Riyadh scales back on power projects

27 October 2015

Saudi Arabia may have to turn back to the private sector to ensure progress with new generating capacity

The decision by Saudi Electricity Company (SEC) to shelve the PP9 power plant conversion project is likely to be symptomatic of the pressures facing the kingdom’s investment programme in the era of lower oil prices.

After receiving bids in April this year and selecting a preferred bidder, SEC has decided to cancel the project for the time being. While the reason behind this is unclear, it is likely due to money being required elsewhere.

The cancellation of the power project comes as the Washington-based IMF voiced its concern over the kingdom’s declining fiscal position. The fund forecasts that the kingdom will run significant deficits for the next five years and faces emptying its deep reserves if it does not alter its budget plans.

The IMF’s prediction follows hot on the heels of the news that the Saudi Finance Ministry has ordered government clients to put a freeze on contract awards for the remainder of 2015. While Riyadh has said little publicly about cutting expenditure, it should not come as a surprise if its upcoming budget for the next year reveals a trimming in capital spending.

The government is aware the power sector is one area where investment is vital, with population growth and industrial diversification continuing to drive rampant demand growth for electricity.

SEC is planning to add 47,711MW of generation capacity to the grid by 2024 to meet the expected demand, which will require tens of billions of dollars to finance. The utility has moved away from the independent power project (IPP) model for recent schemes, favouring variations of engineering, procurement and construction (EPC) models.  

However, Riyadh may now have to turn back to the private developer market to ensure it can deliver all of the power projects it requires.

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