In Abu Dhabi’s energy oasis, setbacks and progress by Brian Dumaine @FortuneMagazine April 29, 2013, 10:24 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons FORTUNE — The last time we visited Masdar — the green city being built in the desert sands of Abu Dhabi — the project wasn’t much more than an architect’s scheme. Fast-forward and what you’ll find is an operating university, the Masdar Institute, and nearby the energy-saving Middle East headquarters tower of Siemens, plus various shops and restaurants — including a sushi joint, a bookstore, and an organic supermarket. To date, Masdar’s buildings reduce energy demand by 56% and potable water demand by 54% compared to traditional Middle Eastern structures. What’s perhaps most impressive is that the small city is currently powered 100% by renewables. Electricity is generated by a 10-megawatt solar PV plant located on-site and a rooftop solar PV installation totaling 1 megawatt. Nawal Al-Hosany, the director of sustainability at Masdar says: “As we build the city we’re constantly experimenting with a lot of new technology, and we’re constantly learning from the process. Each new phase of building enforces the next.” Indeed. This is tricky business. As an example, Al-Hosany says that they originally wanted to conserve water (and save money) by tapping the water table beneath the city instead of shipping it in — which is common in the Middle East. When the engineers found that the groundwater was many times saltier than seawater, they switched gears and are now researching how to build a solar-powered desalination plant for seawater. MORE: The truth about social media: It’s a risk Much of the energy savings at Masdar come from smart design. Street layouts mitigate the effects of the hot summer sun. Walkways and plazas are oriented away from the south and contain awnings and shade trees. Building exteriors use materials to minimize reflected sun. Al-Hosany says the cityscape is as much as 40 degrees cooler than a conventional urban area. Masdar is an effort on the part of the government of Abu Dhabi to invest its oil dollars in a greener future. Think of it as a lab where sustainable ideas can be tested. The project will now take a couple of years longer to finish than first thought. And so far, it’s not clear whether any of the technology being deployed has an economic payback. The goal, however, is to learn how to integrate green ideas into a livable desert city. What many miss is that Masdar is more than a city. At Masdar Institute, a university operated in conjunction with MIT, 337 masters and PhD candidates from all over the world are studying ways to make our energy, buildings, water, and food more sustainable. Masdar Capital, the project’s investment arm, backs clean-tech projects around the world, hoping to get in early on promising new sustainable technologies. Masdar even has a $4 million award program — the Zayed Future Energy Prize — like the vaunted X-Prize. Each year it recognizes companies and individuals who show leadership in renewable energy and sustainability. And who knows? Maybe someday a few of those notions will end up in Masdar City.