In order to achieve its objectives of broadening the energy mix and diversifying the economy away from oil dependence, the government is pursuing reform of the energy sector. Vision 2030, the Kingdom’s long-term economic diversification and development programme, foresees a greater role for the private sector in the provision of electricity and water. To these ends, the country has moved towards the elimination of subsidies, thereby establishing market prices for end-users. It has also carried out a gradual privatisation of state assets and has undertaken adjustments to improve the investment environment for foreign companies.
Electricity Generation
Saudi Electricity Company (SEC) was developed under a model that utilised the Kingdom’s hydrocarbons wealth to subsidise utilities consumption. As part of this framework, electricity generation was primarily achieved by burning crude oil, while revenue generated from hydrocarbons was used to keep prices for end-users at a fraction of the market price.
State-owned energy giant Saudi Aramco provided the feedstock, with settlement on a non-cash basis via gradual transfers of accrued payables to a government account. The promise of cheap feedstock – which included natural gas as well as crude oil – made it viable for independent power producers (IPPs) to enter the market, with a single government-owned entity providing the input at one end of the energy generation process, and another government-owned entity as the end user.
SEC has equity in many of these plants, which gives it a share of approximately three-quarters of electricity generation in the Kingdom. After the idea of restructuring and selling off assets belonging to SEC was first put forward in 2009, the Electricity and Cogeneration Regulatory Authority (ECRA) subsequently published the Electricity Industry Restructuring Plan in 2010. This laid out the necessary steps for this process, unbundling the industry’s main activities – generation, transmission and distribution – and moving it from a vertically integrated structure to an environment that encourages greater private sector participation and competition.
In the years since, SEC has undergone periodic restructuring, creating National Grid – a spin-off transmission company – in 2012. In 2014 Energy Trading and New Ventures, another subsidiary, was created to handle SEC’s commercial relations with power producers and customers, with the additional role of establishing links with the strategic partners. Progress towards market liberalisation has been more gradual in the intervening years, though the government began to remove energy subsidies at the end of 2015 in order to shift consumption costs closer to a true reflection of market prices.
In 2017 the government expressed confidence that privatisation could generate $200bn in income across 16 sectors, including utilities.
Investment Strategies
Vision 2030 acknowledged there were a number of ways in which key utility assets could be transferred from government ownership to the private sector. These approaches include privatisation, in which citizens have the option to buy shares in existing companies floated on the Saudi Stock Exchange; and public-private partnerships (PPPs), whereby greenfield projects are developed using private sector finance supported by long-term power and water purchase agreements.
When the large-scale plans for privatisation were first unveiled in 2017 the Saudi government was confident that the privatisation process could generate as much as $200bn in income across 16 different economic sectors, including utilities, in addition to the $100bn it hoped to raise through the flotation of a 5% stake in Saudi Aramco.
In August 2017 the National Centre for Privatisation and PPP (NCP) was established to oversee and facilitate the liberalisation agenda laid out in Vision 2030. The NCP’s mandate includes supporting work towards marketisation performed by government departments, agencies and companies in key sectors including both power and water. In 2018 the NCP was also responsible for coordinating public consultation on the drafting of the Private Sector Participation Law, which is designed to provide the legal foundations for all stakeholders in PPP contracts across multiple sectors.
Privatisation Plans
In April 2018 the Council of Economic and Development Affairs released a delivery plan for the NCP’s privatisation programme, the aim of which is to raise between SR35bn ($9.3bn) and SR40bn ($10.7bn) by selling off five government assets by 2020. These include the sale of the Ras Al Khair desalination and power plant, and the production arm of the Saline Water Conversion Corporation, a state-owned company that operates the bulk of desalination plants in the Kingdom as well as the national water transmission network.
The outcome of these privatisation initiatives is expected to impact the manner in which further government entities are sold off. This could include the long-awaited initial public offering (IPO) of Saudi Aramco. In January 2019 the government announced that the IPO would take place in 2021, in a move which would lay the groundwork for the sale of equity in other public utilities companies.
Independent Producers
The structure and the position of both IPPs and independent water and power providers (IWPPs) is fairly well established in Saudi Arabia. According to the most recent available figures from ECRA, four IPPs had a 10% share of installed power generation capacity in 2017, while three IWPPs contributing an additional 5% of capacity. Furthermore, the four IWPPs operating at the end of 2017 contributed 28% of the total installed water desalination capacity.
In December 2018 Riyadh-based energy investment company ACWA Power and domestic industrial conglomerate Saudi Brothers’ Commercial Company were awarded the contract to develop Rabigh 3, which will be the world’s largest desalination plant when complete. The state-owned Water and Electricity Company has agreed to purchase output of 600,000 cu metres per day at a price of $0.53 per cu metre from the facility, which is being developed under a 25-year, build-own-operate contract.
Challenges
While progress is being made to stimulate greater activity in the utilities market, some obstacles are still in place for the ongoing process of liberalisation. If feedstock prices are to rise to market levels, power stations and desalination plants could also see their costs rise – and so, too, would many of Saudi Arabia’s heavy industries such as those manufacturing petrochemicals and steel. The reform process and resulting feedstock price increases could face opposition from partially state-owned enterprises in these sectors. In addition, some international credit ratings agencies have highlighted that the proposed restructuring of SEC may have negative implications for the utility’s existing debts and credit position.
In June 2018 Standard & Poor’s (S&P) affirmed the “A-” credit rating of SEC, but identified their credit ratings outlook as poor, stating that there was a one-in-three chance of a downgrade in the following one to two years given that structural changes to SEC would lower the likelihood of direct government support and contribute to the utility’s less dominant role in the Kingdom’s energy system. S&P further stated that the removal of subsidies combined with the increase in electricity tariffs could put downward pressure on demand as consumers in the country begin to use power more efficiently.
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