New sources of energy for a sustainable futureMarch 13, 2023
Paddy Padmanathan, president and CEO of ACWA Power, talks to The Energy Year about Saudi Arabia’s position in the global energy transition and the place renewables will have in the company’s power generation portfolio moving forward. ACWA Power is a developer, investor, owner and operator of power generation, water desalination and green hydrogen plants globally.
How is Saudi Arabia positioned to lead the global energy transition?
Saudi Arabia’s domestic oil and gas consumption was previously focused on reliably and competitively making energy available to provide for domestic, municipal and industrial consumption needs and for fuelling the two large petrochemical complexes at Yanbu and Jubail to deliver the full range of chemicals and plastics required for modern life to the world. It is because of having developed this industrial infrastructure and the capacity to deliver these energy solutions of the past that the country is now extremely well positioned to provide the energy solutions of the future.
The challenge for Saudi Arabia is to destroy the myths and misunderstandings prevailing about this country. Saudi Arabia is no longer simply clinging on to the oil economy or encouraging the continuing dominance of oil. It now not only recognises the link between continued, unabated carbon emissions and climate change, but also wants to remain a responsible citizen by supplying the energy that the world needs while it transitions to clean energy production.
As a priority, the country has embarked on a mission to eliminate emissions from energy production for its own use, while also beginning to establish the infrastructure and capacity to serve the world with clean energy in the future, given the abundant resource capacity and delivery capability it possesses.
The country is in a very fortunate position. It used to have all its resources underground. However, the high temperatures for much of the year and the vast, uninhabitable deserts have now turned out to be valuable resources. There is abundant potential for solar power, combined with a large, unoccupied landmass that is not suitable for anything else.
This is coupled with strong wind power prospects and even a certain amount of geothermal power potential. All this, combined with the very strong sovereign capacity and ability to invest and finance the capital expenditure required for the energy transition, will allow Saudi Arabia to not just competitively transition its own energy mix to green energy, but also to generate and export clean energy to the GCC region, the Indian subcontinent, Central and Eastern Europe, and Africa.
What are the country’s priorities for reducing the carbon emissions of its energy mix?
Step one is to take oil completely out of power generation by 2030, as well as increase generation capacity from renewables to at least 50%. I think Saudi Arabia will overshoot the target both in terms of time and with the renewable energy content of the generation capacity, simply because the commitment, resources and capability are all available.
For instance, the oil-fired Shuaibah IWPP, ACWA Power’s first project, will be decommissioned by 2025, 30 years before the expiry of its technical life and nearly 10 years before the expiry of its contractual life. It’s the first privately owned oil-fired plant that will be decommissioned as part of the government’s commitment to take oil out of power generation.
Even back in 2009, when Shuaibah was commissioned, the plant complied with the environmental impact-mitigation regulations of the time and incorporated the best available technology. Thus, we incurred additional capital expenditure to install and use a flue-gas desulphurisation (FGD) system to remove sulphur dioxide from exhaust flue gases and electrostatic precipitators to remove particulates from emissions.
In the case of introducing renewable energy into the fuel mix from scratch just five years ago, the country now has a rapidly growing fleet of renewable energy plants at scale in operation, under construction and in advanced development. ACWA Power alone has a framework arrangement with the sovereign wealth fund, PIF [Public Investment Fund], to lead the development of 70% of the renewable energy assets the country will procure over the next seven years as it seeks to fulfil its ambition of having at least 50% of its power generation capacity from renewable energy.
ACWA Power as a company has been pursuing the same trajectory since the very beginning, with its mission to reliably and responsibly deliver electricity, desalinated water and now green hydrogen at the lowest possible cost, and fulfilling environmental stewardship, social responsibility and good governance. By 2050, we have no doubt we will be net-zero.
How do you expect renewables to grow within ACWA’s power generation portfolio in the future?
Our company has gone from zero to where we are today in 18 years, with assets worth approximately USD 68 billion in 12 countries and delivering spectacularly competitive value by minimising cost without compromising reliability, health and safety, which is a major achievement.
Today, we have a portfolio with a contracted capacity of 44.4 GW and 6.4 million cubic metres per day of water desalination capacity, including the world’s first at-scale green hydrogen project now under construction to deliver up to 600 tonnes per day of green hydrogen from 2026. 39% of our portfolio is already renewable energy. We are well on our way to meeting our 2050 net-zero target.
By 2030, I aspire to see our portfolio triple in size across the board and the renewable energy content to be in excess of 75%. As we are able to deliver renewable energy at very competitive prices, we see green hydrogen as a significant growth opportunity, given that 65% of the cost of producing green hydrogen is the cost of energy.
In an equal partnership with NEOM and Air Products, we are constructing the world’s first large-scale green hydrogen plant. We are already working on four more. In Oman, for example, we are replicating our NGHC [NEOM Green Hydrogen Company] project experience and have already signed a joint development agreement (JDA) towards a multi-billion-dollar investment in a world-scale green hydrogen-based ammonia production facility powered by renewable energy with Oman’s OQ and Air Products. We have also signed MoUs with partners in Thailand, Indonesia and Uzbekistan for new green hydrogen projects.
We have positioned ourselves very well, leveraging our first-mover advantage in this critical solution that is vital to addressing a significant share of carbon emissions.
What will be the main drivers to grow the global supply and demand of green hydrogen?
The world uses 100 million tonnes per year of grey hydrogen for a range of products contributing to 4% of carbon emissions. We should be looking to convert that immediately to green. That’s the closest opportunity.
Given that hydrogen can generate the high temperatures many industrial processes require and can replace carbon as the reducing agent in certain other processes such as steel making – which all together produce 14% of emissions today – green hydrogen should then contribute to decarbonising these products. Finally, even as transportation moves to being powered directly by electricity, long-distance and heavy-goods transportation, shipping and aviation will need to rely on hydrogen directly, or by combining it with another molecule.
However, this transition will take time. You cannot build a green hydrogen plant overnight. The NGHC plant is a four-year construction project. During the same time, industrial consumers involved in steel, chemicals and fertilisers will need to reconfigure their processes to absorb green hydrogen at scale.
While there is much excitement around hydrogen today, and rightfully so, even beyond recognising that electricity is what fuels the production of green hydrogen, the use of electricity as primary energy will grow significantly, and thus, renewable energy will remain a massive opportunity.
By 2050, the total amount of energy the world consumes is going to be 2.5 times what we consume today, and the share of electricity in that enlarged consumption is expected to grow from about 20% to 50-60% as transportation and industrial demand moves to electricity.
How is ACWA Power working to secure long-term commitments from green hydrogen offtakers?
We have a very good idea of how and where we should be focusing in order to continue reducing the prices. We have now demonstrated the ability to go forward by structuring USD 8.5 billion of financing for that first project, the NEOM Green Hydrogen Project. We have now begun construction.
Armed with all that knowledge and experience, we are going forward to develop more plants and get into long-term contract discussions with hydrogen offtakers such as VERBUND, the Austrian electricity supplier, KEPCO [Korea Electric Power Corporation] and POSCO of Korea, and Pupuk Indonesia. These are mostly industrial consumers looking for a long-term supply of green hydrogen as they reconfigure their technology and their manufacturing lines for green products.
What is the main challenge in ACWA’s quest to increase its footprint in Africa?
The main challenges are a lack of clarity on country-level ambition; disbelief regarding how competitive renewable energy can be, even in a poor, credit-challenged country; procurement processes and procedures that are not transparent or are convoluted; and the resistance from incumbents who currently live off often extremely expensive and utterly inefficient and inappropriate fossil fuel-based generation. The current well-documented challenges faced by South Africa are an example.
However, beyond all this, there is an issue which comes first. Take the case of Nigeria. They rely on old and inefficient diesel generators. Since they import diesel, it is extremely expensive. The average cost of energy is USD 0.45 per kWh. Since energy is expensive, people can only use it for the absolute essentials. Nigeria remains an economically inactive country and thus a very high-risk environment where capital gets priced very high and contributes to this unnecessarily high energy cost.
However, the cost of energy should be at most USD 0.15 per kWh, using renewable energy and batteries given where the cost of solar panels and batteries are today and given Nigeria is endowed with excellent, free solar energy resources. To recover the cost of the panels, even in a country like Nigeria, cannot be more than USD 0.11.
To polish it and keep it going is another few cents. In fact, ACWA Power had offered a price of USD 0.0245 per kWh in Ethiopia in 2019, in the pre-Covid-19 and pre-internal-strife era, albeit without batteries, making it possible to deliver electricity only when the sun was shining. If one were to extrapolate this to the costs of today, impacted by the inflationary pressures and the increased interest rates and adding a storage solution, it would still be less than USD 0.10 per kWh.
At these levels of energy cost, given how essential energy is to any economic activity, which in turn will fuel social prosperity, the countries can then economically grow and prosper, reducing credit default risk and thus it can keep further reducing the cost of energy. Given the opportunity presented by Africa and the solutions that are now available at a much lower cost than in the past, now is the time for policymakers and the private sector to re-evaluate the risk/reward equation and accelerate the deployment of renewable energy across the continent.
How will green energy affect ACWA Power’s potential to further develop its desalination capacity?
As we have learned from the crises in Cape Town and Amman, the water crisis is building up slowly and steadily. However, like all crises, it will accelerate, and this case will be further “fuelled” by climate change. The solution must be to first use and then reuse water efficiently. Then, given that all the surface sources are being fully utilised, we have to turn to the sea and desalinate seawater, which is going to be needed at an increasing scale.
ACWA Power is already the largest private desalinated water producer in the world. Water desalination is an energy-intensive process which has traditionally been fuelled by fossil fuels. With the significant advances in material science, energy recovery and process innovation, ACWA Power is at the forefront of reducing energy consumption from as much as 15 kW per cubic metre just 15 years ago to just under 3 kW per cubic metre.
More recently, taking advantage of the cost reduction in renewables, we are putting more and more renewable energy into that desalination. ACWA Power is proud to be developing the world’s first large-scale plant that uses renewable energy as a significant input. The 900,000-cubic-metre Al Taweelah plant in the UAE being developed and operated by ACWA Power is not only the largest reverse osmosis desalination plant in the world, but it is also fuelled by over 40% photovoltaic energy.
I see no reason why, in the near future, we will not be able to have desalination plants that are 100% powered by renewable energy.
What is the preferred source of financing for renewable energy projects in the Middle East?
Given the importance of energy to enable economic growth and comfortable lives, the need to eliminate carbon emissions as fast as possible to preserve the planet and the fact that carbon emission-free renewable energy solutions are increasingly becoming cost-competitive, the transition of the current energy systems to renewable energy and the much-needed expansion of energy supplies to widen energy access offer a massive opportunity.
These renewable energy generation, transmission and distribution assets are reliable, capital-intensive assets. They offer well-understood and manageable risks to generate stable returns over the long term. They are all precisely the type of investment opportunity sought by a vast amount of capital in many pockets of liquidity across the world.
The Islamic faith favours profit generation via investment in assets that deliver a useful service rather than simply placing capital and seeking interest for that capital. In the Middle East, where the majority practice the Islamic faith, a significant additional pool of liquidity is available for this asset-based profit generation activity of providing energy while utilising Islamic financing structures.
While finance is available in abundance, the funding needs are so great that I think we should be tapping into all forms of available liquidity.
What are the main challenges for renewables developers as they try to keep up with demand?
The number and scale of projects will continue to grow as the pace of capacity expansion and energy transition accelerates. Thus, the demand for components that go into these generation, transmission and distribution assets and the equipment and construction capacity needed to deliver these projects are all increasing at an unsupportable rate. They are further exacerbated by the time it is taking for industry, logistics and supply chains to ramp up to the normal, steady state of operations after the Covid-19 pandemic, the current war in Europe and the ensuing energy crisis.
While all of this has manifested in significant shortages and rampant inflation, I am confident that the private sector will see the opportunity ahead, scale up fast and respond to the demand by 2024 or 2025.
What I am far more concerned about is the vast ramp-up of human resources capacity that is needed for the massive task ahead. While the developing world in particular is endowed with a disproportionately higher and growing number of younger people, it is not just about numbers or having more people. What this unprecedented energy capacity expansion and energy transition opportunity needs are people with the combination of skills, passion, commitment and the willingness to work hard for long periods, often in the isolated areas where these renewable energy systems are built.
Industrial capacity can be ramped up over a 5- to 10-year period, fuelled by demand and thus the opportunity to make a profit by opening more mines and refineries, building more manufacturing facilities and assembling more machinery. However, developing people takes a lot more time. It could arguably even take a generation.
We at ACWA Power see attracting, training, developing and retaining people as the most critical need to serve ourselves and capture the vast opportunity ahead of us while reducing implementation and operational risks. Thus, from the earliest days of the foundation of the company, we have been mindful of this issue and, in our own way, have been addressing it.
For example, in as far back as 2008, we developed a large vocational training school to equip technicians for the power generation and desalinated water production sector in Rabigh. There, we develop the potential in the youth from rural areas who are ambitious enough and willing to relocate and serve this sector. They are given the opportunity to take part in a two-year training programme with an optional guaranteed job.
In Uzbekistan, we identified the country as a place to invest in power generation and now the green hydrogen production sector. Even before we started tendering or developing any new projects, we set up a training school.
Finally, as we develop significant assets in all these emerging markets, we must not lose the opportunity to also enable local content to further fuel in-country economic activity and employment creation to keep reducing risk and enhancing the health, wealth and happiness of the communities we serve.