Saudi Arabia straining to meet demand

28 March 2010

Electricity demand in the kingdom is rising by about 8 per cent a year, driven by a rapidly expanding population and industrial base

Faced with a large and fast-growing population of 28 million, along with the rapid industrialisation of its Gulf and Red Sea coasts, the government of Saudi Arabia has to work harder than most Arab countries to provide power to its people.

The global economic slowdown may have provided some temporary relief to local utilities, following a modest exodus of expatriate workers, but the longer-term demand forecast remains the same. Overall, Saudi Arabia will require capital expenditure of at least $53bn over the next decade to ensure the kingdom’s lights stay on, according to the latest government predictions.

Investment in new power stations is not just needed to satisfy rising consumption levels, but also to rebuild the reserve margin that has been steadily eroding over the past decade. Saudi Arabia has a cushion of less than 7 per cent of capacity, compared with the industry norm of at least 10-15 per cent. This is to ensure networks can cope with unexpected spikes in demand during the summer months.

Population and electricity demand growth in Saudi Arabia
YearPopulation (m)Electricity demand (GW)
m=million; GW=Giga Watts. Source: Saudi Electricity Company 

Forward planning

Electricity demand in the kingdom is forecast to climb to more than 60,000MW by 2025, from about 38,000MW today. Annual growth in demand is running at about 8 per cent and the kingdom’s power sector regulator, the Electricity & Cogeneration Regulatory Authority (Ecra), says an additional 35,000MW will be needed in the next decade alone to meet projected demand and build up a healthy reserve margin of 15 per cent of generation capacity.

Amer al-Swaha, head of the independent power project (IPP) programme at the kingdom’s main electricity generator, Saudi Electricity Company (SEC), has described the country’s generation reserve as “unacceptably low”. Local networks, particularly in major cities such as Jeddah and the country’s numerous industrial zones, have been prone to power outages in recent years. Saudi Arabia faces an added challenge in that a large number of ageing power and desalination plants are due to be decommissioned over the next 10 years. About 17 per cent of SEC’s power plants are more than 25 years old. Currently, the company owns some 49 generating plants across the country, making it by far the largest utility in the Gulf.

The forward projects programme released by SEC in September 2009 is appropriately ambitious. At least 34 power projects are planned over the next eight years, ranging from 20-30MW extensions to existing plants to new projects in excess of 1,600MW. In all, they will add around 21,065MW of capacity.

Included in this massive expansion programme are five independent power projects (IPPs) worth around $20bn, which are expected to be completed by 2019. According to comments made by SEC officials at MEED’s Middle East Project Finance conference in Bahrain in February, the new plants combined will generate some 8,800MW of power. SEC says it expects its IPP programme eventually to provide up to 30 per cent of the country’s electricity supply.

Data: Planned Power Generation Projects in Saudi Arabia, 2010-19

Ambitious goals

Considerable progress has been made in recent months on tendering for the first of these schemes, which include the Riyadh PP11 plant, as well as plants at Qurayyah, Rabigh, Dheba, Shuqaiq and Ras al-Zour.

About 50 per cent of the financing for the Riyadh plant is expected to come from the private sector, but SEC officials are expecting to develop future IPPs using debt finance for up to 80 per cent of their costs.

This is an ambitious target, given the lack of project financing in the Gulf in the past two years. There is no reason to believe this cannot be achieved, however. The first of the independent projects to be put to the market, the $2.5bn Rabigh IPP, reached financial close in July 2009. It was the first major project financing to take place in the power sector since the onset of the financial crisis.

Meanwhile, it was revealed in early March that SEC plans to award the contract for Riyadh PP11 to a consortium of France’s GDF Suez and the local Al-Jomaih Group. Competition was tough and the bidding contentious. Three groups eventually submitted bids for the project in December, and a team of the Japan’s Marubeni Corporation, Kansai Electric Power Company, also Japanese, and the local Saudi Masader Company for Power & Water submitted a lower bid – its tariff was 28 per cent lower than that of the preferred bidder.

The gas-fired plant will have a capacity of 2,000MW and will use natural gas feedstock with Arabian super light crude as a backup fuel. Its capacity makes it one of the biggest plants in the SEC programme, and will only be rivalled by a 2,520MW plant intended for Ras al-Zour, to be completed by 2020. Located on the Gulf coast, Ras al-Zour is the site of an extensive industrial programme being developed by the Saudi Arabian Mining Company (Maaden), which will include energy-intensive industries such as fertiliser production and aluminium smelting and processing.

Sector reform

The next IPP on the list is the proposed Qurayyah scheme, for which SEC is expected to issue a request for proposals before the summer, once it has signed a power purchase agreement for Riyadh PP11.

The new 2,000MW plant will be located in the Eastern Province, and is scheduled to begin operation in April 2014. Notably, it is intended to be an oil-fired power plant, suggesting Saudi Arabia continues to face doubts about its ability to source new supplies of
natural gas.

SEC will also be pursuing a range of smaller capacity expansion schemes in 2010 as part of its short-term Capital Projects Plan for the year. These include three projects in Hail, Tabuk and Rafha, which together will increase generation capacity by some 290MW.

The first project covers the 110MW first phase expansion of the Hail power plant in the north. SEC is also planning a 120MW extension of the Tabuk plant in the west of the kingdom and will add 60MW of new capacity at the Rafha plant in the east. Later projects include expansions of the Al-Wajh and Tabarjal power plants, all of which are expected to come on line in 2012, with additional capacity at Rabigh and Duba coming
on line soon afterwards.

Besides building up generation capacity, the power sector is also going through a slow process of reform. It is thought by many industry analysts that the break-up of SEC could be imminent, bringing an end to one of the largest virtual power monopolies in the developing world. The government hopes that by unbundling and deregulating its generation, transmission and distribution industries – all of which are dominated by SEC – it will be able to encourage further private investment in the sector and, in the process, lift the burden from the government by sharing risk and costs with private companies.

The process started some time ago. Formed in 2000 following a royal decree, more than a quarter of SEC was later sold off and the
company is now 74 per cent owned by the government, with a further 7 per cent owned by state-owned oil company Saudi Aramco and the remaining 19 per cent held by the Saudi public. It is listed on the Saudi stock exchange (Tadawul).

While progress on liberalising the sector has been slow, an added impetus will be the need to source private funding. The early projects in the IPP scheme seem to have attracted considerable attention, but there are concerns that the appetite of project financiers may wane as there are so many projects due to come to the market in the coming months, not just in Saudi Arabia, but elsewhere in the region. 

SEC was given considerable hope when it managed to secure the financing it needed for the Rabigh IPP project in July 2009. Its ability to secure financing was further confirmed in June when the US and Canadian export credit agencies each agreed to extend a loan worth some $1.1bn over 12 years – funding which SEC says it will use to finance the acquisition of new power assets.

The subsequent decision by the Saudi cabinet to waive dividends owed to the government for the next 10 years – saving the utility more than $500m a year – also gives SEC considerable breathing room, and a space in which to get its house in order. The company has been steadily streamlining its workforce, and intends to reduce its headcount by up to 5,000 workers by 2012.

Opening up

The next stage in the liberalisation process will involve splitting the company’s generation assets into four separate companies, a process that will take up to three years.

The new companies will each oversee a portfolio based on plant types, fuels and locations rather than on a regional basis – this would prevent a body overseeing power generation in the heavily industrialised Eastern Province, for example, from shouldering too much of the burden. Later in the process, the transmission and distribution assets would be placed under the control of a company provisionally called the Saudi Grid Company.

Data: Planned Power Generation Projects in Saudi Arabia, 2010-19

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