Saudi Arabia is quietly dropping plans to develop 54GW of renewable energy, most of it solar, in an early sign of change in domestic economic policy direction since King Salman succeeded to the throne on 23 January.

It reflects a reappraisal of priorities in light of oil prices that are expected to be around half last year’s average for the foreseeable future. It also represents a victory for Saudi Arabia’s solar sceptics who were unconvinced the plan was either technically or commercially viable.

Responsibility for delivering a sharply reduce solar power programme, which is likely to be less than 1,000MW in the next five years, is now mainly in the hands of Saudi Aramco, the world’s biggest oil exporter, and Saudi Electricity Company (SEC), the region’s biggest producer of electricity.

It is understood SEC and Saudi Aramco have formed a joint body to develop solar power initiatives, led by SEC CEO Ziad al-Shiha.

Al-Shiha was previously executive director for power systems at Saudi Aramco. He is a champion of the idea that the future of Saudi Arabia’s electricity industry lies in getting more power from its existing assets rather than building new capacity. He wants to radically improve the energy efficiency of its power generation capacity, which at present totals almost 50GW.

Only 15 per cent of that 50GW is in the form of combined-cycle production, while conventional gas turbines still account for more than half. By the end of 2020, the positions should be reversed with combined-cycle rising to 48 per cent of SEC’s capacity and gas turbine capacity falling to 18 per cent of the total.

SEC’s gas turbine power plant department manager Abdullah al-Jubran said in February that the thermal efficiency of SEC’s power stations had risen to 36 per cent in 2014 from 32 per cent in 2012.

The aim is to lift this figure to 44 per cent by 2020, equivalent to building 8MW less capacity compared with what would be required without efficiency improvements. Costs and fuel consumption will also be cut.

These developments are having consequences, particularly for the King Abdullah City for Atomic & Renewable Energy (KA-Care), created in 2010. Hisham Yamani, previously Saudi Arabia’s Industry & Electricity Minister and Commerce & Industry, was appointed KA-Care’s president.

An energetic reformer, Yamani masterminded the kingdom’s initial power and water Public Private Partnership (PPP) programme, before taking over the kingdom’s successful World Trade Organisation (WTO) membership negotiations as commerce minister.

Yamani’s initial priority was nuclear power. But less than a year after KA-Care was formed, events intervened. In March 2011, an earthquake triggered a tsunami that engulfed Japan’s Fukushima Daiichi Nuclear Power Plant. It caught fire in the biggest nuclear disaster since Chernobyl in Ukraine in 1986.

No one died, but 300,000 people were evacuated and many areas were contaminated with nuclear radiation. Concern about nuclear power was reawakened around the world.

KA-Care’s focus on renewables emerged at the end of that year and in January 2012, Yamani unveiled the organisation’s strategy for the sector.

He said Saudi Arabia’s demand for electricity was expected to exceed 120GW in 2032. Unless alternative energy and energy conservation measures were implemented, he argued, the kingdom’s overall demand for fossil fuels would grow to 8.3 million barrels a day (b/d) of oil equivalent in 2028, from 3.4 million b/d in 2010. The figure was almost identical to the amount the kingdom exported that year.

KA-Care’s solution was the largest solar power plan ever devised. The agency would procure 54.1GW of renewables capacity by 2030.

In September 2012, KA-Care issued its procurement plan. It called for 24GW of renewables to be procured by the end of 2020; of this, almost 20GW was to be photovoltaic and concentrated solar power stations in different locations. The introductory 500-800MW round of projects was to be procured in a PPP programme that was to be launched in the second quarter of 2013.

The news electrified the global solar power industry. A new era was coming that would change the face of its energy industry and create billions of dollars’ worth of opportunities for investors in, and suppliers of, solar power technology.

But for seasoned observers of the kingdom’s power sector, there were worries that have been fully validated by events this year.

The first was that KA-Care did not have a budget big enough to finance the equity portion of the programme defined in a consultation document circulated by the agency in early 2013.

This provoked a decisive debate within the Saudi government between the Ministry of Petroleum & Mineral Resources, headed by Saudi Aramco chairman Ali al-Naimi, the Ministry of Finance, headed by Ibrahim al-Assaf, and the Ministry of Water & Electricity, the principal shareholder in SEC.

According to people familiar with the debate, Yamani pressed for Saudi Aramco to pay KA-Care $100 for every barrel of oil the renewable programme saved. This would provide the finance KA-Care needed.

Naimi rejected the idea. The volatile spot oil price, which was then around $100 a barrel, was not the only way of valuing the kingdom’s as-yet unproduced oil. For long-term planning, it would be misleading. The kingdom’s oil also could be priced at marginal production cost, which is less than $20 a barrel.

A senior Saudi Arabian involved with the discussion says the debate was as much philosophical as technical. “Saudi Arabia’s oil in the ground could be priced at $100 or it could be priced at $20 a barrel,” he said. “And you have to remember that we have a commitment to our people to keep the price of electricity down. This can only be achieved by pricing oil well below spot market levels.”

It seems Yamani lost the argument and it has been downhill for KA-Care ever since. The expected call for the first round of renewables bids failed to materialise. The fears of the champions of KA-Care’s programme were affirmed in May 2014 when its vice president Khalid al-Sulaiman, designer of the solar programme, announced he was leaving the organisation.

Confirming what everyone had by then concluded, Yamani told a conference in Abu Dhabi on 20 January that Saudi Arabia was delaying its renewables programme by eight years because the kingdom needs more time to assess what technologies it will use.

A further sign of the times came a week after King Salman succeeded his half-brother Abdullah as Saudi head of state and prime minister, with the dissolution of the KA-Care Supreme council together with 10 other inter-ministerial councils created by the late king.

Yamani, who has ministerial rank, sat on the council, but has no place on either of the two replacement inter-ministerial councils. Al-Naimi, Al-Assaf and the kingdom’s Water & Electricity Minister Abdulrahman al-Hussain are all on the Council of Economic & Development Affairs, chaired by Prince Mohammed bin Salman, defence minister and son of the new king, which is the crucial decision-making body on economic matters.

People familiar with developments in the kingdom say KA-Care will continue to function and may have a role as national regulator of any renewable projects completed. But it is no longer running the programme and will have little say over what happens next.

Champions of solar power are despondent about the turn of events.

“Saudi Aramco and SEC have solar power programmes, but these are small,” one says. “They will involve hundreds of megawatts, not thousands of megawatts, in the next five years. Even Qatar now has bigger solar power plans than the kingdom.”

KA-Care and the dreams it fostered were the victim of events outside its control. First, there was Fukushima, which deflected the drive for early action to invest in nuclear. Then there was the oil price crash since last June. When oil was $100 a barrel, investing in solar looked attractive. When oil is bouncing between $50 and $60 a barrel, the case looks weak.

And then there was the tension over Saudi Arabia’s electricity policy.

The Ministry of Petroleum and Saudi Aramco, which provides all feedstock used in the kingdom’s power stations, want a decent price for the oil supplied. However, the Ministry of Water & Electricity, the supreme policymaker for domestic electricity, and SEC want costs kept down.

SEC, which accounts for more than 90 per cent of the Saudi power market, also faced its dominance being threatened by KA-Care’s plans to take almost half of it.

Further complications arise from the role of the Saline Water Conversion Corporation (SWCC), another government agency, which produces 7,000MW, with another 5,400MW due to come on-stream. Like Saudi Aramco and SEC, it has its own solar programme.

At the heart of the issue is the debate about the right price for the oil still in the ground in Saudi Arabia. When the price is high, the case for high production rates and more renewables is stronger.
But at $45-60 a barrel, lower rates of production and modest investment in renewables make more sense.

The decision to kill the big solar programme is a signal from the highest levels in the kingdom that the era of high oil prices is over, perhaps indefinitely. Solar will happen in Saudi Arabia but there is going to be a higher return from cutting energy waste in generation, transmission, distribution and consumption.

And, with KA-Care marginalised, the established order in the Saudi Arabian energy industry has been restored.