Saudi Arabia leads Middle East’s rush to renewables, but policies lag behind ambition

Saudi Arabia, the world’s largest oil exporter, has ambitious plans to tap into the potential of renewables to fill a shortfall in regional power supply. But opinions are divided on how realistic the Kingdom’s strategy is, given its track record of delayed projects and a shortage of domestic policies to help support investment.

The drive to increase renewables generation in the region is not limited to Saudi Arabia. With economies in the Middle East region set to grow in the coming years, power demand is projected to surge in tandem. Despite an abundance of natural resources, electricity supply is a major issue for Gulf countries and oil-fired generation is still the dominant source.

The case for renewables

Saudi Arabia’s economy is set to grow 2.7% over the next year, according to ratings agency Moody’s, and S&P Global Platts Analytics expects Saudi power demand to continue to grow at a rate of 3.3% through to 2030. The looming threat of a power crisis has helped speedball the idea that including more renewables in the region’s energy mix could be the solution.

“Populations in the region are growing much faster than other areas of the world and are set to maintain a rapid pace of growth to [the] middle of the next decade,” Edward Bell, commodity analyst at Emirates NBD told Platts. “The power infrastructure that’s in place will need to be expanded or enhanced to meet that growth so a push into renewables makes obvious sense as part of that dynamic.”

The push towards renewables has been led by Saudi Arabia, which earlier this year announced intentions to develop and install 60 GW of clean power sources over the next decade, including 40GW of solar power, and plans to eventually generate 200 GW from renewables. Around 30% of the power mix is to be supplied by renewables by 2030, with the remainder to be sourced from gas and some nuclear. This compares with a target of 15% of the power mix for Kuwait to be supplied by renewables by 2030, and a target of 10% for Oman by 2035, according to the latest GCC report from the International Renewables Energy Agency (IRENA).

Saudi Arabia’s energy ministry has also set an interim target of developing 27.3 GW of clean power by 2024, of which 20 GW will be from solar.

“The region can’t afford not to be too ambitious in trying to get more and more of its power mix provided by renewable sources given the power demand pressures and what will likely be increasing international pressure to clean up the energy mix in the region,” Bell said. “So the ‘over ambitious’ nature of the targets may be more an issue of capacity to tender, construct and deliver projects rather than a lack of ‘resources,’ either in the form of capital or solar irradiation.”

This year, the ministry released expressions of interest for the seven solar PV projects that will be tendered in the first half 2019, with a combined capacity of 1.51 GW which the ministry expects to attract $1.51 billion of investment this year. Saudi Arabia’s energy minister, Khalid al-Falih said in January that around 12 renewables projects would be tabled for investment this year, including four solar PV parks and 300 MW solar power stations in Rabigh and Jeddah.

“By using our two awarded projects [Sakaka 300 MW Solar PV and Dumat Al Jandal 400 MW onshore wind] as benchmarks, we can estimate that required capex per 100 MW of Solar PV is $100 million and $125 million per 100 MW of onshore wind,” Turki M Shehri, head of renewable energy projects at the ministry of energy, industry and mineral resources told Platts. “These two projects involved a capital investment of $800 million in 2018.”

This can be compared with an investment of $765 million to develop Abu Dhabi’s 100 MW Shams 1 project, the first concentrated solar power project in the Gulf region.

Aside from solar, Middle East countries are also increasingly looking to wind as an option for development. Oman, which already boasts the first onshore wind farm in the Gulf region (50MW), has been mulling the possibility of developing offshore wind farms.

Subsidies persist

One of the biggest obstacles facing Middle Eastern governments in their drive to push renewables is the sizable subsidies that they offer to their citizens. In 2018, the cost of electricity consumption for Saudi residents ranged from Riyal 0.18 – 0.30/kWh (Eur0.042–0.071/kWh). This eats into the profit margin for renewables developers, making it essentially economically unviable to develop alternative energy sources for consumer use.

At the moment, generation costs are higher than consumer electricity tariffs. Saudi Arabia is making attempts to raise tariffs and fuel prices, which could eventually bring consumer tariffs in line with or lower than the cost of renewables, plus the infrastructure needed to use them.

“Efficient price signals in both the electricity and fuel markets can certainly play a role in attracting more renewable investment,” King Abdullah Petroleum Studies and Research Centre, also known as KAPSARC, told Platts. “The speed of the development is subject to additional factors such as the regulatory framework and the financing mechanism available to support these projects.”

Some countries, including Bahrain, are in the midst of developing incentive policies that would effectively make it cheaper for industrial customers to use photovoltaic solar power rather than gas. This is a first step, but the gap between current consumer prices and those required to breakeven or profit on renewable-generated power is much greater than it is at the industrial level.

“The [Bahraini] government is working on [policies] to try and incentivize,” Shaikh Mohammed bin Khalifa Al Khalifa, Bahrain’s minister for oil, told Platts in an interview. “Today you can buy and install photovoltaic that will generate you power cheaper than you can buy on the grid, for commercial customers.”

In Saudi Arabia, industry tariffs were not raised at all in 2018, which means that for solar to be cost-competitive in this sector, deeper reforms are needed than those that have begun implementation in the consumer, agricultural and commercial sectors.

Luring investment

Despite question marks over how robust investor appetite would be following the killing of Saudi critic and journalist Jamal Khashoggi, one banking analyst who wished to remain anonymous told Platts that investor sentiment into Saudi Arabia remains strong and that a view towards commerce is prevailing over conscientious concerns.

“Given that auctions have already been awarded for both wind and solar, and sites have been carefully selected and are clearly assigned, we expect that the projects will be realized,” David Linden, director at Wood Mackenzie told Platts. “Previous plans were not organized in the same way as the most recent ones, which may have contributed to earlier problems with execution.”

More than 16 bidders took part in the latest Saudi auction from outside Saudi Arabia which vindicates this view, but investors have been concerned over the implementation of local content strategies, both for materials and for staff, and how this affects businesses operating in the Kingdom. Projects need to use at least 30% of local content, which limits the amount of imported material which can be used in development.

There are several reasons why Saudi Arabia’s renewables plans could prove important for advancing its economy. The local content requirement will serve to create jobs and reduce the country’s unemployment rate. And rising renewable generation will eat into the share of petroleum-product fired plants in the energy mix, freeing up crude that can be exported at international prices, hopefully fetching prices that will be worth making the switch.

To really entice consumers, it is critical that the Kingdom can offer supporting infrastructure and pricing structures which will enhance development. The Kingdom would do well to ensure cheap panels and turbines are available through ultra-large scale PV manufacturing, Linden told Platts. A $2 billion deal with China’s Longi and South Korea’s OCI could also give the Kingdom competitive panel pricing that will further the case for developing the technology. The deal will bring fully integrated solar manufacturing to Saudi Arabia. Feasibility studies for the deal are scheduled for completion in the first half of this year.

Saudi Arabia’s past experience with renewables projects rings a cautionary note. A giant 200GW deal the Kingdom signed in March last year with Japan’s Softbank Group Corp would be the world’s biggest solar project and nearly triple Saudi Arabia’s power generation capacity but there has been little sign of progress on the venture.

“Negotiations and [requests for proposals] with potential partners are ongoing and are being led by the Public Investment Fund (PIF) and the Saudi Arabia General Investment Authority (SAGIA) – these partners include, but are not exclusive to, Softbank Energy,” Shehri told Platts. “Most recently the PIF and SAGIA have issued an RFP inviting qualified companies to propose plans to build 1-to-2 GW per year of solar PV components manufacturing based within the Kingdom.”

Nonetheless, the drive at least appears to be there, and despite a tumultuous 2018, investors do not seem to be shying away from the Kingdom. In the past, several government agencies were all pursuing renewables. Since 2017, they are all run and overseen within the ministry of energy, industry and mineral resources. “This unification of governance means that the Kingdom has been able to deploy two projects totalling 700 MW within one year – a process that would usually take closer to five years,” Shehri told Platts.

The rate development of will rest on how quickly Saudi Arabia can implement deals and pass supporting legislation. The scale of the projects and timeframe for their development is not impossible, but without action on the Kingdom’s side and changes aimed at supporting foreign investors, like clarity on local content requirements and available solar manufacturing in country, their grand plans may yield much more modest results.