Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

Growth, Investment

and the Low-Carbon

Transition: A View

From Saudi Arabia

Ibrahim Abdel Gelil, Nicholas Howarth

and Alessandro Lanza

July 2017 / KS-2017--DP014-R1

Revised August 2017

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia 2

About KAPSARC

Legal Notice

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mandate is to advance the understanding of energy challenges and opportunities

facing the world today and tomorrow, through unbiased, independent, and high-caliber

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No portion of this document may be reproduced or utilized without the proper attribution

to KAPSARC.

Background to this Study

This paper was provided to the OECD in the context of the project “Growth, Investment

and the Low Carbon Transition”. The content remains the sole responsibility of the

authors and of KAPSARC. The views expressed herein do not necessarily reect the

position of the OECD or its member countries. Contact: nicholas.howarth@kapsarc.org

Revision 1, August 2017

Whilst we make every effort to ensure that the information provided is accurate at the

time of publication, we have corrected the following errors and omissions:

1) Page 14, Figure 11. Y-axis scale changed from 0 – 60 to 0 – 9.

2) Key Points added (page 3).

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

Key Points

common priority across G20 countries is the need to reinvigorate economies through an economic

transformation that delivers a higher level of better quality growth. At KAPSARC, the need to

improve economic growth and deliver climate goals agreed at COP21 in Paris is being investigated

using an energy productivity framework, or how greater value can be obtained from the energy system for

each unit of energy consumed.

Energy productivity is an economic planning tool that is increasingly being used in G20 countries to

help achieve sustainable development goals. Its key elements are structural change towards higher

value added economic activities and improving energy efciency.

A focus on lifting productivity across the economy aligns naturally with the need to lift overall economic

productivity, which is the main long-term driver of growth.

Faced with the current extended period of weak international growth and low commodity prices,

Saudi Arabia has intensied diversication efforts aimed at more sustained and sustainable economic

development.

Key elements of the diversication strategy involve boosting private sector investment and improving

business conditions; a signicant scal stimulus to households and industry; increasing energy prices

to help diversify government revenue and support structural change and energy efciency in the

economy; and increasing the share of renewable energy in the energy mix.

Such pro-growth measures to realign the Saudi economy towards a higher-value added, more energy

efcient economy will lift the Kingdom’s energy productivity and contribute to achieving its Nationally

Determined Commitment to avoid 130 million tons of CO2-e as set out at COP21 in Paris.

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

Growth, Investment and the Low

Carbon Transition

While the rst part of the 21st century was a

period of almost unprecedented growth,

today governments around the world

are striving to reignite their economies and realign

growth to be both more inclusive for their citizens

and to achieve the goals of the Paris Agreement

on climate change. Such a transition will require

policies that combine scal initiatives and structural

reforms with strong labor market and environmental

policies. In Saudi Arabia, recognizing the risks

posed by an economy over-reliant on oil export and

with rapidly growing domestic energy consumption,

the government has brought in an ambitious whole-

of-government reform program called Vision 2030.

Figure 1 below shows nominal growth in GDP and

its oil and non-oil components for the years 1990-

2016. While non-oil GDP has been a steady and

growing component of overall total GDP (Figure

2), volatility in oil revenues, reected in oil-based

GDP, has contributed to signicant volatility in

overall growth. Shifting towards more sustained and

sustainable growth, a long-term goal in the Gulf, has

therefore recently gained added signicance.

The Kingdom’s Vision 2030 is being supported and

implemented through a roll out of substantive sub-

programs including: the Fiscal Balance Program

(2016), the National Transformation Program (NTP

2016) and the Saudi Energy Efciency Program

(http://www.seec.gov.sa/en). As part of these

programs, the Kingdom has announced ambitious,

public goals that have been transparently shared to

create a more open, diverse economy, less reliant on

hydrocarbon resources.

-60

-40

-20

-60

-40

-20

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

NominalGDP

(Percentchangey.o.y.)

NominalGDP

(Percentchangey.o.y.)

Oil-based Non oil-based Tot a lG D P

Figure 1. Nominal GDP growth 1990-2016 for Saudi Arabia (oil and non-oil).

Source: KSA General Authority for Statistics.

Nominal GDP

(Per cent change year on year)

Nominal GDP

(Per cent change year on year)

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

This includes a signicant program involving the

privatization of state-owned enterprises, support of

the private sector, greater localization and reforms

to provide an environment attractive for local and

international investors.

These plans also have a strong sustainability

dimension which will deliver signicant greenhouse

gas avoidance co-benets through a combination

of energy efciency, structural diversication and

renewable energy investments, among other

measures.

For example, the Saudi Energy Efciency Program

is coordinating action across 30 government

entities and engaging with enterprises in the private

sector. It is expected to achieve avoided energy

consumption of around 1.5 million barrels of oil

equivalent per day by 2030, or around a 20 percent

reduction on what energy consumption might be

expected without this program.

A central element of the economic plan in Saudi

Vision 2030 is to move the Kingdom up the global

ranking of leading economies from currently being

the 19th largest country to top 15 status by 2030 by

growing the non-oil sectors of the economy (Figure

2), increasing jobs and expanding the share of

private sector non-oil GDP from around 40 per cent

in 2015 to 65 per cent by 2030.

While economic diversication has as its primary goal

a structural shift in the economy to higher value-

added sectors which deliver greater employment and

500

1,000

1,500

2,000

2,500

3,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

SARBillion (nominalvalues)

Figure 2. Oil and non-oil GDP (nominal prices).

Source: KSA General Authority for Statistics.

Growth, Investment and the Low Carbon Transition

Non-oilGDP

Oil-basedGDP

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

Growth, Investment and the Low Carbon Transition

growth opportunities, it will also bring substantial

greenhouse gas avoidance co-benets by

transforming the energy sector (Figure 3).

This structural shift in the economy towards or away

from energy intensive industry, as well as the relative

contributions of growth in the overall scale of the

economy and underlying energy efciency, can be

illustrated through a Fisher decomposition of non-

residential energy consumption, or in other words, a

decomposition of energy demand in sectors which

generate value added (Figure 4).

Here we see that the primary driver of the strong

growth in non-residential energy consumption (in

blue) between 1990 and 2014 has been growth in

the overall size of the value added sectors of the

economy (scale, in grey), combining with strong

growth in energy intensive industries (composition,

in yellow).

Slowing this rise in energy consumption, there

has been an improvement in the energy efciency

of economy which started to gather pace from

2003 onwards, given by the ‘technology’ series, in

green. While the scale and composition effects far

outweigh the avoided energy consumption from

the ‘technology’ effect, this analysis suggests the

infrastructure investment and energy efciency

programs already implemented are having a

positive effect in avoiding domestic energy

consumption.

Saudi Arabia’s Nationally Determined Contribution

under the Paris Accord outlines a plan to avoid

around 130 million tones of CO2-e per annum by

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1990 1995 2000 2005 2010 2015

TotalFinalEnergyConsumption (ktoe)

Industry

Transport

Buildings

Non-energyuse

Figure 3. KSA energy consumption trends.

Source: OECD and Enerdata.

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

2030 compared to a dynamic baseline relative to two

possible diversication pathways (Figure 5):

A development pathway involving accelerated

industrialization in energy intensive sectors, such

as petrochemicals, steel, aluminum and cement,

based on Saudi Arabia’s comparative advantage

in low-cost energy. This would bring about rising

domestic energy consumption and declining oil

exports.

A development pathway involving substantial

diversication into non-energy sectors, such as

nancial services, medical services, tourism,

education, renewable energy and energy

efciency. With this model, the Kingdom would

continue to export signicant amounts of oil and

channel export revenues into investment in these

high value added sectors.

In terms of renewable energy, the Kingdom has

set a 9.5GW target by 2023 with around one third

of this expected before 2020. By 2023 around

10% of the Kingdom’s electricity is expected to be

generated from renewable energy sources (Saudi

Gazette 2017). Renewable energy reform plans also

include provisions to strengthen local supply chains

and the development of advanced manufacturing

in renewable energy to grow the private sector’s

contribution to investment and to provide new

employment opportunities in the electricity

generation sector.

As part of the Fiscal Balance Program in Vision

2030, the government has also outlined signicant

energy price reform measures to support this

transition, as well as diversifying government

revenue to improve scal stability (Figure 6).

Figure 4. Fisher decomposition of non-residential energy consumption.

Source: OECD and Enerdata.

Growth, Investment and the Low Carbon Transition

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

Figure 5. Saudi Arabia’s greenhouse gas emissions and possible diversication pathways.

Source: KAPSARC based on IEA data and Saudi Arabia’s NDC to the UNFCCC.

Figure 6. Fiscal balance in KSA and oil prices.

Source: KAPSARC based on IMF.

200

400

600

800

1000

1200

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

MtCO2-e

Prioritize

expansion

ofenergyintensive

industry.Higher

energyconsumption

Decliningoilrevenuesfor

government

NDC:130MtCO2-eperyearby2030

Diversificationintohighvalue

manufacturingandservicesectors.Strong

investmentintoenergyeffici encyand

renewable energy.Increaseormaintain

oilexportrevenue

Growth, Investment and the Low Carbon Transition

Prioritize expansion of energy intensive

industry. Higher energy consumption.

Declining oil revenues for government.

Diversication into high value

manufacturing and service sectors.

Strong investment into energy

efciency and renewable energy.

Increase or maintain oil export revenue.

Non-oil

government

revenue

23%

Oil-based

governmentrevenue

78%

Oilprices(RHS)

Governmentrevenueandspending(SARmillion)

Government

spending

Fiscalbalance

OilPrices(Brent,USD)

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

The rst phase of energy and water price reform

was implemented in 2016 for households and

non-households (industry and others). These

reforms are outlined in Table 1. Impacts of the

reforms already implemented include increased

revenue from fuel sales of SAR 27-29 billion in

2016 and a reduction in the annualized rate of

growth of energy consumption from 3.5 per cent

in the rst half of 2015 to 1.7 per cent in the rst

half of 2016. This has been achieved while not

inducing any signicant impact on ination and

foreign investment (Fiscal Balance Program

2016). The inationary effects of these reforms,

while signicant for energy products, have been

somewhat mitigated due to lower import prices for

some goods. This is because the Riyal, which is

pegged to the U.S. dollar, has risen along with higher

U.S. interest rates making many imported goods

cheaper in local currency terms.

The proposed second phase of reform will

commence in 2017 with steady change in prices

from 2017 to 2020. Domestic prices of energy

products will be linked as a percentage to the

reference export price of the respective product, and

at full implementation will uctuate with changes in

international markets (Fiscal Balance Program 2016).

Households Industry and others

Pre 2016

prices,

Current prices

(March 2017)

Pre 2016 prices Current prices

(March 2017)

Gasoline

(SAR / litre)

0.45-0.60

(0.12- 0 .16)

0.75-0.90

0.2-0.24)

Diesel USD/

barrel

Transport 10.6 19.10

Industry 9.12 14.00

Electricity

(SAR/kWh)

0.05-0.26

(0.013-0.069)

0.05-0.30

(0.13-0.08)

Industrial 0.14 (0.03) 0.18 (0.04)

Commercial 0.14-0.26

(0.03-0.07)

0.18-0.30

(0.04-0.08)

Water

(SAR/m3)

0.10 - 6 .0 0

(0.026—1.6)

0.15 -9.00

(0.04-2.4)

Governmental 0.26

(0.07)

0.32

(0.09)

0.1- 6 .0

(0.026-1.6)

0.15 -9.00

(0.026-1.6)

Gas (methane)

(USD/mmBtu)

0.75 1.25

Ethane

(USD / mmBtu)

0.75 1.75

HFO 380

(USD / barrel)

2.08 3.80

Table 1. Implementation of phase 1 energy price reforms in Saudi Arabia.

Source: Fiscal Balance Program 2016 (USD in parenthesis, unless otherwise specied in SAR).

Growth, Investment and the Low Carbon Transition

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

Three main reasons have been cited in the Fiscal

Balance Program for the reforms:

1. The large opportunity cost of (or foregone

revenue) calculated at SAR 300 billion in 2015

from energy prices set according to the cost

of supply, rather than based on international

benchmarks.

2. Concerns around wasteful and unsustainable

growth in domestic energy consumption.

3. Social equity considerations, as the current

system may benet more afuent consumers

compared with lower income households than

arrangements after the reforms.

Phase two of reforms to energy and water prices

are scheduled to be carried out from 2017 through

to 2020 at differing times for households and non-

households (Table 2).

Taken together, phase one and two of the energy

price reform package is expected to generate

SAR 209 billion by 2020 (Figure 7). Taking 2015

international energy prices and domestic energy

consumption as a guide, this would imply that the

opportunity cost of energy benets to consumers

would fall from SAR 300 billion per year in 2015 as

estimated in the Fiscal Balance Program to around

SAR 91 billion by 2020 under the energy price

reform plan.

As part of the implementation of energy price

reform, the government plans to bring in targeted

assistance to households and industry.

Households will be split into ve income categories,

with the lowest income groups receiving full

compensation for the rise in energy prices and

the highest income earners no extra allowances.

Individuals have been requested to register for the

Household Allowance Program which will deliver

direct cash payments to a special citizens’ account

commencing in advance of the second round of

reforms. According to the Fiscal Balance Program,

disbursements are planned to start from SAR 22.5

billion in 2017 and reach SAR 65 billion in 2020.

While care will need to be taken with implementation,

the extra revenue raised for government can also

play an important role in nancing the broader

economic transition envisaged under Vision 2030.

Households Industry and others

2017 Link electricity 100% to reference prices

2018 Link electricity 100% to reference prices

2019 Based on the readiness of water infrastructure,

gradually link water prices to reach reference prices

Gradually link all unpegged products to reach reference

prices (except for butane, propane and natural gas)

2020 Bring all products to reach 100% of reference prices

Table 2. Implementation of phase 2 energy price reforms.

Source: Fiscal Balance Program 2016.

Growth, Investment and the Low Carbon Transition

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

For example, the government has also signaled that

industries that have a strategic importance with a

strong global export outlook which can build on the

Kingdom’s areas of competitive advantage will be

offered support through a SAR 200 billion industry

stimulus package in support of Vision 2030 objectives

(Fiscal Balance Program 2016).

These reforms can be put in context by comparing

current energy domestic prices to their relevant

international benchmarks. Figure 8 does this for gas

and Figure 9 compares prices for petrol.

100

150

200

250

2016 2017 2018 2019 2020

Revenuefromenergypricereforms

(SARBillion)

Figure 7. Gross revenue from planned energy and water price reforms.

Source: Fiscal Balance Program 2016.

Growth, Investment and the Low Carbon Transition

Revenue from energy price reforms

(SAR billion)

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

Figure 8. 2015 wholesale gas and Asian LNG spot prices.

Source: KAPSARC based on International Gas Union.

2006 2008 2010 2012 2014 2016

PriceofSupergasoline

(USDcents/liter)

Bahrain Kuwait Oman Qatar KSA UAE Internationalbenchmarkprice

Figure 9. Regional benchmarking of petrol prices.

Source: KAPSARC based on GSI and IISD 2014; GIZ 2014 and national country authorities.

Growth, Investment and the Low Carbon Transition

Price of super gasoline

(USD cents/liter)

● ●

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

These changes to higher energy prices will

increase incentives to improve energy efciency

across the economy and invest in less energy

intensive sectors or, in other words, this will have

the effect of moving the Kingdom onto a more

energy productive growth pathway (Figure 10).

Other G20 countries including Australia and

the United States have recently enacted energy

productivity targets and programs. Within this

context, energy productivity is both an emerging

policy agenda focusing on how energy can best be

used to create value in the economy, as well as an

indicator which integrates economic growth with

energy consumption and is a useful framework for

policymakers to view economic-energy transition.

At the macroeconomic level, energy productivity

describes how much GDP can be produced using

an amount of energy. It is thus both a reection of

the structural make-up of the economy between

energy intensive and non-energy intensive activities,

as well as how efciently energy is used in those

activities across the sectors of the economy.

At the microeconomic level energy productivity

focuses on how much revenue is produced from

economic activities per unit of energy consumption.

HistoricalValues

Stabilization

HighProductivityScenario

Time

EnergyProductivity (GDP/Energyconsumption)

Economic

diversification

Buildings

Transport

Energy

efficiency

Industry

Power

Sectors

Figure 10. The key drivers of energy productivity.

Source: KAPSARC.

Growth, Investment and the Low Carbon Transition

Energy Productivity

(GDP/energy consumption)

Transport

Buildings

Industry

Power

Sectors

Energy Efciency

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

This is related but distinct from energy efciency

which focuses on how much physical output is

produced per unit of energy consumption.

For example, in the industrial sector, measures of

energy efciency focus on total energy use per

unit of output, such as GJ/ton of steel. In contrast

measures of energy productivity focus on company

revenue/total energy use. Thus energy intensive

industries, such as petrochemicals and cement,

will tend to have much lower energy productivity

than sectors such as aerospace, healthcare or

automotive manufacturing irrespective of how

energy efcient they are within their sub-sector. An

example of how energy productivity can be used to

inform industrial strategy is shown in Figure 11.

Figure 12 illustrates the energy productivity

of Saudi Arabia compared to several key G20

countries. Between 1990 and 2015 energy

productivity rose in almost all major economies

around the world, but in Saudi Arabia it fell by

29 percent. This decrease was in part due to

Saudi Arabia’s stage of economic development,

with rising per capita energy consumption from a

relatively low base.

Figure 11. Energy productivity as a framework for industrial strategy.

Source: KAPSARC based on Climate Works (2016).

Growth, Investment and the Low Carbon Transition

Total revenue ($) / Energy

use (boe)

Basic energy intensive products

Chemicals Steel Aluminium Food products

Transport

Utilities Fertilizers

Cement

Higher value added industries

Beverages

Engineering,

construction

Automotive

Health care

equipment

Household

goods

Specialty chemicals

Aerospace and

defence

Textiles

ICT industries

Refining Industrial

conglomerates Packaging and

containers

Strengthen local supply chains

Maintain competitiveness

through energy efficiency

Develop

downstream

industries

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

Saudi Arabia also has had a historically very high

energy productivity, pushed up by a high proportion

of GDP from oil production. As oil extraction

generates a lot of revenue for the amount of energy

required to produce it, this means that energy

productivity in the Kingdom was exceptionally high

in the 80s and 90s by international standards. If

we strip away these oil-based components, we

see there has been little change in overall energy

productivity in the Kingdom since 1990.

Without including oil revenues, the absolute level

of energy productivity also is around 40 per cent

lower and well below the United States, which

has similar per capita energy consumption. This

highlights the importance of distinguishing the

oil and non-oil components of GDP when using

energy productivity (or intensity) as a metric for

major energy exporting countries as well as a

clearer view of the scope for improvement in the

Kingdom.

2,000

4,000

6,000

8,000

10,000

12,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

EnergyProductivity(GDPUSD2005PPP/TPEStoe)

Figure 12. Energy productivity in KSA and global trends.

Source: KAPSARC based on KSA General Authority of Statistics and IEA and Enerdata databases.

Growth, Investment and the Low Carbon Transition

SaudiArabia

(totalGDP)

Germany

China

USA

WorldAverage

G20

SaudiArabia

(non-oil GDP)

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

Conclusion

Saudi Vision 2030 and its supportive programs

are aimed at achieving a substantive

transition towards more sustainable growth

– economically, socially and environmentally.

Reforms which aim to diversify the economy and

increase energy efciency are closely related to

the Kingdom’s overall energy productivity. This is a

metric which can be used to track progress against

the Kingdom’s sustainable development goals in

addition to other measures such as greenhouse gas

avoidance.

The reform pathway outlined by Vision 2030 will

be a long road, and its success will be dependent

on the long-term resolve of the government,

the transparency and perceived fairness of the

reforms and how well they are implemented and

communicated to citizens. Keeping these factors

in mind will inuence the likelihood that an energy-

rich country, such as the Kingdom, can use its

resources as a foundation to diversify and grow

its economy while achieving a transition to a lower

carbon future.

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

References

Climate Works. 2016. Assessing the energy productivity

of a company: A do-it-yourself benchmarking guide for

investors. Sydney: Climate Works.

Fiscal Balance Program. 2016. Fiscal Balance Program.

Riaydh: Government of Saudi Arabia.

Jadwa Investment. 2017. Saudi Chart Book, March 2017.

Riyadh: Jadwa Investment.

NTP. 2016. National Transformation Program. Retrieved

from http://vision2030.gov.sa/en/ntp.

Saudi Gazette. 2017, April 18. KSA to develop 30 solar,

wind projects. Retrieved from http://saudigazette.com.sa/

business/ksa-develop-30-solar-wind-projects/

Vision 2030. 2016. Vision 2030: Kingdom of Saudi

Arabia. Government of Saudi Arabia.

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

Notes

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia

About the Authors

Alessandro Lanza

Alessandro is a visiting researcher at KAPSARC. He is Professor of

Energy and Environmental Policy at LUISS University, Rome and a

member of the Board of Directors of ENEA, Italy. He holds a Ph.D in

Economics from University College London.

About the project

This paper draws on KAPSARC’s energy productivity work focused on how shifting to a growth

model based around higher energy productivity can benet Saudi Arabia and the countries

of the Gulf Cooperation Council. Energy productivity is both a policy agenda focusing on how

energy can best be used to create value in the economy, and an indicator which integrates

economic growth with energy consumption. At the macroeconomic level, energy productivity

describes how much GDP can be produced using an amount of energy. It is the mathematical

inverse of energy intensity and is both a reection of what activities energy is used for (the

structural make-up for the economy), and how well energy is used in specic activities (the level

of energy efciency). At the microeconomic level energy productivity focuses on how much

revenue is produced from economic activities per unit of energy consumption. This is related

but distinct from energy efciency which focuses on how much physical output is produced per

unit of energy consumption. KAPSARC has partnered with UNESCWA to explore the energy

productivity potential of Saudi Arabia and the countries of the Gulf Cooperation Council and will

release a synthesis report of this work later in 2017.

Ibrahim is a visiting fellow at KAPSARC and an adjunct professor of

Energy and Environment at the Arabian Gulf University in Bahrain.

He was previously the chairman of the Energy Planning Agency of

Egypt (OEP) and the CEO of the Egyptian Environmental Affairs

agency (EEAA). His current research focus is on energy and

environmental policies of the GCC.

Ibrahim Abdel Gelil

Nicholas Howarth

Nicholas is a research fellow at KAPSARC currently leading the

Center’s work on energy productivity. He is an applied economist

with 20 years of experience working with governments and industry

and holds a D.Phil in economic geography from Oxford University,

specializing in energy, technological change and climate change.

Growth, Investment and the Low-Carbon Transition: A View From Saudi Arabia