Impact of Higher Energy Efficiency on Growth and Welfare Across Generations in SA

About the Project
Increasing energy productivity holds some of the greatest possibilities for enhancing the welfare countries get out of their energy systems. It also recasts energy efficiency in terms of boosting competitiveness and wealth, more powerfully conveying its profound benefits to society. KAPSARC and UNESCWA have initiated this project to explore the energy productivity potential of the Arab region, starting with the six GCC countries and later extending to other countries. Aimed at policymakers, this project highlights the social gains from energy productivity investments, where countries are currently at, and pathways to achieving improved performance in this area.

Key Points
Energy policies in the oil-rich countries of the Gulf Cooperation Council (GCC) region influence their domestic growth in the long run. Accordingly, they also redistribute income across generations over long periods. In this paper, we use MEGIR-SA to assess the aggregate effects of higher energy efficiency in Saudi Arabia. 

The model MEGIR-SA – Model with Energy, Growth and Intergenerational Redistribution-Saudi Arabia – is designed to assess the quantitative effects on growth and welfare across generations of different energy policies in Saudi Arabia – e.g., increasing end-use energy prices, fostering alternative energy mixes, bolstering energy efficiency and defining different levels of oil production over time while developing a sovereign wealth fund. 

An annual increase of 4 percent in future energy efficiency would result by 2030 in 1 million barrels per day (bbl/d) of avoided domestic energy consumption and thus enable additional oil exports. Saudi oil income could increase by 50 billion Saudi Arabian Riyals (SAR) to 100 billion SAR per annum by 2030, depending on market conditions. If fully recycled through public current spending or investments, the upward effect on growth could be between 0.3 and 0.6 percent per year by 2030. Under pessimistic oil market and domestic oil production assumptions, our model suggests there would be a benefit in recycling additional oil revenues into public investments in infrastructures. 

Most of the economic benefits of higher energy efficiency gains would accrue to individuals born after 1990 – who now account for more than half of the current Saudi population – or to future generations. The welfare effect is limited for those Saudis who are already adults.