Saudi Arabia’s future: From Oil Kingdom to Solar King?

The facts are diffuse, to say the least, as Saudi Arabia’s current major shake up of its economy, a real focus on economic diversification and inclusion, is new and has never been put in place in the Kingdom at this scale. The role of MBS in the whole endeavor is clear, he leads and supports, Saudi Vision 2030, the Aramco IPO, NEOM and also this latest 200GW solar power project. By 2030, as stated by MBS and SoftBank’s Son, 200GW will be added to the currently 400GW globally installed solar power capacity. The scale of the endeavor is gigantic, it will be with one move the largest solar power project in the world, dwarfing the others.

Even that skepticism not strange to most analysts, looking at the underlying drivers for this solar project, commercial viability and a real rational need is available. Even that Saudi Arabia is OPEC’s largest oil producer and the world’s largest oil exporter, the Kingdom is fighting an uphill battle. A growing population and increased industrial activity have resulted in a continuous increased demand for electricity. Cooling (mainly air-conditioning), desalination and industrial processes are currently pushing domestic demand of crude oil and products to around 4 million bpd. Based on Saudi sources, around 800,000 bpd are used for electricity generation. If no actions are taken, predictions the last years showed that the Kingdom could be facing a domestic demand for oil products hitting 8 million bpd by 2030, with an increased part for power generation. The latter situation would be diminishing the OPEC leader’s geopolitical and economic power.

The latter threat has been understood by the Saudi leadership and preventive measures to quell demand already have been put in place, such as reduction of subsidies on energy, gasoline and water. Still, more is needed, and looking at the overall availability of sun in the region, solar power generation is logical and feasible. The move illustrates at the same time the commitment by MBS to transform the country’s economic status quo. The implementation of this project is a win-win situation for Saudi Arabia. Not only will it reduce substantially domestic use of crude oil, but also show a commitment to a more diversified economy, which includes renewable energy production. A direct link between this project and MBS’ grand scale dream called NEOM is easy to be made. The latter will be a high-tech city of the future, in which fossil fuels will not be used. The experience gained from implementing an 200GW solar project will be for sure used in the set up and design of NEOM in the coming years.

Still, the project will be facing immense challenges. Financial and technical issues still have to be addressed. The current Memorandum of Understanding (MOU) between SoftBank and Saudi Arabia calls for a total investment volume of $200 billion (R2.33 trillion). The latter is needed to install 200GW capacity, which includes the solar panels, battery storage and a manufacturing facility for panels. The first phase, which is 72.GW, is estimated to cost $5 billion, of which SoftBank’s Vision Fund (in which Saudi Arabia has invested) will supply $1 billion, while the remaining $4 billion will be coming from project financing. Official interest will be immense to take part, but reality is most of the times much more difficult. As long as no other details have been published or tender documents are available, interest will be high but action will be lacking.

Another possible threat could be the fact that Saudi Arabia itself doesn’t need 200GW solar capacity. The country currently has a total installed capacity of 60GW, mainly oil-fired plants. The enormous excess capacity either needs to be exported to neighbors or being used by local industry. At present, looking at the German experience, that will be easier said than done. Reality checks also reiterate that even that the Kingdom will have a huge overcapacity of power if all installed, but due to lack of storage capacity options, it still will need additional fossil or nuclear back-up for demand during the night.

Saudi Arabia should also assess and implement from Day One a total revamp and expansion of its national and regional power grid infrastructure. The addition of solar power at this scale will put the existing grid and regional interconnections under severe stress. Risks of black-outs would be enormous if the grid is not being expanded, but also intra-regional interconnections and take-off arrangements are in place. A sudden surge in power capacity and generation could be having dire consequences otherwise.

Looking at the current regional developments, Saudi power exports will be constrained, as the UAE has been aggressively expanding its own power sectors (solar), while Qatar is not an option for a long-time to come. Main markets would be Egypt, Jordan and potentially Iraq. Exporting high voltage over these distances is very costly, due to losses, but still could be the only functional option at present. The dream of Saudi Arabia becoming the world’s largest power exporter is at present more a Fata Morgana than a realistic option.
Coming back to economic viability and the costs of this giga solar project, it is functional and viable. Taking out only 800,000 bpd of crude oil demand domestically will already bring the Kingdom annual additional revenues of between $7-20 billion, based on $70/barrel.