these higher costs increase the value of the system at the same time? And if so, by how much?

We all like a method that allows us to compare different solutions and technologies in a simple way. As long as LCOEs are calculated using the right assumptions, then they provide a straightforward comparison. But we should be cautious. There is an old saying, “what gets measured gets done”. But is a low LCOE what we want to get done, or would we rather demand and supply are matched at the lowest possible cost? Do we want to have security of supply that is sustainable environmentally? If the answers to these three questions are ‘yes’, or even if it is ‘yes’ to just the first question, then we need to go beyond a simple LCOE number.
In future, we need to work with a “function” rather than with a single “index”. Our new Cost of Energy Function (COEF) needs to start by capturing the system cost of power generation, and then progressively show how this cost changes, typically increasing, if the generation (supply) profile is adjusted to a demand profile. The resulting curve may well end before full adaptation has been reached as this amount of flexibility may not be possible technically. The demand profile will be a new assumption that is factored into our equations. We may also need to accept that two demand profiles are necessary: one for summer daily demand, another for winter. We will also need to include whether we are considering a base load or a peak load generation source.

In addition to generation curves, we can construct demand curves that start with demand today. By creating two curves, we can show the cost of energy efficiency (how much investment would be needed to reduce energy consumption) and the cost of flexibility (how much it would cost to move the point in time when energy is consumed by 30 minutes or one hour, for example).

Moving from a LCOE index to a function is not an easy undertaking, and it may well progress in stages. The car industry currently measures gas consumption using different driving profiles, depending on whether it’s in the city, on country roads, or on the highway. Regardless of the question, if we use a function or a group of values that are profile-based, we need to ensure that we all mean the same thing. Here, an independent body or workgroup could play an important role in developing and codifying a workable framework: a framework that captures the complexity of demand and supply, that captures the value of storage, and that helps regulators to set policies because it measures what needs to be done.


30 OCT 2017

Saudi Arabia's Renewable Ambition: 5 pillars for businesses

Ever since the discovery of petroleum in 1938, Saudi Arabia has used oil to grow its economy with billions of dollars generated each day through exports. Nearly 80 years on, the energy landscape is shifting, and the oil rich nation now has an opportunity to become a world leader in clean energy.

Saudi Arabia’s commitment to the Paris Agreement and its Vision 2030 reforms has set the country on a path to energy diversification. After experimenting with solar power in the 1970s, the country has embarked on building a competitive renewable energy sector.

However, no government can make the shift to renewable energy alone, completing this journey also needs the support of the business community. Global businesses are now recognizing the commercial opportunity of tackling climate change, in some cases regardless of the policy landscape, and are taking steps to become more sustainable, including making investments in renewable energy.

Ahead of Abu Dhabi Sustainability Week (ADSW) 2018, we have identified five pillars on which the business sector can help Saudi Arabia build its ambitious renewable energy programme.

Partnerships: It doesn’t matter if you’re a start-up or a multinational conglomerate, realizing a low carbon economy requires the technologies of tomorrow. Developing these solutions and bringing them to market demands knowledge-sharing programmes and public-private partnerships. Such partnerships will fast track the deployment of renewables in Saudi Arabia and support its aims to become an international leader in future energy technologies.

Harness local talent: Besides oil and the desert sun, Saudi Arabia’s people are a vital resource. The kingdom has some of the best engineering, science and business universities in the Middle East, with thousands of students graduating each year. Nurturing this raw talent, as well as existing experts in the petrochemicals industry, will provide the ingredients for developing and deploying renewables in the country.  

Energy efficiency: In many countries, improving energy efficiency across the business sector has allowed renewable assets to be maximised. Every business can do its part, but it’s not just about achieving efficiency and becoming more environmentally friendly. It’s also an opportunity for businesses to improve their bottom-line. Across the US and Europe, commercial businesses and heavy industry are embracing smart grid technologies like Demand Side Response (DSR) to improve energy efficiency. DSR automatically adjusts in real-time the energy consumption of equipment, from air conditioning to furnaces, without compromising operational performance. With 70% of Saudi’s electricity consumed for air conditioning during the summer, the adoption of smart technologies by the business sector could be key in reducing peak demand and balancing the country’s electric grid.[1]

Energy storage: As Saudi Arabia works towards its initial target of generating 9.5 gigawatts from renewable energy, businesses are well positioned to deploy energy storage across the electricity network. We all know that wind and solar are intermittent sources of power—the wind doesn’t always blow and the sun doesn’t always shine. But advances in battery technology are allowing clean energy to continue to supply power grids even when the sun has set and the air is still. This is making storage applications for utility-scale renewable energy more attractive for investors. At smaller scales, businesses are using storage to better manage their own energy needs and create new revenue streams.

Invest for the long-term:  By supporting the diversification of Saudi Arabia’s energy portfolio, businesses can generate significant ROI, including from R&D, manufacturing, and project development. Building any sector from the ground up is unlikely to deliver instant returns. However, companies like Tesla are demonstrating the benefits of long-term investment. When the company was formed in 2003, Elon Musk and Tesla’s other co-founders outlined a simple mission statement – ‘to accelerate the transition to a sustainable energy future’[2]. Fast forward 15 years and Tesla has overtaken Ford and General Motors in market value[3].

With the right regulatory framework, entrepreneurial spirit, and innovative solutions, countries like Saudi Arabia can realise their renewable energy ambitions. The path to a renewable energy sector can’t be reached through the adoption of just one technology or business model; it’s going to need a multi-pronged approach with governments and businesses working side by side to achieve a common goal. That’s why each year, ADSW brings together thousands of delegates from around the world to discuss effective strategies for achieving a more sustainable future.

Making long-term commitments to clean energy will create new markets, generate jobs and deliver new investment opportunities. Acting now will ensure businesses are ahead of the clean energy curve while helping to transform Saudi Arabia as a global player in renewable energy.





20 SEP 2017

Hurricanes and monsoons devastating impact across two continents

Hurricane season is at its peak, but that hasn’t made the dramatic pictures of Hurricane Harvey and Irma any easier to digest. Hurricane Harvey was the first devastating cyclone to reach the USA at the end of August, slamming into Texas and the Gulf of Mexico. Hot on its heels is the current category-four storm, Irma, raging across Florida, Miami and parts of the Caribbean.  

In tandem with the recent hurricanes coming in from the Atlantic Ocean, monsoon rain has stuck northern parts of India, Bangladesh and Nepal, displacing tens of millions, with the International Federation of Red Cross and Red Crescent Societies (IFRC) estimating that at least 1,200 have subsequently lost their lives.

Meteorological experts have calculated that almost a week's worth of rainfall normally experienced during the summer season fell across parts of Bangladesh in the space of a few hours.

These recent events are examples of freak weather patterns and extreme storms impacting various regions across the globe. All have been catastrophic for the populations affected, but what have been the wider economical and societal affects?

Hurricane Harvey, USA

Harvey was the first major hurricane to make landfall in the USA, since Wilma in 2005. What hasn’t gone unnoticed is the fact that the storm struck at the heart of America's oil and gas industry, at one stage knocking a third of US production offline, forcing the closure of multiple refineries around the Gulf Coast and disrupting a number of major fuel pipelines.

Petrol prices increased in anticipation of the storm, with shortages reported at gas stations in Texas, and as far away as the UK.

Goldman Sachs, the multinational finance company, estimates that the hurricane is anticipated to become one of the costliest disasters in postwar US history. Sachs has reported that up to one percentage point of third-quarter GDP will be deducted from US economic growth as a result of the storm.

Monsoon floods, South East Asia

Villagers have described the recent rains across parts of Northern India, Bangladesh and Nepal as the ‘worst in living memory’.

UNICEF has estimated 31 million people have been affected by the floods, with a further eight million affected in Bangladesh and over one million in Nepal. Aid agencies have also stated that out of the 1,200 plus who have lost their lives, 30 to 40 per cent are children.

Such flooding is catastrophic for rural areas around the world. Whilst these areas are used to seasonal flooding, the impact of recent events is unprecedented, with cattle, homes, crops and food supplies wiped out in many cases. What’s more, reconstruction efforts invariably take longer in developing countries than in wealthier economies.

Hurricane Irma, USA

Making landfall on the first weekend of September, Irma has steadily caused destruction across the Caribbean, Florida and Miami. At the time of writing, over 68 people had lost their lives.

In Florida and the Gulf Coast, where winds reached over 135 mph, coastal waters rose up to 10 to 15 feet above normally dry land, inundating homes, businesses and roads.  Less than one week after the storm hit, authorities in Florida reported a $250 million spend against various recovery efforts.

Elsewhere, several Caribbean islands have been devastated, with insurance experts already estimating the cost at more than US$10bn (AED 36bn). The island of St Martin had more than 60 per cent of its homes ripped apart, with no electricity, gas or drinking water.

Climate change to blame

Scientists and climate experts have widely attributed the severity of the recent storms to climate change, arguing that the warming of both the ocean’s surface water and the world’s atmosphere are exacerbating extreme weather.

Climate change and resource scarcity will be issues in focus at Abu Dhabi Sustainability Week 2018. In January, we’ll be inviting world leaders, global experts and business leaders to further examine climate change and its impact on world communities, as well as the practical steps that can be taken to mitigate the effects of our warming planet.