With power consumption increasing by an average of 7 per cent a year and water usage rising by about 3 per cent, Saudi Arabia faces an unrelenting challenge to add new power generation and desalination capacity.

In contrast to other Gulf states, the kingdom expects no let-up in utility demand growth on the back of the global economic slowdown and a mass exodus of expatriate workers.

Electricity demand is forecast to climb to more than 60,000MW by 2025, from about 38,000MW today. Meanwhile, demand for desalinated water is expected to nearly double from the current level of 800 million gallons a day (g/d).

These projections are largely based on an expansion of the local population of almost 28 million, 61 per cent of whom are under the age of 30. Population growth is currently just under 2 per cent a year.

Supply shortages

Investment in new power stations is needed not just to satisfy growing demand, but also to rebuild the generation reserve that has been steadily eroded over the past decade to less than 7 per cent of total generating capacity, compared with the industry norm of at least 10-15 per cent.

“The generation reserve is unacceptably low,” says Amer al-Swaha, head of the independent power project (IPP) programme at the kingdom’s main electricity generator, Saudi Electricity Company (SEC). “We are vulnerable to risks. At any time, there could be a technical fault or problem in a rotating machine, and we do not want to be in this position. We want to have a more reliable system.”

In the summer of 2006, the country experienced power outages as peak demand exceeded supply, and there have also been shortages in the water sector. Last year, Saline Water Conversion Corporation (SWCC), the body responsible for water provision in the kingdom, had to draft in emergency assistance in the form of floating desalination plants to bolster supplies to Jeddah.

Over the past six months, Jeddah has been receiving 50,000 cubic metres a day (cm/d) of water from two barge-mounted reverse osmosis plants moored at Shuaibah on the kingdom’s west coast.

The situation in the city has improved since early February, following the start of production at the Shuaibah independent power and water project (IWPP), which is contributing an additional 200,000 cm/d of drinking water.

A further 150,000 cm/d of capacity is also due to come on stream this month at the original Shuaibah desalination plant, which has been extended. As a result, the barges have been towed round to Shuqaiq on Saudi Arabia’s Red Sea coast.

“The Shuqaiq plant is not due on line, according to the contract, until the end of 2010, with full commercial operation in 2011,” says Paddy Padmanathan, chief executive officer (CEO) of Acwa Power International, the majority shareholder in Bouwarge, the company that arranged the emergency water supplies for SWCC. “So they are expecting the next crisis down there this summer and the next.”

With supply and demand so tightly balanced, Saudi Arabia has no choice but to push ahead with a massive capacity-building programme, in spite of the currently unfavourable economic climate.

Projects to add 14,560MW of power capacity and 555 million g/d of water are being planned, in addition to schemes that are already under construction or have recently been awarded.

But contrary to the expectations voiced when the credit crisis first manifested itself in the Middle East late last year, banks are proving reluctant to take on large, long-term financing deals even for government-backed infrastructure projects. As a result, developers are struggling to secure funding for power and water projects.

Liquidity issues

In 2008, the $3.8bn Ras Laffan C IWPP in Qatar was the only scheme to reach financial close. Also last year, the Power & Water Utility Company for Jubail & Yanbu (Marafiq) pushed back the December bid deadline for its 1,700MW and 150,000 cm/d of water Yanbu IWPP to March 2009, in response to the change in the financial environment.

The lack of activity in the project finance markets has raised concerns over the prospects for securing credit for other power and water schemes in the region, prompting SEC to examine alternative financing options to ensure that its plans can move ahead on schedule.

SEC has three IPPs planned to come on line by 2014, at Rabigh, Riyadh and Qurayyah, which will have a combined generation cap-acity of 5,200MW. The company estimates that the three plants will require an overall investment of SR21bn.

Bids for the 1,200MW Rabigh plant were submitted in December by consortiums of Acwa Power International and Korea Electric Power Corporation, and GDF Suez Energy International with Saudi Oger.

The contract will be awarded on a build-own-operate basis, and a 20-year power-purchase agreement is expected to be signed with the winning party by mid-March. Financial close is targeted for June.

“Everybody knows there is a crisis, but we have received bids for our first project – Rabigh – and we received them during this crisis,” says Al-Swaha. “So we are optimistic that we will continue receiving bids for our projects.

“These are infrastructure projects. The company is a quasi-government entity and the Saudi economy and the Saudi banks are quite robust in the present situation, so we do not see that there is a need to change our plans.

“Having said that, we should not shut our eyes to the situation, and when we prepare our requests for proposals, we should consider different strategies, in case there are any difficulties faced by the financing parties. But so far, we have not made any major changes to our plan.”

One option being considered is that the Saudi government could take an equity stake in projects via the Public Investment Fund (PIF), thereby reducing the amount of finance needed to be found through the debt markets.

The PIF was set up in 1971 to provide financing for commercial projects deemed to be important to the national economy, but which the private sector lacked the ability to undertake alone because of insufficient capital or experience.

SEC is also considering the idea of raising finance for the Riyadh IPP (PP11), through an initial public offering. The prequalification deadline for the project was the end of January. The plant will have a capacity of 2,000MW of power and initial commercial operations are planned for April 2012. The request for proposals for PP11 will be released this year.

The request for proposals for the Qurayyah project, which will also have a capacity of 2000MW, is expected in the first quarter of 2010. “The Qurayyah plant is only required from 2014, so we have some time and do not need to pinpoint a date yet,” says Al-Swaha, adding that by then the liquidity situation should have improved.

Given the current difficulties in raising project finance, SEC has still to decide whether to tender a further 9,360MW of power generation capacity as three large IPPs or as nine smaller projects. Sites have been selected for the plants at Daba, Shuqaiq and Ras al-Zour, and contracts for the projects are due to be awarded between 2010 and 2017.The facilities are scheduled to start up between 2014 and 2021, after the first three IPPs have come on line.

The company will gain some relief from the news that emerged in February that the consortium named as the preferred bidder for the $5.5bn Ras al-Zour IWPP has finally secured financing for the project.However, this was only made possible by reducing Malaysian developer Malakoff’s equity stake in the deal from 20 per cent to 5 per cent. Japan’s Sumitomo Corporation and the local Al-Jomaih are providing additional equity to make up the shortfall.

The project has secured $1.2bn in funding from export credit agency Japan Bank for International Co-operation, along with $1.2bn from Saudi banks, and a further $500m from international banks.

New direction

The Water & Electricity Company (WEC), the SWCC and SEC joint venture that is managing the tender, still has to approve the change and proceed with the signing of the power and water purchase agreement. The Ras al-Zour plant is scheduled to start up in 2012, and will have a capacity of about 1,000MW of power and 1 million cm/d of water.

Faced with such strong demand growth and with several ageing power and desalination plants due to be decommissioned over the next 10 years, Riyadh cannot afford to slow down its capacity-building programme despite the global financial turmoil.

To ensure developers remain interested in participating in its power and water projects, the kingdom will have to demonstrate a degree of flexibility in its project specifications. SEC’s readiness to consider different financing solutions is an important step in that direction, and will likely prove critical to the success of its independent power programmes.