In recent years, the country, which boasts the world’s largest oil reserves and is also the world’s largest oil exporter, has been struggling to meet the power requirements of its fast-increasing population, which are forecast to rise from 176TWh in 2010 to 211TWh by the end of 2015. valeria camerino reports.

The “power struggle”: housing boom and population growth

Saudi Arabia’s peak-time electricity demand is expected to record a three-fold increase in the next 20 years, Dr Abdullah Al Shehri, Governor of Saudi Electricity and Co-Generation Regulatory Authority (ECRA), said, identifying population growth, per capita consumption increase and low efficiency rates as the main demand drivers.

At present, the existing total Saudi generation capacity is around 40GW. According to recent statistics, which estimate an expected 7-8 per cent growth in electrical demand, this will reach 70GW by 2020.

Earlier this year, King Abdullah, the Custodian of the Two Holy Mosques, issued a new decree allocating SR250 billion (US$67 billion) to address the housing needs of its growing population, which will require two million homes by 2014, according to Credit Suisse estimates.

Demand for housing units in the Kingdom is expected to increase this year by between 25 and 35% compared to previous years, a report by the R&D department of the Saudi investment company KSB Capital Group suggests.

The subsidies are estimated to increase power needs by an additional 4-5GW over the next five years.

As a result, the authorities have outlined a long-term, ambitious development plan to boost the kingdom’s energy infrastructure.

“Not sure that the housing grants will cause a major increase in electricity demand, particularly since KSA has already quite an ambitious plan to add power to the grid over the next years,” said a major industry player that doesn’t wish to be named.

However, for some, the grants’ impact on electricity demand will only be felt at a later stage.

Nader Abdellatif, Country President at Alstom’s Saudi Arabian operations, for example, said: “We are hopeful that they will come into effect smoothly. However, with all new schemes there will be a period of familiarisation needed for the grants’ process and, thus, the impact on electricity demand will be seen after.”

The country, which has joined the GCC Interconnection grid, has also carried out a feasibility study to build a power link between Saudi Arabia and Egypt, which would provide it with 3,000MW additional capacity. The World Bank is likely to provide financing for the project.

From extending or upgrading existing plants and building new ones to examining alternative energy options, including nuclear and renewables, the Saudi government is doing its best to relieve the country’s power shortage.

However, with an expected population increase of 2.6 million by 2015, as well as GDP and electricity consumption per capita forecast to rise by 25% and nine per cent respectively, the task seems particularly daunting.

According to Business Monitor International’s (BMI) Saudi Arabia Power Report, released in April this year, the country is expected to account for 16.8% of Middle East and Africa (MEA) regional power generation by 2015, with a balanced market after system losses if there is sufficient additional investment in capacity.

Domestic power consumption is expected to increase from an estimated 176TWh in 2010 to 211TWh by the end of 2015, assuming 3.6% average annual growth in electricity generation.

“Between 2010 and 2020, we are forecasting an increase in Saudi electricity generation of 56.2%, which is near the middle of the range for the MEA region. This equates to 30.5% in the 2015-2020 period, up from 19.7% in 2010-2015.”

Furthermore, by 2015, the country is expected to account for 18.5% of region’s thermal generation. Saudi thermal power generation is forecast to rise by 56% between 2010 and 2020.

The report highlighted that oil has been the dominant fuel for Saudi Arabia in 2010, accounting for an estimated 65% of primary energy demand (PED), followed by gas at 35%.

Towards increased private sector participation

Saudi Arabia now shares the sixth place with Nigeria in BMI’s updated Power Business Environment Rating, in spite of its considerable market size, low level of energy import dependency and particularly low proportion of renewables use.

“The power sector is not competitive, with little progress towards privatisation,” the study said. “The regulatory environment remains relatively unattractive.”

However, in Dr Al Shehri’s view, the country has taken significant steps towards increasing market competitiveness.

Indeed, the Saudi market is embarking on a period of change as the Electricity and Cogeneration Regulatory Authority (ECRA) has recently announced the creation of a national company for the transmission of electricity.

If the plan is implemented, the market will be gradually shifting towards a more deregulated model.

As part of the plan, ECRA intends to separate the activities of the Saudi Electricity Company (SEC) – generation, transmission, distribution and service provision- into different companies.

The newly created companies will be initially under the umbrella of SEC.

“Several years ago, we decided to privatise the entire utilities sector”, Dr Al Shehri said. “We are currently in the process to privatise the water and electricity sectors. There is room for private sector involvement in renewable and conventional energy projects.”

Harnessing renewable and alternative energies

Last year, King Abdullah City for Atomic and Renewable Energy (KACARE) was established through a royal decree, as part of the government’s strategy to diversify its energy sources.

The entity is aimed at establishing cooperation with other countries, developing feasibility studies, assessing the implementation of new policies and regulations.

Dr Al Shehri explained that KACARE will announce the amount of subsidies that the government will introduce to promote renewable and nuclear energy deployment as well as the renewable energy quota in the country’s energy mix.

The Kingdom is also developing demand side management and energy efficiency programmes and has recently made building insulation mandatory, although the measure has not been enforced yet.

“Saudi Arabia has been active since the late 1970s to support research and development activities within the renewable energy sector,” he said “Academic institutions such as King Abdullah University and King Faisal University play an active role in developing local skills through vocational trainings.”

Alstom’s Abdellatif acknowledges that renewable energy growth is directly linked to the implementation of feed-in tariffs and other financial incentives, which will play a critical role in encouraging sustainable development in the Kingdom.

Another key industry player shares a similar view. In his view, for renewables to take off, feed-in-tariffs and offtake schemes need to be introduced by the government.

He observes that while solar power is abundant in Saudi Arabia, so are its oil resources.

“Renewable energy is perceived as not being as cost effective as fossil fuels,” the industry player, who wished to be anonymous, said. “But the Saudi Arabian government has pledged US $133 million for renewable energy projects in its 2011 budget, so evidently it is aware that at current consumption rates, the oil supply in the Kingdom will rapidly deplete, and it needs to look at other sources of energy,” he points out.

He claims that, although there are no concrete renewable energy projects being carried out in Saudi Arabia at the moment, this budget declaration shows how serious the Kingdom is taking the topic of renewable energy and how to use its solar resources.

“Saudi Arabia is currently looking into introducing a feed-in tariff to support the propagation of renewable solutions,” Alstom’s Abdellatif said.

As far as Saudi nuclear plans, the Kingdom intends to build 16 nuclear reactors over the next 20 years for a total investment of US$300 billion. Dr Al Shehri observed that “everywhere, the public has now mixed feelings towards nuclear”.

In his opinion, although there is an urgent need for improved nuclear safety measures and building design, nuclear will remain an important energy source in the future.

Dr Al Shehri argued that the main difference between the GCC nuclear programmes and Iran is the degree of transparency. “The GCC cooperation in nuclear initiatives is based on a clear and transparent approach,” he said. “The problem with the Iranian nuclear programme is the lack of transparency, which causes concerns for everybody.”

Power capacity boost

The Saudi power transmission market is led by ABB, followed by Siemens, which has recently announced its plans to build a switchgear production plant and a service centre in the Kingdom, and Alstom. However, recently, some Korean manufacturers, namely HHI and Hyosung, have been implementing a very aggressive pricing strategy for gas-insulated switchgears and power transformers and have therefore, increased their market share.

A number of local EPC contractors, such as Alfanar, Saudi Services for Electro-Mechanic Works (SSEM), National Contracting Company (NCC) and Al Toukhi, are also consolidating their position in their market.

Another active player in the Saudi power sector is GE. The company has recently been awarded an over US$500 million contract by the Saudi Electricity Company (SEC) for the expansion of its four power plants, Qurayyah, PP10, Qassim and Tabouk power plants. GE will deliver advanced gas turbine technology and services that will support Saudi Arabia generate nearly 1,700 MW, or over half of SEC’s targeted annual expansion of 3,000MW in the Kingdom’s grid.

A GE spokesperson claimed that the project brings GE Energy orders for SEC projects in the last 24 months alone to more than US$2 billion.

The Kingdom has maintained a high level of growth in the power industry over the past years, including during the global financial crisis.

“We see the market growing at 3-5GW a year to keep up with the ambitious infrastructure and residential investment plans proceeding in the Kingdom,” Alstoms Abdellatif said.

He adds that Saudi Arabia’s power capacity increase will make up between 60 and 70% of the GCC total power increase.

The power generation specialist is involved in a number of projects in the Kingdom, which accounts for around 40% of its business volume within the Near Middle East region.

The SEC, which is the only supplier of electricity to the Kingdom, is Alstom’s main Saudi customer, in addition to the Gulf Cooperation Council Interconnection Authority (GCCIA), which is headquartered in Al Khobar.

The company also works closely with the desalination and oil industries.

Alstom has designed, manufactured and built the 5.6 GW Shoaiba power and desalination complex on the coast of the Red Sea, about 120 kilometres south of Jeddah, which include flue gas desulphurisation (FGD) equipment to reduce sulphur emissions resulting from burning oil, and ensure compliance with strict environmental standards and concerns.

The FGD system is a wet SWFGD system that uses seawater to capture the sulphur dioxide in the flue gas.

The US$ 2 billion-worth Saudi power transmission market is a wealth of business opportunities, said Abdellatif.

In addition to the traditional utility Gas Insulated Substation (GIS) segment, he sees significant potential for Solar Power Supply systems (SPS), High Voltage Direct Current (HVDC) and Flexible AC Transmission Systems (FACTS).

“The Kingdom has set about adding a significant additional generating capacity to its roadmap,” said Abdellatif.

“However, to ensure that they have sufficient power in the meantime it is important that they continue to operate and maintain their existing plants.”

As he points out, along with the maintenance and upgrade of the existing plants, updating the transmission systems is also fundamental to guarantee security of supply.

SEC has recently awarded a €57 million (US$83.5 million) contract to Alstom for the extension of five substations and the construction of two new substations.

In Abdellatif’s opinion, smart grid solutions will play a key role in addressing the region’s power shortage issues.

“The smarter grid systems are facing several top-level challenges raising the networks complexity: the increased demand for energy and electricity, moving towards an environmentally friendlier energy mix (lower carbon emissions, more renewable energy); volatile energy prices and critical energy losses; and emerging large Gulf transmission networks,” explained.

In his opinion, smart grid solutions reinforce the existing needs, ensuring security of supply, network reliability and the quality of the electricity delivered.

Some of GCC’s key power challenges, he said, include monitoring oscillations and managing the network to prevent blackouts, maximising availability of power, and optimising market efficiency by setting up tools and processes to fully enable end-users’ active participation in the energy market.

Abdellatif observed that, as the main OPEC swing producer, the Kingdom is in a strong position within the cartel.

Furthermore, he said, the recent oil price boom has boosted growth in the non-oil sector and infrastructure is now much improved. A large and growing local population means solid domestic demand for goods, services and infrastructure in spite of the global macroeconomic crisis.

Saudi Aramco, the world’s largest state-owned oil company, plans to double its power-generating capacity to 4,000MW by 2015 to supply all the expected electricity it will need to produce crude and natural gas.

The company is expanding power plants at existing oil and gas sites and aims to build generators for refineries and other facilities that are under development, Ziyad Al Shiha, the executive director of Aramco Power Systems, was reported to have said at the Saudi Water, Electricity and Power conference in Dhahran.

The analyst’s view SEC has a low-risk profile, says Moody’s 

Martin Kohlhase, Dubai-based Assistant Vice President – Analyst Corporate Finance Group, at rating agency Moody’s, comments on Saudi power sector’s credit risk levels.

To what extent will the recently announced government housing grants boost the Saudi construction sector and, as a result, the power industry?

The stimulus package will, as a secondary effect, also impact the power industry, as more capacity, will be required for the additional demand created.

Do you think that the grants will be effective in relieving the Saudi housing and electricity shortages?

The government has already in the past been supportive of SEC by supplying the company with fuel. The government is also behind the push for new capacity as it is in line with the broader strategic policy goal to diversify the national economy for which sufficient power capacity is paramount.

Could you please briefly describe Saudi electricity regulatory framework?

It appears to be well-established and regularly assessed. SEC benefits from tariff increases to meet its expansion goals.

What are the regulatory challenges that the market faces?

Unbundling and private sector participation, which are part of the government’s plan to promote a more competitive structure for the Saudi electricity industry, could jeopardise the SEC’s low credit risk profile over the long term.

Based on the information provided, how do you rate the Saudi power market in terms of energy risk?

Energy providers need to ensure that sufficient capacity is available to meet growing demand, expected to be in the 8-9% range. As Saudi Arabia is long on fuel, the procurement risk is low, although it is not as efficient to have fuel-powered plants.

What are the key factors and market drivers that you have taken into account to assign the above rating?

Moody’s views SEC’s business risk profile as low, given the strength of its preeminent domestic market position as integrated and monopoly electricity provider in the Kingdom of Saudi Arabia, as well as its supportive regulatory environment. Saudi Arabia’s electricity demand has been rising significantly in recent years, and growth is expected to remain strong in the foreseeable future, thus providing attractive investment opportunities to all utilities operating in the sector, particularly to SEC, which controls the vast majority of the market and is tasked with providing stable supply throughout the Kingdom. Ratings are also enhanced by a favourable procurement cost structure, as SEC sources its fuel needs from Saudi Aramco, which is obliged by Royal Decree to maintain adequate supply of fuel to SEC. Finally, ratings incorporate Moody’s assumption of strong government support and we recognise that should support be required, the government would intervene. This has been demonstrated throughout SEC’s history by means of government soft loans, non-cash fuel payments and in 2010 a revised commercial tariff framework. Moody’s considers SEC’s baseline credit assessment in the low “A” range.
German-Saudi cooperation in use of high-efficiency energy 

Saudi Arabia and Germany entered a joint cooperation agreement in order to strengthen the relationship between the two countries in the field of energy efficiency in buildings.

The agreement between the Saudi Forum of Green Building and the German Office of Trade and Industry in Saudi Arabia, AHK was signed at the beginning of May, at a symposium titled “Energy Efficiency in buildings in Saudi Arabia”, held in Riyadh by the German Office of Industry and Trade.

Dr Saleh Al-Awaji, Deputy Minister of Water and Electricity for Electricity Affairs, stressed that the use of high-efficiency energy is expected to reduce overall consumption of electricity by 30%.

Energy efficiency has become a key priority for Saudi Arabia’s energy policymakers, as well as public and private contractors. A regulation on thermal insulation in buildings was passed in September 2010, and a new Saudi Building Code is currently being drafted.