Waiting for Privatisation: Saudi Arabia's Electricity Generation and Distribution Programmes Offer Tremendous Scope for Investment but Only after the Promised Privatisation Measures Have Been Put in Place

By Ford, Neil | The Middle East, January 2005 | Go to article overview
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Waiting for Privatisation: Saudi Arabia's Electricity Generation and Distribution Programmes Offer Tremendous Scope for Investment but Only after the Promised Privatisation Measures Have Been Put in Place


Ford, Neil, The Middle East


WHEN SAUDI ARABIA'S SUPREME ECONOMIC Council ordered the formation of the Electricity Regulatory Authority (ERA) at the end of November 2001, it seemed as if competition in the Saudi electricity sector could not be far behind. Why set up a regulator without a genuine market to regulate? Yet although the government remains committed to unbundling the Saudi Electric Company (SEC), it appears loath to loosen its control of the industry.

While the government has not made an express commitment towards the privatisation of the power sector, it has certainly moved in that direction. Greater private sector participation is being encouraged, while SEC is to be divided into generation, transmission and distribution components. It remains to be seen how much competition this will engender and how many separate business units will be formed. The creation of the ERA seemed to point towards a more competitive market, but its responsibilities at present appear confined to integrating independent power producers (IPPs) with the rest of the sector.

With or without sector reform, new generating plants are a priority because of annual growth in demand in excess of 5% and the inadequacy of existing capacity. Continued population growth and rising per capita electricity consumption should see demand continue to rise just as quickly for the foreseeable future. The Saudi electrification rate stands at just over 80% and SEC is unlikely to complete its rural electrification programme until the end of the decade. However, connecting new consumers should help to maintain levels of demand growth.

According to the Ministry of Industry and Electricity, 20GW of new capacity is required over the period 2003-2019 and given the length of time required to develop new plants, it is vital that a long term strategy for achieving this goal is put into place as soon as possible. Although national generating capacity currently stands at just 26.6GW, Saudi Arabia's plans for industrialisation and its plentiful gas reserves mean the 20 GW target is not overly ambitious. It is likely that the lion's share of new capacity will be provided by gas fired plants. Apart from the ease of using domestic reserves, the durability of high oil prices and the government's desire to maximise oil exports should rule out new oil fired plants, even though new technology makes them a cleaner option.

The government hopes private sector developers can provide most of the new generating capacity required; although it is still unclear how privately funded plants will fit in to the rest of the sector. Towards the end of 2003, SEC announced plans for $4.5bn of new infrastructural investment. Some of the money is being put into new interconnectors in order to ease the transmission of electricity around the country, creating a more comprehensive national power grid. However, as Table 1 outlines, seven new generating plants are also to be built, providing over 14GW of new capacity.

SEC has only been in existence since 2000, when the government merged the country's various power companies, all of which are believed to have been in debt because of mandatory low tariffs. The sector is still unofficially subsidised thanks to artificially low tariffs that are set by the government and although it is intended that SEC should be financially viable, this seems an unattainable aim at the current time without government support.

Major private sector companies are already active in the sector. For example, CMS Energy is constructing a 250MW cogeneration plant for the Saudi Petrochemical Company, while Bechtel and Mitsubishi are developing the 2,400MW Ghazlan II plant at a cost of $1.7bn. The first turbines have already been brought on stream and the plant is scheduled for completion later this year. Further plants are likely to be built in build-own-transfer (BOT) and build-own-operate (BOO) contracts and are likely to be planned by the government and SEC rather than by private companies identifying good opportunities for IPPs.

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Waiting for Privatisation: Saudi Arabia's Electricity Generation and Distribution Programmes Offer Tremendous Scope for Investment but Only after the Promised Privatisation Measures Have Been Put in Place
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