Can Saudi Arabia break free from using oil for power generation?

The kingdom is investing heavily in renewable energy and natural gas infrastructure upgrades

Storage vessels at Aramco's Ras Tanura refinery in Saudi Arabia. EPA

If Saudi Arabia’s electricity sector were a country, it would match the entire oil consumption of Italy, Spain or Turkey. Despite also consuming prodigious quantities of natural gas, the kingdom uses nearly 1.4 million barrels per day in summer to generate power and water. But Riyadh may be about to turn the corner.

Like its GCC neighbours, Saudi Arabia needs large volumes of fuel for desalination and air-conditioning. It is on a bigger scale, though, and with the exception of Kuwait, its other Gulf colleagues use gas almost exclusively instead of oil. Fuel is supplied to the power sector at very low prices: until recently, less than $7 per barrel of crude oil.

After subsidy reductions in 2016 and 2018, electricity demand flattened out. But the attempts to diversify the economy, boost industry and tourism, and construct new cities, have seen power consumption resume its strong upward growth from 2021 onwards. An increasingly hot climate and new sectors such as data centres will push up future electricity needs: peak demand was up 9.5 per cent in the first half of this year.

This heavy use of oil is problematic in various ways. Not because Saudi Arabia cannot afford it – it can. Oil production costs are low, and reserves huge, probably more than will realistically be produced well into the second half of this century. This is not, as some naive analyses suggest, oil that would otherwise immediately be exported to the world market at $80 per barrel.

A recent Bloomberg opinion piece suggested that the future of Saudi Arabia’s domestic oil consumption was crucial to the timing of a global peak oil demand. This is numerically true, but misleading. If Saudi Arabia does not devote the average 1.1 million bpd of its oil production to its power stations, but cuts back output by the same amount, there is no net effect on the world market.

The impacts are subtler. First, there is a huge swing between winter and summer demand, of nearly 1 million bpd. This complicates Saudi Arabia’s task of market management as the leading country within Opec. The kingdom has turned to importing large amounts of Russian fuel oil during summer, probably significantly discounted. Eliminating crude burn would ease this seasonal shift, but it would leave Aramco with even more spare production capacity than it has today.

Second, burning oil is highly polluting, both to local air with sulphur dioxide, and with emissions of carbon dioxide. To make progress on its net-zero commitment by 2060, oil consumption in power plants has to drop sharply.

The country is well-aware of this issue. It has a programme to move to a mix of gas and renewables by 2030. New offshore gasfields and unconventional developments, including the giant Jafurah resource in the Eastern Province, are intended to boost gas output to at least 16 billion cubic feet per day by 2030, from 10.7 bcf last year. The increase is equivalent to about 900,000 bpd of oil, although a large part will be devoted to industrial use.

Saudi Aramco has begun work on new pipelines to supply the west coast, which has mostly lacked access to gas. A gas storage project that has just been commissioned will help balance consumption between summer and winter.

After some years of indecision and halting progress, the renewable programme, too, is accelerating. Nearly 13 gigawatts of renewables may be operational by the end of next year. The target is to have more than 100 gigawatts of renewables, mostly solar, by 2030, compared to national peak demand, which reached nearly 73 gigawatts this year. The Saudi Power Procurement Company aims to tender 20 gigawatts every year, which would be about on-track for the 2030 goal.

Allowing for reasonable electricity demand growth, if about half of the new gas output goes to power generation, then that plus the renewables would indeed eliminate oil use on a gross annual basis.

It is a very favourable time to build a large solar power sector. Consultancy Rystad thinks that there is enough global capacity to manufacture about 1,600 gigawatts of solar modules this year, but only about 500 gigawatts will be installed. The oversupply will be even more pronounced by 2026.

This glut means record-low costs, and should easily absorb another 20 gigawatts or more per year from Saudi orders. Even with the low oil and gas prices charged to the Saudi electricity sector, solar power will be cheaper.

The story is not quite so simple, of course. On a daily basis, demand peaks in the afternoon, then again in the early evening when people go home from work. Batteries can store a few hours of solar generation for the post-sunset period.

Renewable output also varies seasonally; solar output is greatest in the late spring when days are longer but temperatures still relatively cool. Electricity demand, meanwhile, is at its lowest in the cooler months of February and March, highest from June to September.

Two large projects on the west coast, at Magna and Wadi Baysh, are intended to pump water uphill with surplus electricity, and generate electricity by releasing it as required. This is the same concept as Dewa’s Hatta dam. But, Saudi Arabia will need more long-term electricity storage options.

Although nuclear power isn’t explicitly in the 2030 plan, unlike the UAE’s successful programme, Saudi Arabia had after numerous delays asked to receive bids from four consortia last month. The Barakah plant took about nine years from the start of construction to begin generating, so a similar Saudi programme would only be active by the middle of next decade.

Tackling demand growth would make the combined task much easier. The country has had an active energy efficiency programme for several years, including methods such as district cooling. But electricity prices are still quite cheap, and tariffs do not vary by season or by time of day to encourage storage or optimal timing of consumption.

Still, even if the goals are not fully achieved, the Saudi power sector will look radically different by 2030. If the authorities can get all the moving parts of oil, gas, electricity, renewables, efficiency and perhaps nuclear working together, they will save money, cut emissions, and have a machine to drive towards net-zero.

Robin M. Mills is chief executive of Qamar Energy and author of 'The Myth of the Oil Crisis'