As head of the regulator of the Middle East’s largest utility sector, Abdullah al-Shehri, governor of Saudi Arabia’s Electricity & Cogeneration Regulatory Authority (Ecra) has a difficult job. This has been made even more challenging with the fall in oil prices and some of the highest growth rates for electricity and water consumption in the region.

The kingdom’s population is growing at 2.5 per cent and demand for utilities is even higher.

“Electricity [consumption] will grow at a rate of 7 per cent a year until 2032, and peak demand will climb to 120GW [from 62GW] in this period,” says Al-Shehri, in an exclusive interview with MEED. “On the water side, we expect a growth rate of 5 per cent a year.

“The growth rate of water demand is higher than the [growth] rate of [the] population, which means an increase in capita consumption or an increase in losses.”

Ecra is leading the march to ensure targets are met while efficiency is improved to reduce consumption and so cut pressure on the kingdom’s natural resources.

Sustainable industry

“The major objective for us is to create a sustainable electricity and desalination industry,” says Al-Shehri. ”We are working on it from all aspects. We are working on it from an efficiency side, from a demand side and we are also looking at efficiency on the supply side.

“We are looking at tariffs and at the cost, and are also looking at directing subsidies to those who need it. We think all this work together will create a sustainable industry.”

The Ecra chief is keen to express that planned tariff reforms could have a significant impact on demand for power over the next 16 years, leading to peak consumption falling by up to 14 per cent. “If business continues as usual, peak demand will reach 120GW,” says Al-Shehri.

Improving efficiency is the “low hanging fruit” and is the easiest place to start, he explains. “We have a lot of waste in electricity consumption. We conducted a study of device consumption patterns, and air conditioning represents almost 50 per cent of total consumption.

Targeting air conditioning

“[Reducing air-conditioning consumption] is our first target, and has two major aspects,” says Al-Shehri. “The first is improving installation on major buildings; there has been a decree passed on targets for all new [major] buildings and this has been enforced.

“The second is improving the quality of imported air-conditioning units. All imported units must be to a high efficiency, and this has been enforced since the beginning of 2015. The other programme is to improve other electrical equipment, such as washing machines.”

If enforced correctly, these measures are expected to reduce consumers’ bills by about 40 per cent. That will in turn ease pressure on the kingdom’s grid and natural resources. “It is an incentive for consumers and the economy,” says Al-Shehri. "The economy is subsidising fuel and if fuel is used correctly we don’t need to pay that amount of subsidy.”

District cooling

The kingdom is also keen to follow the example of Dubai and implement district cooling on a large scale. A study by the Saudi Energy Efficiency Centre into best practice around district cooling found the technology was feasible for large construction projects, such as university campuses and big shopping malls.

“We are preparing the general policy for it, and Ecra has been assigned to regulate this industry once it is implemented; we are preparing for it to start,” says Al-Shehri. "At the beginning it will be mandatory for large government structures and then we will be moving later to smaller sizes depending on the conditions. District cooling will help reduce peak demand and it’s a good way of using treated sewage water.”

Stunted progress

Following the creation of the King Abdullah City for Atomic & Renewable Energy (KA-Care) and the announcement of an ambitious 54GW renewable energy programme in 2013, Saudi Arabia emerged as one of the most exciting renewable energy programmes in the world.

However, KA-Care was unable to make any progress following the release of a draft white paper detailing its early procurement plans, and its ambitious programme appears to have been abandoned.

Al-Shehri says the kingdom remains committed to renewable energy, but that some key issues need to be addressed first.

“One is local fuel prices,” he says. “With the current low fuel prices, renewables are not competitive with conventional sources. On the other side, the costs of renewables are declining. So as long as we are not competing on it, it will become more competitive with conventional sources.”

Meeting targets

When a coherent strategy is approved by the government, then Ecra will ensure the targets are met. “The environmental policy has not been cleared,” says Al-Shehri. "But if government policy [is approved] to reach a 10 or 20 per cent target by any year, then as the regulator we will start enforcing it.”

“But if that is going to be enforced, there needs to be some way to pay the difference in cost between conventional sources and renewables; will that be part of the consumer's bill, or will the government pay it? Who is going to pay that difference?”

Al-Shehri is clear about what needs to be done to make renewable energy more of a viable alternative for the kingdom’s energy plans. “The reduction in subsidies will reduce the gap between conventional resources and renewables,” he says.

Subsidy reforms

Reforming subsidies on fuel, electricity and water provision is a challenge faced by the majority of countries in the Middle East and North Africa (Mena) region.

With its abundant oil reserves and large population, Riyadh is one of the largest subsidisers of electricity and water, and this is an area the kingdom, like its GCC neighbours, is beginning to confront in the face of lower oil prices. In 2015, Saudi Arabia made the first moves towards a significant reform of tariffs.

“Last year’s tariff reforms were made to reflect the change in fuel costs, mainly to cover the additional cost that SEC [Saudi Electricity Company] and other producers are incurring as a change in fuel prices,” says Al-Shehri.

Despite welcoming the initial moves, the Ecra chief says much more needs to be done.

Revenue shortage

“The electricity industry is still suffering from a deficiency in revenues,” says Al-Shehri. "The deficits in the past few years have been partly mitigated by government loans and if this continues the loans are a must. If the loans are not there, the alternative is to reform the tariffs to reflect the cost.

“In our estimates, the difference is still about 2.9 halalas [the 100th part of a Saudi riyal] a kilowatt hour [kWh], so that needs to be mitigated.” 

While tariff reform is important, Al-Shehri believes it must be implemented on a gradual basis.

“If Ecra is mandated to suggest tariffs and is given responsibility to enforce, we will be considering gradual change," he says. "We think that is more accepted by consumers and we will also develop scenarios of what the tariff would be after three or six years.

“Ecra will be able to [help] the consumer know what the cost is going to be; we will be able to serve the investors so they can build their feasibility studies on something which is clear and stated; we can help the service providers know what their revenues can be so they can plan for their projects.”

Privatisation strategy

While tariff reform is crucial to reducing consumption and government losses on fuel, it will also improve the prospects for eventual privatisation of the country’s utilities. In 2012, Ecra along with SEC launched the Electricity Industry Restructuring Plan (EIRP), which set a comprehensive plan for the restructuring of the kingdom’s electricity market and a move towards a more competitive wholesale power market.

“The plan will break down SEC's generation plants into four companies to encourage competition in this sphere and establish a principal buyer, which will be buying from everybody and selling to the distribution companies.”

While more progress has been made with the establishment of a separate transmission company, National Grid, which was created in 2012, SEC is working on establishing other key components.

“We are establishing an independent system operator, which will be able to operate all power plants from SEC and others with fair management. [We are] also establishing a distribution company, which in the future will be broken down into several distribution companies to allow for benchmarking services.”

Staying positive

While SEC’s progress with its restructuring plan has been slower than Al-Shehri would like, he is positive about the prospects of advancement for the programme in 2016.

“These things were supposed to be well established by the end of 2015, but I hope this year [SEC] will be able to accomplish the plan," says the Ecra chief. "The principal buyer and independent system operator are in the process of being established, and we are finalising their licences. The transmission company is already in existence and we are modifying its licence as the independent system operator is being taken out of the transmission company.”

Once the restructuring has been completed, there is a possibility for SEC to launch an initial public offering (IPO) for major parts of the utility company.

“I think SEC could have an IPO for the generation companies, once they have been created,” says Al-Shehri.

“It could be part of an IPO, or it could also turn it into a strategic partnership for investors from Saudi Arabia or from outside. And the same is possible for the transmission company. I think it is going to be operated on a commercial basis, it will be very valuable and the IPO would be a good option for it.”

Desalination plan

While progress with the restructuring of SEC has fallen behind schedule, the kingdom has yet to agree on a plan for the country’s desalinated company, Saline Water Conversion Corporation (SWCC).

“SWCC prepared a plan for corporatisation, and at a later stage privatisation. The plan was sent to the supreme economic council, but has now been eliminated. So it was discussed, but has not been realised,” says Al-Shehri.

“I hope there will be some more discussion. I think SWCC needs to be looked at in a different way. SWCC is producing desalinated water and they pump it to the storage tanks, and then it is taken from there by NWC [National Water Company] or by the governorate; there is no pricing mechanism. So I think this very precious commodity is being used without any accountability, and this is one of the things we are trying to find a way to work on – to make these commercial relationships click.”

Private sector

In the new economic climate of lower oil prices, Al-Shehri says private sector participation in the power sector, whether through privatisation or through participation in independent power projects (IPPs), will increase.

“The participation of the private sector is going to come as things are reaching a clear, stable situation financially,” he says. “Between 2007 and 2015, we started with 2GW from the private sector, and now we have almost 18GW of generation from private participation.”

“What we need to do now is open the market for the private sector, but based on commercial opportunities. In order to make this possible we need to create an electricity market that is open for competition within the market rather than competition for the market.”

Regional cooperation

While government cooperation with the private sector is key, there is potential for increased collaboration between neighbouring governments with electricity sharing. The GCC Interconnection Authority (GCCIA) was established in 2009, but has yet to formalise a commercial structure for the transfer of electricity between countries.

“Now [the GCCIA] is running supporting the six countries," says Al-Shehri. "Sometimes they are exchanging energy, but they are exchanging it in kind; it is not an enterprising system.

“The obstacle for fair pricing is that fuel subsidies in different countries are at different levels. Some countries are providing free fuel, some others are pricing it at a very low price, and the UAE and Oman are now considering international fuel prices. So unless there is a clear policy regarding what prices are going to be for other utilities, it will be an obstacle for electricity exchange.”