On May 7, 2016, King Salman bin Abdulaziz al Saud announced the most comprehensive change in Saudi ministries in decades and a revamped 9 GW by 2023 clean energy target laid out by deputy crown prince Mohammed bin Salman, in the “
Saudi Arabia Vision 2030” policy paper.
Saudi Arabia’s previous 2011 announcement would have seen 54 GW of renewable energy by 2032 supply a third of the Kingdom’s electricity. But only 25 MW of that goal was deployed in the six years since the announcement in 2011.
But according to Oxford University’s Middle East Energy Expert Justin Dargin – who had been very skeptical at the time of the earlier announcement – new realities make this time completely different.
Dargin told CleanTechnica that he believes that the new target can and will be met. Bin Salman’s new “more rational” goal has a lower bar, but it must be met much sooner, and lays out a method for getting there, using a series of competitive auctions. And it is still a sweeping change. If projects from the first round of bids are completed by 2018, it would take an average deployment of 1,600 MW of new capacity each year for 6 years.
Dargin pointed out that 9 GW is just the initial step of a multi-decade switch. But changes are making the time right for a clean energy switch now.
1. There is now a precedent for effective solar policy in the Arabian Gulf.
The first Gulf country to use competitive auctions, the UAE’s Dubai, has been breaking solar price records with bids to build each 200 MW phase of the Sheikh Mohammed bin Rashid Al Maktoum Solar Park.
Last year, ACWA Power bid under 6 cents unsubsidized. This year, Masdar bid under 3 cents. These are not only the lowest solar prices in the world, but on a par with prices for gas-fired power in the UAE, and lower than the prices for coal.
The low prices are partly the result of competitive auctions, instead of the initially high feed-in tariffs that eventually wound up destabilizing the solar industry in Germany and Spain, as subsequent governments yanked them out.
“If the Kingdom follows the path of Dubai in a competitive bidding process, with a flexible framework, then it is likely to reach these low solar energy prices as well,” Dargin said.
2. Saudi firms are now among leading regional developers.
This year, it is a Saudi firm, Abdul Latif Jameel (ALJ), in a consortium with French solar developer Fotowatio Renewable Ventures (FRV) and Masdar, that offered the lowest bids for Phase III at Dubai – breaking global solar records with the world’s-lowest-ever 2.99 cents. (ALJ had bought FRV in 2015, bringing solar development experience to a Saudi firm.)
Last year, it was another Saudi-based firm, ACWA Power, that broke world records in Dubai for Phase II of the Sheikh Mohammed bin Rashid Al Maktoum Solar Park, with 2015’s lowest unsubsidized price for PV at 5.85 cents per kWh.
“ACWA Power have built up a solid business model and that allows them to access capital at attractive rates,” Steven Geiger, a former founding director of Masdar, told CleanTechnica. “They are very aggressive and very driven, and they realize they want to own this game and Paddy [Padmanathan] is a very impressive leader,” said Geiger, who is now a partner at the US investment firm Innova Partners.
3. Solar in the Gulf is getting the same favorable finance rates as oil.
According to both Geiger and Dargin, these kinds of prices are possible in part because finance rates for the solar industry in Saudi Arabia are closing on parity with oil industry finance rates. Governments in the region have now begun to provide the same kinds of rates to finance solar and wind projects as they already offer the oil and gas industry.
“In the Gulf region, the oil sector is dominated by state-owned national oil companies. Banks have a low project finance rate for various oil, gas and petrochemical projects throughout the region. There is strong state support for energy project development,” explained Dargin. “The same low cost financing is developing in the solar energy sector as well. What we have witnessed as a result in Dubai, is the record setting solar price below coal power generation.”
4. Finally, it is clear that the end of oil is nigh.
Saudi Arabia needs to pull out of its complete dependence on oil prices. It is a race to the bottom for the global oil industry. As hedges against below-cost oil prices are now beginning to time out, banks are pulling out.
Even the Financial Times, which is very focused on the fossil industry, points out in The long twilight of the big oil companies, that fossil fuel producers face a future of slow and steady decline.
When Saudi announced its initial goal in 2011, its grid had a 50 GW demand. That has been rising 8% a year, and continues to do so. Saudi Arabia is completely dependent on oil from its oilfields to burn for electricity, about half derived from flared gas and the remainder from diesel, crude oil, and heavy fuel oil.
“Saudi Arabia is under much greater financial pressure to actually do something,” said Geiger. “They need to build real diversification across all industries, and unfortunately, they have a real short timeframe to do that.”