Saudi Arabia will need to follow Dubai’s lead and hike electricity prices by more than 50 per cent to support the expected growth of its renewable energy sector after the government’s new diversification drive, experts said.
The country is looking to drum up US$100 billion a year in new revenue by 2020 through slashing subsidies and increasing levies, according to Deputy Crown Prince Mohammed bin Salman in an interview with Bloomberg.
“It’s a large package of programmes that aims to restructure some revenue-generating sectors,” the prince said, highlighting solar as a key industry for the kingdom’s future.
Decreasing electricity subsidies and pushing up power bills to match those in Dubai will trigger a demand for renewables, particularly rooftop solar in the residential and commercial sectors, according to Apricum, a consultancy specialising in renewable energy.
Mortiz Borgmann, a partner at Apricum, pointed to Dubai’s ability to foster local demand in solar energy, beginning with the utility-scale Mohammed bin Rashid Al Maktoum solar park. “Dubai shows that a local rooftop solar market can be driven by high electricity prices,” he said.
Saudi Arabia began initiating economic reforms by way of decreasing power subsidies at the end of last year. This resulted in a 15.4 per cent increase in power bills for the commercial and residential sector to 8 US cents per kilowatt-hour from 6.9 cents per kWh last year. Dubai’s residential and commercial rates are at 12.1 cents per kWh.
This shake-up in strategy, moving the kingdom away from heavy reliance on petrodollars, comes as the price of oil nears a two-year lull to around $40 per barrel from highs of US$110.
Saudi Arabia, where demand for electricity has more than doubled since 2000, is one of the few countries worldwide that uses crude oil for power generation, according to the US energy information administration.
The kingdom consumed nearly a third of its oil for domestic production in 2014. By incorporating other forms of energy such as wind and solar power, the country would free up more crude oil for export to international markets.
Prince Mohammed also has plans to build a solar energy plant. “We’re targeting many projects. Most important is building the first solar energy plant in Saudi Arabia,” he said.
Saudi Arabia originally planned to more than double its generating capacity to 120 gigawatts from 58GW using solar and nuclear power by 2032, but the country has hardly made any headway in its diversification efforts. The kingdom last year announced that it would delay this plan by eight years to 2040, as it needed to further assess various technologies.
“Numerous examples worldwide show that deploying renewables triggers local economic activity,” said Mr Borgmann. “By creating a sustainable domestic demand for solar and wind, Saudi Arabia could create jobs in both manufacturing and around construction of power plants, helping their goal of diversifying the economy.”
However, the heavy renewable energy hitter Acwa Power in Riyadh said that the case for renewables has become more compelling, with a greater opportunity for the private sector.
“We expect to see much more focus on cost and on the private sector taking increasing responsibility to invest in infrastructure assets, take ownership and operate to deliver service,” said Paddy Padmanathan, the chief executive of Acwa.
And this points to another page from Dubai’s book. The emirate’s power utility, Dubai Electricity and Water Authority, announced at the start of this year that it would tender renewable energy projects worth more than Dh27bn based on an independent power producer model, as a way to “leverage public-private partnerships and build new capacity in renewable energy”.
This puts the tab on private companies rather than the government fronting the capital, a move replicated throughout the region as government budgets tighten because of low oil prices.
And players such as Acwa with home court advantage are ready to respond.
“We expect a significant amount of renewable energy procurement to also start soon and we will participate with the same vigour as we have done in other markets,” Mr Padmanathan said.
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