A composite index, called the Energy Transition Advancement Index (ETAI), has been developed to compare Saudi Arabia’s progress in the energy transition with that of the UAE and Norway, which are oil-producing economies. The ETAI provides a holistic overview of the energy transition in those countries. It assesses the ongoing performance of each country in terms of its transition. Nonetheless, it also examines the countries’ capability to transition.

The ETAI has two sub-indexes: performance and capability. Each of these two sub-indexes has indicators. The performance sub-index has two indicators, while the capability has four. In total, there are 39 dimensions: five in the economic development indicator, 13 in the technical development indicator, six in the business and regulation competence indicator, eight in the financial competence indicator, four in the technical competence indicator, and three in the social and knowledge competence indicator. Fig.1  shows the index breakdown, including the sub-indexes, indicators, and dimensions.

The result of the main index, the ETAI, is shown in Fig.2. The performance and capability sub-indexes are shown in Fig.3 and Fig.4 respectively.

The index indicates that Saudi Arabia significantly trails behind both the UAE and Norway in its energy transition efforts. In 2023, the gap between Saudi Arabia and the UAE's ETAI results was 14.67 points, while the difference between Saudi Arabia and Norway was 20.91 points. Over the past 34 years, Saudi Arabia has shown only marginal improvement, with an average annual growth rate of just 0.42%. In contrast, Norway and the UAE have experienced much more robust progress, with rates of 1.47% and 4.17%, respectively. This disparity highlights the obstacles that have hindered Saudi Arabia's advancement in the energy transition.

Obstacles to transition

Several obstacles have hindered Saudi Arabia's progress in the energy transition, especially when compared with countries such as Norway and the UAE.

The first major challenge is the strong dependence of Saudi Arabia's economy on oil prices, a situation that persisted until the announcement of the country’s Vision 2030 scheme in 2016. The volatility of oil prices complicates efforts to achieve fiscal sustainability, which can explain the stagnation in the ETAI scores between 1990 and 2016. Additionally, the extensive transformation required in the energy sector necessitates significant capital investment, making the shift more difficult.

Another significant hurdle is the complex and lengthy institutional approval process for implementing low-carbon solutions. Before the establishment of the Saudi Energy Efficiency Center in 2010, energy transition policies were largely non-existent, further stalling progress.

Lastly, the limited involvement of the private sector in low-carbon technologies (LCTs) has posed a significant barrier for Saudi Arabia.

To fully grasp the advancements made by Norway and the UAE in their energy transitions, it is essential to examine the underlying factors that contributed to their success.

In Norway, the effective utilisation of the Government Pension Fund Global (GPFG) has been a crucial driver. Established in 1990, the fund leveraged oil revenues to diversify the economy and gradually transition away from fossil fuels. This strategy has allowed Norway to become a green economy leader in Europe, despite being the continent’s largest oil producer. In contrast, although Saudi Arabia’s Public Investment Fund (PIF) was founded in 1971, it did not become effective until 2016.

Additionally, Norway's fossil fuel sector has positioned itself as a leader in low-carbon investment, contributing to consistent improvements in its ETAI scores. For instance, Equinor, Norway's national oil company, is committed to installing 12–16GW of renewable energy capacity by 2030.

On the other hand, the UAE has adopted a strategy that emphasises promoting small-scale energy projects led by the private sector. This approach helps alleviate the financial burden on the government while facilitating faster progress, as it encourages the involvement of multiple stakeholders in the energy sector.

Capability is there but action is lacking

Saudi Arabia has the potential to transition to a more sustainable energy system, as evidenced by improvements in its capability sub-index. However, insufficient initiatives have been implemented to leverage this potential, leading to a decline in the performance sub-index. Notably, the country scored below 50 points in 20 out of 39 dimensions of the ETAI. Therefore, prioritising improvements in these areas is essential to enhance Saudi Arabia's position in the global energy transition.

First, while Saudi Arabia began reforming fossil fuel subsidies in 2016, the share of these subsidies relative to GDP has increased from 18.7% in 2016 to 19.6% in 2023. This trend underscores the urgent need for further measures to gradually phase out these subsidies. One effective strategy could involve reducing subsidies when oil prices decline. Additionally, Saudi Arabia could adopt a model that links fuel prices to market rates, similar to the UAE's monthly price reviews.

The sooner Saudi Arabia’s transition gathers pace, the freer the country economy will be from the shackles of the oil dependence

Furthermore, redirecting fossil fuel subsidies to fund low-carbon technologies (LCTs) through mechanisms such as a feed-in tariff (FiT) would incentivise renewable energy investments. Implementing a FiT could create a merit-order effect, lowering electricity prices as renewable energy installations increase, while ensuring stable consumer pricing. This reallocation of subsidies toward investment tax credits (ITCs) and FiTs would positively influence economic and technical development indicators, improving 13 of the 39 dimensions of the ETAI, particularly those related to fossil fuel subsidies, renewable energy deployment, and carbon intensity.

Second, financing energy transition initiatives such as CCUS, electric vehicle (EV) infrastructure, and smart grid projects through public-private partnerships (PPP) is crucial. PPPs can significantly accelerate energy transition efforts by engaging both local and international private firms, providing a valuable opportunity to diversify the economy while updating financial regulations to align with global standards. This approach also effectively balances risks between the public and private sectors.

Lastly, Saudi Arabia can further leverage policy tools by enhancing financial incentives. While current incentives exist for energy-efficient air conditioning units, additional measures are necessary to encompass other sectors, particularly transportation. Saudi Arabia's expenditure on research and development as a percentage of GDP lags behind that of the UAE and Norway. Therefore, increasing funding for research grants and offering financial incentives for early market adoption can strengthen this dimension. In summary, investing through PPPs and providing robust financial incentives will significantly advance Saudi Arabia's progress in its energy transition.

The way forward

In order to accelerate the inevitable energy transition, more emphasis is needed on the following policies:

1. Gradual phasing-out of fossil fuel subsidies by reducing them when the global oil prices are low or redirecting the subsidies to be in the form of a FiT for renewable energy projects and ITC for the other low-carbon technologies investments.
2. Urgently establish PPPs in all low-carbon investments that will allocate the risks between the public and private sectors.
3. Increase private sector participation in energy transition projects whose contribution will lessen the burden on the government financially and bring broader economic values, including FDI.
4. Continue to expand the value chain of the petrochemical industries.

The sooner Saudi Arabia’s transition gathers pace, the freer the country economy will be from the shackles of the oil dependence and more it will be able to use the enhanced oil exports for continuing progress in the modern and clean industries.

This article is the third in a three-part series based on a Master’s thesis of Nawaf Bin Awshan, completed with a distinction in the Energy Systems course, Department of Engineering, University of Oxford. Dr Adi Imsirovic and Dr Anupama Sen were his supervisors. Dr Imsirovic edited the thesis down for publication. Click here to read the first part, and here to read the second.

Note: The ETAI structure was adapted from two indexes developed by WEC and KAPSARC, augmented by adding additional dimensions and a different statistical method used.

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Author: Nawaf Bin Awshan