This post is part of an AGSIW series on Saudi Vision 2030, a sweeping set of programs and reforms adopted by the Saudi government to be implemented by 2030.

The restructuring of Saudi Arabia’s petroleum ministry into a new powerful Ministry of Energy, Industry and Mineral Resources (MEIMR), announced as part of a larger government reorganization on May 7, is a central pillar of the new Vision 2030 unveiled at the end of April by Deputy Crown Prince Mohammed bin Salman (MbS). The latest announcement also included a reordering of other ministries focused on the economy and finance, such as the new Commerce and Investment Ministry and a new head of the Saudi Arabian Monetary Agency.

Replacing veteran Oil Minister Ali al-Naimi to lead the enlarged MEIMR will be Aramco Chairman Khalid al-Falih, who is also an important member of MbS’ inner circle. Indeed, underscoring the confidence MbS has in Falih, the new mega-ministry is responsible for more than 50 percent of the country’s economic output. Overseeing the partial privatization of Saudi Aramco is an enormous task in itself, but Falih will also have to navigate the politics of OPEC as he manages this behemoth, which will be a major engine of economic reform for the post-oil era.

The restructuring brings the industry portfolio, including the fast-growing petrochemical and mining sectors, and the critical electricity portfolio under the umbrella of the expanded MEIMR, to increase efficiency and synergy. Up to this point, the tangled web of dozens of agencies has often led to conflicting agendas that work against others’ interests. Falih is expected to institute a more streamlined and top-down line of responsibilities and management structure. As a result of the restructuring, the new minister will be in charge of expanding non-oil sales income while creating hundreds of thousands of jobs for Saudi youth. Key expansion targets are the refining, petrochemical, and mining sectors, among others.

While budget deficits in the lower oil price environment may be a major impetus for this radical overhaul by MbS, what has not been widely flagged is an urgent need to tackle the problem of increasing domestic oil demand, which is eroding the country’s future export revenue. The transfer of the electricity sector to Falih’s orbit, therefore, is a hugely significant development given the kingdom’s growing demand for power and the massive financial burden it places on the country. Saudi Arabia’s domestic oil demand consumes over 30 percent of the country’s oil production, according to International Energy Agency data, which costs the government billions of dollars in subsidies as well as a loss of income from the oil burned at power and desalination plants instead of exported to world markets.

Reducing the runaway domestic demand levels and switching electricity generation away from oil use will be a critical component of the country’s post-oil world. An explosive Chatham House study in 2011 calculated that the kingdom’s crude oil exports could dwindle to zero by 2038 given burgeoning oil demand growth rates, especially for electricity, if the country did not take immediate and drastic action. The public report set off alarm bells in Riyadh and among oil analysts around the globe.

Source: International Energy Agency

Saudi Arabia’s oil demand has increased by nearly 165 percent in 10 years, according to the International Energy Agency, rising from just 2 million barrels per day (mb/d) in 2006 to just under 3.3 mb/d in 2015. Oil demand has risen in tandem with the exploding population and rapid industrial growth. Domestic oil demand is also fueled by heavy subsidies for electricity and gasoline that give businesses and residences little reason to conserve energy and adopt efficiencies. The country implemented its first reduction in subsidies at the start of the year, largely due to severe budget constraints stemming from the decline in oil prices; nevertheless, subsidy reform is likely to be a slow process given the sensitivity of the issue. Subsidies amounted to $107 billion in 2014 and were forecast to fall to $61 billion in 2015. Subsidy reform of 50 percent could reduce domestic oil demand by around 600 thousand barrels per day (kb/d) by 2035 and by 840 kb/d over the same period if 100 percent reform is implemented, according to Saudi investment bank, Jadwa.

At peak demand during the summer months, crude oil burned by utilities reached about 900 kb/d in 2015. The country’s power plants burn around 60 percent crude, fuel,and diesel with the remaining 40 percent met by natural gas. Three new crude oil-powered electricity plants are scheduled to come online this year. However, the increased demand for crude burn will be largely offset by increased gas supplies from Wasit gas facility. But increases in gas supplies can’t keep pace with surging domestic demand. At current growth rates, demand could rise to 8.3 million barrels of oil equivalent by 2028, which would necessitate a further 3 mb/d of crude for the power sector, according to the International Energy Agency.

A key program to reduce the country’s dependence on oil is an effort to develop a renewable energy industry. In a major reversal from the past, the Vision 2030 plan sets out an initial target of 9.5 gigawatts (GW) of renewable energy as part of the King Salman Renewable Energy Initiative. Initially, the assumption was that that target was to be reached by 2030 but the government later clarified that the first tranche of 9.5 GW is targeted for much earlier – 2023 – 17 years earlier than projections in the previous plan, released by The King Abdullah City for Atomic and Renewable Energy (KACARE).

KACARE was set up in 2010 but with in-fighting among the various agencies and ministries, very little has been accomplished. The agency originally set a target of 41 GW of solar capacity, 20 GW worth of geothermal and wind power, and construction of 16 nuclear power plants with 17 GW of capacity by 2032. However, in January 2015 the plans were delayed until 2040. By the end of 2015, just 25 megawatts (MW) of renewable-energy generation capacity, mostly solar, had been installed. KACARE, the Saudi Electricity Company, Electricity & Cogeneration Regulatory Authority, and half a dozen other agencies will now be under the new mega-ministry and an overhaul of their operations is expected.

The initial 9.5 GW of renewable energy represents about 5 percent of electricity consumption, although a relatively small percentage of this new capacity could cover around 50 percent of new power generation if implemented within the next five years, according to Jadwa. That compares with neighboring Dubai, which has set a target of 25 percent renewables in its electricity mix by 2030.

The new King Salman Renewable Energy Initiative is charged with developing the legal and regulatory framework for private sector investment in the renewable industry. More information about the initiative is expected in the National Transformation Plan, reportedly to be released in coming weeks. The failed start in 2010 lacked a clear government directive and cohesive planning to achieve renewable targets. Potential investors will be looking for specific details and timelines for the development of the initial 9.5 GW as well as new targets for 2030. With electricity generation capacity expected to double to 120 GW by 2032, renewables have an important role to play in replacing oil in the power sector, and their development falls squarely under Falih’s new mandate.