Between 2000 and 2010, installed power generation capacity in Saudi Arabia more than doubled to 50,000MW to meet the kingdom’s 97 per cent increase in demand over the same period.

This rising demand is expected to continue. By 2020, demand is forecasted to grow to 77,430MW from about 46,000MW at present.

Some SR87.8bn ($23.4bn) will be required to finance the generation capacity expansion. In addition, the Water and Electricity Ministry has estimated that a further SR123.3bn will be needed for transmission and another SR97.8bn for distribution projects.

With an anticipated spend of SR302.9bn between now and 2020, the Saudi Arabian electricity sector is the most lucrative in the region for contracts. How the country will pay for this huge investment will also be important.

The kingdom has a successful track record in building to meet demand through government procurement and independent power projects (IPPs). Six more IPPs are planned up to 2020. Two will be built at Qurayyah, joined by other projects at Dheba, Abu Kamis, Jeddah South and Riyadh.

Directly procured projects need finance more urgently than IPPs, which require less immediate equity injection from Saudi Electricity Company (SEC), but still need long-term capital to maintain power purchase agreement payments. As the company has a government back-stop, its creditworthiness is strong. It is rated at AA-, AA- and A1 by Standard & Poor’s, Fitch and Moody’s respectively. This aspect is beneficial to its IPP programme as investment can be secured cheaply.

SEC needs to balance the requirement to maintain a reasonable demand/supply margin with keeping costs to a minimum. Central to this is the issue of tariffs. SEC has about 6 million heavily subsidised customers and, as a result, posted a SR744m loss for the first quarter of 2011.

With power demand expected to continue rising, the situation is becoming increasingly unsustainable. Small steps have been taken towards revising its tariffs. From 1 July 2010, SEC’s industrial, commercial and government customers paid a higher tariff.

The revised tariff has improved SEC’s balance sheet to a certain extent, but the number of customers classified as industrial, commercial or government represents only a fraction of the total number of customers. Residential consumers represent the bulk of individual customers and total power consumed.

As a result, tariffs will remain a sticking point in Saudi Arabia. Residents are not used to paying for the power they consume and any efforts to impose charges are met with a significant political backlash. The government is likely to continue to subsidise power for the foreseeable future, both in the form of fuel to generate power and at the point of power consumption.

Without changing the tariffs, Saudi Arabia will spend more and more of its revenue from oil sales to satisfy domestic power demand. At the same time, power consumption will continue to rise as individual consumers are not incentivised to curb their usage.