Financing Renewable Energy in the Middle East

The International Renewable Energy Agency (IRENA) estimates that between 2021 and 2030, $30 billion annually is needed worldwide to develop grid and mini-grid renewable energy infrastructure. And bridging the funding gap will require both private and public sectors to work together to scale up investments. 

The world's recognition of the need to shift toward renewable energy is already a big leap. However, it’s just one part of the story. To achieve ambitious energy targets, governments and energy entities around the world must attract adequate investment. And that task is easier said than done.

The International Renewable Energy Agency (IRENA) estimates that between 2021 and 2030, $30 billion annually is needed worldwide to develop grid and mini-grid renewable energy infrastructure. And bridging the funding gap will require both private and public sectors to work together to scale up investments.

The imperative to find financing for renewable energy projects is especially pronounced in the Middle East, which has a long history of reliance on oil. 

Various financing mechanisms are available

Conventionally, entities finance their renewable energy endeavors through debt financing. Often, this mechanism covers about 70% of a project’s overall cost. Debt financing comes from international and national banks, multilateral development banks (MDBs), and other financial institutions like the International Finance Corporation (IFC). 

Public funding, including grants and government budget allocations, is also critical. In the Middle East, sovereign wealth funds such as Saudi Arabia’s Public Investment Fund (PIF) and the UAE’s Mubadala are leading investors in renewable energy projects. These funds have been essential in mobilizing capital for large-scale projects like NEOM in Saudi Arabia, a futuristic city powered entirely by clean energy, and the Mohammed bin Rashid Al Maktoum Solar Park in the UAE.

However, there are various risks involved in sustainable projects, hindering potential investors from injecting funding. Apart from risk mitigation tools, various guarantees are also available, especially in areas with still-developing financial markets and geopolitical tensions.

For instance, governments offer government guarantees through long-term power purchase agreements (PPAs) with state-owned utilities or political risk insurance, which protects against geopolitical disruptions like war or civil unrest. Meanwhile, currency risk guarantees are a safety net against currency fluctuations (Usually, renewable projects are financed in hard currencies like the US dollar or Euro, but the revenue is generated in local currencies).

Innovative financial instruments

Apart from traditional financing methods, today’s renewable energy initiatives also receive funding from more innovative instruments, such as sustainable bonds, which cover various forms of clean energy-oriented bonds like green, social, sustainability, and sustainability-linked bonds. These bonds are issued to finance environmentally friendly projects, such as renewable energy. 

In the first three quarters of 2024, the Middle East saw $16.7 billion in sustainable bond issuances. Though this represents an 18% drop compared to the same period in 2023, the decrease is largely attributed to the waning halo effect of the UAE-hosted COP28. 

In this frontier, Saudi Arabia and the UAE are leading the charge. For instance, Saudi Arabia’s PIF was the first sovereign wealth fund globally to issue green bonds, raising $3 billion in 2022, followed by a $5 billion offering in 2023. Of this, $5.2 billion has been allocated to environmentally focused projects as of mid-2024. These bonds are used to finance projects like solar farms, wind energy, and other green initiatives that align with the region's long-term sustainability goals.

Earlier in July, Masdar, the UAE’s leading clean energy company, continued to strengthen its sustainability credentials by successfully raising $1 billion through its second green bond issuance under its Green Finance Framework. This issuance, which comes a year after Masdar's initial $750 million green bond debut, reflects the company’s commitment to financing new greenfield renewable energy projects. Projects financed by Masdar’s first green bond issuance in 2023 are expected to mitigate 5.4 million tonnes of greenhouse gas (GHG) emissions annually.

Beyond sustainable bonds, carbon financing is also emerging as a significant tool for the region. For instance, Saudi Arabia has launched the Regional Voluntary Carbon Market Company (RVCMC), which aims to scale up the voluntary carbon market and encourage sustainable business practices. Meanwhile, the UAE Carbon Alliance has pledged to purchase $450 million worth of African carbon credits by 2030, supporting both African climate goals and the UAE’s own climate pledges. 

Both an opportunity and a challenge

Developments like the ones mentioned above showcase how far the Middle East has come in financing renewable energy projects in the region and even beyond. However, to fully realise the potential of renewable energy, governments and private investors must continue to work together to create innovative financial instruments, mitigate risks, and support both large- and smaller-scale projects.