UAE: Solar to benefit from diversifying power-mix

01 November 2017

The United Arab Emirates (UAE) is working to diversify its power mix, creating substantial investment opportunities in solar generation. Investors will be encouraged by a stable operating environment, cost-competitive solar electricity prices and strong performance in the non-oil economy.

Security Environment 

Given its weak defence capabilities, the UAE seeks to reduce the risk of an interstate conflict with its neighbours by deepening commercial links and strengthening counter-terror links with the United States. However, an increasingly robust US stance on Iran has raised the likelihood of an interstate conflict in the Gulf caused by miscalculation by either party, although this remains outside our core scenario. In the face of deteriorating Iran-US relations, the UAE’s strong engagement with the United States will likely motivate Iran to take provocative actions against it. This may include enhanced patrols by the Islamic Revolution Guards Corps Navy (IRGCN) in Iran’s Salman offshore oil field. This borders the UAE’s Abu Al Bukhoosh field, although the maritime border has not been defined. However, an escalation to full military conflict with Iran is unlikely. 

Islamic terrorist groups, such as Islamic State (IS) and al-Qaeda, have struggled to establish a foothold in the UAE, given its effective security and surveillance systems. However, the country’s engagement with the US and participation in regional counter-terror operations will make it an aspirational target. In September 2016, a pro-IS social media channel encouraged attacks in the Emirates in response to the country’s actions in Syria and Iraq. Any terrorist incident in the next 12-months is likely to be an active shooter or improvised explosive device (IED) attack on crowded public spaces, such as hotels, shopping malls and bars in Dubai and/or Abu Dhabi. In January 2017, a UAE national was convicted of planning to attack a bar in Umm al-Quwain. Details of the planned attack were not released.

Trading Environment 

Throughout 2017, the UAE has restricted oil production in order to comply with an OPEC deal to cut global supply. The deal, which was initially agreed in late 2016, will lead to a 0.1% drop in production in the UAE in 2017, following a 2.2% growth in 2016. 

Production cuts will weigh on the UAE’s economic performance in 2017, with real GDP growth forecasted at 2.2%, down from 3.0% in 2016. Looking ahead to 2018, much will depend on whether OPEC decides to ease the production cutting deal, which currently runs until March 2018. In October 2017, reports suggest that the cartel favours its extension throughout the whole of 2018. 

If the deal is not extended, an uptick in oil production could spur economic growth of 2.9% in 2018. 

However, underperformance in the hydrocarbons sector masks positive performance in the non-oil economy. Robust global trade is driving strong performance at the UAE’s Port Khalifa, Dubai International and Abu Dhabi International logistics hubs. The economic embargo of Qatar is also increasing numbers of Saudi Arabian tourists visiting the UAE, supporting the tourism industry. Robust performance in the non-oil sector will be reflected in Dubai’s headline growth figure. Its diversified economy will ensure it outperforms, with real GDP forecasted to expand by 3.2%. 

Investment Environment 

There are significant investment opportunities in the UAE’s power sector, as the country seeks to diversify its generation mix to free up gas for export. The UAE’s growing population is also driving demand for new capacity. The principal beneficiaries of this diversification push will be the nuclear and solar sectors.

Solar electricity prices in the UAE have fallen by 75% in the last 5 years, making solar cost-competitive with thermal generated power. As a result, solar capacity is forecasted to grow by an annual average of 54.2% between 2017 and 2026. 

In May 2017, Abu Dhabi Water & Electricity Authority (ADWEA) secured a USD 872 million financing package for the construction of a 1,777 MW solar plant, which will be the largest such asset in the world. Investors in the power sector will encounter a favourable business environment in the UAE, despite varying legal and regulatory systems between the emirates. The country’s reliance on foreign investment mitigates expropriation risks, although liberalisation of the power sector is making slow progress.

UAE CPS

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Spain, Guinea, Indonesia, and Togo, all of which have been the subject of recent enquiries from JLT's client base.

World Risk Review

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

Download November Risk Outlook

For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com