*The Gulf Arab states’ utility-scale energy storage market is expected to reach 1.5-2.5GW by 2027, compared to 0.1GW of capacity installed by 2021. This will constitute a growth of at least 15-fold by 2027 despite limited policy support, and persistent market and financial challenges.

*In the region, batteries are currently the largest source of energy storage system (ESS) and are dominated by the United Arab Emirates. These technologies will contribute significantly to planned capacity expansion, mostly through a large single-site application in Saudi Arabia. Additionally, pumped hydro storage is expected to provide half of storage expansion through announced projects in Saudi Arabia and the UAE.

*Storing large quantities of electricity in various ESS can address the variability of these renewable energy technologies and manage the need to curtail or quickly ramp up power generation sources. This is also an attractive option considering the chronic investment deferrals for network upgrades which target transmission and distribution operations. 

Increasing deployment of large-scale grid-integrated Energy Storage Systems (EES) in Gulf Arab states is being driven by the implementation of renewable energy systems. More and more, variable renewable energies are being integrated into the grid as upgrades to transmission and distribution networks are being deferred. As a result, demand for ESS is likely to grow.

Planned to expand at least 15-fold within the next four years, the announced large-scale storage systems in Gulf Arab states are together expected to exceed 1.5GW of capacity by 2027, with 7.5GWh of cumulative stored energy deployed through several notable projects in Saudi Arabia and the United Arab Emirates (UAE). Separately, a 1GW dam in Wadi Baysh, Saudi Arabia faces an uncertain fate. If the project proceeds, then the region’s combined storage capacity will reach 2.5GW by 2027, with a stored energy capacity of 13.5GWh.

This represents additions of 1.4-2.4GW of capacity, which is expected to be online by 2027, up from 0.1GW in 2021. This will increase stored energy from 1.8GWh to 11.7GWh. For comparison, the European energy storage market reached 3GW/4GWh by the end of 2021 according to Bloomberg NEF, whilst on a global scale, a record 10GW/22GWh was installed in 2021.

The ESS market has had a slow start in the Gulf, but renewable energy and, by extension, storage indicators - such as electricity demand, committed renewables targets, and grid status - highlight potential for fast growth. Historically, Gulf Arab states’ rapid increase in power consumption prompted a race to boost power generation capacity. Consequently, the annual growth rate of installed generation capacity in Gulf Arab states averages 7%-10%, compared to a global rate of 6%. Oil producers are now adding renewable energy to their sources of power generation, thereby freeing up oil for exports – and increasing revenues as a result.

To achieve the goal of freeing up oil for export and mitigate the impact of climate change, Gulf Arab states have pledged ambitious 2030 renewable energy targets ranging from 15% of power generation in Kuwait to 50% in Saudi Arabia. Although renewable energy has yet to make a dent in the Gulf Arab power mix, these states have the opportunity to leapfrog renewable energy project development. Fast-tracking renewables in the Gulf is enabled by a strong renewable energy resource base, favorable financing terms and lower project development risks compared to many developed and developing countries.

Deployed renewable energy in the Arab Gulf has thus far focused on variable renewable energy (VRE) that produces electricity from intermittent energy resources, particularly wind and solar photovoltaics. As the share of VRE increases within the power mix, so do the risks to grid stability, and power supply and demand balances. The grid is already constrained by low levels of investment in transmission and distribution networks. Power generation, on the other hand, attracts significant private sector investment due to its favorable revenue model which generously rewards investors per kWh produced and/or sold. This model is authorized by power purchase agreements signed with the utility or government. However, transmitting electricity through power lines or distributing it to end-users does not offer the same incentive.

Storing large quantities of electricity in various ESS can address the variability of renewable energy technologies and manage the need to curtail or quickly ramp up power generation. This is also an attractive option considering the chronic investment deferrals for network upgrades which target transmission and distribution operations. In addition, different ESS applications provide a variety of benefits such as grid services, including frequency regulation and energy arbitrage, among other ancillary services.

REGIONAL MARKET, GLOBAL TRENDS

Energy storage systems vary in technologies, applications, and characteristics. Indeed, energy storage technologies fall within one of the following categories: mechanical - such as pumped hydro storage; electrochemical - as in batteries; thermal - such as molten salt; chemical - like hydrogen; and electrical supercapacitors. Despite this variety, technology market trends in the Gulf are largely in line with global trends, focusing on pumped hydro storage and battery applications.

Globally, batteries are increasingly being deployed and they currently comprise the second largest share of energy storage after pumped hydro. Similarly, within the Gulf region, battery-type projects account for seven out of the eleven ESS projects planned by 2027. These electrochemical technologies are currently the dominant source of ESS in the Gulf and will contribute significantly to planned capacity expansion. The UAE hosts the bulk of the current energy storage systems in the region through sodium sulfur batteries, with a capacity of 108MW and 648MWh of stored energy deployed by the Abu Dhabi Water and Electricity Authority. However, Saudi Arabia plans to boost its capacity via a 1.3GWh off-grid battery application in NEOM, coupled with a 400MW Red Sea solar photovoltaic system. The project is the world’s largest and constitutes a significant push for the energy storage market in both Saudi Arabia and the Gulf region more broadly.

Yet, pumped hydro technology offers a higher capacity and duration margin compared to batteries. Pumped hydro storage has the potential to provide half of the Gulf’s planned ESS expansion – 1.25 GW once the UAE’s Hatta dam is completed towards the end of 2024, and if the Saudi Electricity Company’s Wadi Baysh materializes. This is on par with global ESS trends; pumped hydro storage will still constitute 42% of globally planned energy storage systems by 2026, according to IEA analysis. Although only two of the ESS projects in Gulf Arab states are pumped hydro, the technology’s superior capabilities will yield higher cumulative additions. Thus, despite making up seven of the eleven planned ESS projects, batteries will represent only 18% of total operational ESS energy, equivalent to 1.9GWh.

Other technologies, particularly thermal storage molten salt, will make a significant contribution to ESS capacity through the addition of 700MW of concentrated solar power when the fourth phase of the UAE’s Mohammed Bin Rashid Al Maktoum Solar Park becomes operational towards the end of 2023.

A PATH FULL OF CHALLENGES

The obvious need for and planned growth of ESS are taking place despite both limited policy support - since ESS has not yet been prioritized by electricity utilities and grid operators - and persistent market and financial challenges. Planned ESS expansion is underway, yet the project announcements do not follow specific action plans, nor do they benefit from incentives. Therefore, they remain highly unpredictable. Without support mechanisms, specifically in terms of regulation, government financing, and innovative tenders, ESS deployment will be piecemeal and subject to planning and implementation delays. This will contribute to investors’ risk aversion to emerging technologies. This uncertainty will further challenge Gulf Arab states’ abilities to meet their targets as it hinders integration of renewable energy into the grid.

Gulf Arab states have neither adopted regulations governing ESS nor have they outlined energy storage targets. Their ambitious renewable energy targets have not accounted for policies or targets for ESS, although some solar photovoltaic projects do include energy storage systems. In contrast, energy storage targets are common in the United States and China, where the ESS market is most developed. Ten American states have adopted storage targets to date, while China is targeting 100GW of storage capacity by 2030.

In addition, energy storage assets are not clearly defined or categorized within the Gulf power sector’s value chain. This means that it is unclear whether they fall within generation assets, are subset assets, or should be considered within transmission and distribution mandates. As a result, the guidelines, procurement practices, and utilities governing ESS remain uncertain. Regulations for and definitions of storage are typically slow to emerge but are critical for the provision of legal certainty and clarity over the role of ESS - the latter being crucial for investors when making such capital-intensive long-term investments. The early adoption of storage definitions - by regulators or, in their absence, government bodies - would be extremely beneficial, yet cementing such definitions is not a priority in Gulf Arab states. This complicates investment plans and could result in disagreements among market stakeholders.

In fact, defining storage has been a trying task for both the European Union and the United Kingdom. While the EU Clean Energy Package sets a definition for storage assets and outlines rules to facilitate grid connection and services, member states have either been slow to adopt these rules or issue their own definitions. Separately, before settling on their own definition, the United Kingdom’s regulator and renewable energy industry bodies disagreed for two years, causing uncertainty over storage’s role. In the context of Gulf Arab states, failure to adequately define or classify ESS could create hurdles in the future as electricity utilities are restructured and unbundled into several companies, creating numerous liberalized utilities, ultimately promoting instability and uncertainty.

Project financing and market structure complicate the situation further. For an energy storage project to be economically viable, storage capacity payments alone do not suffice. By stacking revenue - adding payments for various grid services provided by ESS on top of capacity payments - the ESS industry has grown. Market-driven projects capitalizing on lucrative ESS grid services such as frequency regulation and energy arbitrage have been the main drivers of developed storage markets. Yet such grid services are neither identified by utilities or grid operators nor recognized as having a monetary value in Gulf Arab states. Therefore, revenue stacking cannot take place, threatening ESS project funding.

The structure of the Gulf’s power market presents an additional challenge. Dominated by state-owned electricity utilities, with a single buyer model and subsidized electricity tariffs, ESS in the Arab Gulf will have no choice but to rely on government spending for the foreseeable future. As the Arab Gulf is an emerging market, ESS projects will also likely require more equity spending compared to other power projects, according to analysis from regional development bank Apicorp. Sustainable progress in deploying ESS in the Gulf will eventually require a power market and tariff restructure, increased private sector engagement, and stacked grid services - all of which are more easily planned than implemented.

Bid selection and award criteria also need to be remodeled to promote ESS. Auction-based contracts are typically awarded based on least-cost, technically compliant criteria. To date, this has driven record-low prices for electricity produced from variable renewable energy in Gulf Arab states. However, new evaluation and award criteria for auctions should be adopted to reflect the value of ESS stacked services and its associated technologies, applications, and specifications.

As a way forward, adopting new procurement measures - particularly renewables-plus-storage tenders and innovative auctions criteria - will likely drive additional storage investment. As in any emerging market, early tenders in the Gulf Arab states may involve high pricing and premium costs, with storage developers bearing some of the risks in return for early mover advantages. However, renewables-plus-storage tenders and the co-location of different renewable energy systems with storage would allow the Gulf to add storage applications while benefiting from its low-financing cost advantage. Tenders incentivizing paired renewable energy systems, in addition to storage, are the primary drivers of wider ESS markets. For example, such tenders have been recorded in Germany via the annual “Innovation Tender” adopted since 2020.

Despite facing challenges along the way, innovative procurement can help the Gulf grow its energy storage market while it develops support mechanisms for its ESS expansion.

*Jessica Obeid is Head of Energy Transition, SRMG Think