Saudi Arabia’s green agenda: renewables at home, oil abroad

When Paddy Padmanathan first pitched the idea of introducing a sliver of renewable energy into Saudi Arabia’s electricity supply, the state utility gave him short shrift.

The chief executive of Riyadh-based energy firm ACWA Power recalls being politely told to “go away” in 2007 after it was pointed out that the supplier was receiving oil at a “very competitive price,” far cheaper than solar.

It was a predictable response in the world’s top crude exporter, which has for decades happily burnt billions of barrels of oil to fuel power plants, desalination units and industries at heavily subsidised rates. “The incentive was not there,” says the Anglo-Sri Lankan executive.

But 15 years on, he and ACWA are on the front lines of the Middle East’s most ambitious renewables programme as the energy-guzzling kingdom that is one of the planet’s top emitters of CO₂ promises to go greener and cleaner. Saudi Arabia last year set the target of having half its electricity generated by renewables by 2030.

That means raising the amount of power generated by solar and wind from less than 1 gigawatt to 58 gigawatts in just over seven years. ACWA, a state-affiliated company, is the lead vehicle developing renewable projects.

“Yes, it’s ambitious, [but] it’s been done in a heartbeat in China, it’s been done on a significant basis in India,” Padmanathan says. “Money is not in short supply [and] the commitment is there from the procurer. The supply chain, yes it’s a challenge, but it’s not insurmountable.”

The state-backed plan, if successful, would represent a radical shift in the kingdom and be critical for Riyadh to lower its emissions to net zero by 2060, as it pledged in October 2021 and reconfirmed at COP27 this month.

Despite the state’s dependence on fossil fuels, officials say the kingdom is serious about tackling climate change and adapting to the energy transition — even as it enjoys a huge petrodollar windfall from oil prices driven up by Russia’s invasion of Ukraine.

They cite plans to harness emissions generated by the production of hydrocarbons by developing carbon capture and storage technology; ambitions to become the world’s top exporter of clean hydrogen; and the launch last year of Riyadh’s “green initiative,” with goals that include planting 10bn trees in the kingdom.

But climate experts remain sceptical that the kingdom will meet its promises, having watched previous announcements about renewables come and go with little, if any, traction on the ground.

Instead, they see a state addicted to fossil fuels that has historically been obstructive at global climate change talks. At COP27, it successfully campaigned alongside other countries to keep language on the phaseout of all fossil fuels out of the final declaration.

“It’s a little hard to take it seriously before having actually seen the concrete development,” says Mia Moisio at the NewClimate Institute. “There’s a history of kind of stop-and-go in terms of renewable energy policy.”

‘A triple-win situation’

But officials in Riyadh say this time there is genuine appetite for renewables — with more at stake than burnishing the kingdom’s image with the green lobby.

While much of the world is looking to transition to cleaner energy to wean themselves off fossil fuels, in Saudi Arabia the shift is just as much about freeing up more crude oil for export.

The calculus among Saudi policymakers is that even as nations seek to go green, the world will still need oil, particularly from the lowest cost producers like Saudi Arabia.

The less the kingdom burns for domestic use, the more it will be able to export at global prices, reaping more petrodollars to help finance the government’s grandiose plans to develop the nation.

“It’s a triple-win situation,” says energy minister Prince Abdulaziz bin Salman, in that it will save the kingdom money, bring in revenues, and lower domestic emissions. “We wish we had the means to do it in one year, but because we need to expand our gas master system it will have to be in a phased approach.”

He estimates that the kingdom could make a net saving of $130bn in the years to 2030 by introducing more gas and renewables into the energy mix and freeing up oil to export.

At present, just under half of Saudi Arabia’s electricity is fired by oil and related liquids, with the kingdom burning an average of 1mn barrels of crude and related liquids a day to keep the lights, air conditioners and desalination plants on. The remainder relies on gas.

Saudi officials make no apologies for insisting oil will remain core to their plans, despite Riyadh’s push to diversify the petrodollar-dependent economy.

As part of the strategy, Saudi government entities have been mobilised to support an “oil sustainability programme” to ensure the commodity remains part of the future energy mix by developing new uses for hydrocarbons, including using polymer-based materials in concrete, roads, tiles and packaging.

It is what Prince Abdulaziz describes as a “hedge” to ensure the longevity of oil’s future as traditional uses of the fuel, particularly for transport, decline and the kingdom looks at how best to monetise its primary resource while it can.

“You will still have growth [in oil demand], and even if you plateau or it comes down, look at who [else] is going to remain producing,” Prince Abdulaziz says. “In absolute numbers, your production may not change, as a matter of fact it may grow because some other producers may shrink.”

The kingdom is already working to increase its production capacity from 12.2mn bpd to 13.4mn bpd by late 2026, and Prince Abdulaziz says that transitioning to renewables will equate to “adding excess capacity which was going down the drain”.

Hence, the “government is totally incentivised to do that [renewables] programme”, he says.

Power-hungry kingdom

For years there have been warnings that Saudi Arabia’s voracious domestic energy consumption was on an unsustainable path as cheap, subsidised prices fostered an environment of excessive use and waste.

Households account for about 40 per cent of the country’s electricity consumption, with air-conditioners responsible for more than two-thirds of that figure in a country where summer temperatures can soar to about 50C. In 2020, the nation of about 34mn people was the planet’s 11th largest energy consumer, according to the US International Energy Administration.

Twelve years ago, Khalid al-Falih, then-head of Saudi Aramco and current investment minister, warned that domestic energy demand was expected to rise from about 3.4mn bpd of oil equivalent to about 8.3mn bpd of oil equivalent by 2028. If there were no efficiency improvements and it remained “business as usual” the oil availability for exports would decline by 3mn bpd, he predicted.

The kingdom began considering alternatives, including a brief dalliance with renewables that led it to establish the King Abdullah City for Atomic and Renewable Energy in 2010, a sprawling research campus to be based in Riyadh. Three years later, it released a white paper that outlined ambitions of producing 23.9GW of renewables by 2020 and 54GW by 2032.

There were even boasts from officials that Saudi Arabia would export solar to Europe in winter. Yet none of those plans made it off the drawing board.

“The leadership, the people in high positions, have been conscious of it, but I think there’s also been major conflicts of interest and major differences of opinions,” Moiso says.

Instead, the focus was put on ramping up gas production, which historically was considered less financially attractive to develop than oil. Since 2010, gas production has increased by almost a third to more than 9bn cubic feet. By 2030, the kingdom hopes to increase production by more than half.

The leadership, the people in high positions, have been conscious of it, but I think there’s also been major conflicts of interest and major differences of opinions

The authorities have also sought to curb decades of soaring electricity consumption through an energy efficiency programme as demand had been growing at an average annual rate of about 6 per cent since 1990 — double the global average.

“The problem was the energy intensity was [increasing], so to produce each extra dollar of gross domestic product you would require more and more energy,” says Fahad Alajlan, president of the King Abdullah Petroleum Studies and Research Center (Kapsarc), a Riyadh-based think-tank.

The policymakers realised that by failing to address the issue of energy demand, he adds, “the opportunity cost they were wasting was huge.”

In 2016, financial pressures drove Riyadh to hike electricity and fuel prices as it began to tackle the politically sensitive issue of price reform, while grappling with a yawning budget deficit and an economic slowdown. It followed up with a second round of price hikes two years later, including a 260 per cent tariff increase for some household users.

While the move was designed to ease the burden on the treasury, it also signalled an attempt to address a culture of profligacy as many Saudis, born into a cradle-to-grave welfare system, have traditionally had little reason to fret over energy bills or wastage because of the subsidised system.

The reforms, combined with a period of subdued economic growth, caused electricity demand to flatten and drop in 2019 for the first time on record.

In per capita terms, consumption declined 3 per cent per year on average between 2016 and 2019, although it was still nearly three times the global average, according to Kapsarc.

In June, a World Bank report estimated that Saudi Arabia was losing $128bn a year by subsiding energy, from explicit costs such as pricing petroleum products and energy lower than the international market, to implicit costs such as air pollution and global warming.

Saudi Arabia consumes about 3.6mn barrels of crude and related liquids a day to meet its domestic energy and fuel needs, says Jim Krane, a Gulf energy expert at Rice University’s Baker Institute for Public Policy. “The oil intensity in the kingdom is just unsustainable.”

The turning point

Saudi officials acknowledge there has in the past been uncertainty and discomfort towards renewables.

Padmanathan recalls a period when there was a lot of internal debate, concern that renewables would eat into oil and gas “as well as disbelief that, really, can it be cost competitive?”

At times it has been unclear which entity was driving the renewables agenda. “It was all carrying on in a vague manner for a few years,” he says.

The “inflection point,” he says, was around 2015 when prices for solar tariffs fell, particularly in the Gulf, which has gone on to deliver some of the world’s lowest rates.

The following year, Crown Prince Mohammed bin Salman unveiled Riyadh’s plan to overhaul the conservative kingdom, which set “an initial target” of generating 9.5GW through renewables and to develop local industry to serve the sector.

Padmanathan says greater clarity came after the energy ministry was given a more central role in preparing a master plan and “validating the work done by different agencies”.

Policymakers realised they would struggle to achieve their targets “tender by tender,” he says, and instead determined that the Public Investment Fund, the $620bn sovereign wealth fund, would be given the responsibility for 70 per cent of the renewables target, with the remainder put out to competitive tender.

ACWA, now 44 per cent owned by the PIF after receiving its first direct investment in 2018, has become the main vehicle through which the sovereign fund aims to deliver on its commitment of getting 42GW online by 2030.

The kingdom currently has about 3GW under construction and 7.1GW tendered. Prince Abdulaziz says the target is to have another 15GW tendered this year and next. Asked how Riyadh will meet its targets, he returns to the theme of freeing up oil to export. “That’s the incentive,” he says.

What to believe

But even those who believe the plans are feasible, question whether the kingdom will meet its schedule.

Nick Mabey, co-found of Third Generation Environmentalism, says Saudi Arabia’s goals were “technically viable” but questioned the “political will”.

“The big question mark is why they haven’t been doing it already,” he says. “I’m intrinsically sceptical . . . but this is not philanthropy, this is purely in their economic and political interests.”

He adds that no one is going to think Riyadh “is going to become a supporter of Greta Thunberg and rapid climate transition. But the fact is the more people who displace dirty fuels, like oil, with renewables . . . it’s good for the planet.”

Few doubt the kingdom’s potential as a producer of renewables as it boasts vast stretches of sparsely populated desert that is prime land for solar farms.

“The Saudis’ advantage in solar is almost the same as its advantage in oil. It’s the cheapest place to make solar electricity in the world,” Krane says. “They’ve got just oodles of empty land that is controlled by the state and also happens to be near cities.”

But, he adds, “their credibility in meeting targets is not, let’s say, ironclad”.

It’s important to view the energy transition through the lens of regime security. Saudi ruling elites depend on oil exports to maintain their power

In 2018, Prince Mohammed signed a preliminary agreement with SoftBank for a $200bn scheme to develop a solar parks project to generate 200GW, promising that the deal was “a huge step in human history”. But there has been no progress or public updates on that project.

There are also questions about what electricity demand will look like over the next decade as Riyadh pushes ahead with hugely ambitious plans to modernise the nation.

This includes a raft of megaprojects, including Neom, Prince Mohammed’s flagship project, which is a vast development on the kingdom’s western coast supposed to be powered by clean energy; a target of transforming Riyadh into one of the world’s top 10 richest cities, and an industrial and logistic programme that seeks to attract $425bn in investment over a decade, with cheap energy one of its selling cards.

When the development plan was launched six years ago it forecast that local energy consumption would increase threefold by 2030. The current installed electricity capacity is about 85GW, and it is expected to be expanded to about 140GW by 2030.

“There have been a lot of dramatic pronouncements. Producing the power to make all those things happen is going to be a Herculean lift. Doing it with 50 per cent renewables is going to be even tougher,” Krane says. “They have to meet demand growth for all these new projects while shutting down oil-fired plants and replacing them with renewables.”

An ACWA Power site in Saudi Arabia. The group has become the main vehicle through which the state’s sovereign fund aims to deliver on its commitment of getting 42GW online by 2030

Still, Padmanathan says he is “absolutely sure” that by 2030 there will not be a “single drop” of liquids burnt for domestic power.

“For Saudi to build 40GW or 60GW in 10 years, it’s not an issue. It’s a country that does megaprojects,” he says. “It takes a while to get the ducks lined up, but . . . it starts ramping up very fast.”

Much will depend on the whims of the leadership. As an autocracy, the kingdom has a streamlined, top-down policymaking process.

Leaders can also be “capricious”, Krane says. “It’s important to view the energy transition through the lens of regime security. Saudi ruling elites depend on oil exports to maintain their power. They certainly want to develop a Plan B in case oil demand goes away, but right now their biggest concern is protecting the oil business.”

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