Where is Saudi Arabia on its plan to power itself on sun and wind rather than oil?

"Saudi Arabia’s renewables plans are overhyped and falling short!"

"No, they’re not, they’re transformational and decisive for the future of the world oil market!"

Between competing narratives, what is the truth of the kingdom’s ambitious plans to power itself on sun and wind rather than oil?

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This debate arises from three key trends: Saudi power demand is growing steeply, the country burns huge quantities of oil for electricity and it has one of the world’s most ambitious plans to build renewable generation. If it succeeds in phasing out petroleum in power generation by 2030, that could upset the global oil market – at least in theory.

Let us break down these components.

Saudi electricity consumption is powered by the push for diversification and industrialisation, and more recently by data centre construction. Power demand jumped 10 per cent in the first half of this year and peak needs exceeded 75 gigawatts for the first time. This is despite promotion of energy efficiency, and the effect of increases in prices of electricity and water in 2016, 2018 and (via a value added tax rate hike) in 2020. Tariffs were raised again this May.

The country is both one of the world’s biggest oil producers and consumers. While most utilities worldwide have phased out the use of costly oil for power generation, Saudi Arabia burns on average 1.1 million barrels daily to make electricity and desalinated water. In the summer, this rises to more than 1.4 million bpd of crude and fuel oil for power, driven by air conditioning needs. This consumption eats into Saudi oil exports and the seasonality limits its flexibility with Opec policy.

By 2030, the government wants to eliminate this oil consumption. Instead, 130 gigawatts of renewable capacity is hoped to produce at least half its electricity, the rest coming from gas.

The Saudi renewable programme has had several false starts, beginning with the King Abdullah City for Atomic and Renewable Energy, which in 2013 set a target of 58.7 gigawatts by 2030. Little progress was made, leading to scepticism from project developers.

But over the last two years, progress has accelerated enormously. Today, the country has 10.2 gigawatts of operational renewable energy, mostly solar photovoltaic. By the end of 2028, the installed capacity should exceed 40 gigawatts.

So hitting the 2030 target would require an average of 45 gigawatts built in both 2029 and 2030. With planned awards at 20 gigawatts annually, Riyadh looks behind schedule, but it could reach its goal by 2032 or 2033, still an impressive achievement.

This is purely a question of organisation; national champion Acwa Power and the kingdom's sovereign wealth fund, the Public Investment Fund, plus numerous international renewable developers, are keen to deliver and finance has been readily available.

Saudi Arabia’s ambition would be less than 3 per cent of the total global solar installation this year forecast by BloombergNEF. This again looks highly achievable given its large land area, excellent solar conditions and other advantages. The very low costs achieved for large-scale renewables in its sunny, windy deserts are equivalent to oil priced at around $6 per barrel, below even its very low production costs, and far lower than world market prices.

It also has a hefty investment programme to boost gas output, extend its gas pipeline network to the west coast and convert oil-fired power plants to gas. On Thursday, it signed an $11 billion deal with a consortium led by asset manager BlackRock, to finance processing facilities for Jafurah, its giant development of unconventional gas.

By 2030, Jafurah should be producing 2 billion cubic feet of gas daily. This is a big chunk of raising overall gas output from 10.8 bcf per day last year to about 16 bcf daily by 2030.

What will the effect of all this be? The answer is: it depends on demand. Going by the breakneck pace of this year, with almost 10 per cent annual rises in electricity demand by 2030, the kingdom will do well even to keep oil consumption flat, let alone eliminate it. At a more restrained but still strong pace of 4-5 per cent, seen over the last three years, oil burn could indeed be stopped entirely around 2031.

To achieve its goals, Riyadh needs to work hard on energy efficiency. The recent subsidy reforms may continue to control consumption. Air conditioning, the main driver of summer electricity use, can be made more efficient, and supplemented by better building design, insulation and natural cooling systems. And, as the data centre sector booms, it would be helpful to allow them to source renewable energy directly, rather than drawing on the grid for power from oil or gas.

If the country does indeed succeed in cutting most of its oil consumption for power around 2030, does that mean a further glut in the world crude market? On the face of it, eliminating 1.1 million bpd of demand would wipe out the equivalent of a whole year’s global demand growth.

But this is purely an arithmetic exercise. The impact on the world outside Saudi borders depends on whether it chooses to export the saved oil, or to cut back production correspondingly. Saudi Aramco was told in early 2024 to pause plans to expand production capacity, a possible acknowledgement of the expectation of lower domestic needs.

There will be impact on specific parts of the petroleum business. For instance, the reduced burning of heavy fuel oil, a low-value product of refining, will saturate that market. The additional hydrocarbon liquids from Jafurah, which are not counted as crude oil, will mean Saudi exports and petrochemical feedstocks will grow regardless of Opec policy.

But Riyadh, in co-ordination with its colleagues in the Opec+ alliance, will decide on overall oil output levels. Less domestic consumption will give it greater flexibility, especially in summer. It will have more spare capacity, a buffer against disruption elsewhere. Saudi Arabia’s power shift will transform its domestic energy system – but do not foreshadow a practical peak in world oil demand.

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