Analysis & Opinions - Carnegie Endowment for International Peace

Saudi Arabia’s Moment in the Sun

| May 07, 2019

As part of a high profile tour of China in February, Saudi Arabia’s Crown Prince Mohammed Bin Salman (MBS) has overseen a range of multi-billion dollar pledges and MOUs with Beijing. This partly reflects Riyadh’s desire to diversify sources for investments and technology following the mass withdrawal of major Western business leaders from the Future Investment Initiative in October 2018, after the murder of Saudi Journalist Jamal Khashoggi in the Saudi Embassy in Istanbul. Yet cooperation with China on renewable energy, if successful, would realize a significant first step towards Saudi Arabia’s lofty ambitions for solar and wind power.

These MOUs follow Saudi Energy Minister Khalid al-Falih’s confirmation in January that the kingdom aims to develop 60 gigawatts of renewable energy capacity over the next decade—plans that would multiply the Gulf Council Cooperation’s solar capacity tenfold. However, global trade dynamics and the inherent volatility of the solar market may complicate Saudi Arabia’s goals.

Saudi Arabia hopes that developing a new industry would help create jobs for Saudi nationals. The country’s policymakers are concerned that massive youth unemployment—standing at 35 percent among jobseekers aged 15-24 and with the potential to increase to over 42 percent by 2030—can otherwise become a major source of instability. Promoting employment, particularly in the private sector, is a key goal of Vision 2030, which seeks to fundamentally reshape the kingdom’s economy and society. As part of the overhaul, Vision 2030 furthermore aims to improve the domestic business environment, localize domestic military manufacturing, and revitalize plans for industrial cities.

As one of the world’s largest fossil fuel consumers, Saudi Arabia hopes to use the grand programs to help expand renewable energy sources to meet domestic demand. In summer months, Saudi Arabia burns around 700,000 barrels of oil per day solely for electricity generation, particularly for air conditioning and water desalination. This counts for around one-fifth of Saudi Arabia’s daily total oil consumption—after transportation and the petrochemical and refining sector—but this share is expected to grow as the population does. Providing alternative sources of energy for domestic consumption would also free up more oil and gas for export. With oil prices between $50 and $70, the 700,000 barrels of oil per day currently used for electricity could be exported for between $13 billion and $18 billion per year.

With an abundance of both sunlight and land, Saudi Arabia has a geographic advantage in developing solar power generation at scale. According to a 2016 report by the International Renewable Energy Agency, developing even 1 percent of the suitable area in Gulf Cooperation Council (GCC) countries could create the capacity to generate 470 gigawatts of photovoltaic power and create over 100,000 jobs. Within Saudi Arabia specifically, the report estimated this would reduce the use of oil and gas for electrical production by 25 percent.

Introducing renewables at a large scale would allow Saudi Arabia to free up spare oil production capacity, which it has usually kept between 1.5 and 2 million barrels. This gives it greater geopolitical leverage to affect oil prices by increasing or decreasing exports. Furthermore, renewable energy investments are critical if the country is to meet the commitments it made in Paris as part of the United Nations Framework Convention on Climate Change in 2015. Through renewable investments, Saudi Arabia has suggested it could avoid emitting 130 million tons of carbon dioxide by 2030. That is a an ambitious goal, given that over the period between 2007-2017 Saudi Arabia’s carbon dioxide emissions increased by an average of 4.7 percent per year, from 392.5 million tons in 2007 to 594.7 million tons in 2017. By comparison, over the same period, France decreased its carbon dioxide emissions by 1.9 percent, or 44 million tons of carbon dioxide.

Furthermore, situated between the economic bulwarks of Europe, Asia, and Africa, the kingdom is able to serve as an export platform for solar technology from places such as China to other countries in the region seeking to expand their solar capacity. For example, in May 2018 major Chinese photovoltaic manufacturer LONGi signed an agreement with El Seif Group, a major commercial and industrial trading company in Saudi Arabia, to establish a large-scale solar manufacturing infrastructure in the kingdom.

As part of a broader push to establish itself as a logistics hub, Saudi Arabia has already streamlined its once-byzantine trade documentation requirements as part of Vision 2030 and established a special economic zone (SEZ) near the Riyadh airport to serve as a hub for importing, assembling, and re-exporting goods to three continents. Moreover, rather than simply purchasing foreign-made components and assembling them in Saudi Arabia, domestic demand for renewable energy could fuel the growth of local manufacturing of solar components. Riyadh’s commitment to such an import substitution policy is evident in Vision 2030, which calls for the localization of manufacturing for both renewable energy projects and industrial equipment. Similarly, Saudi Aramco’s In-Kingdom Total Value Add (IKTVA) program, launched in December 2015, aims to have all businesses in the kingdom—including renewable energy companies—rely on Saudi suppliers for at least 70 percent of the goods and services they need to operate by 2021.

Saudi Arabia is poised to become a leader in renewables. Notably, it is entering the global solar market late, and therefore has a clearer idea about the costs and benefits. Saudi Arabia is able to draw on the experience of other countries and take advantage of falling costs of photovoltaic cells, thanks to China’s advances on this front. Furthermore, the relative absence of renewables in Saudi Arabia suggests more room for growth to spur the economy.

Yet the extent to which Saudi Arabia has a comparative advantage in setting up a new industry such as renewable energy production remains unknown. One of the greatest challenges to the country’s renewable energy ambitions is the lack the technological expertise, trained workforce, or manufacturing capabilities to compete on a global scale.

In addition, as long as China is able to produce and export cheap panels to the whole world, there is little incentive for Chinese firms to relocate their production, except where it think it can avoid high tariffs. A closer alliance with China could also pit Saudi Arabia against the Trump administration. According to the Office of the United States Trade Representative, the willingness of Chinese firms to move their production facilities out of China to avoid tariffs was the driving force for the most recent bout of penalties in Donald Trump’s trade war with Beijing. Although Trump has highlighted Washington’s close relationship with Riyadh, the administration has demonstrated a willingness to impose trade protection policies even on its closest political allies. For instance, in February 2018, the Trump administration introduced a 20 percent tariff on washing machines following accusations that South Korean manufacturers were flooding the U.S. market. Similarly, Washington has threatened to raise tariffs on European car imports, given that the U.S. tariff of 2.5 percent is noticeably unequal to the European Union’s 10 percent tariff on U.S. cars. Efforts by Riyadh to increase its domestic solar power manufacturing industry through cooperation with China risk prompting Washington to extend the most recent tariffs to include Saudi Arabia.

With geography on its side, Saudi Arabia could engineer a smooth economic pivot toward renewables and maintain its key role in the global energy industry. However, Riyadh has a delicate balancing act to play if it continues relying on China to develop its solar energy sector without becoming collateral damage in the ongoing U.S.–Chinese trade war.

  – Via the original publication source.

For more information on this publication: Belfer Communications Office
For Academic Citation: Braunstein, Juergen and Oliver McPherson-Smith.“Saudi Arabia’s Moment in the Sun.” Carnegie Endowment for International Peace, May 7, 2019.