Saudi Arabia to require additional energy capacity in the years ahead

A rising population and fast-expanding energy-intensive industries will continue to fuel Saudi Arabia’s growing demand for water and electricity in the coming years. In early 2016 Abdullah bin Abdul Rahman Al Hussein, the minister of electricity and water at the time, said that the country expects peak electricity to hit 90,000 MW in 2022. As such, a substantial expansion of installed capacity – which is currently around 70,000 MW – is due to take place. “The expansion plan... requires the execution of electricity projects for the next 10 years whose costs will exceed SR500bn ($133.3bn),” said Al Hussein, noting that he hoped that the private sector would play a significant role in this expansion of capacity.

Calls for greater private sector involvement have grown stronger in recent years, and in its 2014 report, the Electricity Cogeneration and Regulatory Authority (ECRA) singled out private participation in the electricity and water desalination industries as one of its highest priorities.

The state-owned Saudi Electricity Company (SEC) owns and operates the vast majority of the Kingdom’s electricity generation plants, accounting for more than 70% of total installed capacity, while the state-owned Saline Water Conversion Corporation (SWCC) accounts for approximately 62% of desalinated water production. Plans to break up these entities and further integrate private players into the sector have been talked about for several years, but a renewed sense of urgency has emerged in the wake of the drop in oil prices between June 2014 and January 2016, with the gradual liberalisation of the Kingdom’s fuel market, as outlined in the Vision 2030 development plan, driving restructuring.

Restructuring

Ideas to restructure the electricity sector were first put forward in 2009. ECRA’s Electricity Industry Restructuring Plan outlines the steps for unbundling the industry’s main activities – generation, transmission and distribution – and moving it from the current vertically integrated structure towards an environment that encourages greater private sector participation and competition. Although implementation of the plan made little concrete progress at first, efforts appear to have been refocused recently. In February 2015 the Council of Ministers directed ECRA to “work with the SEC in order to execute the contents of the memorandum of understanding [MoU] signed between ECRA and the SEC on December 29, 2013”. The MoU contained SEC commitments to undertake various actions, including the establishment of four companies that will take over the ownership and operation of the SEC’s generation assets, in accordance with rules agreed with ECRA. Each of the generation companies will be fully operational and will assume its full duties and responsibilities independently, with its own board of directors.

Progress appears to have been made in this regard, and in February 2016 Abdullah Al Shehri, governor of ECRA, said on Al Arabiya television that the SEC would be split into several firms. “By the end of 2016 we will see the creation of four power generation companies that will be made from the assets of the SEC,” he said. “Performance will be improved by the creation of a more competitive sector, which will lead to increased efficiency.” Stakes in the new firms will be offered either to local citizens via stock market flotation, or to local or international corporate partners.

Private Expansion

As such, private players can expect numerous opportunities for expansion in the near to medium term. In March 2016 ACWA Power’s executive director of acquisitions and project finance, Pascal Martese, indicated the company would be one of those looking to capitalise on the restructuring of the SEC’s assets. “If the government is selling, we will happily buy,” he said. “This is our business, and we think we can value it properly, give a good deal to the government and deliver reliable power capacity after we take over.” Although the private electricity sector’s installed capacity is dwarfed by that of the SEC, there is nevertheless a considerable private sector presence in the industry, with 13 private companies operating 19 of the Kingdom’s 81 plants in 2014. ECRA’s plans are likely to see this number rise significantly in the coming years as it seeks to further liberalise the sector. “Compared to the public sector, the private sector, with its own money at risk is incentivised to be cheaper, efficient and on time in delivering such capital assets,” Paddy Padmanathan, CEO of ACWA Power, told OBG. “It is our money at risk, so we are quicker and more efficient.” Saudi Arabia’s rising demand for power is also boosting its power rental market, which is set to undergo significant growth. Investment in new construction projects is expected to drive the power rental market by a compound annual growth rate of 12.6% between 2015 and 2021.

Project Development

According to ECRA’s 2014 report, the funding needs of the Kingdom’s electricity services between 2010 and 2020 in generation, transmission and distribution total SR526bn ($140.2bn). Of this, 63.7% is required to fund generation plants, 23% to develop transmission infrastructure and 13.3% to invest in distribution lines. In 2013 contracts worth SR48bn ($12.8bn) were signed, while in 2014 the total contracts awarded were worth SR39.4bn ($10.5bn). Of the contracts signed that year, SR7.6bn ($2bn) was spent on expanding and developing generation plants; SR29.1bn ($7.8bn) was spent on transmission projects, including the building of a new switching station for the residential area of Jubail; and SR2.7bn ($719.8m) was spent on distribution projects in other cities and towns across the Kingdom.

ECRA has identified various areas where significant opportunities either currently do or will exist for private sector players through to 2020. These include the development of independent power projects and independent water and power projects; building, leasing and/or operating transmission lines and pipelines; forming power generation companies; and undertaking electricity distribution in specific areas.

Water

With water consumption set to rise significantly, the SWCC has announced plans to invest a total of $80bn by 2025 in an effort to ensure supply keeps pace with demand. The corporation expects these investments to boost daily production to 8.5m cu metres in the next 10 years, up from the current 3.6m cu metres. Plans to restructure the SWCC have been in the pipeline for some time, with the authorities carrying out many studies focused on privatisation alternatives for the entity. According to ECRA, restructuring would involve the transformation of the SWCC into a holding company with wholly owned subsidiaries. This approach will enable private participation at the production stage, with the subsidiaries being partly owned and operated by private players. Mohammed Al Saud, the deputy minister for water affairs, says the private sector has much to offer the water industry in terms of efficiencies in cost of production, and in shifting the burden of capital investment away from the government. “There are many business opportunities for private players in the sector in desalination, groundwater pumping and purification, and treatment of wastewater and sewage,” Al Saud told OBG. “These represent big areas that are open to the private sector where promising models can generate good returns on investment.” Investors must also consider the broader economic benefits. “What is the value added to the economy, or towards one of the aims of Vision 2030? These should be the questions that are asked for any investment before it is made, otherwise it is just speculation,” Abdullah Alkhorayef, CEO of Alkhorayef Industries, told OBG.

Waste Energy

Waste-to-energy generation solutions are also picking up pace in Saudi Arabia. The Kingdom is among the world’s top waste producers, and there are considerable opportunities for municipal authorities and private players to harness the energy potential at municipal disposal sites. “Trash burning for fuel is still not competitive but is now becoming an option,” Asim Almuallimi, CEO of Middle East Environment Protection Company, told OBG.