Saudi foresees end of fossil fuels in electricity generation
Saudi Arabia's former minister for petroleum and mineral resources has hinted that the country could phase out the use of fossil fuels by mid-century. The country's commitment to renewable energy was laid out in its Vision 2030 policy paper, in which a target of 9.5 GW of installed capacity by 2023 was set. However, environmental factors alone are not driving the push to renewables: subsidies for its electricity and desalination industries cost an unsustainable $61bn, or 9.3% of GDP, in 2015.
At an industry conference in June 2015, Ali Al Naimi, Saudi Arabia’s former minister of petroleum and mineral resources, hinted that his country could phase out the use of fossil fuels by the middle of this century. While some have called this projection unrealistic, it demonstrates the significant political will driving the Kingdom’s renewable energy industry, with Saudi Arabia set to account for 70% of the total value of the GCC’s renewable energy projects by 2020. A renewed commitment to renewable energy goals was laid out in Vision 2030, according to which Saudi Arabia will initially target 9.5 GW of installed capacity by 2023. The programme will be overseen by the King Salman Renewable Energy Initiative, which will be responsible for the legal and regulatory frameworks for the deployment of renewable energy, as well as the involvement of the private sector.

Subsidies

The economic case for renewable energy crystallised against the backdrop of falling oil prices in the 18 months to January 2016. Although the price had rallied by autumn 2016, it is unsustainable for the Kingdom to continue subsidising its electricity and desalination industries at a time when oil prices are 50% down on what they were in June 2014, and the government faces a SR326bn ($86.9bn) budget deficit. Subsidies cost Saudi Arabia $61bn – 9.3% of GDP – in 2015. “Ultimately, Saudi Arabia needs to move away from oil for power generation,” Paddy Padmanathan, CEO of ACWA Power, told OBG. “Not only because oil can be monetised in other ways, but also because burning oil to produce steam to then run a turbine is the least efficient way to generate electricity.” The most pressing argument to support the large-scale take-up of renewable energy technologies is an environmental one. This was demonstrated at the historic COP21 meeting in December 2015, where 195 countries adopted the first-ever universal, legally binding global climate deal. However, while environmental concerns loom large, more significant for Saudi Arabia is the increasing commercial viability and cost competitiveness of renewable technologies against a backdrop of low hydrocarbons revenues and widespread political and economic support for the subsidy reforms being implemented across the region. “What is driving renewables in the Gulf and in the Kingdom has more to do with economic than environmental concerns,” Todd Leyland, strategy consultant at Advanced Water Technology (AWT), told OBG. “At least 40% of a conventional desalination plant’s expenses can be attributed to power. In the Gulf these costs are heavily subsidised, but such subsidies cannot be expected to last forever.”

Vision 2030 has indicated as much, with its commitment to guarantee the competitiveness of renewable energy “through the gradual liberalisation of the fuels market”. Another advantage of renewable energy is the stability it affords stakeholders. “The volatility associated with oil prices disappears once you have built a plant and are running it on solar power rather than conventional energy,” Leyland told OBG. “This ensures investors and stakeholders can come up with a predictable long-term financial model.”

Diversification

In June 2015 Al Naimi said that Saudi Arabia planned to become a global leader, and possible exporter, of solar and wind power technologies. These ambitions were reasserted at the launch of Vision 2030, with the Kingdom seeking to “localise a significant portion of the renewable energy value chain in the Saudi economy, including research and development, and manufacturing, among other stages”. As such, there is an onus on developing technology in-country, rather than buying ready-made technologies off the shelf. AWT, a subsidiary of the technology investment company TAQNIA, was established in 2011 to invest in local and global technologies, and actively engage in their development. “There is an obligation to support the building of an ecosystem of renewable technologies,” Leyland said.