Lowering Saudi Arabia’s fuel consumption and energy system costs without increasing end consumer prices

Summary:

Saudi Arabia aims to reduce the growth of its energy demand. This paper outlines an approach that could help the country to reduce substantively its current fuel consumption and could result in a net economic gain without increasing current end consumer prices and while maintaining positive utility sector net cash flows. Using a new multi-sector equilibrium model developed by KAPSARC (the KAPSARC Energy Model or KEM), we estimate the magnitudes of the potential economic gains that different policies
would generate.
Our long term static version of the model reveals that an annual economic gain exceeding 23 billion USD in 2011, or almost 5% of that year’s GDP, could have been achieved while the water and power sectors continue to live within their cash flows. Our

approach—which introduces investment credits for solar and nuclear and allows more natural gas consumption in the power sector—achieves almost all the benefit of raising inter-sector transfer prices for fuels to world market equivalences, but only

moderately increases current transfer prices. Importantly, this gain does not require an increase in consumer prices of electricity or water.
The main conclusions of this work are the following:
  • Our modeling shows it is possible to solve the apparent contradiction of inducing greater efficiencies and lower energy consumption, while preserving current consumer prices.
  • All scenarios lead to substantive reductions in fuel consumption and attractive net economic gains when compared to the baseline scenario. The Price-deregulation scenario, which prices fuels at the marginal value, yields the highest net gain, but those gains are broadly matched by the gains achieved with the Investment-credit option.Furthermore, the latter option maintains the profitability of the utilities.
  • The net economic gain is impacted by the assumed value of oil saved, which also affects the optimal equipment mix, but that gain is always positive irrespective of the chosen value of oil saved.
  • In all scenarios, the economic gain for the nation as a whole, as well as for the government, is substantial. The petrochemical and utilities sectors suffer reduced net revenues relative to the baseline scenario, but those losses are more moderate in the Investment-credit scenarios and would be ameliorated in practice by honoring the terms of existing contracts.
Our approach is consistent with decentralized decision making, allowing price incentives to guide efficient investment decisions, and avoids the supervisory burden that top-down planning would impose. Furthermore, it maximizes the societal gain that can be achieved without burdening end consumers with higher prices.
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