The Singular Chancellor
The Merkel Model and Its Limits
U.S. President Donald Trump’s visit to Saudi Arabia last month cast attention on a kingdom in transition. The country is currently working to transform its vast oil wealth into a modern, sustainable economy fit for the twenty-first century. Central to this goal is a transformation of the Saudi energy sector, which the National Renewable Energy Program was recently established to help bring about. Saudi Energy Minister Khalid al-Falih recently announced that under NREP, Riyadh aims to deploy 9.5 gigawatts of renewable energy capacity by 2023 and attract $30 billion to $50 billion of investment in renewables by 2030.
Despite the fanfare these announcements have received, skepticism about their attainability is warranted. Saudi Arabia and the broader region face technical, institutional, and economic challenges in reaching such lofty renewable targets. Indeed, Riyadh initially floated even more ambitious goals, only to scale them back when crude prices fell dramatically below the $150 per barrel mark that planners were anticipating.
The motivations behind Saudi Arabia’s renewables revolution are clear. Wind and solar power are needed to displace power generation from oil and oil products. Saudis rely almost entirely on domestic crude oil, diesel, and natural gas for electricity. At current rates, domestic demand is projected to cut up to two million barrels a day from oil exports by 2020. Riyadh is already taking concrete steps in response. In February, Saudi Arabia solicited tenders for a 300 megawatt solar project and a 400 megawatt wind project representing NREP’s first phase. Falih stated this could be as transformative a development as when the kingdom first discovered oil in the 1930s. Yet even if Saudi Arabia achieves only part of its aims, Washington should find ways to guide Riyadh through these initiatives.
Clean energy contributes to Vision 2030, the Saudi national plan to curtail dependence on oil revenues through economic diversification, in two ways. First, it would incentivize Saudi Arabia to integrate its power grid more deeply with its neighbors’, which would allow it to export electricity throughout the region, an explicit goal of the NREP. To fully benefit from fluctuating, non-constant sources of energy such as wind and solar, Saudi Arabia needs to add more power transmission lines, as interconnections generally increase system efficiency by allowing electricity to easily flow where it is most needed, thereby reducing the amount of reserve power generation required.
So far, Saudi Arabia is connected to its Gulf neighbors through the Gulf Cooperation Council Interconnection Authority, which links its grid with those of Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates. This shared grid, however, was initially designed for emergency blackout relief rather than for economic power trading, and is thus quite limited in its design. Saudi Arabia can only export and import 1,200 megawatts at a given time, less than two percentof its total generation capacity, and its grid operates on a different frequency than its Gulf neighbors. The kingdom will need to switch to its neighbors’ frequency, or vice versa, before these interconnections can be truly efficient and most useful.
Meanwhile, Saudi Arabia has plans to export and sell electricity even farther away by linking its grid to Jordan, Yemen, and the African market through Egypt. The kingdom has already signed a memorandum of understanding with Jordan, as well as an agreement with Egypt to trade electricity by 2020. The Egypt project is furthest along, with one Egyptian official saying a trial period to exchange three gigawatts of electricity will start in 2019. But obstacles will impede electricity imports there, too. It remains to be seen how well constructive energy interconnection projects can be shielded from participating countries’ political differences, such as Saudi Arabia’s strained relations with Egypt, which have already resulted in delays.
Moreover, Saudi Arabia’s revised renewable targets will hardly be enough to satisfy domestic energy demand, let alone exports. Domestic consumption is already increasing at seven percent annually. In 2016, solar and wind capacity in the country totaled less than one gigawatt, with virtually all power (55 gigawatts total) coming from crude and oil products (50 percent) or associated natural gas (50 percent). Additional gas generation will be needed to meet the gap between renewables growth and overall demand growth.
Saudi Arabia’s revised renewable targets will hardly be enough to satisfy domestic energy demand.
Even if the kingdom does deploy enough wind and solar power to justify exports, other barriers remain. Throughout the greater Middle East, bureaucracy, balkanized regulation, subsidies for fossil fuels, and entrenched monopolies have impeded renewable energy despite its increasing cost competitiveness. Even tough solar bids in the region are some of the lowest in the world, the lack of common market policies cannot be overcome solely by Saudi determination to export electricity. The kingdom will first have to deepen trust and the level of technical and legal coordination—including cybersecurity, already an energy-sector vulnerability, for sensitive points in the transmission network—throughout the Gulf Cooperation Council and beyond. Greater alignment of GCC countries’ energy policies, including on fuel subsidy reforms, civil nuclear energy plans, and major potential sources of future energy demand such as desalination, would also improve the long-term transparency and certainty desired by renewables investors.
Saudi Arabia can also leverage its attractive short-term renewable energy deployment goals into a full-blown clean energy technology sector that can export products regionally. It has already announced several projects in service of this goal which will be tendered on a “build, operate, and own” basis, meaning that firms will construct the projects, retain ownership of them, and offer the full range of services from financing to maintenance.
Nearly all of the companies bidding on the announced solar and wind projects in NREP’s first phase are non-Saudi, however. On the one hand, the fact that these companies are interested is good news, demonstrating foreign investment market confidence in the idea of solar and wind in the kingdom. But this foreign-led deployment of renewable energy in the short term undercuts prospects for nurturing a domestic clean energy sector in the long term, as schemes involving build, operate, and own generally offer little technology and knowledge transfer and limited domestic employment opportunities. Although the arrangement will help Saudi Arabia deploy renewable energy quicker, it seems that the country’s short- and long-term economic strategies are on different tracks.
To build up its domestic industry, Saudi Arabia will introduce a local content requirement of 30 percent for its current projects and plans to raise the level for subsequent rounds of NREP projects. Such preconditions, however, might run afoul of international trade rules, which expressly prohibit such mandates. (The World Trade Organization already ruled against a similar Indian regulation for solar panels.) And competition from low-cost Chinese wind and solar developers, which already dominate the global market, will stifle Saudi efforts to export beyond the Middle East.
Despite these challenges, Saudi firms have found some success developing solar projects abroad by working with, rather than against, the tide of competition. For example, Saudi renewables developer Acwa Power partnered with a Chinese firm to develop as much as 170 megawatts of solar energy in Morocco. The same company is also bidding on the solar projects in Dubai, Jordan, and Oman. These developments may one day see Saudi Arabia’s foreign policy evolve from one based primarily on oil diplomacy to a more complex geoeconomic strategy more akin to those of Germany, South Korea, or other industrialized nations with a variety of key export sectors.
The kingdom’s push toward renewable energy is good news given that the shift would make the country a more environmentally responsible regional leader and would advance clean energy in one of the regions that climate change will hit hardest. Supporting it would provide a new dimension for U.S. engagement beyond the petro-diplomacy and regional stability issues that have dominated the bilateral relationship over past decades.
To promote these efforts, the United States should help Saudi Arabia transform itself from petro-state to participant in the global clean energy market. First, the Department of Energy can partner with Saudi scientists to research clean technologies optimized for desert climates similar to Saudi Arabia’s. Specifically, Washington can employ one of its greatest underappreciated assets, its national laboratories, to partner with institutions in Saudi Arabia in a less formalized version of the successful U.S.-China Clean Energy Research Center.
The kingdom’s technical hurdles to solar—such as frequent sandstorms and the need for desalinated water—may be a blessing in disguise in terms of innovation. It is leading development on dust-resistant solar panel coatings and concentrated solar power, the latter of which is a technology whose waste heat can be used to power water desalination. The United States should push Saudi Arabia to integrate this research into its Mission Innovation goals to double public spending on energy research.
Second, the State Department can dispatch experienced economic and technical advisors to the Gulf and assist efforts to harmonize regional regulations and subsidies. If Saudi Arabia intends to be a power producer for its neighbors, it will need help reforming existing energy subsidies, dismantling domestic monopolies, privatizing national companies, and unbundling energy industries to promote power sector competition.
China’s track record does not suggest an appetite, or expertise, for such comprehensive assistance on consensus building and rulemaking. But the United States’ long-standing relationship with the kingdom provides a natural opportunity. Washington should act quickly and creatively, in coordination with the International Monetary Fund and World Bank, to seize it. Energy experts have already floated specific mechanisms such as “sunset credits” to help reallocate fossil fuel subsidy financing into clean energy, which may prove a useful tool as the economics of renewables mature. In the wake of the U.S. withdrawal from the Paris agreement, bilateral initiatives to advance clean energy globally are all the more urgent. Supporting the kingdom’s renewable energy goals offers the Trump administration the opportunity to export American technology and expertise to a U.S. ally to combat climate change.
Under Vision 2030, Saudi Arabia is charting a new, decades-long course to reinvent its society. Its renewable energy targets are key to this transition, and will reshape the kingdom’s regional and global role. The United States must pay heed to this unique turning point and work to bend the course of Saudi energy in a cleaner and more innovative direction.