Saudi Electricity Company (SEC) is the largest utility in the Gulf, both by market capitalisation and in terms of its installed power generation capacity. The company was formed in 1999, as the result of a merger of the country’s 10 regional power companies.

“This marked the first step towards the deregulation of the market,” explains Ali Saleh al-Barrak, the company’s chief executive officer (CEO). “SEC began operating in April 2000 with a natural monopoly in generation, transmission and distribution. Now it is one of the largest entities in Saudi Arabia in terms of market capitalisation and shareholder equity.”

Structure

Headquartered in Riyadh, the utility operates as a vertically integrated company. It is 74 per cent government owned, with the rest of its shares held by the private sector. In turn, it owns 50 per cent of Water & Electricity Company, the single off-taker for independent water and power (IWPP) projects in the kingdom.

Last year, SEC hired the US’ McKinsey & Company to prepare a plan to improve efficiency and performance. Its recent financial per_formance highlights the need for change. In the first quarter of 2008, it recorded a loss of SR771m ($205.6m), its largest in at least four years.

SEC has already started implementing the changes recommended in the plan. In March, it issued a tender for its first ever independent power project (IPP), to be located at Rabigh. “The next step is to improve project procurement,” says Al-Barrak.

Instead of tendering engineering, procurement and construction projects individually, SEC has started to bundle them into groups to attract the biggest contractors and increase competition. It has also begun buying materials in bulk. “To save time and cost, we bought 25 generation units from [the US’] GE for $1.5bn last year,” says Al-Barrak.

The company is also working on improving the efficiency of its workforce. The company had a problem with long-term staff who, despite having high salaries, were no longer considered to be productive. Already, almost 800 people have accepted redundancy packages and will be replaced with new employees.

“We are not hiring the same number,” says Al-Barrak. “If we get 800 leaving, we will hire 200 that are more efficient. The cost of the old guys is high. They have been in the company for 15-20 years and their pay is high compared to their productivity.”

Operations

SEC owns assets with a generation capacity of 33,000MW, which accounts for 85 per cent of the country’s total. Its portfolio of projects under way is worth SR40bn and another SR30bn worth of projects are being tendered.

With demand for power in Saudi Arabia growing at 7-8 per cent a year, SEC cannot afford to slow down. It estimates that 35,000MW of new capacity will be required over the next 10 years to cover demand growth and build up 15 per cent reserves. Some $53bn in capital expenditure will be needed for generation, transmission and distribution projects.

“The main driver is to maintain adequate power supply to consumers, to sustain the current level of industrialisation and boost the economy,” says Al-Barrak.

The company is the largest shareholder in the GCC interconnection project, holding a 35 per cent stake. Together with the Egyptian Electricity Holding Company, it also financed a study into an interconnection between the kingdom and Egypt.

Domestically, 8,000MW of its own new capacity is under construction and it is a shareholder in the Shoaiba and Shuqaiq IWPPs. Its first IPP, at Rabigh will provide 1,200MW of new capacity by 2013. This will be followed by the 2,000MW Riyadh P11 IPP in 2014 and a second 2,000MW IPP in Qurayah by 2015.

Ambitions

SEC will not stop at three IPPs. At least 30 per cent of all capacity introduced over the next 10 years will built by private developers. “SEC will continue building at some locations where we are expanding a power plant or at locations that are not attractive for IPPs,” says Al-Barrak. “If we can achieve more than 30 per cent, we will definitely do it. But from what we see in different parts of the world, IPPs are not taking 100 per cent of the market.”

Already, two more IPPs, to be located in the south and northwest of the country, are being studied.

Eventually, SEC plans to encourage investors to sell part of their IPPs in initial public offerings (IPOs). The Riyadh plant will be the first to go through the process. “We are planning to include in the request for proposals that developers should take into consideration that they should make part of their investment available for an IPO,” says Al-Barrak.

The proportion of the IPP to be sold off has yet to be decided.

As part of the government’s programme to move to an open electricity market, SEC will be split into four generation companies, which will eventually be sold off to the private sector. For this reason, IPPs will be developed on a build-own-operate basis, rather than within a build-operate-transfer framework. “We have no intention of transferring any assets,” says Al-Barrak. “SEC in the future will go out of generation.”

MEED assessment

SEC, like other utilities in the region before it, has recognised the need for greater private sector participation in power generation. Thanks to its IPP programme, it will be in a position to invest more of its funds in improving transmission and distribution networks in the kingdom.

However, in the context of market libera_lisation, long-term power-purchase agree-ments between SEC and developers may be a hindrance. Saudi Arabia’s low electricity tariffs, which are not reflective of the cost of production, are also a burden on the restruc_turing process.

Shortages in contractors and rising materials costs could also negatively impact SEC’s plans. Its Rabigh IPP is on the Gulf market at the same time as five other major power projects and is likely to face significant competition.