Increasing private participation and a more sustainable energy mix in Saudi Arabia

Providing power for its rising population represents a significant challenge for Saudi Arabia, with the Kingdom generating more than twice as much electricity in 2015 as it did in 2000 in order to meet growing demand. According to the Electricity and Cogeneration Regulatory Authority (ECRA), the Kingdom will have to invest some $140bn before 2020 to increase generating capacity at Saudi Electricity Company (SEC) power stations from 51.5 GW to 71 GW. Beyond that Saudi Arabia has also announced plans to boost total capacity to 120 GW by the year 2032.

In addition to a growing population, demand is being driven by the expansion of energy-intensive industries and highly subsidised utility prices for consumers. The country, which is the world’s largest producer of desalinated water, is also facing rising demand for water and is investing heavily in enhancing its capacity. ECRA estimates that investments in desalination totalling SR300bn ($80bn) will be required over the next 20 years, including SR91bn ($24.3bn) before 2020.

Electricity Generation

In 2013 Saudi Arabia generated 292.2bn KWh of electricity, a 7% increase on the previous year, according to BP’s “Statistical Review of World Energy 2014”. ECRA records show it had 76 power plants run by 15 different operators with a total installed capacity of 69.76 GW. Of those, SEC operated 46 with combined capacity of 51.53 GW, equal to 74% of the total; the Saline Water Conversion Corporation (SWCC) ran six with capacity of 5 GW; and Saudi Arabian Oil Company (Saudi Aramco) had six stations with a combined capacity of 1.19 GW. There are also two major cogeneration stations producing significant quantities of both electricity and desalinated water. Jubail Water and Electricity Company’s single station had capacity of 2.9 GW in 2013 and Shuaibah Water and Electricity Company’s plant offered 1.2 GW.

Of the 7.12m electricity customers in the Kingdom, 5.7m were residential users, who were responsible for using 48% of the country’s electricity capacity. More than 8000 industrial customers used another 21%, with commercial customers accounting for almost 15% and the government a further 12.2% of capacity. The number of customers in the Kingdom increased by almost 58% from 2004 to 2013, rising from 4.49m to 7.14m over that period. Energy sales grew by almost 78% in the same timeframe, from 144,385 GWh in 2004 to 256,687 GWh in 2013. “There is an increasing demand for electricity throughout the Kingdom,” Emad Mukhalalaty, managing director of power and water provider Altaaqa, told OBG. “This demand, growing at a rate of 7-10% year-on-year, is mainly driven by industrial and population growth, as well as the low-cost energy, which does not inspire conservation.”

Fuel Mix

ECRA figures for 2013 show that the fuel mix used in electricity generation was as follows: natural gas, 46%; crude oil, 29%; diesel, 15%; and heavy oils, 10%. However, these proportions do not remain fixed throughout the year. In September 2014 the US Energy Information Administration (EIA) reported a surge in the use of crude oil for electricity generation in July of that year, citing statistics from the Joint Organisations Data Initiative (JODI). Demand for electricity rises during the summer as the use of air conditioning increases. The EIA reported that Saudi Arabia consumed 900,000 barrels per day (bpd) in July 2014, the highest figure JODI had ever recorded for the month of July and the highest overall since August 2010. It said the Kingdom used an average of 700,000 bpd for power generation during the summers for 2009-13. During the same summer periods Kuwait and Iraq, the Middle East’s next two largest users of crude oil for power, each averaged roughly 80,000 bpd. “There is a clear need to diversify energy generation resources in Saudi Arabia to fulfil rising demand from urban expansion and several industries,” Ziad Mortaja, country president for Schneider Electric, told OBG.

Desalination

ECRA figures show that there were 24 plants collectively producing 6.17m cu metres of desalinated water per day in Saudi Arabia in 2013. SWCC accounts for 60% of the total capacity in its 16 desalination plants, or 3.67m cu metres per day, and it produced 59% of the desalinated water used in the Kingdom in 2013. ECRA estimates that rising demand dictates that by 2020, SWCC alone will have to produce 6m cu metres per day, a 64% increase on 2013.

Most of SWCC’s plants are cogeneration facilities that also produce electricity for the grid. Two other large-scale cogeneration plants provide a significant proportion of the country’s desalinated water needs. Jubail Water and Electricity’s cogeneration plant has capacity of 805,464 cu metres daily while Shuaibah Water and Electricity’s facility has capacity of 888,000 cu metres per day. In 2013 these two individual plants collectively provided 34% of the water supply, 20% from Shuaibah with the remaining 14% from Jubail Water and Electricity. SWCC’s share of production increased by 6% from 2012 to 2013, when the total volume of water it supplied reached 1.055bn cu metres.

SWCC is also responsible for water distribution from the desalination plants to reservoirs managed by potable and sanitary water departments in towns and cities. These departments are administered by the Ministry of Water and Electricity, which along with the National Water Company is responsible for supplying consumers. The Kingdom’s overall production capacity, which measures the ratio of actual production to design capacity, decreased slightly from 81.8% in 2012 to 80.7% in 2013, and ECRA attributed this to a new reverse osmosis plant in Jeddah and an increase in the installed capacity at the west coast city’s plants.

Gas

Although the state energy company Saudi Aramco is focusing on tapping into Saudi Arabia’s 291trn cu feet of natural gas reserves, gas is not piped into the Kingdom’s homes. The master gas system (MGS), which was first built in 1975, is designed to supply gas to industrial cities such as Yanbu and Jubail for use as feedstock in petrochemicals plants or in power stations. Several expansions to the MGS network are now being developed, the largest of which is a 212-km conduit to the Rabigh complex and to the Yanbu natural gas liquid processing facility.

Saudi Arabia is also estimated to have 600trn cu feet of unconventional gas, and in 2014 Saudi Aramco announced it was planning to build a 1000-MW power plant to be fuelled by shale gas, one of the first such facilities outside North America, as part of Ma’aden phosphate mining complex at Waad Al Shammal.

At a domestic level, a number of homes and restaurants rely on bottled gas for cooking purposes, with supplies organised by the National Gas and Industrialisation Company. In March 2015 local media reported the price for gas cylinders jumped from SR15 ($4) to SR100 ($26.65) as disruptions to supply from a Saudi Aramco Yanbu plant forced several restaurants in Jeddah to close their doors.

Subsidies

In common with many other oil-producing nations in the GCC and beyond, Saudi Arabia spends billions of dollars every year in subsidies for fuel used in transportation and utilities. The IMF and other international bodies have argued for some time that while universal subsidies on fuel and energy may be designed to allow the benefits of hydrocarbons wealth to trickle down to all members of society, those who live in bigger houses and run more cars receive more of the benefit than their fellow countrymen.

Another criticism levelled at these subsidies is that they fuel consumption and so lead to more cars on the roads and more liberal use of drinking water and air conditioning. Moreover, oil or gas that could have been exported at market prices is offered to local power and desalination plants for a fraction of its value.

In its September 2014 report on its Article IV consultation with Saudi Arabia, the IMF revealed it had discussed the gradual removal of energy subsidies with government officials, arguing for a well planned and clearly communicated policy adjustment with the introduction of compensatory measures for low-income members of society. However, the IMF reported that officials “expressed concern about the macroeconomic and social implications of an adjustment to energy prices”. The IMF report added that the authorities felt major public transport projects such as the Riyadh metro would have to be completed before any reforms were considered. However, those working in the utilities sector are debating the subsidy issue.

“We are planning on reducing the dependency on government subsidies and trying to redirect them towards those who need the support, rather than the current situation of having scattered support for everybody,” Abdullah Al Shehri, governor of ECRA, told OBG. “I think there is a growing feeling among people that they would be satisfied if they could see government support used in an intelligent way to support those who need it most. The current support is benefitting the rich more than the needy people.”

Burning Oil

In its 2013 annual report ECRA revealed the price SEC was charged per million British thermal units (Btu) for four fuels compared to their value on the international markets at that time. Heavy fuel oil cost SEC $0.43 per million Btu, versus an international price of $15.43 per million Btu; gas was $0.75 compared to $9.04; diesel was $0.67 but could have fetched $21.67; and crude oil was $0.73 as opposed to $19.26.

ECRA reported that the subsidy cost for 2013 alone was SR150bn ($40bn). It calculated that if international market prices had been paid for feedstock, the average unit energy cost would have been SR0.80 ($0.21) per KWh. The subsidy paid by the government meant that the average energy unit sold to Saudi customers was actually SR0.14 ($0.037) per KWh. Even with its heavily subsidised fuel, SEC calculated it cost more than this, or SR0.15 ($0.04) per KWh, to produce the electricity and distribute it in the Kingdom meaning the Saudi government is spending $40bn a year on a system that produces energy for $0.21 that is then sold to customers for $0.04. Although the pricing mechanism appears to give the customer a $0.17 saving, it is also causing waste, especially when that production price, based on the use of fuel oil, diesel and crude oil, is compared to more efficient fuels.

Power Shift

In January 2015 the King Abdullah City for Atomic and Renewable Energy (KACARE) announced it was delaying its planned implementation of a diversified energy mix for Saudi Arabia by eight years to 2040. KACARE was established by royal decree in 2010 and had originally announced it was planning to invest heavily in nuclear energy and renewables by 2032 in order to reduce the Kingdom’s dependence on hydrocarbons. In 2012 KACARE declared it would build 41 GW of solar power plants by 2032, while investing in an additional 21 GW of wind and geothermal power. It also planned to build 16 nuclear reactors by 2030. Although nuclear cooperation deals were signed with France, South Korea and China in 2011 and 2012, the development appeared to have stalled.

In February 2015, after a meeting with South Korea’s president, Park Geun-hye, it was announced that a three-year feasibility study would be conducted by the two countries with a view to building nuclear reactors worth $7.5bn in the Kingdom. “There needs to be an optimised, least-cost, sustainable energy mix,” Paddy Padmanathan, CEO of ACWA Power, told OBG. “Over the years this will be a mix of gas and renewables, with oil eventually phased out of the system entirely.”

In February 2015 SEC moved forward with plans to build a 600-MW integrated solar combined-cycle plant, known as the Green Duba. The facility will run on natural gas and solar energy. SEC ordered SR1bn ($266.5m) worth of generators for the facility, which is due to open near Tabuk on the Red Sea Coast by 2017. Local media reported the facility would cost SR2.5bn ($666.3m).

Supply Side

In addition to investments in new generating plants, SEC is also upgrading many of its older power stations to make them more efficient. Although 31% of the country’s power stations were built in the five years before the ECRA 2013 report, almost 40% were more than 25 years old. “We are converting all open-cycle power plants to combined-cycle power plants, which will raise the efficiency of an average plant from 33% to hopefully more than 45%,” Al Shehri told OBG. ECRA is also working with SEC to ensure power generation is shared between different plants during peak load. “Some of the existing power plants are now operating at less than 25% capacity factor and if the demand-side management programme is implemented properly that capacity factor could be improved to more than 45-50%,” said Al Shehri.

Raising Efficiency

The authorities in Saudi Arabia have also been taking a firmer line with energy-efficiency practices in construction to ensure new buildings use power effectively. Arja Talakar, CEO of Siemens Saudi Arabia, told OBG, “The Kingdom has been focusing on improving energy efficiency and is implementing cleaner, more efficient technologies across the entire spectrum from generation to consumption.”

Inefficient air-conditioning units cannot be imported or manufactured in the country, and a royal decree was issued in 2013 demanding better insulation in all buildings. A 2011 Saudi Aramco report on energy efficiency found that 70% of buildings in Saudi Arabia were uninsulated. New energy-efficiency standards for electrical equipment such as washing machines, refrigerators and dishwashers are also being introduced and there are plans to introduce new standards for energy-efficient lighting. As with many countries in the region, a considerable proportion of electricity demand is driven by air conditioning, particularly during the hot summer months.

“Currently our estimate is that almost 80% of electricity is consumed in buildings, whether in residential or commercial or government buildings, and almost 70% of that energy is for air conditioning,” said Al Shehri. “So we can say that maybe 50% of energy is used in air conditioning and if these two elements, the insulation and the air conditioning unit efficiency, are implemented, we will be saving a lot of energy.”

Waste Not, Want Not

In addition to focusing on ways to encourage consumers to save power, there is also potential to turn the Kingdom’s waste products into energy. Asim Almuallimi, CEO of Middle East Environment Protection Company, told OBG, “Education alone will not be sufficient. It needs to be done in cooperation with improving the whole system from collection to sorting to disposal. Dumping techniques here are old fashioned. We need to use more advanced methodologies such as waste-to-energy generation. It would fit with the government goal of using alternative sources of energy for power generation while also reducing pressure on landfills.”

New laws have been introduced requiring all waste to be disposed of in municipal landfill sites, which could provide those municipal authorities or private sector firms with the opportunity to use this waste as a meaningful alternative fuel source. “Saudi Arabia, on a per capita basis, is one of the biggest waste producers in the world, with a good amount of that being organic waste that can be transformed into power generation,” Padmanathan told OBG.

Privatisation

In its 2013 report ECRA highlighted private sector participation in utilities as essential and regards it as “one of its highest priorities”. ECRA estimates a total funding requirement of SR526bn ($140.2bn) for projects in the electricity segment alone during the 2009-20 time period. It reports that contracts worth SR48bn ($12.8bn) were signed in 2013, with SR14.8bn ($3.9bn) spent on building and expanding power generation plants; SR22.5bn ($6bn) spent on transmission, including construction of an overhead line from Rabigh to Madinah and three 380-V transformer stations; and SR8.5bn ($2.3bn) spent on distribution projects in towns and cities.

It suggests that between now and 2020 there will be opportunities for firms in the following areas: developing independent power projects and independent water and power projects; building, leasing and/or operating transmission lines and pipelines; forming power generation and desalination companies; obtaining leases or concessions for existing generation and water production facilities; obtaining facility management contracts; direct purchase of existing power and water assets; and undertaking electricity distribution to specific areas. ECRA expects investment of SR91bn ($24.3bn) on desalination until 2020, and with plans to privatise SWCC moving forward it sees many opportunities in the industry in the near term.

GCC Grid

Saudi Arabia’s electricity distribution network allows spare generation capacity to be directed to the areas most at need at any particular time or season, and for the last four years the GCC countries have integrated their networks so that the constituent countries can help each other cope with unexpected disruptions to supply. However, there are plans to make this network more dynamic. “I would like to see more trading over that link and the GCC Interconnection Authority is conducting a study to look at developing that market for electricity,” Al Shehri told OBG. “The major obstacle there is that each GCC country is pricing fuel in a different way and that price is meant to support domestic usage, but now for export there would have to be a different policy. If the fuel was priced on a common agreed basis it would make it easier for that market to be established.”

The advantage of this would be that as countries in the region build new power plants anticipating higher future consumption, their neighbours in the region would be able to buy that electricity as an interim measure while they are constructing their own improved facilities. For example, Abu Dhabi, which plans to open its first nuclear power station by 2017, would be able to sell its electricity to Saudi Arabia, where the first feasibility study on nuclear power is due to be concluded with South Korea by 2018.

Beyond the GCC, plans are moving ahead to create a 3-GW power link between Saudi Arabia and Egypt so the two can share generation capacity and so smooth over any peak-load demands. In 2015 the project, estimated to cost $1.6bn, is at the bidding stage.

Outlook

With a growing population driving demand for both electricity and desalinated water, coupled with plans to open up the industry to more private involvement, Saudi Arabia’s utilities sector offers a number of opportunities for investors. While government policy on subsidies for feedstock and customers’ utility bills present challenges for the Kingdom, the implementation of government policies aimed at conserving power consumption and moves to incentivise the use of renewable energy sources in the country’s energy mix should lead to more sustainable growth.