‘There have been multiple announcements with regards to sustainable financing,’ Marthinus Vermeulen (OilSERV) highlights. ‘They illustrate the fact that regional governments are willing and able to steer investments towards renewables, clean energy and ESG objectives.’
For the first time in the history of COP events, finance was one of the major topics discussed at the Glasgow COP 26. Participants agreed that both the public and the private sectors have available or transferable funds to devote to foster the global energy transition and achieve net-zero emissions.
‘Worldwide, more and more private individuals and companies invest in energy bonds, for instance. A clear trend is emerging,’ Nadine El Gemayel (VWT) confirms.
Indeed, in 2021, more than one fifth of the world’s largest companies have set their own programmes to tackle climate change. Many of these targets include using renewable energy and to engage in green finance, thus giving an opportunity to the private sector to complement public investments.
Green and Sustainable Finance. What is the difference?
Green finance aims at collecting funds in order to address environmental issues and help manage the financial risk linked to the environment. Its two main instruments are green loans and green bonds, which can only be used for climate- and environment-related projects.
Sustainable finance, on the other hand, proceeds from green finance, in that it covers all ESG matters and risks, and it aims at expanding the sphere of sustainability to various levels of the economy.
‘In the Gulf, governments have headed in a similar direction, which is essential to mark their intentions in this area and to attract financial flows from major companies that have committed to provide the necessary effort to contribute to the transition,’ Nadine El Gemayel continues.
As Ahmed Samir concedes, ‘the financing of the large projects currently being carried out is not always apparent. Most GCC countries still need to develop their sustainable finance policy framework, although interesting novelties have arisen.’
The most recent initiative and the most talked about by legal professionals is the recent announcement by the Saudi government that green bonds would be issued, in compliance with ESG goals. The National Debt Management Center (NDMC) has declared that green bonds will most likely become their main funding avenue to back renewable energy projects.
The Kingdom’s Sovereign Wealth Fund has through the Public Investment Fund (PIF) developed a Green Finance Framework aiming at raising capital and delivering long-term sustainable investment to support its switch to renewable energy.
In the UAE, the Abu Dhabi Sustainable Finance Declaration initiative has been open to private and public companies since 2019. Its purpose was to design guidelines for organizations to reduce their carbon footprint with the support of banks and it proved to be an important milestone int the country’s push towards renewable power.
The Dubai Green Fund is the longest-established government investment firm dedicated to renewable energy projects. It was created as the investment branch of DEWA as early as 2016 and is now the ‘first specialised green investment fund in the MENA region’.
‘Similar initiatives’ charters have been signed across the region, notably in Bahrain and Oman,’ Ahmed Samir adds.
More specifically, though, Gulf countries offer a range of concrete incentives to attract investments in renewable energy.
In Saudi Arabia, for instance, the National Renewable Energy Program (NREP), in addition to allowing full foreign ownership of onshore projects, also include, under specific conditions, custom duties exemptions for the import of certain raw material and equipment, as well as other tax and land incentives. Similar decisions have been made in Bahrain, Oman and, more recently, in Qatar and Kuwait.
In the UAE, as most power generation is furnished by IPPs, regulation has focused on the financing of these providers. In particular, the law authorises lease financing for solar photovoltaic equipment, thus encouraging competition in the sector and ensuring more affordable prices for power suppliers and customers.
Other than that, IPPs are not specifically incentivised and are usually supported by nonrecourse loans or common long-term financial instruments. Generally, IPPs carry contractual obligations for the developer to ensure that all appliances and materials meet the local safety and efficiency requirements. A corollary to this obligation is that promoters are often bound to prioritise the use of locally manufactured equipment, which can add to the overall cost of the investment.
However, standard IPP agreements typically include take-or-pay clauses which require buyers to purchase a minimum of energy regardless of their need, thus protecting the providers and creating an environment favourable to investors.
The broader renewable regulatory framework can also ensure incidental advantages that are likely to draw investments. The Renewable Energy Certificates (RECs), pioneered in the region by the UAE and championed by the Abu Dhabi Department of Energy’s Regulatory Policy for Clean Energy Certificates provide a government accreditation to corporate businesses or private households wishing to prove their resort to a measurable amount of renewably produced electricity. Renewable Energy Certificates in general are tradeable financial instruments, meaning that once the renewable energy is fed to the power network, the certificate can be traded as credits that grant the benefits ESG-created value.
In any case, the foundations for green finance are still being built. Aside from tangible initiatives and proposals in Saudi Arabia and the UAE, everything remains to be done in the other GCC jurisdictions. Indeed, legal professionals and investors are looking forward for this area to expand, which should promote trade in the industry.
In fact, whilst they anticipate some pitfalls, experts are optimistic about the future of renewables in the region.
Some of their concerns are related to technology. Like the fact that renewable energy is not currently efficiently storable and has to be used as it is produced or that the renewable energy currently produced worldwide cannot supply the entire planet. In fact, if the fact that if most GCC counties’ infrastructure seems to be compatible with renewables or easily adaptable, other jurisdictions are in the opposite situation, forcing engineers to rethink their facilities on a large scale, requiring time and further extensive investments. Furthermore, renewable energy installations require a lot of space. For example, wind and solar farms need a large amount of space to generate enough energy.
Other concerns are directly linked to specific regulatory approaches, for which the legal and the business communities offer insights into how the broad landscape could be positively improved.