Saudi Arabia’s utilities sector will undergo significant changes in the coming years as the country works to reduce the number of barrels of oil it burns to create electricity, as well as the amount of drinking water it consumes. Beyond that, the sector is shifting amid subsidy reforms, the gradual privatisation of public assets, improvements in sanitation practices and plans to expand the use of desalination.

Vision 2030 – the Kingdom’s blueprint for social and economic reform – also works towards these ends, opening opportunities for privatisation, improving the quality of life, and diversifying sources of fuel for power generation and desalination. It includes commitments to ensuring the efficient use of high-quality energy and water services, as well as reforms regarding feedstock and end-user prices to ensure the market costs associated with the generation of electricity and desalinated water are reflected in household bills. Protections are included for low-income citizens, and the policy is expected to stimulate investment and boost competitiveness in the short to medium term.

Oversight

A number of government ministries have responsibilities related to utilities, and their roles – as well as the general organisation and regulation of the sector – have change significantly in recent years. In late August 2019 a royal order was issued dividing the portfolio of the Ministry of Energy, Industry and Mineral Resources into the Ministry of Energy, and the Ministry of Industry and Mineral Resources effective January 2020. The new Ministry of Energy – led by Prince Abdulaziz bin Salman bin Abdulaziz Al Saud – is responsible for oil, gas and renewable energy, while Bandar Alkhorayef is the minister of industry and mineral resources – two sectors that are crucial in efforts to diversify the economy, lower state spending and create jobs.

Also involved is the Ministry of Environment, Water and Agriculture (MEWA), handling issues related to potable water, wastewater and sewage. Abdulrahman bin Abdulmohsen Al Fadhli leads the ministry, which consists of the Directorate of Water Affairs and the Directorate of Water Services. Both directorates 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.

Structure & Performance

While ministries have responsibility for policy, operations are managed by a number of entities that are either fully or partially owned by the government. Saudi Arabia’s arid climate and limited groundwater reserves mean that, as is common in other Gulf nations, it is heavily reliant on desalination for the production of drinking water. Many desalination plants also generate electricity and, as such, are cogenerational. This has led to considerable overlap at the operational level between power and water operators.

The Electricity Cogeneration Regulatory Authority (ECRA) oversees the production of electricity and desalinated water by state-owned enterprises, independent water and power producers (IWPPs) and independent power producers (IPPs). The government owns equity in some of the major utility companies through the country’s sovereign wealth fund. The Public Investment Fund (PIF) owns 74.3% of Saudi Electricity Company (SEC), with Saudi Aramco, the state-owned energy and chemicals company, having a 6.9% stake, and the remaining 18.8% of shares floated on the Saudi Stock Exchange. The National Water Company is wholly government-owned through the PIF, with water supply and sanitation operations in Riyadh, Jeddah, Makkah and Taif. Regional directorates of MEWA manage the supply in other areas.

Water, electricity and gas accounted for 1.6% of GDP in 2019, or SR47.1bn ($12.6bn) in current prices, with the sector contracting by 4% from the year before, according to the General Authority for Statistics (GaStat). This fall was the most significant decline of any sector and may have been a reflection of the impact of energy efficiency campaigns, subsidy reform and demographic changes.

Electricity Generation

There were 79 power plants with a combined installed capacity of 85.5 GW at the end of 2018. SEC operated 40 directly owned power stations that were responsible for 65% of installed electricity generation capacity in 2018, according to ECRA. Through its role as a shareholder in a number of IPPs, the agency contributed 69.4% of installed capacity, according to an October 2019 estimate from credit ratings agency Standard and Poor’s. As of March 2020 the company served some 9.8m customers and was responsible for a transmission network of 84,600 km.

The majority of the remaining suppliers were smaller-scale producers, contributing between 1-2% of the total, with the next largest producer – the government-owned Saline Water Conversion (SWCC) – producing 9% of total electricity generated that year. Around 37% of capacity was licensed to producers in the Western Province, 36% in the Eastern Province, 19% in the Central Province and 8% in the Southern Province. Steam turbines and gas turbines each produced 41% of the supply, followed by combined-cycle units (17%) and diesel generators (1%). ECRA data showed in 2018 available capacity of the national grid was 68.8 GW compared to a peak load of 61.7 GW, leaving a reserve margin of 7.1 GW.

Some of Saudi Arabia’s cogeneration facilities and power plants serve industrial or energy companies, such as cement firms and Saudi Aramco. There are two cogeneration plants in the twin industrial cities of Jubail and Yanbu, and a third desalination plant operated by municipal firm Power and Water Company for Jubail and Yanbu produces 485,900 cu metres of water and 2 GW of power. The Royal Commission for Jubail and Yanbu, Saudi Aramco, petrochemicals producer SABIC and the PIF each own 24.81% of equity in the desalination plant’s operator, with the remaining 0.76% in private hands.

SEC’s financial statements for 2019 showed a 72.9% fall in net comprehensive income from SR2.6bn ($693.2m) in 2018 to SR641m ($170.9m), while net profits fell by 21% from SR1.8bn ($479.9m) to SR1.4bn ($373.2m). Historically, net profits were SR3.6bn ($959.8m) in 2014, but fell to SR1.5bn ($399.9m) in 2015 before climbing for two consecutive years to SR4.5bn ($1.2bn) and SR6.9bn ($1.8bn) in 2016 and 2017, respectively. In terms of electricity sold, volumes increased from 287,692 GWh in 2016 to 288,519 GWh in 2017, and fell to 282,124 GWh in 2018, reflecting a 2.1% compound annual growth rate (CAGR) over that period, according to SEC. The number of electrified customers also rose, with its CAGR of 5.5% outpacing that of sales.

Desalination

With installed capacity of 7.6m cu metres per day and desalinated water providing about 60% of the water needs of municipalities, Saudi Arabia is the world’s largest producer of desalinated water. The Kingdom accounts for over half (54%) of total desalinated water production in the GCC, and 22% of that throughout the world. The authorities aim to increase production further, with MEWA issuing a directive to provide 90% of urban water supply from desalinated water by 2030. According to the ministry, by 2030 only four regions – Najran, Hail, Al Jouf and the Northern Borders – will continue to rely on groundwater, and the remaining nine regions will use desalinated and surface water.

The SWCC operates 17 plants on the eastern and western coasts, as well as the 5600-km water transmission network. The SWCC produced around 60% of all desalinated water made in the country in 2018, with the private sector accounting for the rest. It is a key target for privatisation under the Kingdom’s Vision Realisation Programmes, created to support the government in achieving the objectives laid out in Vision 2030 (see analysis).

According to ECRA’s “Statistical Booklet 2018”, in addition to the SWCC’s plants, there were 12 privately owned desalination facilities. There were also 16 steam plants – eight of which were owned by Saudi Aramco – with the country having the capacity to produce 15,600 tonnes of steam per hour. One steam plant belonging to Rabigh Arabian Water & Electricity Company produced both desalinated water and steam. It accounted for 39.3% of all steam produced, with Saudi Aramco producing 29% and Tihama Power Generation Company producing 18.5%. Smaller producers accounted for the remainder. There were four IWPPs in operation that year.

Domestic Use

The principal off-taker of water is Saudi Water Partnership Company (SWPC), which changed its name from the Water and Electricity Company (WEC) in March 2019. The WEC was jointly owned by SEC and SWCC when it was founded in 2003. SWPC is owned by the Ministry of Finance and purchases desalinated, purified, treated and untreated water, as well as cogenerational activities. In addition to purchasing and selling water, SWPC is responsible for tendering new desalination and cogeneration projects and water storage.

With an eye on the future, in 2019 SWPC published a strategy running through 2025 covering desalination plants, sewage treatment facilities and strategic reservoirs. The company aims to fill gaps in water production, strategic storage and treatment capabilities by analysing supply and demand, and planning projects accordingly. It is building off efforts of other entities such as MEWA, which instituted a number of policies aimed to reduce water network losses and engage in demand-side management, such as the use of water-efficient appliances and tariff reforms. According to the strategy, total urban demand for water is expected to increase to 14.6m cu metres a day by 2025 before falling to 14.2m cu metres a day in 2030 as the strategy bears fruit.

The framework includes insight for the private sector on projects that are expected to be tendered by SWPC. The company foresees a gap of 4.5m cu metres per day of water by 2025, and the strategy will work to bridge the deficit by constructing 11 desalination plants in Riyadh, Qassim, Eastern Province, Makkah, Medina, Baha, Tabuk, Jazan and Assir. Together, they are expected to have a capacity of 5.5m cu metres a day. The statement projects total existing, under-construction and under-tendering water sources to reach 10.1m cu metres a day in 2025 and 8.4m cu metres a day in 2030.

According to the “Bulletin of Household Energy Survey 2019” published by GaStat, 89.3% of households use natural gas for cooking, while 10.2% used electricity, 0.3% used wood and 0.2% used other sources. Saudi Aramco supplies liquid fuel and gas used for domestic and commercial cooking, while the National Gas and Industrialisation Company is responsible for the filling, marketing and wholesale distribution of propane and butane cylinders.

Efficiency Savings

Launched in 2012, the Saudi Energy Efficiency Programme introduced a range of improvements and incentives to lower energy demand, such as stricter building standards and higher efficiency regulations for cooling and heating equipment. Between its establishment and 2018 it focused on industry, buildings and transportation, three sectors that represent over 90% of energy consumed in the Kingdom. In 2018 its mandate was extended to include utilities – specifically, energy efficiency in power generation, electricity transmission and distribution, and water desalination. It also raises awareness among the public about energy efficiency, running 10 campaigns between 2014 and 2018 via traditional media outlets, online advertisements and social media.

The government has also been edging towards electricity tariffs that are close to market rates by reducing energy subsidies in 2016 and again in 2018. In the latter round, residential customers, who collectively account for about half of the customer demand, saw an increase of 260% in electricity tariffs for those who consumed fewer than 6000 KWh. The impact of the higher tariffs, however, was to an extent ameliorated by new grants for citizens.

New Generation Sources

In order to encourage cleaner, more sustainable generation, Saudi Arabia is working to replace its stock of older power stations relying on crude, diesel or fuel oil with new plants running on natural gas. In 2018 the primary fuel at 239 plants was natural gas, with 227 using crude oil, 122 powered by diesel and 96 operating on heavy fuel oil. According to the “BP Statistical Review of World Energy 2019,” in 2018 Saudi Arabia was using more oil to generate electricity than any other country, with 150.6 TWh generated through oil, accounting for more than half of the 310.9 TWh generated using oil throughout the Middle East. Japan came in second in terms of using oil to generate electricity, at 60 TWh. Even so, that year Saudi Arabia produced more electricity from natural gas, at 233 TWh, than it did from oil.

It is important not only to diversify sources of electricity for environmental concerns, but also to ensure production methods are kept up-to-date. As power generation units age, newer technologies are coming online and becoming more widely used. According to ECRA, in 2018 facilities built over30 years ago accounted for 9.4 GW of electricity, with 58.5% coming from steam turbines and 41.5% from gas turbines. Plants built between 21 and 30 years ago produced 6 GW of energy, 56.7% of which was from steam, 20% from gas and 23.3% from combined-cycle units. Facilities constructed 11-20 years ago produced 15.7 GW, 50.3% of which was from steam, 42% from gas and 8.3% from combined cycle. Meanwhile, plants built between six and 10 years ago produced 21.5 GW, 25.1% of which came from steam, 51.6% from gas and 23.3% from combined cycle. Plants built zero to five years ago produced 32.6 GW, 49.4% from steam turbines, 21.5% from gas turbines and 28.8% from combined cycle units.

Water Technologies

It is not only power plants that are ageing and sources diversifying. The same is true with desalination facilities, with reverse osmosis (RO) and other technologies accounting for increasing proportions of the water supply. ECRA found that 1.7m cu metres a day of desalinated water was produced by facilities over 30 years old, while 442,000 cu metres a day were produced by plants built between 21 and 30 years ago, and 1.2m cu metres a day by those 11-20 years ago. Multi-stage flash distillation (MSF) was the dominant source of water in older facilities, accounting for 99.8% of water generated from facilities constructed over 30 years ago, 72.4% from those between 21 to 30 years ago, and 74.3% of water produced by facilities built 11-20 years ago, with the remainder produced by RO. By comparison, in facilities constructed between six and 10 years ago, MSF accounted for 36.9% of water produced, while 27% was from RO and 36.1% from multiple-effect distillation (MED). Facilities built within the last five years produced 37.8% of water from MSF, 52.5% from RO and 9.7% from MED. “While technologies now allow for the conversion of sewage water into potable water, neither Saudi Arabia nor European countries are currently doing so,” Javier Diaz Gomez, country manager of water management company Aqualia, told OBG. “However, the Kingdom is introducing policies aimed at reducing per capita water consumption.”

IPP

Four of Saudi Arabia’s major power plants have been built as IPPs, granting the private sector an important role in electricity generation. Together, they have a combined capacity of 9.3 GW. The Qurayyah IPP, a 4.1-GW facility built on a build-own-operate (BOO) basis, was the largest combined-cycle, gas-fired power plant in the world when it was launched. Qurayyah began operations in 2015 with an off-take contract lasting 20 years. It is managed by the group Hajr for Electricity Production Company and investors include ACWA Power, SEC, Samsung C&T and private equity investor MENA Infrastructure. It is the largest IPP in the country, accounting for 5% of total electricity produced.

In 2013 ACWA Power led another consortium into a power-purchase agreement with SEC to develop the 2.1-GW Rabigh 2 IPP on a BOO basis. The SR6bn ($1.6bn) plant – managed by the project group Al Mourjan for Electricity Production Company – began commercial operations in 2018. Other IPPs include the Riyadh PP11, a combined-cycle plant with net power output of 1.8 GW located 135 km west of the capital Riyadh and managed by Dhuruma O&M Company. The first Rabigh IPP has a capacity of 1.3 W and is managed by Rabigh Power Company. Rabigh-1, Rabigh-2 and Riyadh PP11 each contribute 2% of total electricity produced in the Kingdom.

IWPP

In addition to IPPs, three IWPPs operate in the market: Jubail Water and Power Company (2.9 GW), Shuaibah Water and Electricity Company (1.2 GW), and Shaqaiq Water and Electricity Company (1 GW). Shuaibah and Shaqaiq each contributed approximately 1% of total electricity produced in 2018, while Jubail contributed around 3%.

On Saudi Arabia’s western coast, two project companies, Shuaibah Water and Electricity Company (SWEC) and Shuaibah Expansion Project Company (SEPCO), collectively have a daily output capacity of 1m cu metres, with 888,000 cu metres coming from SWEC and 150,000 cu metres from SEPCO. The Shuaibah facility accounted for 14% of water produced in the Kingdom in 2018. Jubail, managed by the SWCC, has a daily output of 805,500 cu metres and accounted for 10% of water produced, while Shuqaiq produced 212,000 cu metres of water a day and accounted for 3% of total output.

Grid & Network Issues

According to ECRA data, at the end of 2018 there were 7791 circuit km of underground transmission cables carrying up to 110 KV and 337,700 circuit km of high-voltage distribution cables. Overhead lines carried 75,691 circuit km of transmission cables and 312,851 circuit km of high-voltage distribution lines. The combined length of overhead cables grew by 4.3% that year, while the underground network grew by 6.9%. Losses in transmission and distribution networks have ticked upwards since 2014, when it was at 6.9% of power supplied to the grid. The figure rose to 7.7% in 2015, 7.8% in 2016, 9.4% in 2017 and 9.5% in 2018. The authorities are looking to bridge these losses through investments and renovations in the grid.

The country is also moving to establish a smart grid. In December 2019 SEC awarded China Electric Power Equipment and Technology Company a $1.1bn contract to install 10m smart metres across the country. Around 3.5m of the metres will be sourced from local manufacturers, adding value to the economy. The metres are expected to be installed by March 2023. Once in place, the metres will be connected to the telecommunications grid and SEC’s billing system, and a smartphone app will be launched to allow users to monitor consumption in real time, obtain information about how to improve usage patterns and pay their bills electronically.

Similarly to the power segment, there are losses and shortages in the water networks. In its 2019 strategy document SWPC estimated that the urban water requirement in Saudi Arabia is 362.5 litres per capita per day, or 250 litres per capita per day for consumption, 50 litres per capita per day for peak consumption and 62.5 litres per capita for day for network losses. As such, losses are estimated to measure in at 17.2% of all water produced.

SWPC also noted that in some parts of the country, urban water demand has led to the overuse of ground and surface sources, much of which cannot be replenished. Part of SWPC’s strategy for addressing this water stress is through the construction of reservoirs capable of holding three days’ worth of water at any time, as well as strategic storage facilities for the Hajj, the annual pilgrimage.

Renewables

Saudi Arabia is not only looking to improve its existing power grid, but also to increase the contribution made by renewables to its power generation, with targets of 27.3 GW and 58.7 GW of green electricity by 2023 and 2030, respectively.

In January 2020 the Renewable Energy Project Development Office (REPDO) invited developers to pre-qualify for the third round of the National Renewable Energy Programme (NREP), a strategic initiative in line with Vision 2030 that aims to maximise Saudi Arabia’s renewable energy potential. REPDO was created in 2017 to drive green energy initiatives forward and its board includes representatives of Saudi Aramco, SEC, ECRA and the King Abdullah City for Atomic and Renewable Energy.

The NREP laid out a roadmap for the diversification of energy sources in order to stimulate sustainable economic development while simultaneously reducing CO emissions. The first round, issued in 2017, included a 300-MW photovoltaic (PV) plant located in Sakaka and a 400-MW wind facility in Dumat Al Jandal, both tendered as IPPs. The second round, announced in August 2019, included six projects that will produce 1.5 GW of solar PV power. The third round consisted of four solar PV projects that had a combined capacity of 1.2 GW.

Waste Management

Saudi Arabia is looking beyond clean and renewable sources to waste as a potential source of energy, with a goal to develop 3 GW of waste-to-energy by 2030. The kingdom produces around 15m tonnes of municipal solid waste a year. The development of waste-to-energy facilities would help the Kingdom reuse and manage solid waste, boost electricity capacity and even further diversify the energy mix away from hydrocarbons.

In line with the country’s wider goals, in July 2019 the National Waste Management Centre, Riyadh Municipality and the Saudi Investment Recycling Company (SIRC) announced a waste-management programme for Riyadh that envisions recycling 81% of municipal waste, and 47% of construction and demolition waste by 2035. Under the plan, 18m tonnes of construction and demolition waste will be recycled into building materials for road and housing projects. As part of the agreement, the SIRC, a unit of the PIF, will also build recycling and sorting plants that will turn municipal waste into recyclables such as fertiliser, paper, plastics and metals.

Outlook

The government is moving at pace to expand energy and water output to meet growing demand from businesses and individuals. Ambitious plans to upgrade utilities networks and facilities, while aligning more closely to market prices, make the Kingdom an increasingly attractive proposition for investors. There is an established framework for private participation and a will to increase the role played by the private sector in the transformation towards cleaner and renewable sources of energy.