Projects ahead: New initiatives and privatisation aim to create competition

While Saudi Electric Company (SEC) remains majority state-owned, several initiatives are under way to bring private investment into the sector. Investment is already flowing in the form of independent power projects (IPPs), with some already up and running, and other major projects in the pipeline for the near future. The Kingdom is also currently in the process of “unbundling” its electricity generation, transmission and distribution assets with a view to creating competition in the market and, eventually, privatisation. Saudi Arabia took a key step towards this goal in early 2012 with the creation of a new separate transmission company, though the schedule for privatisation has yet to be determined and the process may face political obstacles such as resistance to raising electricity prices.

Deregulation

Electricity production (like water desalination) is regulated by the Electricity and Cogeneration Authority (ECRA), which licences “all electrical activities”, and implements legislation covered by the 2005 Electricity Law, which addresses issues such as investment in the sector service, reliability and pricing. Both the ECRA and the law provide for a measure of deregulation and competition in the Kingdom. The ECRA has a mandate to foster “legitimate competition” in the sector, and the Electricity Law calls for the ECRA and the Ministry of Water and Electricity to promote competition and encourage private investment in the sector, with the eventual aim of creating a range of both generation and distribution companies.

Moves to make this into a reality are now under way, in the form of the Electricity Industry Restructuring Plan. Under the plan, SEC’s existing assets will be divided into six newly created companies – four generation companies, a transmission company and a distribution firm. The SEC itself will be transformed into a holding company that, to begin with, owns each of the six firms.

Branching Out

In January 2012 the first of these new entities to came on-line with creation of the new transmission subsidiary, National Grid Company. According to the ECRA, the goal is to create a transmission firm with “an open and unbiased policy of access” to generation companies and consumers. As regards the transmission network, the initiative will also see the creation of a wheeling tariff, with a tariff structure for use of the network currently being tested. The ECRA also has plans to lease out some principal transmission lines.

The new distribution company is scheduled to begin operations in early 2013. Ultimately, the plan envisages creating multiple distribution firms. The new generation firms are to enter into service before the end of 2013, with the SEC’s generation assets to be divided among the four new firms in roughly equal distribution of assets in terms of age, capacity and production costs to promote fair competition between them.

A purchasing entity, which will be the “principal buyer” and called Saudi Power Procurement Company, will also be established within the new SEC holding. The firm will enter into contracts with the generating, transmission and distribution firms and will operate energy conversion and power purchase agreements with existing plants until competition kicks in. The restructuring plan will also lead to the eventual creation of a spot market for trading in electricity.

Privatise

SEC estimates the cost of the restructuring programme, scheduled to be completed by January 2014, at around SR200m ($53.3m). The initiative aims to first introduce competition into wholesale services to distribution firms and large-scale consumers, before eventually also entering the retail segment. The ultimate aim is to privatise the electricity market. While press reported in September 2012 that this could take place in 2014, it is not clear on what this is based, and authorities have yet to announce a firm date. SEC is already partially privatised, with around a 20% share in the firm floating on the Kingdom’s stock exchange. However, the initiative eventually will see multiple privatised companies competing with each other.

The authorities are also planning to privatise the Saline Water Conversion Corporation (SWCC), a major electricity generator. However, the SEC has yet to decide on a timeline for this move, which has been on the table for quite some time. Revisiting the initiative is reportedly part of the brief of SWCC governor Abdulrahman Al Ibrahim, who assumed the position at the end of 2011.

Competitive Gains

Competition will have major implications for the market. “Deregulation will have a huge impact,” Al Rashoud told OBG. “Currently, we have a single-supply market. However, once there is competition, things will improve. For example, it could reduce the need for tariff increases, as competing firms would find ways to trim fat and specialise in specific areas.” However, he believes such a scenario remains some ways off. “In terms of infrastructure, it will be much harder to introduce competition than, say, in the telecommunications market. Most of the infrastructure is underground, and there would be a need for new technology or ways to manage disturbance. Customers would likely be reluctant to install new meters, for example.”

Pricing might also have to be at least partially deregulated to attract investment, which could face some political resistance. Furthermore, although the SEC does currently register annual profits, these are partly a result of significant government support that might be less forthcoming for private firms, and the company makes seasonal losses – with heavy use in summer compensating for unprofitable winter months – that private firms might be reluctant to accept.

IPPS 

Private firms are already involved in power generation in Saudi Arabia in the form of IPPs, of which there are to be six in total under current plans, all constructed under build-own-operate (BOO) models. The country has already awarded licences for three existing IPPs, with a combined capacity of seven GW at a total investment of $7.5bn. Some of these projects are already up and running. The first IPP to enter into operations in Saudi Arabia was the 1200-MW Rabigh 1 project, located approximately 175 km north of Jeddah along the Red Sea coast, which uses heavy fuel oil as its feedstock. The first unit was commissioned in 2012, and the second is due in 2013. Saudi Arabia’s water and power projects developer ACWA Power International and Korean Electric Power Company each own a 40% stake in the project, while SEC has a 20% stake.

Another IPP partly commissioned in 2012 was the gas-fuelled Riyadh PP11, also to be completed in 2013. Ownership is divided between SEC with a 50% stake, French utilities firm GDF Suez with 30%, and Saudi and Japanese investors with shares of 15% and 10%, respectively. Ownership of the third licensed project, the gas-powered Qurayah plant, will be split 50:50 between SEC and a consortium led by ACWA. Qurayah is the largest IPP project in the world, with a planned net generation capacity of close to 4000 MW, and will be the first in the Kingdom to be led by a Saudi developer. Electricity will be sold to SEC under a 20-year power purchase agreement, scheduled to begin in 2014.

More To Come

The remaining three IPPs are Rabigh II and the Dhaba I and II projects, which are to be built in western Saudi Arabia. Rabigh II will be a 1800-MW facility based on heavy fuel oil, to be built at a cost of $2.5bn. In October 2012 a consortium led by Abu Dhabi National Energy Company submitted the lowest bid for the project and subsequently entered into talks with SEC regarding its development. The chosen consortium will take a 50% interest in the project, with SEC taking the other half. The Dhaba projects both remain at an earlier stage, with tenders yet to take place. Dhaba I will consist of a 550-MW combined-cycle plant using gas as a feedstock, though there are plans for a solar option as well. Dhaba II will be an 1800-MW steam-powered plant that uses heavy fuel oil as feedstock.

While financing has been an issue for some countries trying to attract investment into the utility sector, industry figures say capital is currently readily available for Saudi IPPs. “Banks are flooded with liquidity and can meet the challenge,” Amer Al Swaha, head of the IPP programme at SEC, told OBG. Al Swaha said that around half of the financing for IPPs in Saudi Arabia comes from the local market, with the remainder being provided by export credit agencies. “International banks have a limited role in this type of project finance,” he said.