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Oil-Producing Nations Signal a Warning to the Utility Industry

Stuart Ravens
Apr 17, 2018

Saudi Arabia seems to be following Norway’s lead as a major oil producer eschewing fossil fuel generation for cleaner alternatives. This nation-state trend is mirrored at a company level, with major oil companies also seeking opportunities in renewable energy. Utilities may ignore it at their own peril.

From Oil Empire to Renewables Powerhouse

In February 2018, Saudi Arabia’s first utility-scale solar auction broke records: ACWA Power won the right to develop a 300 MW solar farm under a 25-year PPA with a tariff of $0.0234 kWh, made possible through unique market conditions. High solar irradiance and declining costs are assisted by low land costs, a favorable licensing regime, and cheap finance.

This is just part of a much wider shift to solar. In March, the Saudi government and Japanese tech giant SoftBank announced an ambitious $200 billion, 200 GW, 12-year solar generation project. If—and it is still a case of if not when—all this planned capacity is installed, Saudi Arabia’s generation capacity will exceed the country’s needs. Part of the King Salman Renewable Energy Initiative, this project could see Saudi Arabia become a net exporter of renewable power.

Saudi Arabia’s Plans Could See It Become the Norway of the Middle East

Despite obvious differences, there are many parallels to be drawn between Saudi Arabia and Norway. Both are net oil exporters, have huge sovereign wealth funds, and are keen to become the renewable energy leaders in their respective regions. Norway’s renewables strategy is somewhat more advanced than Saudi Arabia, and may point to Saudi Arabia’s future.

Rather than self-consume its North Sea reserves, Norway relies on abundant hydropower and 838 MW of wind capacity for its generation, exporting most of its hydrocarbons. With abundant oil reserves, one could expect Norway to be a nation of gas-guzzling vehicles, but the reality is very different. Through a raft of incentives, Norway has become the EV capital of the world. Navigant Research projects Norwegian EV market share could hit 33% in 2017, well ahead of its European neighbors. Finally, the Norwegian transmission systems operator Statnett is deploying interconnectors to help secure Norwegian energy supply and allow its generation companies to export excess generation capacity.

Economics and Environment See Oil-Producing Countries Turn to Renewables

There is an economic argument that underpins Norway and Saudi Arabia’s domestic energy policy: with abundant and cheap renewables, neither country relies on hydrocarbon generation, which can be exported to other countries. With further reductions in the cost of Saudi solar, the Kingdom could rapidly follow Norway’s lead. It is not difficult to imagine a future where Saudis increasingly rely on renewable generation for internal electricity consumption and drive more and more EVs.

Utilities Beware: Oil Majors Are Following Similar Paths

There are other parallels to be drawn, however. Two of the largest and cash-rich oil producing countries are making their marks in renewable energy. So are the oil majors, making increasing investments into downstream renewable energy. Which brings me back to a subject close to my heart: a distributed and renewable energy future will also be fiercely competitive. There is no room for monopoly market thinking at incumbent utilities. Oil majors and auto manufacturers are betting heavily on an electrified, distributed, and renewable future. There may be no room at the table for old-school utilities fixed on a centralized business model.