Riyadh and Cairo relinquish control of electricity industries

02 October 2008
Egypt and Saudi Arabia are beginning the process of liberalising their electricity industries, but they are a long way from leaving behind the state-dominated structures of the past.

When competition is introduced to any industrial sector, it is expected to inspire innovation, improve efficiency and drive down costs.

So it is no wonder that two of the most populous countries in the Middle East - Saudi Arabia and Egypt - are embarking on programmes to transform their electricity sectors.

Both Cairo and Riyadh have set out plans to liberalise their power markets, leaving behind the cumbersome state-dominated structures that are currently in place.

In Saudi Arabia, the Electricity & Cogeneration Regulatory Authority (Ecra) is responsible for overseeing the transition to an electricity market that is free from state control. It will introduce competition to the sector in three phases up to 2016.

Saudi Electricity Company (SEC), which is responsible for the majority of the country’s generation, transmission and distribution activities, currently monopolises the market.

In the first phase of the transition, which began this year and is scheduled for completion in 2010, SEC’s assets will be unbundled into four generation companies, which will be privatised at a later stage.

Parallel market

A transmission system operator, the Saudi Grid Company, will be established, as will the Saudi Power Procurement Company, a principal buyer for all the electricity produced in the kingdom.

At the same time, a parallel market will be created to allow producers and consumers to enter into bilateral agreements for the purchase and sale of power.

The new companies will operate on a commercial basis, with revenues equalling costs. However, as the tariffs paid by Saudi consumers are too low to cover electricity costs, Ecra will put in place a mechanism to assist them.

“The regulator has recommended the difference between the full cost and what the end user pays be funded by a balancing fund,” says George Sarraf, principal in the energy, chemicals and practice department at US consultant Booz & Company.

“Government support will be required to provide this pool of money as long as the end-user tariffs remain subsidised.”

The consultants have worked with SEC on the unbundling of its generation activities, helping to define the new entities that will be formed.

The plan will be submitted to SEC’s board for approval this month.

In the second phase of the restructuring programme, from 2010 to 2013, large consumers will be able to buy their power from producers on a spot market.

Several distribution companies, which will initially be owned by SEC, will also be established.

The objective of the third and final phase of the plan, scheduled for completion in 2016, is to create full wholesale and retail competition, with hourly or daily bidding for both supply and demand.

This will entail creating independent generation and distribution companies, with the Saudi Grid Company managing the market.

Consumers will have the freedom to choose their service providers. Under this stage, the principal buyer’s role will also be diminished.

To date, little progress has been made towards unbundling SEC’s assets. The priority for the company is to install 35,000MW of new generation capacity over the next nine years.

“Meeting demand is capturing most of SEC’s attention,” says Sarraf. “Most of its energy goes towards that, and with the growth in demand, it is difficult even to do that.”

Although Ecra’s plan sets out a clear time-table for the restructuring process, it is not certain that the transition to a competitive electricity market is achievable in the space of eight years.

“The plan has specific milestones that have been set by the regulator,” says Sarraf. “However, plans and reality often differ.

The liberalisation will happen in some shape, taking into account the external and internal situations.”

Soaring demand

The restructuring of SEC already appears to have been shelved while the company prioritises its strategy for coping with soaring power demand.

High demand could also have an impact on the liberalisation process in a different way.With all of Saudi Arabia’s power supply accounted for domestically, the country lacks spare capacity.

The fact that there is demand for all of the output from producers means there is no room for competition in the market.

“The market is so tight that it is difficult to have immediate competition for end users in this situation,” says Sarraf.

While supply constraints are also part of the Egyptian electricity landscape, they are not as acute and Cairo is moving more quickly towards a free market than Riyadh.

A new electricity law setting out the framework for the liberalised power sector will be submitted to parliament in its next session.

The Egyptian Electric Utility & Consumer Protection Regulatory Agency enlisted the help of an independent consultant to bring the final draft of the legislation, which is currently being reviewed by the cabinet, into line with EU best practice.

The authority has also taken the first step towards encouraging the non-discriminatory trade of electricity through the transmission system.

In June, it introduced tariffs for grid access, with the generating companies making payments to a planned transmission system operator for moving power through the grid.

“Nobody is using these tariffs now,” says Hafez el-Salmawy, managing director of the Egyptian regulator. “But we are preparing them for the market and for any new investors.”

Producers connected to the grid at ultra-high voltage will pay £E0.019 a kilowatt hour. Those using a high-voltage connection will be charged £E0.047 a kWh, and those connected to the transmission network at medium voltage will pay £E0.057.

The Egyptian electricity industry is based on the single-buyer model, with the Egyptian Electricity Transmission Company (EETC) purchasing the power output from all of the country’s generating companies and selling it on to high and medium-voltage users and distributors.

There are currently five generation companies and nine distribution companies operating in the country under the umbrella of the Egyptian Electricity Holding Company (EEHC). Spinning off these individual units will be integral to the liberalisation process.

“Although the different generation and distribution companies are already split legally, they do not really operate as fully commercial com-panies,” says Sarraf.

“A lot of approvals and a big concentration of power is at the level of EEHC [the holding company]. Work needs to be done on the governance of these companies to ensure they become more independent over time.”

The new electricity law will allow producers and consumers to enter into direct bilateral contracts for the trading of power. But the bilateral market will be only the first of four competitive markets to be established.

Balancing market

EETC will act to ensure that supply and demand of electricity are kept in equilibrium, creating a ‘balancing’ energy market.

The transmission company will step in if a producer is unable to fulfil its commitments to a customer, securing additional power from other generating firms.

A market for ancillary services will follow, allowing EETC to buy generating reserves, which are required when actual demand exceeds forecasted demand or when some generating capacity is unexpectedly lost from the system.

Finally, a day-ahead market will be created to facilitate the sale of power at short notice.

In conjunction with the move to free up the electricity sector, Cairo is encouraging private participation in power generation.

Private companies will be able to generate power on a build-own-operate basis, provided they have entered into a bilateral agreement with an end user.

The European Commission has prepared a report on the potential for private investment in the country and El-Salmawy says the authority has already been approached by developers seeking to invest in projects with capacity of up to 3,000MW.

Meanwhile, a World Bank-funded study is examining another avenue for introducing private participation in the Egyptian electricity sector.

“It is looking at public-private partnerships [PPPs] as one of the possible formulas to introduce private investment in an emerging market,” says El-Salmawy.

“PPPs could be used in power generation, distribution or the supply business, but specifically for generation because it is so capital intensive.”

A fully liberalised market is still a long way off in both Saudi Arabia and Egypt. If and when it does take shape, it will necessitate a re-evaluation of the status of independent power projects and independent water and power projects in these countries.

The long-term purchase agreements associated with these schemes, which are gaining popularity in the Gulf, are not compatible with the free-market model.

Key fact


Additional generation capacity in Saudi Arabia to be installed by 2017

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