The Impact of the COVID-19 Pandemic on the Energy Sector in the Kingdom of Saudi Arabia: The Future of Renewable Energy after the Crisis
Sarah Alotaibi
Special Report
February, 2021 / Jumada I 1442 H. 1
The Impact of the COVID-19 Pandemic on the Energy Sector in the Kingdom of Saudi Arabia: The Future of Renewable Energy after the Crisis
Special Report
Table of Contents
Abstract 6 Introduction 7 Section 1: Implications of the COVID-19 pandemic and change in domestic energy demand 9 Oil 9 Energy diversification strategy 10 Gas 10 Renewable energy sources 11 Growth of renewable energy projects investments 12 Section 2: The impact of COVID-19 on electricity consumption 16 Enhance energy efficiency policies 19 Electricity sector reforms 19 Section 3: Transition towards a sustainable energy system 22 Conclusion 23
5 Abstract This report focuses on the impact of the COVID-19 lockdown on domestic electricity consumption in the Kingdom of Saudi Arabia. It includes a breakdown by percentage of how different energy sources, including gas and renewable energy (RE), are contributing to the total energy mix during the crisis. Finally, it highlights the importance of renewable energy sources for the sector after the pandemic.
6 Introduction The number of infections from the coronavirus has exceeded 56 million, resulting in more than 1 million deaths. Governments across the globe are continuing to take measures to combat the spread of the epidemic and reduce its economic and social repercussions.(1) In many countries, this one crisis has led to a series of consecutive crises that revealed profound weaknesses in their economies, necessitating a review of sustainability policies according to these new perspectives to overcome it.
In Saudi Arabia, the government has adopted decisive measures to combat the pandemic in order to preserve the health of the population and bolster its health infrastructure. This has resulted in a relatively low infection and mortality rate from COVID-19. On the other hand— as in other countries—these measures have affected the demand for energy in general and the volume of domestic consumption of electricity in particular.(2)
With regards to the energy system, diversification of energy sources and reorientation according to the concepts of sustainability have become an essential part of achieving economic growth and mitigating the associated damages in the future. This is clearly related to countries that depend on oil revenues due to the concerns of fluctuations in energy markets and changes in supply and demand.
This is evident in the impact of the crisis on the fiscal situation in Saudi Arabia, as the decline in oil demand has had a direct reflection on government revenues during the second quarter of 2020. According to a report issued by the Ministry of Finance, oil revenues decreased by 49% compared to the of 2019.(3)
In addition, the growth rate of the gross domestic product (GDP) recorded a decrease of roughly 1.6% compared to 3.8% growth in the last quarter of the last year.(4) It is worth mentioning that
(1) For more details see: https://www.worldometers.info/coronavirus/?utm_campaign=homeAdUOA?Si. (2) Roberto Bocca, “As Coronavirus Shocks the Energy Sector and Economy, Is Now the Time for a New Energy Order?,” World Economic Forum, April 26, 2020, https://www.weforum.org/agenda/2020/04/energy-oil-gas-electricity-sustainability-economy- covid19-coronavirus-pandemic-market-stability/. (3) Jadwa Investment, “Q2 2020 Budget Statement: Debt Rises Significantly,” 2020, http://www.jadwa.com/en/search/index/ page/5?q=saudi+budget&__buffer=true. (4) Jadwa Investment, 1–3.
7 the contribution of non-oil activities reached 59% of the gross domestic product after the Vision 2030 reforms were announced to promote economic performance. Non-oil sector activities include wholesale, retail, and hospitality; mining (excluding hydrocarbons); and transport and communications activities. In terms of contribution to GDP, the crude petroleum and natural gas sectors make up 37.3%.(5)(See Figure 1)
Figure 1: Contribution to GDP by Economic Activity in Q1 2020 (constant price), General Authority for Statistics, 2020, https://investsaudi.sa/en/news/saudi-arabia-announces-foreign-investor-license-results-for-q1-2020/
(5) Invest Saudi, “Investment Highlights: A Special Report by Invest Saudi,” 2020, https://investsaudi.sa/en/news/investment- highlight-summer-2020/.
8 Section 1: Implications of the COVID-19 pandemic and change in domestic energy demand The crisis has directly affected the volume of global energy demand. According to a recent report from the International Energy Agency, the first quarter of this year saw a decrease of 3.8%. This was evident across different energy sources: The report also indicated a decline in coal by 8% from last year, while oil recorded the largest drop of nearly 5%, a decrease of 27 million barrels per day compared to last year.
On the other hand, the demand for gas recorded a limited decrease of 2%, while renewable energy sources witnessed a growth compared to the rest of the sources.(6) This also applies to the growth of renewable energy projects in Saudi Arabia, which continues in Requested for Proposals (RFP) for Round Three ‘Category B’ Solar PV independent power producer (IPP) of the Kingdom’s National Renewable Energy Program (NREP). It will also be referred to in detail in the report.
Oil The impacts of the pandemic differed for the local energy sector, the electricity and water desalination sectors, during the crisis. In general, the energy generation sector is still heavily dependent on oil and gas, as oil accounts for more than a third of the total energy consumed daily.(7) According to the CMarkits company estimates, domestic consumption of oil decreased to approximately 3.17 million barrels in the first quarter of 2020 due to the crisis, compared to 3.96 million barrels for the first quarter of last year, i.e., a drop of 910,000 barrels per day.(8) According to these estimates, the electricity sector demand is expected to decrease by nearly half a million barrels, and a million barrels for the industrial sector, while the transportation sector demand will decrease by approximately 910,000 barrels of gasoline and diesel.
(6) International Energy Agency (IEA), “Global Energy Review 2020: The Impacts of the Covid-19 Crisis on Global Energy Demand and CO2 Emissions,” April 2020, https://www.iea.org/reports/global-energy-review-2020. (7) 55th Annual Report of Saudi Arabia Monetary Authority, (2019) https://www.sama.gov.sa/en-US/EconomicReports/ AnnualReport/Annual_Report_55th-EN.pdf (8) Interview with the CEO of CMarkit Dr.Yousef Al-Shammari., April 2020.
9 Energy diversification strategy In recent years, specifically after the launch of its Vision 2030, the Kingdom has started to reform the energy sector. This vision considers achieving a balance in the total energy mix as one of its most important goals. This was in response to the need to meet citizens’ demand for electricity and desalinated water, which is growing at a rate of approximately 5.48% annually.
In addition, the government has put in place a strategy for the diversification of energy sources, with the aim of reducing crude oil consumption in electricity generation. It does so through strengthening energy efficiency policies, as well as by increasing dependence on natural gas. This raises the proportion of energy generation from renewable energy sources and accelerates the policies of introducing nuclear energy into the overall energy mix.
Gas This strategy has clearly contributed to raising the proportion of natural gas contribution in the production of power plants to approximately 57%, according to the latest reports published in 2019, with a growth rate of 4.8%. The contribution of crude oil reached 20%, fuel oils 20%, and diesel 3%(9) (see Figure 2).
Figure 2: Fuel Consumption - by Fuel Type, ECRA - Annual Statistical Booklet for Electricity and Seawater Desalination Industries, 2019, https://www.ecra.gov.sa/ar-sa/MediaCenter/doclib2/Pages/SubCategoryList.aspx?categoryID=4
(9) Yagyavalk Bhatt, Anushree Majumdar, and Nora Nezamuddin, “The Impact of the Coronavirus Lockdown on the Electricity Sectors in Saudi Arabia and Indi,” KAPSARC, July 5, 2020. https://www.kapsarc.org/research/publications/the-impact-of-the- coronavirus-lockdown-on-the-electricity-sectors-in-saudi-arabia-and-india/.
10 In this context, the government’s strategy aims to expand its investments in natural gas to meet increasing domestic demand, which is growing at an annual rate of 3.6%.(10) In 2018, Saudi Arabia was ranked seventh among the countries with the highest demand for gas. According to Saudi Aramco, the kingdom has proven gas reserves of 237.4 trillion standard cubic feet and its daily output is approximately 13 billion cubic feet. In the next decade, the volume of investments in the gas development program is expected to reach $150 billion. The recent discovery of natural gas fields such as the Jafurah and Zeba and Midian fields in the north of Saudi Arabia is contributing to expand this strategy and achieving its objective to export gas in the future. In this regard, some specialists have indicated that in the coming years more investments are needed to take advantage of the large gas reserves.(11)
Renewable Energy Sources Interestingly, in this respect the coronavirus crisis has had limited impact on the contribution of other energy sources in Saudi Arabia, specifically renewable energy, in the total energy mix, compared to oil. The total installed solar PV capacity in the Kingdom is about 390 MW.(12) The total installed capacity of solar energy in the world by the end of 2019 reached 627 GW, enough to meet 26% of global energy demand.
The Ministry of Energy’s policy toward the renewable energy sector during the previous years was characterized by a careful and gradual introduction of renewable energy into the total energy mix. There were different reasons behind this. One was to avoid negative repercussions resulting from the rapid shift toward clean energy sources, as happened in other countries, such as Brazil. Another reason was the high costs associated with investments. This policy led to the limited contribution of renewables to the current total energy mix, as shown in the results. After the launch of the National Program for Renewable Energy Projects in 2017, the target renewable energy source size was only 9.5 GW.
(10) ARAMCO Company: https://www.aramco.com/en/magazine/elements/2020/strategy-flows-toward-natural-gas. (11) “al-Su'udiyya Tu'azziz Makanatuha fi Sina'at al-Ghaz al-Tabi'i” [Saudi Arabia enhances its position in the natural gas industry], Independent Arabia, February 18, 2020, https://www.independentarabia.com/. (12) Amro Elshurafa, “Trends in Global Solar PV Installation,”, KAPSARC, July 27, 2020. https://www.kapsarc.org/research/ publications/trends-in-global-solar-pv-installation-2/.
11 Then, on January 9, 2019, the Renewable Energy Projects Development Office (REPDO) announced its new plan to expand renewable energy projects by increasing the target to 58.7 GW, to be implemented by 2030. This new plan included developing more than 35 sites distributed throughout the Kingdom. The energy expected to be generated from three main sources is 40 GW of solar PV, 16 GW of wind power, and 2.7 GW of Concentrated solar power (CSP).(13) (See Figure 3)
5-Year Target 12-Year Target
58.7
CSP 2.7 16.0 Wind
27.3 7.0 Solar PV 40.0 1.2 9.5 20.0 2.4 5.9 Initial Revised 2030
Figure 3: Overview of Saudi Arabia’S Renewable Energy Program, Renewable Energy Projects Development Office (REPDO), Ministry of Energy, January 9, 2020.
Growth of renewable energy projects investments To date, REPDO has put forward 12 projects with a total value of 3.1 GW. In the first stage 2017, it started with the implementation of 2,170 MW, and two projects with a capacity of 700 MW were awarded in 2019. The first project is located in Sakaka, with a capacity of 300 MW for solar energy, and in operation. As for the second, the Dumat Al-Jandal wind energy project is still under construction, at a size of 400 MW.(14)
(13) Overview of Saudi Arabia’s Renewable Energy Program, Renewable Energy Projects Development Office (REPDO),Ministry of Energy, January 9, 2019. (14) Renewable Energy Projects Development Office (REPDO), Ministry of Energy, https://www.powersaudiarabia.com.sa/web-ar/ index.html.
12 In 2019, the second phase started with the submission of six solar projects with a capacity of 1,470 MW. These offers have been received by developers and work is underway on evaluation, and the awarding and signing of contracts.(15)
During the pandemic, the REPDO office announced the start of the third stage in April 2020 and received offers from companies qualified to implement four solar PV projects, with a total capacity of 1,200 MW. This indicated a determination to enhance the contribution of these sources to the overall mix. The process to determine who was qualified to implement these projects was completed at the beginning of the current year, and the launch of these projects was offered to the qualified companies during the second quarter of 2020.(16)
The number of companies applying for the last stage reached 83, indicating the sector’s attractiveness to the investing companies. Ultimately, 49 companies qualified, 28 of which were Saudi companies.(17)
It is worth noting that the new plan gives the Public Investment Fund (PIF) an important role in the development of the sector, where the REPDO office will achieve 30% of the renewable energy goals—within the tenders it will put forward—the remaining 70% will be developed by the PIF and its selected partners.(18)
In terms of industry, the PIF has focused on developing the renewable energy sector through concluding agreements with leading companies in the field to establish factories that develop the value chain for renewable energy locally. Additionally, it has taken a role as a leading investor in large projects in the sector. On the other hand, REPDO was responsible for achieving the 30% of RE objectives remaining to small and medium projects, within the tenders offered
(15) Bids Received for Round Two Projects of the National Renewable Energy Program, REPDO, https://www.powersaudiarabia. com.sa/web-ar/attach/news/NREP%20ROUND2_%20All_Bids.pdf. (16) Saudi Arabia Launches Round Three of National Renewable Energy Program, REPDO, Powersaudiarabia.com.sa/web/index.html. (17) “al-Su'udiyya Tad᾿u 49 Sharika li-Taqdim ῾uruwdh Tanfidh Mahattat Shamsiyyah Ba᾿d Ta’hulaha fi al-Marhalah al-Thalithah min al-Barnamij al-Watany li-l-Taqa al-Mutajaddida” [Saudi Arabia invites 49 companies to submit bids to implement solar plants after being qualified in the third phase of the National Renewable Energy Program], Altaaqa, April 15, 2020, https://attaqa.net. (18) “Wazir al-Taqah: Na'mal ma᾿ “Sunduq al-Istithmarat al-᾿Aamma” ῾iIa Jadhb al-Sharikat al-᾿Alamiyya ‘ila al-Mamlaka li-Tawtin wa-Tasni᾿ Taqaniyyat al-Taqa al-Mutajaddida” [Minister of Energy: We work with the “Public Investment Fund” to attract international companies to the Kingdom to localize and manufacture renewable energy technologies], Arqaam, January 16, 2020, https://www.argaam.com/ar/article/articledetail/id/589822.
13 by the National Renewable Energy Program. Due to the financial solvency of the PIF, these strategic partnerships supported by PIF encourage investors and foreign developers to enter the local sector by reducing risk. Other entities have also provided incentives to enter the sector, such as providing special sites for industries and related services from the Saudi Industrial Estates Authority “MODON,” the King Abdullah Economic City, and the Royal Commission for Jubail and Yanbu.(19)
In this context, the importance of the role of the (REPDO) office is highlighted by overseeing the initiative to empower the private sector, in addition to two main initiatives: the King Salman Renewable Energy Initiative and the initiative to localize the renewable energy industry and related businesses.(20) During the implementation of its three-phase strategy, the office sponsored many presentations as part of the initiative’s goals, such as:
1. Among the conditions set by the office of REPDO for international developers is the presence of local partners, for small projects in category (A) with a capacity of 20 MW and 50 MW in the second phase of the national renewable energy program.
2. Regarding the medium projects in category (B) of the second phase, the strategy focused on attracting international investors without requiring the entry of local partners in order to enhance the attraction of foreign investments to the local sector. This strategy has been implemented in projects with a total capacity of 1,400 MW, distributed as follows: Al- Faisaliah project 600 MW; Jeddah project 300 MW; Rabigh project 300 MW; and Qurayyat project 200 MW.(21)
3. The qualification criteria REPDO requires from local developers are more flexible. For example, in the projects of a small category (A) for the second stage, previous experience with regard to work in the renewable energy sector was not necessary.
(19) Al-Otaibi, Sarah, The Development of Government Policies in Support of Saudi Renewable Energy Sector,(January, 2019) King Faisal Center for Research & Islamic Studies. https://www.kfcris.com/en/view/post/203. (20) “Mubadara Tashmaluha Manzumat al-Taqah wa-l-Sina᾿ah w-al-Tharwa al-Ma᾿daniyyh fi 6 Masarat” [An initiative involved in the energy, industry and mineral resources system in 6 tracks], Al-Eqtisadiah, April 2, 2017, https://www.aleqt.com/2017/04/02/ article_1162256.html. (21) Interview with an expert from the Renewable Energy Projects Development Office (REPDO),Ministry of Energy, May 2020.
14 4. Producers are exempted from paying land or rent fees for renewable energy projects, while maintaining a low annual rental fee for manufacturers of only 1 to 4 Saudi riyals.
5. Developers are given access to the logistical services provided by King Abdullah Economic City in Rabigh. This includes providing infrastructure for developers of electricity, water, sewage, and industrial waste management, among other things.
6. The percentage of financing for the owners of industrial projects, whether service or industrial, reaches 75% of the value the project, according to the agreement concluded by the REPDO with the Industrial Development Fund.
7. The minimum contribution of local content rises during the three stages of implementing projects the program. The percentage in the first phase projects was 13%, in the second phase it increased to 17%, and the third phase 18%. Determining the percentage of content contribution to projects is based on results evaluating the market and the potential of the private sector, according to the measurement mechanisms set by the Local Content Authority and government procurement to develop and indigenize the local value chain.
8. The ministry’s strategy to enhance the competitiveness of the energy sector contributes to an increase “the independent energy projects”; So far, the contribution of these projects— not affiliated with the Saudi Electricity Company—has reached 35% of the total power generation capacity. These projects enjoy benefits to mitigate the effects if fluctuations in fuel prices on projects; the government enters contracts with these projects through Aramco to supply it with fuel.
9. The adoption of the “Principal Buyer” model is responsible for managing trade agreements as contracts for fuel supply and power purchase. Relying on this model spares investors associated risks by request—through concluding contracts ranging from 20 to 25 years— according to the agreed implementation prices. The company was established on December 18, 2018, as part of the Electricity Allocation Reforms.(22)
(22) Al-Otaibi, The Development of Government Policies in Support of Saudi Renewable Energy Sector, 31.
15 Section 2: The impact of COVID-19 on electricity consumption According to the International Energy Agency, global electricity generation was 2.5% lower in Q1 2020 than in Q1 2019, while global electricity demand decreased by 20%. This shows that the lockdown measures that have been adopted by many countries after the coronavirus have resulted in a decrease in electricity consumption.(23)
This is clear in Italy, which has recorded the highest rate of decline in electricity demand. Italy started its lockdown measures on March 4, 2020 and tightened its restrictions on March 13 for a period of nine days, then eased lockdown measures on April 14. Spain followed suit, with lockdown measures beginning on March 9. Britain followed suit by implementing lockdown measures on March 19. However, the report also pointed to a good diversity in the contribution of different energy sources in these countries, especially natural gas and renewable energy, which were not significantly affected by the repercussions of the crisis compared to oil and coal.(24)
In Saudi Arabia, the lockdown measures started on February 27, 2020. This included a temporary suspension of Umrah, and suspended entry to Medina. Decisions were then made relating to economic activity on March 11 to close cinemas, markets, and malls; to prevent people from going to work places in the public and private sectors; to stop domestic and international flights; and to implement curfews and other measures. Thus, we can consider it as one of the first countries that took immediate measures to contain the spread of the coronavirus.(25)
This series of measures had an influence on electricity consumption, and on the volume of demand for oil and its derivatives. The impact on the demand for oil is mainly due to the fact that oil is still a major source of energy for the transportation and petrochemical sectors and for generating electricity in several electricity and water stations, at least in the western region of the Kingdom.
(23) IEA, “Covid-19 Impact on Electricity,” 2020, https://www.iea.org/reports/covid-19-impact-on-electricity. (24) IEA, “Impacts of the Covid-19 Crisis.” (25) Center for Communication and Financial Knowledge, Ministry of Finance: https://www.mof.gov.sa/mediacenter/KnwoledgeCommunication_Center/Pages/default.aspx.
16 During the first few months after the beginning of the crisis, electricity demand recorded an increase to 34,655 MW in mid-March 2020 compared to 31,135 MW for the same month in 2019. Then there was a decrease recorded in mid-April to 32,977 MW, while 2019 recorded 39,020 MW in the same month. This is considered the highest decrease in the volume of demand during the first quarter of the year by 15%. Then an increase was noted again at the end of April to 40,976 MW (See Figure 4).(26)
45,000 15.00%
12.13% 12.50% 40,000 11.34% 10.00% 35,000 4.85% 5.00% 30,000
25,000 0.00%2019 2020 temp. C temp. C
20,000 27 25 -5.00% 27 31 15,000 25 28 -10.00% -10.95% 33 24 10,000 33 28 -15.00% 5,000 -15.49% 28 38
0 -20.00% 15/02 24/02 15/03 24/03 15/04 24/04 2019 demand MW 2019 temp. C 2020 demand MW 2020 temp. C Rate of change in %
Figure 4: The Volume of Electricity Demand in the First Quarter, (2019-2020), by author based on interviews with experts in the Electricity sector.
Thus, the consumption path shows a different scenario from the rest of the countries mentioned above. Despite implications from the crisis and early lockdown measures taken by the government, the demand for electricity is generally higher if we compare to the volume of consumption in the first quarter of last year.
In general, the demand for electricity is considered high. It recorded an increase between 2012 and 2017 of almost 21%.(27) This is due to various reasons, such as increasing population growth, effective economic, industrial growth during recent years, and the expanding scale of urbanization,
(26) Saudi Electricity company: https://www.se.com.sa/ar-sa/Pages/home.aspx. (27) Al-Ghamdi, Abeer, GCC Residential Electricity Tariffs, KAPSARK, September 7, 2020, https://www.kapsarc.org/research/ publications/gcc-residential-electricity-tariffs/.
17 in addition to significant subsidies for energy prices, along with the increasing growth in the number of consumers, which reached an average increase between 2007 and 2018 of almost 5.57.(28)
The growth in electricity demand has also been spurred on by environmental and climatic conditions, which have contributed to rising temperatures.(29) The high demand is concentrated in the services and housing sector: the housing sector represents 49.6% of total electricity consumption, consuming more than a third of the total daily oil production.(30) Refrigeration and air conditioning are the main drivers of consumption, with 65% of total housing demand.
Liquid fuel consumption in the western and southern regions of the Kingdom is high at 88% of total oil consumption compared to the central and eastern regions, which depend on natural gas due to their proximity to gas fields.(31) Therefore, enhancing electricity production from natural gas sources needs more investment (See Figure 5).(32)
Figure 5: Distribution of Consumption of fuel Types, ECRA - Annual Statistical Booklet for Electricity and Seawater Desalination Industries, 2019,https://www.ecra.gov.sa/ar-sa/MediaCenter/doclib2/Pages/SubCategoryList.aspx?categoryID=4
(28) Apicorp Energy Research, “Saudi Power Sector: Reforms Underway,” vol. 3, no. 13, October 2018, http://www.apicorp-arabia. com/Research/EnergyReseach/2018/APICORP_Energy_Research_V03_N13_2018.pdf. (29) Apicorp Energy Research, “Saudi Power Sector: Reforms Underway.” (30) Ahmed Felimban, Alejandro Prieto, Ulrich Knaack, Tillmann Klein, and Yasser Qaffas, “Assessment of Current Energy Consumption in Residential Buildings in Jeddah, Saudi Arabia.” Buildings, 9 no. 7 (2019): 163, https://doi.org/10.3390/buildings9070163. (31) Rami Shabaneh, Abdullah Aldayel, “Crude Oil and Refined Products,” KAPSARC Data Insight, April 2, 2020, https://www. kapsarc.org/research/publications/crude-oil-and-refined-products/. (32) The Electricity & Co-Generation Regulatory Authority, Annual Statistical Report for the Electricity and Seawater Desalination Industry, 21, https://ecra.gov.sa/arsa/MediaCenter/DocLib2/PublishingImages/bookletTest19/ECRA%20Statistical%20Booklet%20 2019-FINAL-INTERACTIVE-final155.jpg.
18 Enhanced energy efficiency policies In this context, policies enhancing the energy efficiency began following the establishment of the Saudi Energy Efficiency Center (SEEC) and the Saudi Energy Efficiency Program (SEEP), along with several government reforms on tariffs of importing or exporting electricity. These reforms contributed to a gradual decrease in electricity demand. The largest drop in consumption was in 2019, when it was approximately 3.5 year-on-year.(33)
On the other hand, reforms in energy products since the announcement of the Fiscal Balance Program 2018–2020, including the reform of energy and water prices, have also affected the reduction of consumption.(34) The first price reform procedure for electricity tariffs started in 2015, and the end of 2017 saw the second increase, which was implemented on January 1, 2018.(35)
Furthermore, the decisions issued by the Fiscal Balance Program on reducing the demand for electricity had substantial indirect impacts. For instance, the imposition of fees on foreign workers in Saudi Arabia as part of the localization of jobs and the alleviation of high unemployment rates led to an increase in the number of residents leaving Saudi Arabia, reaching 1.6 million departing workers between 2017 and 2018.(36)
With the beginning of the coronavirus crisis, about 323,000 people left in the first quarter of 2020 and it is expected that by the end of 2020 the number of departures will reach 1.2 million workers, according to the report on the feasibility of investment. These factors and those emerging in particular after the pandemic contributed to a further decline in the demand for electricity.
Electricity sector reforms The impact of the crisis extended to the profits of the Saudi Electricity Company (SEC), which recorded losses estimated at 63.9% during the first quarter of this year 2020 on an annual basis,
(33) Saudi Arabia’s Unfolding Power Sector Reform: Features, Challenges and Opportunities for Market Integration, (June 21, 2020), https://www.kapsarc.org/ar/research/publications/saudi-arabias-unfolding-power-sector-reform/. (34) Al-Otaibi, The Development of Government Policies in Support of Saudi Renewable Energy Sector. (35) Al-Ghamdy, GCC Residential Electricity Tariffs. (36) Report, Saudi Labor Market, Jadwa Investment, June, 2020, : http://www.jadwa.com/en/researchsection/research/economic- research/labor-market-reports.
19 due to government support against the high volume of electricity consumption. In this regard, the company reported that its losses during the current quarter compared to the same quarter of the previous year were mainly due to the increase in the cost of energy purchased and financing charges.(37) It is worth noting that, in this context, the PIF, which owns approximately 3.1 billion shares of the Saudi Electricity Company (SEC) and represents 74.31% of the total company shares, had waived its share in the dividends for 2019 for the 2020 year as part of facing the repercussions from the crisis in the electricity sector. This step aims to accelerate electricity sector reform plans, as well as the financial and operational sustainability of the company and fulfill their obligations from another side.
On March 31, 2020, the Council of Ministers announced the formation of a special committee concerned with the energy mix for electricity production. In particular, this committee will enable the renewable energy sector to produce and manufacture. This could be an indication of an important shift in government policy toward accelerating the utilization of renewable resources at a local level after the crisis.(38)
This measure was taken in order to speed up sector reforms, ensuring the financial and operational sustainability of the company and fulfilling its obligations. This is one of the important steps that the government has taken to avoid any long-term effects from the current crisis. Thus, strengthening reforms of the electricity sector, in order to keep pace with the economic transformation targeted by the Kingdom’s Vision 2030.
On November 17, 2020, the Minister of Energy announced further reforms and restructuring of the electricity sector, the most important of which are:
· Canceling the government fee imposed on the Saudi Electricity Company.
· Processing net government receivables from the Saudi Electricity Company, registered in its lists approved financial.
(37) “Al-kahraba Takhsar 2.4 Milyar Riyal fi-l-rub’ Al-awwal bi-᾿irtifa’ 36%” [Electric company loses 2.4 billion riyals in first quarter an increase of 36%], Al-Eqtisadiah, May 3 , 2020, https://www.aleqt.com/2020/05/03/article_1819026.html. (38) “Qariban Mashru᾿ Su'udi Yuntij al-Kahraba᾿ bi-‘Aqal Taklifa” [Soon, a Saudi project that produces electricity at the lowest cost], Al-Arabiya, July 27, 2020, https://ara.tv/j9ep5.
20 · Converting it into a financial instrument that is classified under shareholders’ equity with a return of 4.5%, the government to regularly pay the company’s dues.
· Reorganizing the revenues of the Saudi Electricity Company according to a new mechanism that enables it to operate efficiently, to recover the costs involved in service costs, and to achieve a weighted return on the investment cost (WACC) of 6% on the activities organized by the Electricity and Cogeneration Regulatory Authority.
· The Electricity and Cogeneration Regulatory Authority, in coordination with the relevant authorities, monitors indicators’ performance for efficiency targets and periodic service improvement.
These decisions are among the important steps taken by the government in light of the crisis to avoid its long-term effects, within the framework of the electricity sector reforms strategy, and to keep pace with the economic transformation targeted by the Kingdom’s vision.(39)
(39) Ministry of Energy, “al-Islahat al-Tanzimiyya wa-al-haykaliyya wa-al-Maliyya li-Qita᾿ al-Kahraba’ Tahza bi-Ihtimam al- Qiyada wa-Mutaba᾿tiha wa-Da᾿miha wa-Ishrafiha” [Organizational, structural and financial reforms of the electricity sector enjoy the leadership's attention, follow-up, support and supervision], November 16, 2020, https://www.moenergy.gov.sa/arabic/ mediacenter/press-releases/Pages/structural-and-financial-reforms.aspx.
21 Section 3: Transition Towards a Sustainable Energy System There are many policies for transitioning to more sustainable energy systems. The use of renewable energy sources is a key step to achieving a diversified mix of the local energy sector, along with policies such as increasing investment in efficiency projects and controlling supply dynamics.(40)
Meanwhile, renewable energy sources are considered the only sources that have recorded growth during this crisis. The generation rate from renewable energy sources increased by 3%, with the share of renewable energy sources in electricity supplies increasing almost by 28% in the first quarter of the year 2020, compared to 26% in the first quarter of 2019 according to the International Energy Agency.(41)
Yet the renewable energy sector still faced implications from the pandemic. At the same time, the supply chains for operating wind and solar power plants have been disrupted, interrupting the operation of about 11% of the world’s wind turbines, according to Bloomberg’s New Energy Financing report.(42) The entry of new renewable energy projects has also slowed during the year 2020, due to challenges in financing new projects.
The current crisis reinforced the viability of these economically and environmentally renewable sources in the long run. A report on the global prospects for renewable energy published by the International Renewable Energy Agency (IRENA) indicated that the shift to renewable energy will have a role in reviving the global economy and will ensure the flexibility and sustainability of its economies. This will create millions of jobs and improve human wellbeing by 2050, not to mention avoiding about 70% of the carbon dioxide emissions associated with the global energy sector by 2050.(43)
(40) In 2013, the Electricity & Co-Generation Regulatory Authority developed the “Smart Meters and Smart Grids Strategy”, and the smart meters project is one of the largest digital transformation projects in the Kingdom. (41) IEA, “Impacts of the Covid-19 Crisis.” (42) Akshat Rathi, “Renewables are the Only Winners in Historic Decline in Energy Demand,” Bloomberg Green, (April 30, 2020), https://www.bloombergcom/news/articles/2020-04-30/renewables-are-the-only-winners-in-historic-decline-in-energy-demand. (43) Report “Global Renewable Energy Outlook – Energy System Transformation 2050, International Renewable Energy Agency, (April 2020), https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2020/Apr/IRENA_GRO_2020_findings_AR.pdf ?la=en&hash=9D320175ACAC3C40E0EDD48D8347D1A4915C108D.
22 Conclusion In Saudi Arabia, these renewable energy sources are an essential part of the sector’s restructuring plan to enhance the economy’s durability and sustainability according to Vision 2030. There are new considerations that the crisis might impose from the perspective of an optimal energy mix in the future at a local level. There is no doubt that the crisis has increased the importance of diversifying energy sources to mitigate the risks associated with the heavy dependence on oil and the volatility of energy markets, as well as the economic burden incurred by the government to support the large electricity price difference, and rising with demand growth, which can be considered a challenge in itself.
In this context, a recent study indicated that the increasing growth of electricity demand in the Kingdom may lead to equal production and consumption of oil by the year 2035. This study is based on different causes: increasing per capita consumption, a growing population, and continued use of oil in some areas with high consumption. The use of renewable energy sources will increase the achievement of energy security and sustainable economic growth for the post- corona period, which increases its value.(44)
Moreover, the equivalent value is provided by using these renewable sources in Saudi Arabia for every barrel of oil that can be provided for design or investment in projects that turn oil into chemicals. This especially relates to the International Energy Agency’s expectations, which mentioned the increase in production capacity for oil the supply from outside OPEC to about 4.5 million barrels.(45)
In this context, in order to meet the demands of the growing domestic electricity and export of electric power to neighboring countries, it is importantly recommended to diversify local energy and to increase locally installed electrical capacity for generating enough electricity. Therefore, Saudi Arabia has taken many steps so far toward achieving its ambition as a future exporter of electrical energy to neighboring countries, by concluding many electrical interconnection agreements; whether by the electrical interconnection of the Gulf countries, Egypt, or the last agreement in August 2020 with the State of Jordan, with an approximate length of 164 km.(46)
(44) Ahmed Felimban, Alejandro Prieto, Ulrich Knaack, Tillmann Klein, and Yasser Qaffas “Assessment of Current Energy Consumptions in Residential Buildings in Jeddah, Saudi Arabia” MDPI, July 7, 2019, https://www.mdpi.com/2075-5309/9/7/163. (45) IEA, “Oil 2020,” March 2020, https://www.iea.org/reports/oil-2020. (46) “al-Su'udiyya Tuwaqi᾿ Mudhakirra Tafahum li-l-Rabt al-Kahraba᾿i Ma’ al-‘Urdun” [The Electricity Company .. Efficient performance is a prerequisite for departing to Europe], Al-Arabiya, August 12, 2020, https://www.alarabiya.net/ar/aswaq/oil- سوق-السعودية-مذكرة-تفاهم-لمشروع-الربط-الكهربائي-بين-السعودية-واألردن/and-gas/2020/08/16
23 As for Europe, the Saudi Electricity Company made a qualitative investment in a project worth nearly $6 billion. Consequently, achieving this policy will require diversifying local energy sources to generate electricity, increasing the installed electric capacity locally, and not just taking advantage of the Kingdom’s strategic location and the distinctive nature of the electrical network. (47)
The most important remaining challenge is to activate the role of the private sector as an essential and complementary partner to the public sector. Some specialists point out that the private sector’s ability to compete with the large projects on offer still requires more reforms.
On the one hand, electricity prices are still low, according to GlobalPetrolPrices’ classification. Electricity prices in the Gulf region are lower than the global average price of $0.14 per KW for homes, and $0.12 per KW for companies. In Saudi Arabia, electricity prices are $0.048 per KW for homes. For the commercial sector, the rate stands at $0.069.(48)
On the other hand, a review of the plan to achieve the targets of the total contribution of renewable energy and diversification of means to enhance its spread may be beneficial for the future of the sector. There are several reasons this could accelerate the contribution of renewable resources:
First: according to the recent plan, the target to generate electricity from renewable energy sources is 58.7 GW while the total installed capacity of electricity now is 61 GW. In this context, an important question arises of the proportion that will be covered by solar energy from large energy by 2030, in light of the growth in electricity demand, its rate being between approximately 5.48%, along with the high demand for electricity, which is expected to reach 120 GW. Hence, the contribution of renewable energy sources, according to the current plan, will represent only approximately 32% of the total demand for electricity by 2030.(49)
Second: the proposed plan relies on the distribution of renewable energy projects throughout the Kingdom (see figure 6) to ensure the deployment of renewable energy projects on a large
(47) “Sharikat al-Kahraba᾿… Kafa᾿ah al-Ada᾿ Mutatallab al-Intilaq ila ‘Uruppa” [The Electricity Company .. Efficient performance is a prerequisite for departing to Europe], OKAZ Newspaper, March 2019, https://www.okaz.com.sa/articles/na/1710183 (48) GlobalPetrolPrices.com, “Saudi Arabia Electricity Prices,” June 2020, https://www.globalpetrolprices.com/Saudi-Arabia/ electricity_prices/. (49) Caline Malek, “Saudi Arabia Joins Club of Middle East’s ‘Green Energy’ Leaders,” Arab News, January 20, 2020, https://www. arabnews.com/node/1615406/saudi-arabia.
24 scale.(50) Yet this plan did not consider reducing liquid fuel consumption in areas with high electricity consumption, which are centered in the western region of the kingdom, especially those far from the gas fields. Here, the economic viability is greater, in terms of reducing oil consumption or reducing economic impacts with government subsidies for electricity.
Third: There are many methods and policies to spread the use of renewable energy, and the diversification of these means will increase the use of renewable energy sources and decrease demand at the same time, especially since the grid “Operational System Impact” indicates that 13.5 GW of renewables can be integrated without any upgrades.(51)
Waad Al Shammal Solar PV Qurayyat Wind
Tabarjal Rafha CSP Sakaka DAJ North Tabuk Al Kahafah Tabuk Qaisumah Al Masa'a Sourah Unaizah Al Ghat Sudair Al-Ula Ar Rass Shaqra Malham Henakiyah Dhurma Ghilana Khushaybi Yanbu Tuwaiq Riyadh Al Haeer South Yanbu Al Quwaiiyah Mastoorah Mahd Aldhab Duwadimi Rabigh Al-Kharj Dhahban Starah South Jeddah Al Faisaliah Haden Layla Al Laith Bisha Wadi Ad Dawasir
Jazan Sharorah Farasan
Figure 6: Overview of Saudi Arabia’S Renewable Energy Program, Renewable Energy Projects Development Office (REPDO), Ministry of Energy, January 9, 2020.
(50) Overview of Saudi Arabia’s Renewable Energy Program, January 9. 2019. (51) Rami Shabaneh, Walid Matar, “Viability of Seasonal Natural Gas Storage in the Saudi Energy system’ KAPSARC, https://www.kapsarc.org/ar/research/publications/viability-of-seasonal-natural-gas-storage-in-the-saudi-energy-system.
25 About the Authors
Sarah Alotaibi is a Research Fellow at the KFCRIS. She joined the KFCRIS in October 2017. She obtained her master’s degree in Public Law from the Arab East Colleges and her bachelor's degree in Law from the King Saud University. Currently, she is a PhD candidate at the Leuphana University of Lüneburg in Germany. Her research interests encompass renewable energy policies and legislation, and sustainable development.
King Faisal Center for Research and Islamic Studies (KFCRIS) The KFCRIS is an independent non-governmental institution based in Riyadh, the Kingdom of Saudi Arabia. The Center was founded in 1403/1983 by the King Faisal Foundation (KFF) to preserve the legacy of the late King Faisal and to continue his mission of transmitting knowledge between the Kingdom and the world. The Center serves as a platform for research and Islamic Studies, bringing together researchers and research institutions from the Kingdom and across the world through conferences, workshops, and lectures, and through the production and publication of scholarly works, as well as the preservation of Islamic manuscripts. The Center’s Research Department is home to a group of established and promising researchers who endeavor to produce in-depth analyses in various fields, ranging from Security Studies, Political Economy, African Studies and Asian Studies. The Center also hosts the Library which preserves invaluable Islamic manuscripts, the Al-Faisal Museum for Arab Islamic Art, the Al-Faisal Institute for Human Resources Development, the Darat Al-Faisal, and the Al-Faisal Cultural Press, which issues the Al-Faisal magazine and other key intellectual periodicals. For more information, please visit the Center’s website: www.kfcris.com/en
P.O. Box 51049 Riyadh 11543 Kingdom of Saudi Arabia Tel: (+966 11) 4652255 Ext: 6892 Fax: (+966 11) 4659993 E-mail: [email protected]
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