Coffee With: Markus H.-P. Müller, Chief Investment Officer ESG and Global Head of the Chief Investment Office of Private Bank, Deutsche Bank: Müller (LinkedIn) has held multiple posts at Deutsche Bank, serving as global head of chief investment office since June 2020. He was appointed as chief investment officer ESG in June 2021 alongside his role as global chief investment office head. Müller is also a member of the Deutsche Banks Group Sustainability Council. As an author of several books and articles on the transformation of society and economies, his main focus and interest is in the structural transformation of economies and societies, as well as in the area of sustainability.

Enterprise Climate sat down with Müller to discuss challenges to the energy transition in MENA, the investment gap in low-carbon power and sustainable transition technologies, and what governments in the region can do to bridge such a gap.

Edited excerpts from our conversation follow:

Enterprise: What do you think are the key challenges for the energy transition in the MENA region?

Markus H.-P. Müller: While it is of course important to talk about challenges for the energy transition, I believe we often don’t talk enough about the opportunities these challenges will present, whether from a social, economic, or environmental perspective. Especially for the MENA region, I think there are three main energy transition challenges that will create substantial opportunities.

The first relates to the diversification of energy sources, as the region is still currently heavily dependent on fossil fuel sources. Oil and gas accounted for 98% of total energy supply in 2020, against less than 2% for renewable sources. The second biggest challenge is developing updated and modernized infrastructure to allow for high renewables’ penetration, with grid expansion and energy storage facilities to address the different production/consumption patterns of renewable energy sources vis a vis fossil fuel-based systems.

The third challenge, the energy-water nexus, may be underappreciated, but is particularly important for the MENA region. Low carbon does not necessarily mean low water use, and some technologies, such as biofuels, carbon capture, and thermal or nuclear power plants, are relatively water intensive. Nascent technologies like green hydrogen are also expected to be big consumers of water. As the interdependence of water and energy is expected to intensify in the coming period, it will be particularly important for the region to take this dimension into account.

E: What are some key steps MENA countries need to take to accelerate their energy transition plans for emission-free energy?

MM: The first step is related to setting clear and precise renewable energy targets, which will in turn boost further clean energy investments. Another important step is related to renewables development and the upgrade of supporting infrastructure at the local level. Large-scale renewable development is dependent on local supply chains, but economies of scale for locally-manufactured clean energy technologies may be impaired by slow take-off of local projects and thin margins. Transmission and distribution networks need to be digitized, allowing for the fast sharing of data across the value chain, from energy producers to consumers.

E: What are the key challenges for MENA countries in taking this path?

MM: The first main challenge — which is a global one — is ensuring there is a market demand able to absorb an uptick in renewable energy supply. The second challenge — which is more specific to the Middle East’s oil-producing nations — is related to economic diversification. The region accounts for more than 30% of global oil production and as much as 40% of its GDP comes from fossil fuels in some countries. Shifting to renewables would allow countries to diversify economic activities, perhaps leapfrogging into export-oriented industrialization for renewables.

E: A recent ESG report from Deutsche Bank mentions changing the ways in which we distribute, store, and consume energy. How does this directly relate to MENA's ambitious renewables plans?

MM: First of all, the focus must be on switching sources of energy production to sources that do not involve greenhouse gas emissions. This relates to MENA insofar as the region is a major producer of fossil fuels. To put this into perspective, the region produced 31% of global oil and 18% of global gas supplies, while at the same time accounting for 18% and 40% of proven oil and gas reserves worldwide. Hence, MENA’s renewable plans could focus on increasing momentum for renewables generation, especially considering the abundance of renewable energy resources in this area. Approximately one fourth of all solar radiation energy on earth is received in the MENA region. For consumption of energy, electrification is the lever. Electrification is key to ensuring reliable and sustainable energy supply and consumption while reducing greenhouse gas emissions. To provide an example of electrification’s importance, industry is a major source of emissions and currently 95% of energy-related consumption in industry in the Middle East is fossil-fuel based. The transition will not be possible unless we find ways to electrify as many applications or uses as possible.

E: Can you tell us more about the investment gap in the MENA region with regards to low-carbon power and sustainable transition technologies?

MM: According to the International Renewable Energy Agency (Irena), the financing gap for the MENA region is estimated at USD 180 bn annually through 2030 for the region to meet its climate and energy goals. There are several reasons contributing to this gap. Improving the share of renewable power generation requires substantial cost, and it may, due to the criticalities of infrastructure investment, hinder investment into other necessary areas, such as energy storage. In this regard, another reason for the current gap is related to technology deployment and development. If certain necessary technologies, like long term energy storage or electric vehicle charging infrastructure, are not currently scalable, investments will need to focus on research and development for these essential technologies.

E: What can governments do to address this gap in energy transition funding?

MM: Market frameworks, long-term planning methodologies, and industrial value chains were created for a society powered by fossil fuels. As a result, governments have several issues when it comes to renewable-based structures and have to focus their attention on aligning the policy direction with faster implementation. New capacity markets for energy storage, for example, would be required, as would compensating mechanisms for low-utilization fuel-based sources crucial to system resilience. Such market designs would have to evolve in tandem with legislation and ownership structures. But there can also be other incentives provided by governments like carbon pricing systems, carbon taxes, and the development of voluntary carbon markets.

E: What are some of the compromises that should be made for energy transition in the region?

MM: The main compromise is related to the shift to a completely new business model for the entire economy, gradually phasing out fossil fuels while simultaneously promoting the development of renewable energy sources. Several utilities firms are spearheading the development of a renewable energy infrastructure, while numerous oil and gas firms are working to diversify their sources of energy. We expect public and commercial sector priorities to increasingly converge in coming years, spurred not just by scientists' calls for action but also by technological advances that make it possible for investments in renewable energy to make an increasing contribution to economic growth.

The whole energy value chain, from solar panels to distribution networks and energy storage companies, will gain from this global energy shift. But there will be transition risks in this process: Established energy companies will have to work hard to adapt to the changing business environment, if they want to avoid becoming stranded assets.

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