These are crucial times for Saudi Arabia’s power and water sectors as both move through a process of major reform. Privatisation is at a more advanced stage in water than in power, but the next few years should see substantial change in both markets, providing significant opportunities for investors.
Projects that use a wider range of energy sources are also in the planning and development stages, while efficiency in distribution and usage is being strongly promoted, alongside a further reduction in subsidies through reorganisation of the electricity tariff system.
Meanwhile, major desalination projects are under way, along with the roll out of new sewage and waste-water treatment plants, reservoirs, leakage reduction measures, transmission networks and groundwater conservation schemes. The Kingdom has set itself some ambitious short- and long-term goals for both sectors, with a shift towards a more market-oriented approach a key objective of the reforms.
Water
Saudi Arabia has historically relied on underground sources and reservoirs for its water, as it possesses no permanent running surface water and on average only experiences around 100 mm of rainfall a year. A system of wells and irrigation channels known as falaj supplied farms and settlements in the past, with the mining of fossil subsurface water accelerating as the country developed. Centre pivot irrigation, which uses water pumped from an underground aquifer, has since become more widespread.
Population and economic growth, however, have long outstripped the capacity of these ancient resources to meet demand. Thus, Saudi Arabia turned to desalination plants as early as the mid-1950s, and today the Kingdom has the largest number of these facilities of any country in the world, with 30 plants together responsible for 18% of global desalinated water output. Since 1965 they have been under the jurisdiction of the Saline Water Conversion Corporation (SWCC), which was initially under the mandate of the Ministry of Agriculture but became an independent entity in 1974. The SWCC is responsible for a proportion of power generation in the country as well as the distribution of desalinated water to various regions across the Kingdom.
Saudi Arabia’s desalination plants use a wide range of technologies. Multi-stage flash (MSF) processes account for 64% of desalination capacity, reverse osmosis for 20% and multi-effect distillation 16%.
Growing Demand
Factors such as a rapidly expanding population, changing household habits in water usage, and higher demand from industry and services have resulted in the country’s water consumption ranking as one of the highest in the world at more than 300 litres per person per day.
Until 1994 domestic water was provided free of charge to Saudi households, with costs remaining comparatively low thereafter. A cut in subsidies introduced at the end of 2015 changed this, however, bringing about an increase in consumer prices.
Historically, the supply of water has been the responsibility of the state, with the Ministry of Water and Electricity (MoWE), divided into regional water directorates, the overall sector authority until May 2016. The MoWE was then broken up and water authority transferred to the new Ministry of Environment, Water and Agriculture (MEWA), while responsibility for the electricity sector was passed to the Ministry of Energy, Industry and Mineral Resources (MEIMR). MEWA consists of the Directorate of Water Affairs and the Directorate of Water Services, both of which have a broad range of responsibilities, from the management of non-renewable and renewable underground water, to the organisation and management of reused and treated wastewater.
Drive To Privatise
MEWA also established a Privatisation and Investment Directorate to drive the eventual objective of privatising water services throughout the Kingdom. This came after a series of strategic decisions by the Saudi authorities, stretching back to 1997, to bring water utilities under private sector control, leaving the state with a purely regulatory role. To this end, in 2001 the government established the Electricity and Cogeneration Regulatory Authority (ECRA), to oversee the provision of power and desalinated water.
IWPPS
This was followed in 2002 with the establishment of the framework for private sector participation through build-own-operate and build-own-operate-transfer schemes, laying the groundwork for the development of independent water and power projects (IWPPs). The first IWPP, undertaken in 2007 just outside Jeddah, was the Shuaibah III power and desalination plant, while the 2700-MW-capacity Marafiq complex in Jubail, built in 2008, is now the world’s largest IWPP. These IWPPs sell their water and power to the main buyer, the Water and Electricity Company (WEC), which then sells water on to the SWCC and electricity to Saudi Electricity Company (SEC).
In 2005 water sector privatisation was initiated by royal decree, while MoWE’s five-year Strategic Transformation Plan – which aimed to encourage more private sector participation – was unveiled.
In 2008 royal approval was granted for the privatisation of the SWCC, with the National Water Company (NWC) – a fully state-owned, joint-stock company – established in the same year to provide drinking water and wastewater services. The NWC takes water from the SWCC and sells it on to consumers. In recent years it has done this for the largest cities – Riyadh, Jeddah, Makkah and Taif – in partnership with foreign operators. These include public-private partnerships with France’s Veolia, Suez Group and Saur Group, as well as Saudi Arabia’s Al Zamil. MEWA is still the direct provider in some rural areas.
Desalination Targets
Private sector engagement is also being sought in desalination, with MEWA aiming for private operators to increase their share of desalinated water production from 16% to 52% as part of the National Transformation Programme (NTP) 2020. The NTP was published in 2016 with the aim of helping to fulfil the aim of the country’s longerterm development plan, Vision 2030, part of which looks to promote the optimal use of water resources, and increase desalinated and treated water output through strategic partners.
In 2016 the SWCC announced that it had plans to invest around $80bn by 2025 to boost desalinated water production to 8.5m cu metres per day from its current capacity of 3.6m cu metres.
One of the developments currently being pursued by the SWCC is the third phase of the $1.37bn Yanbu plant, a reverse osmosis seawater desalination plant, which will supply 550,000 cu metres of water per day to the city of Medina, along with 2500 MW of power once the plant is in operation. Another major project is Jeddah IV, which will add a further 400,000 cu metres per day to the city’s water supply. According to MEWA, the SWCC will only be a distributor, while the WEC will remain the principal buyer and it is likely that ECRA will have its regulatory powers extended over downstream as well as upstream processes.
Downstream, the first stage of the strategy involves clustering regional companies into five or six entities, though the NWC will continue the single leadership structure for the downstream too. The firm has invested $6.7bn in more than 300 projects in water infrastructure development and treatment in Makkah, Jeddah, Riyadh and Taif in recent years.
Treatment
MEWA has increased its investment in sewerage, initiating some 75 new schemes in 2015 alone. In 2016 it followed these actions up by awarding contracts for a number of sewerage projects, which were valued at $142.4m in total. These investments have also provided a boost to water production, with treated sewage effluent (TSE) becoming more widely available for use in non-potable applications. The NWC set up a TSE business unit to commercially market the product, achieving remarkable success before being spun off as a separate unit in 2012. Contracts to supply TSE on a long-term basis to outfits including SEC, Saudi Tabreed and Bariq Mining were signed before the unit became a separate entity.
TSE and grey water – non-toilet wastewater from homes and office buildings – may have more uses, too. For example, the NTP states that the proportion of water used in agriculture relative to the amount of water available from renewable sources is 416%. In line with the Kingdom’s developmental goals established in Vision 2030, the NTP aims to reduce this to 191% by 2020, while increasing the proportion of renewable water used in agriculture from 13% to 35%.
The NTP has set some other important targets for the privatisation of the water sector. These include boosting the percentage of desalinated water produced by strategic partners from 16% to 52%, and raising its contribution to the country’s total output of treated water from 0% to 20%. The NTP also targets expanding the NWC’s coverage from 42% of cities with water and sewerage services to 70%.
Electricity
As with water, the regulator for electricity is ECRA. The sector is also moving towards privatisation, with ECRA launching an Electricity Industry Restructuring Plan in 2009. This involves the unbundling of SEC, creating an open generation and distribution market, establishing a transmission company and a parallel market where large consumers can buy power from the producer of their choice. Although slow to start, progress has been made, with the creation of the National Grid in 2012, and a memorandum of understanding signed between ECRA and SEC in 2013 outlining both parties’ commitments and actions that will be taken as part of the restructuring.
The NTP also includes a series of key performance indicators for electricity. These target several areas in efficiency, coverage and also guidelines regarding sector presence of strategic, private sector partners.
Alongside broader market reforms, in December 2017 ECRA announced a reorganisation of its electricity tariff system for low-consumption residential and commercial customers. Coming into effect on January 1, 2018, the system is an attempt to gradually raise electricity prices, with the lowest residential category being increased from 5 halalas ($0.01) to 18 halalas ($0.05) per KWh. The savings will be used to support low- and middle-income families through the Citizen’s Account welfare programme, the authority said in a press release. The measures are, in part, a move to bring national electricity tariffs in line with international standards, in accordance with the Kingdom’s Fiscal Balance Programme 2020, but will not affect tariffs for the industrial sector, in order not to impact the pursuit of non-oil growth.
The MEIMR’s goals under the medium-term development plan include raising fuel efficiency in electricity production from 33% to 40% and increasing the share of total electricity output generated by private partners from 27% to 100%. In other words, a radical change in the energy mix and in generation capacity are part of the proposed restructuring. In terms of transmission and distribution, the objectives include reducing the annual number of outages that last more than five minutes from 6.36 to three, lowering the average duration of an outage from 262 minutes to 120 minutes, boosting the reserve generation capacity from 10% to 12% and increasing overall grid coverage from 99% to 99.5%.
Challenges
As is the case with water, the electricity sector faces challenges in terms of demographics and economic growth, with demand rising fast, and in recent years energy consumption has grown rapidly. Oil and gas have traditionally been the main energy sources used in electricity generation, with Saudi Arabia one of the few countries still burning oil to generate a significant proportion of its power.
According to the “BP Statistical Review of World Energy 2017”, the country generated 330.5 TWh of electricity in 2016, up from 328.1 TWh in 2015. Growth in output over the previous 10 years had averaged 6.4% per year, which was below nominal GDP growth over the period between 2006 and 2016, but considerably higher than real GDP growth. While electricity demand continues to rise faster than either, the 2017 summer peak was lower than that of 2016, suggesting consumers may be curbing usage in anticipation of forthcoming tariff changes.
Looking ahead, forecasts also vary, with Business Monitor International anticipating demand doubling by 2030, and BP reporting yearly growth of 5.1% from 2005 until 2015. This represents both a major challenge and a clear opportunity for investors.
The largest organisation in the field currently is SEC, which was formed in 2000 after a merger of several regional companies and the General Electricity Corporation. Since then SEC has undergone periodic restructurings, 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 electrical power producers and customers, and will have a key role in establishing links with the strategic partners mentioned in the NTP.
Capacities
In 2016 SEC had a total generation capacity of some 74.3 GW and sold 287,692 GWh, slightly up from the 285,674 GWh it sold in 2015, registering a compound annual growth rate (CAGR) in sales of 5.5% in the 2011-16 period.
Approximately 50% of GW sold in 2016 went to residential customers, 16% went to commercial consumers, 16% to industrial, 14% to the government and 4% to others. The company had 8.5m customers in 2016, up from 8.1m the year before, giving it a five-year CAGR of 6.3% in number of customers. SEC also managed to boost its installed capacity in 2016 by 9.4%, adding a further 4.7 GW.
This additional capacity was spread across the company’s four geographical zones – Central, Eastern, Western and Southern. The Central Zone contains Power Plant 10 and Power Plant 12. Power Plant 10 benefitted from the addition of seven steam generation units, a total added capacity of 806 MW, while Power Plant 12 had two steam generation units installed, adding 682 MW in total.
The Eastern Zone saw the addition of two 77-MW gas generation units at the Al Qurayyat Power Plant, and one 70-MW gas generation unit at the Rafha Power Plant, while the Western Zone had four 72-MW steam generation units at the South Jeddah plant and two 20-MW mobile gas generation units at the Tabouk 2 plant. Lastly, with a total added capacity of 93 MW, four gas generation mobile units were added to the Southern Zone’s Jazan Power Plant.
In addition to SEC, both the SWCC and Saudi Aramco produce electricity. The SWCC’s MSF desalination plants are dual purpose, with the electricity generated being used in part to power the desalination process, with the surplus exported to SEC. Likewise, Saudi Aramco generates power for and from its own facilities, while selling surplus to the grid. Moreover, two co-generation plants operated by IWPPs produce electricity. These are the Jubail Water and Electricity Company’s 2.9-GW-capacity plant, and the Shuaibah Water and Electricity Company’s 1.2-GW facility.
Under the Kingdom’s strategy to boost private sector involvement in generation, there are a number of independent power station projects that are either currently being developed or have recently been completed. Beginning commercial operations in 2016, the 3927-MW Qurayyah-1 plant was the largest of its kind in the world when launched. Others include the natural gas, combined-cycle 2060-MW Rabigh-2 in Makkah; the 1505-MW Al Fadhili Plant, a joint venture (JV) with Saudi Aramco, which is expected to be completed in 2019; and the 3800-MW Jazan Plant Project, another JV with Saudi Aramco.
National Grid’s 110-380-KV transmission network reached 65,186 km in 2015, while at the distribution end the year saw 502,000 new SEC customers as 150 new communities were supplied with electricity. The transmission network has been regularly expanded over the years, with 5161 km of overhead networks and ground cables being added in 2016, along with 65 new transmission substations.
Meeting Demand
With demand for electricity expanding at a rapid rate, the Kingdom needs to add around 4 GW of generation capacity per year to match recent growth. At the same time, using fuel oil for so much of its power generation has been expensive, even during periods of lower oil prices, and means that Saudi Arabia is using up non-renewable resources at home that could be generating export income. In order to curb domestic energy consumption, on January 1, 2018 the MEIMR implemented fuel price increases, which saw Octane 91 fuel rising from SR0.75 ($0.20) per litre to SR1.37 ($0.37) per litre – an 82% increase – and Octane 95 from SR0.90 ($0.24) to SR2.04 ($0.54), up 126%, with diesel prices for transport unaffected. In recent times there have also been moves to widen the energy mix to include solar (see analysis) and potentially nuclear power, while new, more fuel-efficient systems have been put in place at existing power stations and are a requirement in the construction of new facilities. Meanwhile, a major campaign to manage demand has begun, ranging from smart grid applications to encouraging people to conserve and value energy.
On the generation side, Saudi Arabia has been pursuing a nuclear strategy for some years. In 2010 the King Abdullah City for Atomic and Renewable Energy (KACARE) was established to lead the Kingdom’s nuclear programme development. In January 2016 KACARE signed an agreement with China Nuclear Engineering Corporation to build a high-temperature reactor in Saudi Arabia, signing a further cooperation agreement in March 2017. That month also saw the Saudi Geological Survey sign an exploration agreement with the China National Nuclear Corporation to explore nine potential uranium-bearing sites around the Kingdom over the following two years. Saudi Arabia has also signed feasibility study agreements with other nuclear producers, such as South Korea.
Efficiency
SEC has been upgrading its stations for some years, with the aim of increasing efficiency. Many began operations more than 25 years ago, so moves are being made to convert open-cycle stations to combined-cycle, which should boost plant efficiency from 33% to over 45%. In 2016 SEC produced 24.6% of its total power via the combined-cycle method, up from just 8.3% in 2010.
The establishment of the Saudi Energy Efficiency Centre in 2010 is also boosting efficiencies at the consumer level. In 2012 it began working on the Saudi Energy Efficiency Programme (SEEP) focusing on industry, transportation and buildings – the sectors responsible for some 90% of energy consumption. Under the SEEP, 12 teams and 84 initiatives have since been launched, with the aim of developing and implementing new standards in electrical motors, and producing new fuel economy software.
Meanwhile, SEC is also pursuing the objective of achieving 100% smart meter penetration by 2025. “There are opportunities for Saudi-made technologies to compete in niche markets domestically and abroad,” Abdullah Alkhorayef, CEO of Alkhorayef Commercial Group, told OBG. “Power solutions for agricultural, residential and industrial customers are in high demand in the region.”
Outlook
These are busy times for the power and water sectors, with full privatisation on the agenda. While the water industry has advanced further down this road, the year ahead will likely see a greater role for private companies in power too. Meanwhile, efforts to widen the energy mix and manage demand are creating further opportunities, alongside smart metering and other ICT-based systems, hard infrastructure construction, and power and water project financing. Demand for both resources continues to increase, and this is expected to remain the case.
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