The water and power sector will benefit from a $37.5bn injection of funding from the Saudi government in 2014, as ministers pledge to push ahead with plans to restructure the largely state-owned Saudi Electricity Company (SEC) and boost supplies of water. Power projects are set to receive investment of $26.5bn, with $9bn targeted at water, local media reported in early 2014. The projects will be partly funded through an interest-free government loan of $18bn, according to Abdul Rahman Al Hussein, the minister of water and electricity, with the remainder of the funding coming from banks and private investors. Saudi Arabia’s utility companies are facing increasing consumer demand from a growing population and the challenges of servicing new housing and industrial developments that have resulted from large-scale government investment in infrastructure projects in recent years.

ELECTRICITY: By far the biggest generator of electricity in Saudi Arabia is SEC, which accounts for 85% of public supply. In addition, there are a small number of independent power providers (IPPs), and the country also receives some of its electricity from the Saline Water Conversion Corporation (SWCC).

SEC is 74.3% government-owned and the national oil producer, the Saudi Arabian Oil Company ( Saudi Aramco), has a 6.9% stake, while the rest of the shares are floated on the Kingdom’s stock market. In its 2012 annual report, published in 2013, SEC reported an 8% increase in demand for electricity. The report also stated that its total available generation capacity increased by 4.87% to 54 GW and its actual generation capacity rose 2.8% to 43 GW.

SWCC operates six dual-purpose, multi-stage flash plants that desalinate water while also generating electricity. Some of this energy is used in the desalination process and part of the supply is fed into the grid. In 2012 the combined generation from the six plants totalled 3355 MW, but the company reported that output had dropped by 6.7% year-on-year (y-o-y) due to outages resulting from maintenance and refurbishment programmes.

The US Energy Information Administration (EIA) reports that Saudi Arabia plans to increase total generation to 120 GW by 2020. By that time the UN projects the Kingdom’s population to have reached 32.34m based on an annual population growth rate estimated at 1.85%.

OIL & GAS: With the exception of a few off-grid pilot renewable schemes, Saudi Arabia’s power stations currently run on liquid fuels, predominantly oil. According to the latest BP figures, national consumption of primary energy increased by 3.5% from 222.2m tonnes of oil equivalent in 2012 to 227.7m tonnes in 2013. This made it the world’s 11th-biggest consumer, accounting for 1.8% of the global total. It used 135m tonnes of oil in 2013, up 2.8% y-o-y, and 92.7m tonnes of natural gas, up 3.69% y-o-y.

Although Saudi Arabia has the world’s fifth-largest reserves of natural gas, estimated at 288trn cu feet, according to EIA, it does not import or export gas and its use of the resource remains somewhat limited at present. The EIA reports that supply has been constrained by the costs of exploration, production, processing and distribution, and it says OPEC estimates that around 13-14% is lost to flaring, venting and reinjection as part of the oil extraction process. However, with an eye towards making more efficient use of the resource, the Kingdom has plans to build 1200 km of gas pipelines.

ENERGY MIX: A paper published in 2013 by Bassam Fattouh, director of the Oxford Institute for Energy Studies, says the mix of fuels used in power generation in the Kingdom in 2012 comprised 39% natural gas, 35% oil, 20% diesel and 6% fuel oil. The paper says that gas has accounted for a smaller part of the mix since a royal decree in 2006 dictated that large-scale power plants, which were previously planned to run on gas, would be powered instead by subsidised crude oil. (Natural gas accounted for 52% of the energy mix in 2007, by way of comparison.) According to figures from the group Joint Oil Data Initiative (JODI), released in February 2014, the country consumed 310,000 barrels per day (bpd) of fuel oil in 2013, the most since 2008. In July 2013 London-based analysts Energy Aspects noted the Kingdom imported 78,800 bpd of fuel oil from January to May of that year. In February 2014 data on the JODI website showed crude oil burning at power stations was cut from 528,000 bpd in 2012 to 483,000 bpd in 2013, leaving the Kingdom with more crude oil to export as it consumed more gas and fuel oil.

PRICING & CONSUMPTION: However, the government still gives consumers of electricity in Saudi Arabia significant discounts. In 2012 it cost SR0.15 ($0.04) to produce a KWh of electricity in Saudi Arabia, but the average price for consumers was SR0.142 ($0.038) per KWh. If the fuels had been priced at international levels, the average cost would have been SR0.80 ($0.21) per KWh. International Energy Agency (IEA) price comparisons show that Canadians pay $0.10 per KWh; people in the US, $0.12; UK customers, $0.20; and Germans, $0.35 per KWh.

The biggest consumer of electricity in 2012, using 50% of the total, was the residential sector, according to the annual report released by the industry’s governing body, the Electricity and Cogeneration Regulatory Authority. It noted that of this domestic consumption, around 70% was used for air conditioning, demand for which peaks in the hot summer months. World Bank figures show that Saudi Arabia ranks 18th in the world in terms of per capita electricity consumption and that the rate continues to grow. In 2009 it was 7431 KWh per capita, in 2010 it was 8022 KWh per capita and in 2011 it was 8161 KWh per capita, three times higher than the world average. Other countries in the top 20 include the Scandinavian nations, the US, Australia, New Zealand and other GCC member states.

“With demographic and economic growth we are seeing a consequent rise in domestic energy consumption,” Paddy Padmanathan, CEO of ACWA Power, told OBG. “To address this, the government has worked hard to not only expand overall generation but also to improve its efficiency.”

SUBSIDIES: The IEA, which was created by the OECD, produced a study in 2013 examining the extent to which countries used state subsidies of fossil fuels in 2012 to lower the cost for end-users. Saudi Arabia was the second-largest user of this device after Iran, and the study showed the Kingdom spent almost $61bn on fossil fuel subsidies, 77% of them on oil and 23% on electricity, or $14bn, which is equivalent to 6% of the projected expenditure of $228bn in the 2014 budget. These subsidies represent a lost opportunity cost when compared to the price this oil could have fetched on international markets, and economists argue that fuel subsidies tend to favour the wealthier members of society, whether that is reflected in the price of petrol for their cars or the amount they can afford to spend on running air conditioning units in their homes.

An IMF report published in March 2013 suggested that fossil fuel subsidies across the Middle East and North Africa region account for half of all global subsidies, and its authors argued that a carefully communicated and phased strategy of consumer price increases would enable governments to reduce subsidies and pass on the benefits of their oil wealth in more effective ways to the whole of society. In the same month as the IMF report, two leading figures in Saudi Arabia’s energy and utility sector told local media a reduction in subsidies was being considered. Muhammad Al Jasser, minister of economy and planning, and Ali Al Barrak, former CEO of SEC, suggested that subsidies could be reduced but also applied in smarter ways where need was greatest.

SEC SHAKE-UP: SEC is undergoing some significant structural changes in 2014, and there is a new leader at its helm. In January 2014 Ziyad bin Mohammed Al Shiha moved from Saudi Aramco to take charge of the electricity company, and local media reported the new CEO wanted to see greater efficiencies in electricity generation and consumption. At Saudi Aramco, Al Shiha was the executive director of power systems responsible for developing cogeneration plants, which simultaneously producing electricity and heat. According to Arab News, Al Shiha set out his views on efficiency at an industry conference in 2011. “Between reducing or increasing the efficiency of the supply and enhancing the efficiency of the demand, I think the Kingdom can save thousands and hundreds of thousands of barrels of oil demand.”

Al Shiha takes over at a time when the Kingdom is moving to create a more competitive power market. The Electricity and Cogeneration Regulatory Authority (ECRA) has developed new rules allowing companies such as Saudi Aramco to start selling power to SEC and, after 2016, directly to customers.

SEC itself is being subdivided into separate national businesses running generation, transmission and distribution from 2014. The generation business will also be further subdivided in 2014 into four companies, and under ECRA supervision the SEC transmission company will be able to buy power from these four suppliers. The generation companies will be responsible for improving the efficiency of power stations. Over the next two years SEC is building a major new link to connect the electricity grids in the east and the west of the country in order to improve its transmission system.

ENERGY EFFICIENCY: Although an abundance of hydrocarbons resources and inexpensive electricity makes it difficult to persuade businesses and consumers to use power more efficiently, efforts are nevertheless being made to convince them to do so. Policymakers have responded to a stark warning issued by Saudi Aramco’s CEO, Khalid Al Falih, in 2011 that if domestic demand for electricity and water produced by oil-fired power stations and desalination plants maintained its growth trajectory, the country could be consuming 3m bpd of crude oil by the end of the decade. This prospect gave added urgency to the work of the Saudi Energy Efficiency Centre, which was created in 2010. Its chairman is the president of King Abdullah City for Science and Technology (KACST), and the board of the centre’s Saudi Energy Efficiency Programme (SEEP) includes representatives from relevant government ministries and other interested bodies, including ECRA, SWCC, Saudi Aramco and SEC.

FOCUS AREAS: Naif M Alabaddi, director-general of SEEP, spelt out the priorities of the Saudi Energy Efficiency Centre at a sustainable energy conference in the UAE in October 2013. Alabaddi explained that its focus has been to examine energy efficiency in the three key areas of buildings, industry and transport, which together represent 90% of energy consumption. SEEP’s figures showed that 75% of buildings were not insulated effectively and that at 16.4 KWh per sq metre per annum, consumption of electricity for lighting was considerably higher than in Japan, Germany, the UK and France, which consumed 10, 9.3, 8.6 and 5.7 KWh per sq metre per annum, respectively. In addition, according to studies on transport, vehicles in the Kingdom travelled 8 km per litre on average, against 11, 15, 16 and 17 km per litre in the US, UK, Japan and France.

In 2012 SEEP used a multi-agency approach devoted to addressing efficiencies in energy consumption and to setting and assessing targets for each of its three areas of focus. The building sector is being addressed with a new energy-efficient smart building code and a focus on air conditioning, insulation and lighting. On the roads, the emphasis is on encouraging drivers to buy more fuel-efficient cars and transport companies to invest in more modern haulage vehicles, alongside state initiatives to build urban metro systems and rail networks for passengers and freight. In the industrial sector, SEEP has visited factories producing cement, petrochemicals and steel to encourage greater fuel efficiency in older plants and to encourage more fuel-efficient designs for new facilities, while also pushing for the purchase of more fuel-efficient imported machinery. Part of the process has been to encourage best practice first among the government agencies and companies on SEEP’s steering committee.

SMART CONSUMPTION: Saudi Aramco is one of the companies working with SEEP, and it has been leading by example on energy efficiency by supporting the Energy to the Kingdom (E2K) project by surveying 30,000 homes to assess energy efficiency and by developing software to help builders and architects use optimal materials.

The emphasis on smarter energy consumption has enabled private businesses in Saudi Arabia to offer smart technological solutions in construction and utility supply, particularly as huge government infrastructure investments have resulted in a construction boom. Multinational companies that have been operating in Saudi Arabia for decades are among those providing many of these services.

Siemens, for example, has been in Saudi Arabia for 80 years, operating as a joint venture with EA Jafali and employing 2000 people across its four divisions: health, infrastructure and cities, industry and energy. Each of these sectors is feeling the impact of the government’s expansive spending and Saudi Arabia’s search for smart technology solutions.

“For instance, we have the solutions for efficiency and energy consumption in buildings, and our low and medium voltage business is also involved; the divisions overlap and we can provide smart switches and circuit breakers,” said Ghassan Khalil, head of communications at Siemens Saudi Arabia.

Schneider Electric, which has been in Saudi Arabia for 34 years and employs 1200 people, is also applying smart solutions to problems faced by the country’s utility suppliers. One example is its distribution management system, which enables companies to minimise blackout periods by detecting any failure in the electrical distribution network and to react speedily to disruptions in the network. It is designed to automatically shift the power feeding point, enabling operators to isolate the network failure and schedule the maintenance within normal working hours with minimum disruption of supply to customers. The company believes improvements in the network’s sustainability, and in the quality of the supplied electricity, are having a wider effect.

“The Kingdom has many of the inputs to develop a strong solar industry, and we believe that with this agreement and initiatives from KACST, SEC and Aramco, we see huge potential in the Energy industry towards supporting the Kingdom’s strategy of sustainability and future growth,” Ziad Mortaja, the country president of Schneider Electric in Saudi Arabia, told OBG. “Two or three million people are expected to return to their towns and villages from big cities because of improvements to the supply system made since 2008. It has also enabled new neighbourhoods to be built quickly.”

NUCLEAR: At today’s prices, crude oil is the obvious choice for a business trying to generate power or desalinated water at the optimum cost, but Saudi Arabia’s leaders are set to make huge investments in alternative energy sources that will enable future generations to optimise the country’s hydrocarbons wealth. An April 2010 royal decree stated, “The development of atomic energy is essential to meet the Kingdom’s growing requirements for energy to generate electricity, produce desalinated water and reduce reliance on depleting hydrocarbons resources.” The King Abdullah City for Atomic and Renewable Energy (KACARE) was established in April of that year to act as a focus for the drive to develop sources of renewables and nuclear energy. KACARE has announced it has plans to spend SR300bn ($80bn) on building 16 reactors with a combined capacity of 17.6 GW by 2032.

Nuclear cooperation treaties were signed with France and South Korea in 2011 and with China in 2012. In February 2014 Crown Prince Salman bin Abdulaziz Al Saud visited Japan and agreed to push forward with talks on a civil nuclear cooperation treaty between the two countries that could allow Japanese firms to export reactors to the Kingdom. However, human resources will need to keep pace with these moves. With the option to pursue nuclear power approved, the focus will likely shift next to renewable energies, such as wind and solar power. This will drive demand for technicians in these fields and create investment opportunities in education.

DESALINATION: Natural water is a scarce and diminishing resource in Saudi Arabia, which receives just 70 mm of rainfall annually. According to UNESCO, the Kingdom has an “extreme water shortage”. By some estimates Saudi Arabia has seen its non-renewable aquifers drained by up to four-fifths since the 1970s. The other source of water is desalination; Saudi Arabia is the world’s biggest producer of desalinated water. The SWCC’s governor, Abdulrahman Al Ibrahim, told local media in December 2013 that in 2012 the country’s 30 desalination plants boosted production by 7.8% to 955m cu metres. Al Ibrahim said capacity is expanding at all major plants. The Ras Al Khair, Yanbu and Jeddah plants will produce 1m, 0.5m and 0.25m cu metres per day, respectively.

In July 2013 the minister of water and electricity warned that household water consumption had passed 8m cu metres per day, equivalent to 265 litres per person. In 2013 Omar Ouda, professor of civil and environmental engineering at Prince Mohammed bin Fahd University, published a paper showing consumers were paying 5% of the production cost of water and estimating that water subsidies will cost $6.5bn a year by 2020. According to his calculations, the average sale revenue for water is $0.08 per cu metre, while the marginal cost in 2010 was $1.09 per cu metre. That means that at 2010 prices the 265 litres being used by a typical Saudi would cost them SR27 ($7.20) each a year, but the production cost would be SR369 ($98.40).

OUTLOOK: Water production and power generation face similar issues in Saudi Arabia. Crude oil is used to power most desalination plants and power stations. In both cases, the product is heavily subsidised, consumption levels are among the highest in the world, and a growing population and expanding cities and industrial districts are driving demand ever higher. The government is working to meet these challenges by increasing supply and using more gas and fuel oil to free up crude for export.