Saudi Arabia Energy Transition Strategy Explained: Hydrogen, Solar

This three-part series will analyze the geopolitical ripple effects of Riyadh's pivot from oil to energy transition renewables. Part II.

This article is part II of III-part series dedicated to analyzing Saudi Arabia’s energy transition strategy. The first report laid out the energy transition landscape globally, Riyadh’s efforts in this context, and the Kingdom’s critical minerals strategy.

The second will focus on hydrogen, solar, and the logistical considerations behind its supply chain initiatives. And the third part will layout the geopolitical implications both regionally and globally if KSA becomes an energy transition superpower.

Hydrogen: The Power of the Future?

Saudi Arabia’s forays into stimulating fossil-fuel alternatives is yielding results. Analysis suggests that venturing into hydrogen production could further reduce Saudi Arabia’s reliance on oil revenues.

Fundamentally, there are two types of hydrogen. The first is blue hydrogen.

This is produced from natural gas with Carbon Capture, Utilization and Storage (CCUS) technology. CCUS captures the carbon emissions produced during hydrogen creation, making it a cleaner option than traditional natural gas. Compared to traditional hydrogen production from natural gas (which vents the CO2), blue hydrogen captures a significant portion of the emissions, making it a cleaner option.

The majority of hydrogen production (over 90%) is derived from fossil fuels, resulting in 10 kilograms of carbon dioxide for every 1 kilogram of hydrogen produced. The second is green hydrogen.

This is produced by splitting water using electrolysis, and is powered by renewable sources like solar or wind. At this moment, the technology for blue and green hydrogen is still in its nascent stages.

Since it uses natural gas as a source, blue hydrogen can leverage the kingdom’s existing natural gas infrastructure and supply networks for scaling production and transportation.

The kingdom’s National Hydrogen Strategy, which aims to produce and export 4 million tons of clean hydrogen annually, positions Saudi Arabia as a potential global leader in the hydrogen sector.

The PIF is actively supporting this vision, with notable investments including a $5 billion partnership with Air Products to establish a green hydrogen production facility in Saudi Arabia.

Moreover, in October 2022, the PIF led a groundbreaking initiative by auctioning 1.4 million tons of carbon credits, establishing the first voluntary carbon market in the region and marking a significant step toward environmental sustainability.

Saudi Arabia’s hydrogen strategy also aligns with global environmental goals, notably the Paris Agreement targets that complement multilateral efforts to shift away from fossil fuels.

Currently, China sits at the top of the global hydrogen game, holding the title of both the world’s largest producer and consumer. China’s hydrogen production has been steadily climbing, with an impressive annual growth rate of 6.8% since 2010.

By 2020, this resulted in a staggering 33 million tons produced. However, a closer look reveals a reliance on traditional methods. Currently, over 60% of China’s hydrogen comes from coal gasification, a process with a significant carbon footprint.

Steam methane reforming (SMR) contributes another 20%, while industrial by-products make up 18%. Green hydrogen, the cleanest production method, accounts for less than 1% of China’s total output. However, the small output means there is ample room for a country to position itself as the vanguard of it.

Saudi Arabia’s entry into the hydrogen market is not just an economic diversification effort but a strategic geopolitical maneuver. As the world pivots toward cleaner energy sources, hydrogen is pegged as a critical player in the global energy transition.

The market for blue hydrogen in 2024 is approximately $24.29 billion and is expected to grow at a compound annual growth rate (CAGR) of 11.82% to $47.74 billion in 2030. But this is not happening in a vacuum.

Other gas-rich countries like the United States and Canada are tapping into their abundant resources to start hydrogen production to meet their own emissions goals. Industrial policy is driving the market so to speak — with commercialization projects already underway.

Honda will introduce a hydrogen fuel cell vehicle that can also be recharged, making it the first Japanese automaker to bring the technology to market. The kingdom’s ambitious hydrogen projects, such as the one in NEOM — a $500 billion mega-city project — exemplify its commitment.

The NEOM project aims to power the entire city with renewable energy, primarily solar and wind, making it a beacon for green hydrogen production. This project is not just about producing hydrogen but also about demonstrating the feasibility and scalability of green hydrogen as a cornerstone of a sustainable economy.

The green hydrogen facility in NEOM is expected to produce 650 tons daily, fueling various sectors from transport to heavy industries. This in turn will showcase the versatile application of hydrogen in decarbonizing a broad spectrum of economic activities.

Moreover, Saudi Arabia’s strategic geographical location, bridging the East and the West, offers an unparalleled advantage in the global hydrogen market. It can potentially become a central hub in the hydrogen supply chain, exporting to both Asian and European markets.

Europe’s aggressive shift toward clean energy and Asia’s massive energy demand present Saudi Arabia with a significant export market for its green hydrogen. In addition to green hydrogen, Saudi Arabia’s approach to blue hydrogen is equally strategic.

The kingdom plans to capitalize on its vast reserves of natural gas and existing infrastructure to scale up blue hydrogen production. By integrating CCUS technology, Saudi Arabia aims to make its blue hydrogen among the cleanest and most competitively priced on the market.

This dual approach of pursuing both blue and green hydrogen allows the kingdom to cater to diverse market needs and transition phases toward a hydrogen economy. Existing supply chains will likely be key to facilitating a more seamless energy transition.

Currently, most crude oil is transported via large tanker ships or pipelines. Pipelines designed for liquid hydrocarbons (crude oil) are not directly suitable for hydrogen gas because its small molecule size and high diffusivity raise issues such as embrittlement of metal and potential leaks.

However, some existing natural gas pipelines could be more easily adapted or retrofitted for hydrogen transport, especially for blue hydrogen, which could be blended with natural gas in existing pipelines to a certain extent without significant modifications.

For tanker ships with green hydrogen, it is more likely to be transported as a liquid or bound to a carrier medium (like ammonia or Liquid Organic Hydrogen Carriers (LOHCs). This would almost certainly necessitate repurposing oil tankers with additional modifications.

For instance, transporting hydrogen as liquid ammonia (a method gaining traction due to easier liquefaction compared to hydrogen) would require tanker ships with refrigerated storage tanks designed for ammonia.

In other words, changes to new energy markets and the supply chains that support them will require not just altering the type of cross-border flows but the vehicles that facilitate them.

Where the Sun Shines: Solar

Solar Saudi Arabia is aggressively expanding its solar energy capabilities as part of its broader strategy to diversify its energy sources and reduce carbon emissions. The country’s National Renewable Energy Program (NREP) aims to generate 50% of its electricity from renewable sources by 2030.

As recently as November 2023, ACWA Power, a local utilities company, signed an agreement with Water and Electricity Holding Company (Badeel) to build the world’s largest single-site solarpower plant in Al Shuaibah area, Makkah Province.

The solar-power facility is expected to start operations by the end of 2025, with a generation capacity of 2,060 megawatts. The Gulf region as a whole and Saudi Arabia particularly already boasts among the world’s lowest solar-power tariffs.

The key reasons why the Gulf region has lower tariffs than countries like India include:

1. Lower cost of dollar denominated long-dated financing

2. Lower expected return on equity (ROE)

3. Higher solar resources leading to higher capacity utilization factor (CUFs)

4. No corporate taxes or duties on equipment

5. Power sales and negligible land cost for solar projects.

Government support in this regard is instrumental in creating accommodative finance conditions for domestic production and scaling through magnetizing foreign investments. ACWA has 44% of its equity value owned by PIF, and received non-interest-bearing loans while it raises more equity capital.

As a result, this state-backed effort through sovereign wealth funds is helping to lower the cost for customers and simultaneously expand capacity. This has helped make the levelized cost of Saudi solar energy, which takes into account both construction and operation of a power plant, among the lowest in the world.

The kingdom’s solar energy investments in this regard also complement its green hydrogen initiative. By using renewable energy for electrolysis, it would result in a significantly reduced carbon footprint and complement cross-initiative transition projects.

The lower cost of solar energy has helped to make industrial-scale deployment more feasible. Looking at a broader timeframe, the cost of solar panels has seen a significant drop. Between 2010 and 2020, the price plunged by about 85%.

Fourteen years ago, the average cost of solar PV panels was approximately $2 to $3 per watt. Then around 2020, the price fell to around $0.20 to $0.60 per watt. Saudi Arabia’s total solar installed capacity grew from 14 megawatts in 2012 to 439 megawatts at the end of 2021, representing a 3,064% increase in solar capacity in under a decade.

The kingdom is aiming for 40 gigawatts of solar photovoltaic (PV) capacity by 2030. Countries and companies are recognizing the long-term economic benefits and energy security enhancements that solar power offers.

As a result, solar energy is rapidly becoming a central pillar in national energy strategies, spurring further innovation, driving down costs, and catalyzing the transition to a more sustainable and resilient global energy system.

The relentless expansion of the solar market signals a paradigm shift in energy production, where solar power stands at the forefront of meeting the world’s growing energy needs sustainably.

The kingdom’s push toward a sustainable and diversified energy mix necessitates a reliable energy storage system to ensure grid stability and continuous power supply, especially during periods when solar irradiance is low. One of the pivotal steps taken by the kingdom toward this direction is the inclusion of battery storage in its solar projects.

Although specific regulatory frameworks focusing on energy storage are still evolving, the Saudi Electricity Company (SEC) and the Electricity and Cogeneration Regulatory Authority (ECRA) have started to lay the groundwork for incorporating energy storage within the national grid.

The Al-Jouf PV project, for instance, includes plans for battery storage, showcasing the country’s commitment to stabilizing its renewable energy output. This project reflects a broader strategy to adopt energy storage systems that can mitigate the challenges posed by the variable nature of solar energy, thereby ensuring a more stable and efficient electricity supply.

Against this backdrop, strategic partnerships and government policies are also playing a crucial role in accelerating solar adoption, with initiatives aimed at reducing carbon footprints and achieving net-zero emissions targets gaining momentum. This holistic approach reinforces the solar market’s growth trajectory, ensuring its central role in the global transition to renewable energy.

Moreover, the government has introduced several incentives to attract investment in the renewable energy sector. These include long-term Power Purchase Agreements (PPAs) with favorable terms for renewable energy producers, which provide financial stability and encourage investment.

Additionally, the government has streamlined the process for obtaining permits and licenses for renewable energy projects, significantly reducing the bureaucratic hurdles that developers might face.

Key regulations facilitating the solar energy transition include the introduction of net metering policies, which allow residential and commercial solar energy producers to feed excess electricity back into the grid, receiving credits in return.

This policy encourages the adoption of solar energy by making it more economically viable for individual consumers and businesses. Another significant regulation is the establishment of the Saudi Arabian Standards, Metrology and Quality Organization (SASO) guidelines for solar equipment.

These guidelines ensure that all solar panels and related equipment meet high standards of quality and efficiency, safeguarding the long-term sustainability of solar energy investments in the country.

So, what are the geopolitical implications of these investments, and how could it alter the region’s dynamics vis-a-vis Iran and Riyadh’s Arab neighbors? Find out in the third and final installment to be published next week, October 14 at 6:00 AM Pacific.

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*This report is a re-publication of a paper I was commissioned to author for the Rasanah Institute to analyze the risks and feasibility of Saudi Arabia’s energy transition strategy.