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INSIGHT: Sovereign Wealth Fund Key to Saudis’ Renewable Energy

June 14, 2019, 9:30 AM

The global transition to cleaner fuels is the underlying driver of Saudi Arabia’s Vision 2030 campaign to diversify its economy away from oil. No wonder then that massive clean energy investments are a major component of the country’s development targets.

Fizzled attempts earlier in the decade, and a huge solar deal announced last year by the Saudi Public Investment Fund (PIF), exemplify the gap between lofty ambitions and the country’s capacity to deliver. The energy ministry has been helping to close that gap, demonstrating a willingness to finally engage in market reforms and the ability to organize successful international auctions.

Conditions are improving for investing in Saudi renewable energy, and 3.1 gigawatts of projects are to be tendered in 2019. Yet now with beefed-up targets to 2030, ever more deployment is to be overseen directly by the PIF through private deals, testing the institution’s aims and capacity.

The country has been working hard to reduce the use of oil for power, hence the major drive over the past two decades to increase gas-fired generation. But over the longer term, Riyadh hopes that private sector renewable energy independent power projects (IPPs) will carry much of the burden.

Push for Private Investment

Courting private investment requires clear price signals and a sound market framework.

Long-delayed plans to reform and privatize the power sector—traditionally dominated by the Saudi Electric Company (SEC)—are now part of Vision 2030.

The country had already taken steps toward unbundling in 2012 by launching National Grid SA, and in 2017 the Saudi Company for Energy Purchase was established as a principal buyer for electricity. When it eventually happens, breaking up SEC will portend independent transmission and distribution companies, and an unbundled single buyer model.

With peak demand for power forecast to double to 120 GW by 2032, expanding capacity is a priority.

The National Transformation Program wanted only IPPs by 2020, but that was unlikely, and like many targets, it slipped.

Gas-Fired Power Plants

Current projects under construction by the SEC and Aramco, the Saudi national oil and gas company, continue the shift to gas-fired generation. But given the challenges to domestic gas production, a traditional, if easing, reticence to develop LNG import facilities, and sour political relations with neighboring, gas-rich Qatar, efforts to expand renewables, which began in the 2000s, have accelerated.

After a series of false starts, the 2015 royal succession, and change in government kick-started a new push. The energy ministry’s National Renewable Energy Program (NREP) planned for 9.5 GW of private-sector renewable projects to be competitively tendered by 2023.

In 2017, the ministry organized a well-attended auction for the Sakaka solar IPP, and also tendered for the Dumat al-Jandal wind farm. This year’s second round is building on that experience, with more than 16 bidders participating in the latest auction.

The successful tenders and last year’s groundbreaking at Sakaka are testament to the fact that Saudi Arabia is developing viable frameworks for private renewable energy.

Solar Deal

But all this is separate from the deal touted last year between the PIF and SoftBank to build 200 gigawatts of capacity—equivalent to two-thirds of all solar worldwide. Even a fraction of that capacity realized would transform renewable energy in the Gulf, but no progress was made in 2018.

So, was Saudi Arabia really serious about the PIF’s big talk and allowing it to elbow in on the country’s energy program?

The answer is yes. New targets announced this year are for 58.7 GW of “clean energy” by 2030, 70 percent of that to be developed by the PIF and its chosen suppliers.

The pattern is not unfamiliar in contemporary Saudi Arabia. Confronted with the impracticality of some bolder aspects of Vision 2030, the kingdom scales back plans, and in the quieter rework more power accrues to the PIF and its royal patron.

Even under current auctions, a preference for local content can undermine transparency. Despite a record-breaking tariff offer from Masdar/EDF, the winner of the Sakaka auction was ACWA Power, a Saudi firm now partly owned by the PIF.

‘Fast-Track Localization’

The fund, partly a vehicle for domestic Saudi development, can be forgiven for encouraging a local solar power ecosystem. But as it embarks on “fast-track localization” to rapidly build up entire value chains in the kingdom, its strategic mandate will trump private sector competition.

While the PIF has significant financial heft, its ability to carry out large energy project management is less clear—especially if coordination with the ministry and regulators is not airtight.

Saudi authorities should make sure that it is.

The country’s renewable energy program is finally bearing fruit thanks to broadly competent execution by the energy ministry as it gains experience and improves the market environment. That has laid the groundwork for open tenders and big new opportunities for investment.

But most of those opportunities will now have to be seized behind the closed doors of the PIF, prioritizing strategic state-led development over the transparency of competitive auctions (such as it is). It is in the country’s interest that its sovereign wealth fund and its energy bureaucrats be aligned to deliver an efficient clean power market.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Phillip Cornell is a non-resident scholar at the Arabia Foundation and a specialist in energy policy and economics of the Middle East. He is also a non-resident senior fellow at the Atlantic Council.