On Nov. 18 2020, the Kingdom of Saudi Arabia’s (KSA) Ministry of Energy announced reforms to its electricity sector that appear promising for an acceleration of the uptake of large-scale solar in the country. And as the region’s biggest economy, and the world’s largest producer and exporter of oil, when the KSA moves decisively, the repercussions to the region’s energy sector are significant.
However, when it comes to renewable energy deployment, Saudi Arabia’s plans and announcements have seldom lived up to expectations. And while the Kingdom’s renewable energy deployment target of 58 GW of capacity by 2030 is encouraging, progress toward this goal has been frustratingly slow.
The November 2020 reforms, announced by the Ministry of Energy, are targeted at achieving a number of goals. These are increased generation efficiency and reliability, reduction of liquid fuel use for electricity, and the creation of a “viable and sustainable” electricity sector. Importantly, the package of measures contains a “deleveraging” of the Saudi Electricity Company’s (SEC) balance sheet to the tune of $128 billion, and the provision of a $45 billion equity facility to the SEC for investment in generation and distribution – the latter of which could mean a lot of large-scale solar.
“From what I’ve seen, it boils down to canceling a lot of SEC’s debt, as it was on poor financial footing to say the least. Additionally, it pursues the government’s agenda in terms of reducing the volume of crude that is burnt by the power sector,” says Antoine Vagneur-Jones, from BloombergNEF’s Energy Transitions team.
The retiring of SEC debt sees the company’s debt-to-equity ratio decrease from 2.2 to 0.6, which the KSA Ministry of Energy has described as a “healthy debt level” for a modern utility. Advisers to SEC in the reform process, HSBC and Strategy&, both noted that the measure should allow for further investment in the Kingdom’s electricity sector at appropriate and secure returns.
“Overall, these announcements are expected to create an attractive environment for investment in the electricity sector and contribute to the economic development of Saudi Arabia, in line with the Vision 2030 program,” stated HSBC.
Inside the drivers
As the world’s biggest producer of crude oil, and its cheapest, it should come as no surprise that the KSA’s energy reforms are closely linked to oil prices. Reforms to the country’s electricity sector, and wider economy, have tracked closely with fluctuations in the oil price. In 2020, with oil prices relatively low and peak oil demand looming – by 2035, according to Bloomberg NEF’s New Energy Outlook – there is an increasing imperative for the inefficient burning of oil for electricity production to be reduced, if not eliminated.
“The volume of crude that Saudi Arabia burns in its power sector is monstrously high,” says BloombergNEF’s Vagneur-Jones. “Maybe second only to Iraq – 31% of the crude oil Saudi Arabia produced in 2019 was burnt for electricity. It’s nuts.” The analyst adds that one-fifth of that oil burnt for power generation was heavy fuel oil. “It’s not as polluting as most coal, but still a pretty dire situation for a country that is reliant on oil exports.”
Renewables, including solar, would be well positioned to phase out this oil-fired generation. The KSA currently has around 400 MW of installed solar capacity, built under auctions administered by the the Renewable Energy Project Development Office (Repdo), which was founded in 2017. Low solar power purchase agreements have been achieved, including $0.0234/kWh at the 300 MW Sakaka solar PV project, developed by homegrown renewables developer ACWA Power. At the time ACWA Power CEO Paddy Padmanathan noted that “PV is a no-brainer in our part of the world for a significant source of load.”
As with its Gulf Cooperation Country (GCC) neighbors, demand for electricity in the KSA has been increasing – driven primarily by residential and commercial property air conditioning demand, although additionally through an increase in industrial activity. BloombergNEF expects this demand to continue to increase, although not quite to the 121 GW of peak power demand by 2030 forecast by the government.
Indeed, energy efficiency measures, promoted by the government as a part of its Vision 2030 raft of policies, have been effective in stemming electricity demand growth. In 2019, BloombergNEF notes, electricity demand in the KSA actually fell – “for the first time in many decades,” adds Vagneur-Jones.
On the basis of falling demand in the short term and the existing generation fleet, IHS Markit believes that new thermal generation projects are unlikely to be developed by the Saudi utility, the SEC. Elsa Kiener, a MENA power analyst for IHS Markit, notes that SEC currently has…