Riyadh – Decypha: Saudi Arabia is an oil country; that at least is the common picture of the Gulf monarchy. However, despite this, the kingdom has in recent years increasingly opened itself up to other types of energy production, and aims to offer tenders for renewable energy projects at an overall value between $30 billion and $50billion, in the framework of its Saudi Arabia Vision 2030.
As the potential of solar energy in Saudi Arabia is fundamentally linked to its government's determination to transform its visions into reality, the question remains to what extend can the Saudi state shift its oil-reliant economy to accomodate a competing source of energy, both in terms of policies and investments, especially in light of current volatility the country is experiencing.
The Need to Limit Domestic Oil Consumption
Saudi Arabia has a consumption issue. The International Energy Agency (IEA) stated that the kingdom burns a formidable 900,000 barrels per day (bpd) during peak hours in the summer months, just to keep the lights on and the air conditioning running, burning a quarter of its production themselves, which is making it the sixth-largest oil consumer in the world despite the fact that it has only around 30 million citizens. At the same time, there is not a lot of pressure on Saudi consumers to reduce their consumption, as energy as well as gasoline prices remain far below the levels of other countries.
Furthermore, according to a report by the AUB Policy Institute, the country’s energy consumption hiked by 93% from 2004 to 2013, climbing further at an average of 7.5% per year since then.
These consumption rates in turn of course have an impact on the state's capacity to export oil, which is still its primary source of revenues with around 87%, especially considering the sharp cut in oil prices since 2014, falling from well above $100 per barrel to about half at press time, and the fact that Saudi Arabia bore the brunt of the OPEC's recent production cuts. Furthermore, the main oil consumer in the world, the United States, is increasingly able to meet its needs through domestic production while the kingdom's regional nemesis, Iran, is back on the market after years of international isolation.
Therefore, faced with an ever-increasing demand on energy, the need to generate revenues through oil exports, and a slumping oil price, one could assume that kingdom has a certain need to replace some of its oil consumption with renewables in order to free some of its production for export. However, the country's renewable energy capacity does not exceed 17 megawatts (MW), a figure that is basically not relevant compared to overall capacity and needs.
Plans and Dropped Ambitions
At the beginning of 2017, Saudi Arabia's Minister of Energy, Khalid Al Falih, announced that the government plans to source around 10 gigawatt (GW) of electricity from renewable energies by 2023 along with the investments of the vision 2030.
Renewables and nuclear energy are supposed to account for 30% of the state's energy mix by 2030. It is noteworthy, that there were previous, and even more ambitious, plans for renewables in the kingdom: In 2012, plans were laid out to source 41 GW from solar energy alone by 2032, eventually moving the goal to 2040. Even older ideas, by the King Abdullah City for Atomic and Renewable Energy (KA CARE) in 2010, suggested to boost the percentage of atomic and renewable energies to 50% by 2040, with a total combined capacity of nearly 60GW. However, after the collapse of oil prices in 2014, the government became more concerned with cutting expenditure to address the sudden deficit. This, along with the crowning of a new king in 2015, delayed all previous plans as priorities were reevaluated. Yet, it is the very same collapse of oil prices is likely to be the very reason why the country now might be sincere in its intentions to ramp up investments in the solar sector due to the aforementioned reasons.
Indeed, Saudi Arabia is becoming increasingly serious about renewables: It has, at the beginning of the year, set up a new body, called the Renewable Energy Project Development Office (REPDO), which answers to the Electricity Ministry and is handling the solar and wind energy tenders the country is posing, while it has also assumed authority over KA CARE, the cradle of the country's previous ambitious renewable energies plan. So far, it has posed tenders for a 400MW wind and a 300MW solar energy project, announcing the 27 shortlisted companies at the beginning of April, a broad mix of alliances consisting of international firms and some Saudi ones, including the country's largest renewable energy developer, ACWA.
This comes among the first phase of the National Renewable Energy Program (NREP) – phase two of which has also already been unveiled, including more than 1,000MW. The intermediary target of this is the installation of a capacity of 3.45GW by 2020, leading to the aforementioned nearly 10GW by 2030. The plan for this year includes tenders for about 1GW overall.
Challenges, Roadblocks, and Unfavourable policies
While many of the Saudi solar energy companies are rather active abroad, including establishment of projects in countries such as Jordan and Egypt, both of which have adopted a feed-in tariff system to boost the development of renewable energies, such a system seems to be lacking from Saudi Arabia, additionally, the government has long adopted a centralised approach.
Research shows that feed-in tariffs have been highly successful in developing renewables. The most prominent example in this regard would be Germany, which adopted such policies as early as 1991, restructuring it in 2000, leading to an increase of the percentage of renewable energy contribution from 6.3% in 2000 to 34% in 2016.
A feed-in tariff programme usually guarantees energy producers fixed price rates for their production over several decades, mostly declining over the years to reflect the evolution of technology and prompt innovation.
Such systems have been adopted by a great number of industrialised and developing countries worldwide, achieving great success in renewable energy penetration. Furthermore, such a system also led to a great amount of decentralisation and demonopolisation. Taking Germany as an example again, nearly half of the renewable energy production was citizen-owned as of 2013.
Therefore, studies, such as by the AUB Policy Institute and by researchers like Makbul Ramli of the King Abdulaziz University, have mourned the lack of such a system in Saudi Arabia, stating that the dynamics a feed-in tariff system creates through the utilisation of interests and capital of citizens as well as private companies could also aid Saudi Arabia in its push towards energy diversification. Such as a system could furthermore make use of rooftop solar energy system as so far the country only covers utility scale solar systems.
In fact, the kingdom follows an almost diametrically opposed approach with its heavy subsidies for oil-based power generation, making any development of renewable energies beyond state-sponsored projects extremely difficult.
Potential Opportunities
On the other hand, the general potential of solar energy in Saudi Arabia is great. Average solar irradiation is about twice as high as in Germany – around 1,800 Kwh/m2, up to 2,200 in certain areas, mainly in the south.
Additionally, companies such as Saudi Arabian NOMADD Desert Solar Solutions are increasingly tackling the problems that go along with setting up large-scale solar energy parks in a windy desert country where dust and sand blocking solar panels is a big problem.
All of this, along with the fact that solar energy is, on a global level, already an established energy source with many technologically advanced solutions, means that technology and know-how is available – if not domestically, then from abroad.
Moreover, there are indicators that the kingdom eyes to capitalise on the development of solar energy in more than one regard: Turki Al-Shehri, Head of the REPDO, told Bloomberg that the country aims to create more than 7,000 jobs by 2020 with its push towards renewables: The tenders posed by the state require bidders to spend 30% of the invested capital through home-grown workers and companies. He furthermore stated that the country is not simply looking to set up production capacities but that it wants to “ensure that whatever they [the companies] are opening is competitive, that it can compete globally for exports.”
This hints towards bigger plans of the country for renewable energies and solar energy in particular. However, as many ambitious plans the kingdom previously announced for renewables were eventually downsized or dropped completely, it has yet to be seen whether Saudi Arabia is able to follow through with its plans this time.
Moving Forward
Overall, it has been a common assumption that the necessities the situation forces upon Saudi Arabia will make sure that the country will realise at least parts of its plans by 2030. Domestic energy consumption is too high and the oil price, despite production cuts, remains too low for the country to remain unserious about its solar energy plans.
While it basically has all the necessary preconditions – sun, companies providing solar energy solutions, and a solid investment climate – policies in place do not hint towards a quick and dynamic development of solar power, as the government keeps relying on large-scale tenders and has so far given hints that it tends to establish a dynamic feed-in tariff programme – something which already bore fruit for plenty of countries around the globe in their push towards renewables.
If, however, the kingdom does shift its policies away from heavy subsidies for oil-based power generation and towards incentives for setting up solar power arrays, the country could easily achieve its goals in the framework of its vision 2030, and likely even go beyond – all given a more favourable climate that relies less on central-planning and more on a dynamic incentives system for private investors.
By Tim Nanns
