The private sector is becoming increasingly important in reducing pressure on the Saudi Arabian state energy budget, after demand for power increased by 6.6 per cent per year since 2006.
A report by Arab Petroleum Investments Corporation (APICORP) said high levels of investment had not succeeded in meeting demand, and estimated a further $20 billion would be needed over the next five years to meet it.
“Electricity demand has surged over the past decade, with our estimates suggesting that the power sector needs $20 billion (US) of investment in the next five years to meet rising demand,” said the report.
“The government has been able to add significant capacity in the last decade but has more recently relied on independent power producers (IPPs) to share the burden.”
The kingdom’s current capacity is 82 gigawatts (GW), up from 60 GW in 2010, and at present, the Saudi Electricity Company (SEC) owns most of the country’s power generating assets, as well as being the only wholesale purchaser of energy from private companies, responsible for selling electricity to consumers.
“[But] the old model is not sustainable and the need to curb demand has become a priority. Historically, electricity prices have been too low, leading to overconsumption, whilst the provision of subsidized feedstock to power plants encouraged inefficient generation,” said APICORP’s report, adding: “To meet rising demand, the government had to invest in new generating capacity at a high cost, putting additional pressure on the government’s energy budget.”
The report from APICORP, a development bank headquartered between Al Khobar and Dammam in the kingdom’s Eastern Province, also highlighted SEC’s heavy reliance on external financing, borrowing at a record level of $5.1 billion in 2016, falling to $1.8 billion in 2017, with a total of $26 billion borrowed since 2006.
Saudi Arabia has 17GW of additional capacity already in the pipeline, of which 7.5GW are SEC projects while the rest are either Independent Power Projects (IPPs), as well as schemes by Saudi Aramco and Saline Water Conversion Company (SWCC).
However, the picture is complicated by the fact that demand growth is gradually slowing, according to APICORP, at a time when IPPs in Saudi Arabia typically sign power purchase agreements (PPAs) with SEC of between 20 and 25 years, under which state monopoly SEC agrees to buy the producer’s entire capacity for a set fee.
“In theory, this is fine as long as demand continues to rise,” the APICORP report said. “However, after years of unprecedented growth in electricity demand in the Kingdom, demand growth is now actually slowing. If this continues, the government could find itself with overcapacity and costly obligations in the long run, although in the medium term, this is less of an issue,” the report stated.
In 2016, the government announced that the SEC’s power generation assets would be allocated to four companies, which would be backed by local or international investors. APICORP said shares in these would most likely be offered on the Saudi stock exchange, although the timing of this currently uncertain.
Distributing distribution
“This will make the power-generating element of the sector more competitive and could eliminate some of the inefficiencies prevailing in the current bundled single-buyer model where the state owns most power-generating capacities,” the report said.
Renewable energy is an important part of the reforms, with a government target to produce 9.5GW from renewables by 2023, seeking investment of $30-50 billion to achieve it, it added.
APICORP said the first utility scale renewable solar project, the 300 megawatt (MW) Sakaka PV Project, was awarded to ACWA Power, under a PPA, and had achieved a world record price of $0.02342 per kilowatt hour (kWH).
However, earlier this month Saudi Arabia’s Public Investment Fund (PIF) denied that it had shelved a $200 billion plan with SoftBank Group to build the world’s biggest solar power generation plant.
APICORP also cited a need to liberalise pricing and introduce efficiency measures as part of the Saudi power sector’s market structure reform. Its report said uncertainty about how consumers would react to price hikes, as well as unclear future power structure of the sector and uncertainty around renewable energy integration, were key challenges.
Meanwhile, Fitch Solutions said in a report published last month that gas-fired power is expected to become the dominant source of electricity output in the kingdom as the government seeks to decrease the power sector’s reliance on oil in order to free up more crude for exports.
In its report, the research company said: “We expect that gas power will grow from just over 61.1 per cent of total electricity output in 2018 to 65.6 per cent by 2027.”
The kingdom has the fifth-highest gas reserves globally, ensuring the availability of feedstock for new gas power projects, the report noted, but its ‘ambitious’ plans for nuclear power projects were unlikely to be online within Fitch’s 10-year forecast period, it said.
“This is based on the continued delays in the government’s plans to construct nuclear capacity. Initially, the government's plans were to start construction in 2018. However, the Saudi government now aims to have selected the winning bidder by the end of 2018.”
Fitch cited nuclear weapon ambitions - Saudi Arabia has stated that it would pursue a nuclear weapons programme if Iran did the same - as a potential barrier to nuclear power investment in the kingdom from the United States of America, particularly after the US government negotiated for no nuclear weapons to be allowed in the United Arab Emirates in an agreement which dates back to 2009.
