With some analysts expecting Saudi Arabia’s population to expand by just over 8m to reach 39.1m by 2030, along with continued growth in the Kingdom’s energy-intensive industries, demand for electricity and desalinated water is set to rise considerably in the coming years. Estimates suggest that more than SR500bn ($133.3bn) will need to be invested in Saudi Arabia’s power sector over the next 10 years to ensure that supply keeps pace with demand, while an ever-rising demand for water means that the Kingdom’s desalination facilities will need capital investments of SR65.4bn ($17.4bn) by 2020.
Many expansion projects are already under way, while sustainable energy solutions are increasingly prominent in the Kingdom’s energy mix. Comments in June 2016 by Khalid Al Falih, the minister of energy, industry and mineral resources, stipulated that natural gas would become the greatest contributor to the Kingdom’s energy mix, with a target of 70%. The minister added that this would be achieved not only through increased domestic gas production, but possibly even sourcing from external suppliers.
While the price of oil had rallied late in the year, reaching $52 a barrel in October 2016, its decline from $115 per barrel in June 2014 to $28.50 in January 2016 threw the issue of subsidy reform into sharp relief, with various initiatives aimed at curbing energy demand and enhancing efficiency deployed.
Sector Structure
A May 2016 government restructuring saw the dissolution of the Ministry of Water and Electricity, with the water portfolio now falling under the jurisdiction of the newly formed Ministry of Environment, Water and Agriculture. Electricity affairs are now overseen by the Ministry of Energy, Industry and Mineral Resources.
The Electricity and Cogeneration Regulatory Authority (ECRA), the water and electricity regulator, was established in 2001 and is responsible for licensing all entities operating in either the electricity or water desalination spheres. ECRA is also responsible for ensuring that the Kingdom’s supply of electricity and water keeps pace with demand, is of high and reliable quality, and is fairly priced.
Key Players
The electricity and desalination industry is broken down into various entities licensed by ECRA. The Saudi Electricity Company (SEC), a joint-stock company whose shares trade on the Saudi Stock Exchange, is the dominant player in the electricity industry. The government and Saudi Aramco together own 81.2% of the company’s shares, with the remainder held by the Saudi Arabian general public. The Saline Water Conversion Corporation (SWCC) is the dominant player in water desalination, responsible for approximately 60% of the Kingdom’s production of desalinated water in 2015.
Although the SEC and the SWCC are largely government-run agencies, recent moves have explored possible restructuring of both bodies in a bid to foster private participation in the sector, something ECRA has specifically targeted moving forward. Ibrahim Al Nassar, CEO of Miahona Holding – a developer, investor and operator of water and wastewater assets – told OBG, “Privatisation of the water and wastewater sector is the key for the Kingdom to enhance economic efficiency through reducing build and operating costs, while optimising the life cycle to augment performance and availability.”
The goals outlined in the National Transformation Programme (NTP), released in June 2016, seem to indicate either full or at least partial privatisation of both companies. Various independent water and power projects also operate within the electricity and water desalination industries, and the NTP has outlined targets for increasing the percentage of desalinated water production through strategic partners from 16% to 52% by 2020, as well as increasing the percentage of power plant electricity generation through strategic partners from 27% to 100%. These plants sell their electricity production to the SEC and their water output to the SWCC.
Electricity
The Saudi electricity network is the largest in the Arab world. According to ECRA’s data from 2015 the Kingdom’s peak load for the year reached 56,547 MW. Electricity was generated by 81 plants run by 17 different entities in 2015, with a total installed capacity of 81,603 MW. In 2015 the SEC owned 70% of the Kingdom’s installed capacity, at 54,717 MW. The SWCC was next with 8%, or 6222 MW, followed by Jubail Water and Electricity Company and Hajar Electricity Company, each of which had a single plant generating 4% or 5%, respectively, of the Kingdom’s installed capacity. Different producers held the remaining 13% of capacity. Saudi Aramco ran seven plants in 2015, with a combined capacity of 1563 MW.
The National Electricity Transmission Company, also known as the National Grid, a wholly owned subsidiary of the SEC, is responsible for the development and operation of the transmission system, bringing electricity from generation plants to consumption areas. The system comprises 55,260 km of high-voltage overhead lines and 4826 km of underground lines.
In 2015 the SEC was wholly responsible for distributing electricity to consumers, with the exception of two areas operated by Marafiq, the country’s first private integrated power and water utility company, in Jubail and Yanbu. In 2015 this network consisted of 265,382 km of overhead lines and 272,540 km of underground lines. The biggest electricity consumers in the Kingdom in 2015 were the 6.4m residential subscribers, responsible for 49.1% of total consumption. This was followed by the industrial sector, whose 9306 subscribers accounted for 17.6% of use. The remainder was split between commercial, government and other consumers, accounting for 16%, 13.5% and 3.9%, respectively. Over the past decade a growing and more urbanised population has fuelled a rapid expansion in demand for electricity. Between 2005 and 2015 the number of electricity customers in the Kingdom grew from 4.73m to 8.1m. During the same period, energy sales rose by 77%, from 158,927 GWh to 281,155 GWh, while peak demand increased by 89%, from 29,913 MW to 56,547 MW. Saudi Arabia’s energy generation facilities remain heavily reliant on hydrocarbons, with crude oil accounting for 39% of electricity production in 2015, natural gas for 35%, heavy fuel oil for 17% and diesel for 9%. The government aims to increase renewable energy’s contribution to 4% by 2020 and eventually raise it to 10%.
Desalination
Saudi Arabia has a hot desert climate, with limited yearly rainfall and no permanent rivers or lakes, and around 95% of its territory is covered by desert. These factors, combined with the country having the largest economy in the MENA region, have spurred the development of the biggest water desalination industry in the world. In 2015 Saudi Arabia had 40 desalination plants producing a total of 7.37m cu metres of desalinated water per day. The majority of these plants were run by the SWCC, with the corporation’s 18 plants producing a total of 4.61m cu metres per day, about 62% of the Kingdom’s total yearly production. After the SWCC, Shuaibah Water and Electricity Company and Jubail Water and Power Company were the next-largest producers, accounting for 12% and 11% of total yearly production, respectively, in 2015.
In 2015, 54% of all desalination plant units were owned and operated by the SWCC with the largest of the SWCC’s plants is located in Jubail, with production at this unit reaching 378m cu metres in 2015, or 29.3% of total yearly production. Other major sites include the Khobar, Jeddah and Shuaibah plants. The SWCC is responsible for the transportation of desalinated water from production plants to the major reservoirs of the potable and sanitary water departments in the Kingdom’s urban areas. These units are overseen by the National Water Company and are responsible for the distribution of water to end consumers. The majority of the SWCC’s facilities are cogeneration plants where desalinated water is produced alongside electricity, which is then sold onwards to the SEC. In 2015 the SWCC generated 57.14 GWh of electricity.
Saudi Arabia’s desalination plants use a wide range of processes. Some 64% of desalination capacity uses multi-stage flash (MSF) process, while 20% uses reverse osmosis (RO) techniques and the remaining 16% uses multi-effect distillation (MED). Shuaibah Water and Electricity Company’s plant uses MSF, while the Jubail Water and Power Company uses MED. The SWCC-operated facilities depend on all three techniques, with 47.8% of output relying on MSF, 9.5% on RO and 2.2% on MED.
Gas
Saudi Arabia has yearly natural gas production of 103bn cu metres. The Kingdom has 4.4%, or 8.2trn cu metres, of the world’s proven natural gas reserves. This represents the fifth-largest reserves in the world behind Russia, Iran, Qatar and the US. Saudi Arabia’s natural gas is neither exported nor pumped into private homes; rather, the master system supplies gas to industrial cities such as Yanbu and Jubail for use as feedstock in petrochemicals plants or in power stations. On a domestic level, many homes and restaurants use bottled gas for cooking, supplied by the National Gas and Industrialisation Company. Under the NTP natural gas is slated to become the biggest contributor to the country’s energy mix, with the production of dry gas planned to increase from 12bn standard cu feet (scf) to 17.8bn scf by 2020.
Pipeline
Abdullah bin Abdul Rahman Al Hussein, former minister for electricity and water, said in February 2016 that Saudi power projects will need more than SR500bn ($133.3bn) in investment over the next 10 years to cope with rising demand. According to Al Hussein, peak electricity will reach 90,000 MW by 2022, up from current installed capacity of around 70,000 MW. As such, significant expansion plans are under way, with the SEC planning an additional 47,711 MW of installed capacity by 2024. Of this new capacity, 36,832 MW (77%) will be produced by new combined-cycle power plants, with the remainder coming from steam power plants (17%), conversion projects (5%) and simple-cycle units (1%).
Meanwhile, numerous desalination projects continue apace, including the SWCC’s $7.2bn Ras Al Khair plant on the east coast. The facility will produce 1.025bn cu metres per day when complete, making it the biggest desalination facility in the world when running at full capacity. Work is also under way on the $4.3bn Yanbu 3 desalination plant on the Red Sea coast. When complete, the plant will provide an additional 550,000 cu metres per day to 1.8m residents in Yanbu Industrial City and people in the Medina area.
Subsidies
As with most of the Gulf’s oil-producing countries, Saudi Arabia’s transport and utilities sectors are subsidised at a cost of billions of dollars each year. However, the fall in oil prices over the past two years has thrown the issue of subsidy reform – long urged by international bodies such as the IMF and World Bank – into much sharper focus. According to figures released by ECRA from 2014, crude oil was the dominant fuel type used in the generation of electricity, at 44%. In the same year the Kingdom’s electricity producers paid the equivalent of $0.73 per million British thermal units (Btu) for crude oil, as opposed to the $19.26 per million Btu they would have had to pay on international markets.
Research carried out by Jadwa Investment indicates that subsidies cost the government a total of $61bn, or 9.3% of GDP, in 2015, when the prices of various energy products globally were compared to the prices paid by end users in the Kingdom. The majority of this was spent on the subsidisation of diesel, which cost the government $23bn through its use in electricity generation, desalination and transportation. The provision of pump petrol also represented a considerable cost, at $9.5bn when compared to prevailing international prices.
Indeed, the opportunity cost of using so much oil to run electricity and desalination plants is one of the most pressing issues driving subsidy reform. Saudi Arabia currently produces just over 10m barrels of oil a day. However, around a quarter of this goes towards the needs of the domestic energy market, which consumes around 2.8m barrels a day. Some analysts predict that if the Kingdom continues with such policies, rising demand for utilities will see it become a net importer of oil by 2038.
Subsidising oil for the Kingdom’s electricity and desalination plants translates into lower rates for end users, allowing, the argument goes, the benefits of hydrocarbons wealth to trickle down to all members of society. However, many, including Deputy Crown Prince Mohammed bin Salman al Saud, have criticised the arrangement, pointing out that the current system disproportionately benefits the Kingdom’s biggest energy consumers. Moreover, with consumption growing at a rate of 8% per year, it is argued that such an abundance of cheap water and electricity encourages inefficient consumption, while cheap pump petrol results in more vehicles on the roads.
Speaking to Al Arabiya television in April 2016, Prince Mohammed bin Salman, who also chairs the Council for Economic and Development Affairs, said that the lifting of subsidies would apply to all, princes and government ministers included. However, he said that the 30% of the population on average or below-average incomes would continue to receive government support, with a programme expected in late 2016 due to outline what form this will take.
Tightening The Belt
Although the fall in oil prices demonstrated the economic realities of relying on a single resource, many have discerned a silver lining, regarding the price drop as the opportune moment to address the subsidies issue head on. Indeed, current moves to restructure the subsidies programme form part of the broader economic shift away from hydrocarbons reliance outlined in the Vision 2030 development plan. In December 2015 the Kingdom’s projected SR326bn ($86.9bn) deficit for 2016 prompted the Cabinet’s first-ever introduction of tariff increases for electricity and water rates, as well as price hikes in the pump price of petrol, in what was described as the first in a series of comprehensive economic, fiscal and structural reforms. In December 2015 pump petrol prices increased by 50%, with Octane 91 up from SR0.45 ($0.12) to SR0.75 ($0.20) per litre. Octane 95 rose from SR0.60 ($0.16) to SR0.90 ($0.24) per litre, an increase of 67%.
The new electricity tariff is aimed at rationalising consumption. “The Kingdom is among the highest electricity consumers in the world, with consumption per individual per year reaching 8000 KWh,” said Al Hussein, following the announcement of the budget in December 2015, when he outlined the restructuring that would take place. The new tariffs will be rolled out gradually by 2020 and will see the electricity price for residential customers rise from SR0.12 ($0.03) to SR0.20 ($0.05) for 4001-6000 KWh, and from SR0.15 ($0.04) to SR0.30 ($0.08) for 6001 KWh and above. Commercial customers’ rates will rise from SR0.12 ($0.03) to SR0.16 ($0.04) for the first 4000 KWh, from SR0.20 ($0.05) to SR0.24 ($0.06) for all use between 4001 and 8000 KWh, and from SR0.26 ($0.07) to SR0.30 ($0.08) for 8001 KWh and above. The government sector, meanwhile, will experience a hike of around 30%, with the price set to increase from SR0.26 ($0.07) to SR0.32 ($0.09) per KWh.
Also announced were changes to water tariffs, which will increase by 50% as the authorities try to boost efficient use of the precious resource. These moves come in addition to numerous public awareness and conservation campaigns currently being rolled out by the government that aim to boost water-efficient practices. “Although the tariffs still don’t reflect the cost of production, operation and maintenance involved in the provision of water, the changes that have been introduced are a very important step towards greater conservation of water,” Mohammed Al Saud, the deputy minister for water affairs, told OBG. “It sends the important signal to the public that water is very valuable in this environment.”
Supply-Side Efficiencies
According to independent policy institute Chatham House, the Kingdom’s energy consumption is similar to that of the UK, despite Saudi Arabia being home to half the number of people. To help lead consumption changes, the Saudi Energy Efficiency Centre (SEEC) was established in 2010. Overseen by Prince Abdulaziz bin Salman bin Abdulaziz, the deputy minister of petroleum and mineral resources, SEEC acts in partnership with various stakeholders and government entities to reduce energy waste across the industrial, construction and transport sectors, which together account for 60% of Saudi Arabia’s energy consumption.
In an attempt to curb this, SEEC has introduced strict energy-efficiency standards for electrical appliances (including both small- and large-capacity air conditioners), updated thermal insulation product standards for all new buildings and introduced fuel efficiency standards for light duty vehicles being imported into the Kingdom. The successful implementation of SEEC’s targets has the potential to save the Kingdom the equivalent of 1.5m barrels of oil per day by 2030. The SEC is also working to boost efficiencies across its network of power stations, of which almost 40% are more than 25 years old. The electricity company is upgrading many of its older power stations, converting all its open-cycle plants to combined-cycle facilities in a move expected to boost plant efficiency from 33% to more than 45%. “What Saudi Arabia is looking for is more efficient power plants,” Hisham Al Bahkali, president and CEO of GE Saudi Arabia and Bahrain, told OBG. “The Waad Al Shamal combined cycle power plant, which incorporates solar technology, really demonstrates the types of efficiencies the Kingdom is aiming to achieve.”
Meanwhile, the SWCC is looking to double energy efficiency from the current level of around 26-27% to 54-55%, with renewables increasingly being considered as a means to achieve this.
Leakages in the water distribution system also represent a major target for savings. According to deputy minister Al Saud, ongoing programmes have improved leaked water levels from 25% to 17% in some areas. “We are pumping around 8.5m cu metres of water a day, so 20% leakage represents a huge amount,” he told OBG. “The Kingdom is putting further programmes in place and aims to reach a benchmark of about 10% in 10 years.”
Renewables
In April 2016 Prince Mohammed bin Salman unveiled the Kingdom’s Vision 2030 policy paper. In it the government commits itself to the continued development of the renewables industry, with an initial target to produce 9.5 GW of renewable energy by 2023. The goals outlined will be carried forward by the newly formed King Salman Renewable Energy Initiative, which will aim to localise manufacturing for the sector, foster the development of the necessary skill sets among Saudi youth and further encourage public-private partnerships. Vision 2030 announced that it will “guarantee the competitiveness of renewable energy through the gradual liberalisation of the fuels market”, which over the long term will assist in ensuring the price competitiveness of renewable technology. The goals outlined in the policy paper mark the first official statement on renewable energy policy since the January 2015 announcement that King Abdullah City for Atomic and Renewable Energy (KACARE) was delaying the completion date of a solar energy project, worth $109bn, by eight years to 2040.
With the significant enlargement of the energy ministry in May 2016 seen as a move towards enhancing and integrating decision-making processes across the variety of initiatives working in the sector, it would be unsurprising to see KACARE’s ambitions merged with those of the King Salman Renewable Energy Initiative at some point in the near future. “Renewable energy will play a big role in diversifying the Kingdom’s energy mix and reducing dependence on oil. This will require the establishment of a framework for local manufacturing and independent power producers to play a role,” Fadil Fouad Basyyoni, president of Dr. Fadil Basyyoni Engineering and Environmental Consultancy Firm, told OBG.
The Kingdom has plans to develop nuclear energy facilities overseen by KACARE and build 17 GW of nuclear power by 2032. It is also working to develop its regional energy network. The GCC Interconnection Authority (GCCIA) is the Middle East’s first cross-border interconnector and the unified grid has a maximum transfer capacity of 1200 MW. In 2014 technical consulting and engineering firm CESI Middle East signed a three-year agreement with GCCIA to provide operations and planning studies.
Outlook
Rising demand, an expanding population and the robust outlook for the Kingdom’s power- and water-intensive sectors will continue to drive growth in utilities and capacity increases moving forward. With subsidy restructuring taking place not just in the Kingdom but also across the GCC, demand patterns for water and electricity will start to shift as rising tariffs spur moves towards sustainability and efficiency.
Read More from OBG
