Saudi Arabia to remain key power market

17 January 2013

Despite a drop in project activity in 2012, rapid demographic and economic growth will ensure Saudi Arabia remains the region’s biggest power market in 2013 and beyond

The selection of the local Acwa Power as the preferred bidder on the estimated $2.5bn Rabigh 2 power project has reinforced the view within the region’s power sector that Saudi Arabia will remain the key market for contractors in 2013.

As in other areas of the kingdom’s projects market, the power sector experienced a slowdown in contract awards in 2012, with the total value of power deals falling to $9.5bn, from $11.2bn in 2011. However, with more than $61bn-worth of power projects currently in the design and bidding stages, the market is set to pick up over the next 12 months.

Saudi Electricity Company (SEC) selected Acwa Power for the Rabigh deal on 13 January, with the developer planning to sign financing for the 1,700MW independent power project (IPP) in March. The scheme forms part of the kingdom’s efforts to provide an estimated 31,000MW of additional capacity by 2020 to meet rising demand for electricity.

Government clients

Several government clients, including state oil major Saudi Aramco, are set to join the race to meet the expected demand in the coming years. Riyadh is also moving forward with plans to develop large-scale renewable and nuclear facilities to complement the country’s existing power capacity.

Saudi Arabia’s power sector is the biggest in the region, with an installed generating capacity of 57,440MW at the end of 2011. With the kingdom set to continue experiencing rapid population and economic growth over the next decade, peak demand is forecast to reach 87,760MW by 2021. Demand is being driven by rising consumption among domestic users and industrial projects.

We expect the demand to continue to grow for some time. Demand for electricity is unprecedented

Samer Arafa, Arafa Consult

“There is a lot of investment in domestic infrastructure – 500,000 residential units, factories, hospitals, street lighting, and the demand is growing,” says Samer Arafa, owner and director at Riyadh-based Arafa Consult. “But there is also industrial demand – from factories and the economic cities. We expect the demand to continue to grow for some time. Demand for electricity is unprecedented, and same goes for water.”

Saudi Arabia’s power sector is set to offer major opportunities for contractors in the coming years, with a wide range of renewable and nuclear schemes planned in addition to standard power projects. The largest client in the power sector is state utility SEC, which operates more than 50 plants.

In its 2011 annual report, SEC set out plans to spend SR452bn ($120bn) in the 10 years to 2021 on capital projects to boost power generation and transmission capacity throughout the kingdom. 

2012 power awards in Saudi Arabia

In 2012, SEC awarded construction contracts worth a combined $7.2bn, 78 per cent more than the $1.6bn awarded by the Saline Water Conversion Corporation (SWCC), the second-largest client for power projects in the kingdom.

By mid-2012, Saudi Arabia had an estimated 23,500MW of new capacity under construction, with about 14,000MW of this under SEC’s engineering, procurement and construction (EPC) programme.

The two largest contracts awarded by SEC in 2012 were for the Riyadh PP12 (power plant 12) and the Jeddah South thermal power plant, worth a combined $4.5bn. In May, the utility awarded an estimated $1.25bn deal to the local Arabian Bemco to build PP12 near Riyadh. Bemco will build the PP12 project at a site located 100 kilometres west of Riyadh and adjacent to the PP11 combined-cycle power plant, which is now under construction and will include the construction of a 380kV substation. It is scheduled be completed by 2015.

About 37 per cent of the kingdom’s oil production is consumed locally. The majority of that is for electricity

Samer Arafa, Arafa Consult

In October, SEC awarded the largest power construction deal of the year, worth $3.2bn, to South Korea’s Hyundai Heavy Industries (HHI) to build the 2,640MW oil-fired Jeddah South thermal power plant. The facility will comprise four conventional thermal generating units, with a minimum capacity of 600MW each. The contractor will also be responsible for constructing a 380kV substation.

SEC currently has several power schemes in various stages of the tendering process. In addition to the Rabigh 2 scheme, the company is planning to develop a large thermal power station at Shuqaiq on Saudi Arabia’s western coast. The project will be similar in size to the Jeddah South project, which will have a capacity of 2,400MW and bidders were asked to submit proposals for projects up to 2,640MW.

SEC is also planning to convert several simple-cycle, gas-fired power plants into combined-cycle power stations, with a feasibility study currently under way, according to sources in the kingdom.

Improving energy efficiency

About 66 per cent of SEC’s current power generation is gas-fired, but only 14 per cent uses combined-cycle technology. As opposed to simple-cycle power plants, which use gas turbine for power generation, combined-power plants take the exhaust heat from the turbine to produce steam for the generation of additional power through steam turbines. This technology can improve efficiency by up to 50 per cent for high-powered gas turbines.

“Improving efficiency is important because whatever you save you can sell,” said Michael Suess, chief executive officer of Siemen’s energy division. “Gas and oil are precious resources in the Middle East that need to be used as efficiently as possible.”

SEC is not the only client in the kingdom’s growing power sector. In addition to an increase in domestic demand, industrial demand is rising sharply as Riyadh presses ahead with the diversification of its economy.

“SEC is the main provider, but there are still other big utilities playing a major role. Aramco is more involved in the independent power project (IPP) spree in Saudi Arabia, and it is developing some large schemes,” says Arafa. “You also have the SWCC, which focuses on combined power and water projects.”

Saudi Aramco is becoming an increasingly important client in the kingdom’s power sector. It is currently developing and planning several major projects to boost the kingdom’s refining and industrial capacity. In 2012, Aramco awarded the Tihama Power Generation Company, a joint venture of UK/French IP-GDF Suez and the local Saudi Oger, to expand three independent power and steam projects, adding a further 532MW in power capacity and 2,210 gigajoules an hour (GJ/h) of steam.

Some renewables schemes have been announced, but as of yet we haven’t seen much action

Riyadh-based consultant

In addition to this, Saudi Aramco is planning three greenfield gas-fired power and steam plants. In December, the oil major received bids for the schemes, which involves the construction of three cogeneration plants at Abqaia, Hawiyah and Ras Tanura using the IPP model. In total, they will provide 770MW of power and 2.95 million pounds an hour in steam output. The bids are currently being reviewed by Aramco and UK lender HSBC, which is advising the oil firm on the projects.

One of Aramco’s largest planned power projects is the estimated $2bn power plant for Jizan Economic City, which will be located next to its $7bn Jizan refinery in the southwest of the kingdom.

The Jizan power project was originally to be developed by SEC, but Aramco took over responsibility for the scheme in early 2012. The project will be an integrated gasification combined-cycle power plant, which will have a capacity of 2,400MW and use technology provided by the UK/Dutch Shell Group.

Aramco is expected to approve the power plant by the end of January, with prequalification scheduled to take place during February and March. The EPC tenders are expected to be released in the second quarter of 2013.

SWCC is another key client in Saudi Arabia’s power and water sector. In 2012, it awarded the second-largest value of power contracts in the kingdom, including the estimated $1.5bn deal for the 3,100MW power component of the Yanbu 3 scheme. A consortium led by South Korea’s Samsung Engineering won the deal in December.

Alternative energy in Saudi Arabia

Along with plans to build conventional power capacity, Saudi Arabia is also looking to develop nuclear and renewable sources of energy as it seeks to reduce domestic usage of its oil reserves.

“About 37 per cent of the kingdom’s oil production is consumed locally. The majority of that is for electricity and water,” says Arafa.

With crude prices currently more than $100 a barrel, burning oil to fuel power plants is costing Saudi Arabia billions of dollars in lost revenue.

Riyadh passed a royal decree in 2010 to establish the King Abdullah City for Atomic and Renewable Energy (KA-Care) to develop a renewables and nuclear sector to help meet rising electricity demand.

Energy targets in Saudi Arabia

KA-Care plans for half of Saudi Arabia’s total power demand in 2032 to be met by alternative energy, with solar accounting for 41,000MW and nuclear power for 21,000MW.

The ambitious targets will offer lucrative opportunities for regional and international power companies over the next two decades. The kingdom is planning to invest $109bn to meet its 2032 solar power targets.

Over the coming year, KA-Care is preparing to invite bids to develop 2,850MW of clean energy as IPPs. About 1,100MW will be developed as photovoltaic solar energy, 900MW as concentrated solar power, 650MW as wind projects; 200MW will come from other sources.

Despite KA-Care’s long-term ambitions, Mecca is leading the kingdom’s most advanced solar scheme. On 5 January, it received bids from two developers to build a 100MW solar power plant. The lowest bid was submitted by Acwa Power, with the UK’s EDF Energy and the local Al-Gihaz submitting the other bid.

Although the Mecca scheme is progressing, there is scepticism within the kingdom’s power sector about whether there will be significant investment in renewable schemes in the medium term.

“Some renewables schemes have been announced, but as of yet we haven’t seen much action. We see SEC tendering major projects several times a year, but we haven’t seen that on the side of renewables,” says a Riyadh-based energy consultant. But assistance from Riyadh is important to enable the schemes to make progress, he adds.

“Without subsidy and without support, [renewable energy] cannot compete with the cost of burning oil. There has to be some support to ensure it grows healthily and contributes to the country’s power sector,” he says.

In September 2012, KA-Care appointed a group of advisers to work on plans to develop a 17GW nuclear programme by 2032. The advisory group includes US management consultancy Oliver Wyman, France’s BNP Paribas and the local Riyad Bank. The group is currently advising KA-Care on how to proceed with the ambitious plans, which may involve constructing up to 16 reactors across the kingdom.

Promising outlook for Saudi Arabia’s power sector

Despite a drop in activity across Saudi Arabia’s projects sector in 2012, rapid demographic and economic growth will ensure that the kingdom remains the region’s key power market in 2013 and beyond.

A combination of sharp demand growth and a goal of reducing domestic consumption of the country’s oil reserves has forced Riyadh to adapt its approach to provide electricity for its people and industries.

In addition to turning to trusted clients such as Aramco to develop new major power schemes, the government is pushing ahead with schemes to diversify sources of power generation. The multi-faceted nature of its energy plans will ensure that developers and contractors from across the globe will keep a close eye on Saudi Arabia’s power market.

Key fact

In 2012, Saudi Arabia awarded power contracts totalling $9.5bn, down from $11.2bn in 2011

Source: MEED

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