Investment is being poured into expansions and capacity upgrades across the sector, with around SR500bn ($133.25bn) to flow into the electricity and water segments in the coming decade. Saudi Arabia has ambitious plans to build up renewable electricity generation capacity, in particular solar power, to address rapidly rising energy consumption. The Kingdom is investing in water desalination plants and looking at new technologies, like solar desalination, to improve efficiency. Private investment continues to flow in via independent power projects (IPPs), and authorities are working to restructure and liberalise the electricity market with a view to eventual privatisation. Other initiatives include construction of a regional electricity grid that will increase efficiency and offer long-term export options.
Apart from a few small off-grid pilot renewables projects, electricity generation is fuelled by domestic oil and gas. The main electricity generator in the Kingdom is Saudi Electric Company (SEC), though state-backed desalination firm Saline Water Conversion Corporation (SWCC) and a growing number of IPPs provide electricity for the national grid (see analysis). The government is the main shareholder in SEC, with a 74.3% stake, while national oil company Saudi Aramco owns a 6.9% share in the company, and the remainder is floated on the Kingdom’s stock market.
According to SEC’s 2011 annual report, its actual electricity generation capacity was 41,924 MW in 2011, up from 39,973 MW in 2010. Total available capacity stood at 51,148 MW. SEC is also responsible for transmission and distribution and the combined length of its transmission and distribution network lines stood at 49,675 km and 409,289 km, respectively, in 2011. SWCC is the Kingdom’s second major power supplier behind SEC, currently producing around 5000 MW, though this is set to rise substantially in coming years.
Per capita energy consumption rates in the Kingdom are among the highest in the world, according to BP’s figures, alongside the US, Canada and Norway. This is partly due to the fact that electricity is heavily subsidised and consequently very cheap – average electricity prices at year-end 2011 stood at SR0.125 ($0.03) per KWh – as well as the high demand for air-conditioning, particularly during the summer. Other factors such as the construction of economic cities and ongoing industrialisation are driving up power consumption. Utilities account for an estimated 40% of total primary energy consumption in Saudi Arabia, reaching 127.8m tonnes of oil equivalent (toe) in 2011, according to the June 2012 BP “Statistical Review of World Energy”, which was 7.4% up on 2010. Consumption has grown rapidly over the medium term at a compound annual growth rate of 6.6% between 2006 and 2011. “The huge growth on energy demand will not only require new sources to generate this energy, but also a sustained effort towards optimising the current energy network with higher levels of automation and efficiency,” said Christophe Campagne, country president of Schneider Electric.
Despite Saudi Arabia’s hydrocarbons reserves, including the largest oil reserves in the world, rising energy consumption is a concern for to the country’s economic future. A December 2011 report by British think-tank Chatham House argued that based on recent energy trends, the country could start to record “intractable” fiscal and current account deficits by 2022 (based on an average oil price of $77), and become a net oil importer by 2038. Electricity plays an important role in this and poses a significant threat to government finances. In October 2010 governor of the Electricity and Co-generation Regulatory Authority, Abdullah Al Shehri, warned that government subsidies would become “huge” if electricity prices were kept low, citing subsidies of around SR50bn ($13.3bn).
The authorities are taking a number of steps to address high energy consumption and electricity use in particular. For example, the country started a National Energy Efficiency Programme in 2002, which included the launch of energy efficiency codes for buildings and the development of such standards for household products, as well as efficiency audits of some facilities. In a headline-grabbing move, in June 2011 SEC issued a report recommending the curtailing of government working hours and shopping centre opening times to target consumption. Research is also being done into how to improve the efficiency of use, such as at the King Abdullah Petroleum Studies and Research Centre (KAPSARC), which carries out a number of energy efficiency research programmes.
Other measures include imposition in 2010 of a mandatory minimum power factor of 0.85 for businesses. If companies fail to meet this, the SEC can refuse to increase supply to them, such as in the event that they expand or construct new buildings.
Industry players say that this measure has had a major impact. “The power factor regulations have been a game changer and are a sign that the authorities are serious about energy efficiency,” Ahmed Al Rashoud, the vice-president for corporate strategy, business development and energy management systems of Schneider Electric Saudi Arabia, told OBG. Al Rashoud estimates the current average power factor to be in the range of between 0.75 and 0.80, underlining the ambitious nature of the target. “Thus, 0.85 is achievable, though it requires investment.”
Interest in energy efficiency solutions has also increased as a consequence. “The market has picked up quickly over the past three years,” Al Rashoud said. “In particular, we have seen many enquiries for services like energy audits since 2010, when a lot of major initiatives, such as the King Abdullah City for Atomic and Renewable Energy (KACARE)and new Electricity and Co-generation Authority and SEC regulations on firms’ power factors, were launched. Energy is cheap here and making a return on investment for energy efficiency is slower than it is in Europe, for example, taking perhaps 10 years rather than five or less as elsewhere, but it still makes a difference.”
Nevertheless, while demand for energy efficiency is growing, pricing will remain a determining factor in tackling consumption. “Energy costs need to be revised upwards,” said Al Rashoud. “There will not be large-scale progress in addressing the energy dilemma without revising tariffs. If the price is too low, there will always be people who will waste energy. One way to address this is to introduce various level of tariffs, or perhaps incentives for lower consumption. That way the price will be high for high consumers and remain low for energy-conscious ones.” The authorities are moving to gradually raise tariffs, with price hikes for non-residential customers announced in June 2010. However, doing so for consumers is a sensitive matter.
Electricity consumption is heavily seasonal and can increase by up to half in summer. This is due to the increased use of air conditioning that in peak periods makes up around 70% of consumption from buildings and around 52% of total consumption, according to Chatham House. High demand in the summer can lead to power outages; such as in summer 2009 when the authorities rationed electricity to industrial customers in Jeddah, cutting it for three-hour periods at a time.
With consumption rising, the government believes the country will require around SR300bn ($80bn) of investment in electricity generation over the coming decade, of which it expects private investment to make up around one-third. SEC intends to raise its generation capacity by 30,000 MW by 2018 and envisages SR219.2bn ($58.4bn) of capital expenditure between 2012 and 2016, or SR44bn ($11.7bn) annually. This compares to around SR30bn ($8bn) over the previous three years. In 2011 there were 16,600-MWworth of power projects either under construction or out for tender. Among some of the biggest projects under way are: the 2600-MW, $4bn Rabigh 6 power plant expansion, being built by SEC under an engineering, procurement and construction (EPC) contract in Makkah province and due for completion in 2014; the 2500-MW Yanbu power and desalination project being built by SWCC under an EPC contract due for completion in the last quarter of 2014; the 2400-MW Ras Al Zour electricity and desalination plant also being built by the SWCC under an EPC at a cost of $5bn and to be completed in 2014; and the 2400-MW Jazan power plant, being built at a cost of $2.5bn under a design-build-operate (DBO) contract and due to come on-line in 2013. Other major projects currently under construction include the 1400-MW Shuaibah 2 combined cycle plant to be finished in 2014 and the 2000-MW Al Qurrayah project scheduled to come on-line in 2015.
SEC is also upgrading transmission and distribution infrastructure. In August 2012 the firm announced it had awarded three contracts of around SR700m ($186.5m) for the construction of two substations in the Jeddah and Medina areas, and for the extension of cables to plants in Riyadh. In November 2011 the firm awarded three contracts worth SR546m ($145.5m) for the construction of a transformer station to supply a chemical factory in Jubail, as well as power lines between Dammam and Riyadh, and other lines in Safaniyah.
To tackle the threat of rising consumption, the government is also looking to develop a large renewable energy capability; renewables also make shorter-term economic sense for the Kingdom. Although renewable electricity generation is expensive compared to oil and gas available to SEC at subsidised prices, at current oil prices it would be cheaper for the Kingdom as a whole to use renewables to free up hydrocarbons to sell on the international market, and replace them domestically with renewables.
Several small, off-grid renewable facilities have already been built in the Kingdom. SEC works with Aramco and Solar Frontier to operate a 500-KW off-grid solar plant on Farasan Island that is used to collect data. A 3.5-MW solar plant built in 2011 provides electricity for KAPSARC and a 10-MW plant completed in 2012 supplies power to one of Saudi Aramco’s offices. However, plans to make solar a major component of the national electricity system will see these initiatives dwarfed in size.
The Kingdom’s plans will see around SR375bnaim of sourcing around half of total electricity supply, or 62,000 MW, from the segment by 2032. The bulk of this – around 41,000MW – will be solar power, of which 16,000 MW will be provided by photovoltaic panels and the remaining 25,000 MW will use concentrated solar power technology. A further 21,000 MW will come from other renewables such as wind and geothermal power and from nuclear energy.
Overseeing such plans is KACARE, set up in 2010. The first two phases of its renewables programme, running until 2014, will see the installation of 6650 MW of renewable power, consisting of 4500 MW of solar capacity (2400 MW produced by photovoltaic panels and 2100 MW by concentrated solar), 1700 MW of wind and 450 MW from other renewables. “KACARE is on the right track,” Al Rashoud said. “They completed their feasibility studies and are working on an action plan. They are also currently preparing their procurement plan, which is big and will get the market moving.”
The first two tenders for solar power will be based on power purchase agreements (PPAs). Under these, the government agrees to buy a set amount of electricity over a fixed period for an agreed price from a given operator, according to a KACARE presentation in May 2012. After that KACARE will consider – based on factors such as whether plants under the first tenders were completed on time – as to whether to move fully to a feed-in tariff (FIT)-based system. Here, the authorities will set a general tariff for solar energy and allow private operators to set up plants to sell to the grid as they see fit or to delay FIT and launch a third tender round. An intermediate option of using an FIT-based system for smaller projects only will also be considered. If launched, the FIT programme will be reviewed every three years to examine issues such as efficiency and whether the programme is under- or over-subscribed.
Saudi Arabia also has ambitious plans for atomic energy, though details on its nuclear power programme have yet to be finalised. According to KACARE atomic energy team leader Mohammed Garwan, speaking in September 2012, authorities aim to build 16 reactors by 2032 with a combined capacity of 17.6 GW. Some estimates put the total cost of the programme around $100bn. Garwan said that the first plant should be on-line by 2022, with construction to begin in 2017.
The programme is already advancing; for example in January 2012 the Kingdom signed a nuclear energy cooperation agreement with China, following an agreement in November 2011 with South Korea to collaborate on nuclear research and development, and similar previous agreements with France and Argentina. In September 2012 KACARE appointed advisers for the construction of the first four plants and announced plans for initial tenders for the initiative in 2013.
Saudi Arabia is also working on a regional electricity grid, the GCC Interconnection Project, which is to cost around $2bn. The GCC established the Interconnection Authority (GCCIA) – in which Saudi Arabia is the largest shareholder, with a stake of 31.6% – in 2001, before launching a three-phase implementation plan three years later. The first phase saw the interconnection of Bahrain, Kuwait, Saudi Arabia and Qatar in 2009. The second phase will see the interconnection of the electricity networks in the UAE and in Oman, which according to the general manager of the GCCIA, Adnan Al Mohaisen, speaking in April 2012, said would take place “soon”. The final stage will see the north and south grids joined together.
The project will strengthen regional electricity provision in many ways, such as by allowing states to take power from each other in the event of power failures, lowering each country’s required level of reserves, balancing out fluctuations in demand between states and allowing for installation of larger power plants in individual states. The project could also foster competition between generators in different GCC countries and lead to the eventual connection to other regional grids. “Saudi has the biggest power source, making it a very important partner in the GCC grid project, a political regional project and a good yardstick for the feasibility of further trans-GCC projects, such as the question of the single currency,” said Talal Idriss, CEO of Bahra Cables. “Sharing power facilities is a good starting point to see what other things can be shared multilaterally.”
This and other linkages could see the Kingdom become a significant net electricity exporter. “Saudi Arabia is now interconnected with Egypt, which links in to North Africa,” Waheeb Linjawi, group president and managing director of Saudi Cables Company, told OBG. “Once linkages are properly established, there will be power connection between Saudi Arabia, North Africa and eventually Europe. This presents a real opportunity due to the time difference. For example, at peak time in Saudi when demand is highest, it is early morning in Morocco, meaning they can sell electricity over to match the spike in demand, and vice versa.”
As with electricity, water consumption in Saudi Arabia is high. However, unlike energy, water is a scarce resource to begin with in the Kingdom, which is ranked eighth in UK-based risk analysis firm Maplecroft’s 2012 Water Stress Index, and categorised by the UN as a country facing water scarcity. The Kingdom receives around 70 mm of rainfall annually and, according to National Water Company (NWC), 88% of the Saudi Arabia’s groundwater reserves are not renewable.
Daily total consumption stands at about 7m litres, and per capita consumption at around 250 litres per day. This is around 91% higher than the global average, according to the SWCC, ranking the Kingdom as one of the heaviest per person users in the world, along with the US and Canada. Furthermore, the government estimates that demand for water is growing 7-8% annually. Given high demand and low freshwater resources, around 70% of drinking water is supplied by seawater desalination (see analysis). To help address rising demand, SR150bn-200bn ($40bn-53.3bn) is to be invested in water utilities under the government’s 10-year plan for the sector. NWC is investing around $66bn in water and wastewater initiatives between 2012 and 2020, around half of which ($30bn) will be capital expenditure on new infrastructure projects.
At the same time, the authorities are also looking at ways to limit consumption. Since 2008 the government has been steadily reducing agricultural subsidies to relieve the strain farming puts on the Kingdom’s aquifers. NWC is also trying to encourage customers to limit consumption. Each of the firm’s business units has an awareness department that distributes information on water conservation and works with businesses to examine patterns of water usage and identify ways in which they can reduce them. It also sends representatives into schools to educate children on the importance of water conservation, and is undertaking joint awareness initiatives with private firms, such as a campaign with Unilever called the “four-minute shower”, which Unilever will promote via its packaging for products like soap. NWC also says it levies fines of SR200 ($53.30) per infraction on households deemed to be severely wasting water, and offers domestic consumers conservation kits that can reduce consumption by around 30-40%. A large share of NWC’s capital expenditures will go to wastewater projects, particularly on treatment to effectively recycle water, reducing pressure on resources. Treated water reuse capacity is set to grow enormously, from 260,000 cu metres per day in 2011 to 2.2m in 2016. NWC is also working to develop treatment plants powered by renewable energy However, the low price of water consumption is likely to hinder efforts to limit consumption. Tariffs in the Kingdom are among the lowest in the world, thanks to heavy subsidies at about 90-95% of the cost of resource supply. As with other utilities, raising tariffs is a politically sensitive issue, and a royal decree currently prohibits an increase in prices, though the NWC says it is lobbying the government for change. Wastage accounts for around 20% of public water consumption, or around 1m litres daily; the government aims to reduce it to 5%.
The sector is set to see rapidly expanding investment in water and electricity infrastructure, as well as a dramatic shift toward renewables in electricity generation. The sector will see more private investment via IPPs, as well as via privatised utilities, while construction and engineering contracts will make for plenty of opportunity for such firms for years to come.
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