Saudi Electricity Co. (SEC), which is majority state-owned, says its power generation capacity rose to almost 45,400 megawatts (MW) in the first quarter of 2010, up 76 percent from 25,800 MW in April 2000.
The size of the utility's electricity transmission networks increased 45 percent to nearly 42,800 km from 29,600 km in 2000, while the distribution grid grew 63 percent to nearly 368,400 km from almost 226,700 km over the period. The number of subscribers increased over the same period to 5.77 million from 3.5 million.
However, according to analysts, fuel shortages and other hurdles will put new electricity generation targets in Saudi Arabia out of reach, as the Kingdom prepares to use more of its oil to keep domestic lights on and air conditioners running. SEC's annual report says it wanted to add 12,043 MW power capacity by 2015, equivalent to between four and eight power plants of the size commonly built in the Gulf. The company plans to add 2,478 MW this year alone, according to the report. The country's current capacity is just under 40,000 MW.
The plan faces a number of constraints, including shortages of fuel and manpower, and a lengthy contracting process, says Douglas Caskie, an expert in Gulf power at the international consultancy IPA Energy and Water Economics. "That sounds very ambitious given the capacity developments so far. If you imagine 2,000 MW as a really significant sized power plant, to replicate that, to run the procurement process for that in five years, four times over, is significant."
Saudi Arabia is in dire need of more electricity capacity. Power cuts are an annual occurrence at periods of peak demand in summer, and consumption is increasing at one of the fastest rates in the world. There has been double-digit, compound growth in demand. And that is a combination of a number of factors including low tariffs plus the ongoing planned development of projects, the industrial cities, and the new economic cities.
A shortage of natural gas remains a significant constraint, with Saudi Aramco, the state oil company, being pulled in different directions to supply gas to industrial plants and its own operations, JP Morgan Chase, the investment bank, said in a recent report.
"With gas growth uncertain over the next few years and a stated policy that petrochemicals get first priority for gas supplies, it appears that the Kingdom's power generation will require an increasing amount of oil," says Lawrence Eagles, the author of the report. The burning of oil to generate electricity emits more pollution, requires additional capital investment in power plant technology and reduces the country's exports.
By 2012, Saudi Arabia could be burning 900,000 to 1.2 million barrels per day (bpd) of oil to generate electricity in summer months, JP Morgan says. The country used as much as 470,000 bpd of crude oil last summer, according to a global energy consultancy.
Saudi Arabia has few alternatives. Solar energy is considered an unrealistic option in certain quarters because of its high cost. Nuclear energy is not being pursued as much as the UAE is doing. Natural gas, the default option that fuels slightly less than half of Saudi power capacity, remains in short supply. Despite its vast oil reserves, the country has few reservoirs of natural gas found separately from oil deposits, so gas supplies decrease with OPEC quotas and other limits to oil production, according to analysts.
Saudi Aramco hopes to find significant new reserves in the Empty Quarter in the south, but its efforts after almost six years of drilling with foreign partners have not borne desired fruit. "They would need a significant find. I think they would need a game-changing find in the Empty Quarter if these things are going to be gas-fired," Caskie said of the planned new power plants. "They'll burn fuel or oil.
Meanwhile, Saudi Arabia's effort to unbundle, deregulate and privatize its electricity generation, transmission and distribution industry is taking a leap forward, with new thinking formulated after a lengthy break. A plan has been aired by Saudi Arabia's Electricity and Cogeneration Authority to split the state-controlled SEC's power generation assets into four competing companies and divide the remaining distribution and transmission assets into another two outfits.
The Kingdom has been considering possible reforms for a long time, but has had to overcome opposition to privatization, as well as finding a working blueprint for the reforms. A shortage of gas feedstock might, however, continue to constrain swift generation growth even after the reform, says an analyst.
The plan is hoped to finally bring more private investment into the Kingdom's power sector, which keeps growing at a pace with which the state is finding it hard to keep up, although for the full benefits of privatization and competition to filter through, a scrapping of the generous subsidies would be necessary.
According to analysts, Saudi Arabia has been mulling the idea of radically reforming the electricity generation, transmission, and distribution sector for many years, ever since the potential of allowing private power-generation investments through independent power projects (IPPs). Indeed, a more or less detailed plan to break up the SEC into at least four competing power-generation companies was originally floated a year ago. The plan is now set to move forward with implementation now scheduled for mid-2010.
Abdullah Al-Shehri, vice governor for regulatory affairs at Saudi Arabia's Electricity and Cogeneration Authority, said: "SEC currently owns generation, distribution and transmission and we would like to see this unbundled. Our requirement is by mid-2010 to create competition and encourage privatization." Outlining the plan further, Al-Shehri said SEC would be transformed into a holding company only, owning the four new power generation companies, as well as a transmission and a distribution company.
The plan is understood to call for an equal division of SEC's current generation capacity, which he put at about 36,000 MW, giving each of the four new power producers around 9,000 MW of capacity. With that base, the companies would be able both to divest generation assets in order to finance other projects, or to build strategic alliances. It still remains unclear whether the companies will have as equal a generation capacity spread over the vast country as possible, or whether they will be region-based.
Saudi Arabia's electricity demand has been spiraling for many years, on the back not only of the last few years' high oil export revenues, but also because of the population growth. While the latter is likely to remain robust, economic growth in Saudi Arabia is likely to take a significant hit from the fall in oil export revenue since mid-2008, and from the lower industrial growth and electricity demand that are also a by-product of the deep ongoing global recession. Nevertheless, high electricity demand growth by international measures is still expected, with Al-Shehri confirming that the Kingdom was anticipating a six percent demand growth this year as new generation capacity is brought online, relieving supply constraints suffered on and off over the past decade.
Saudi Arabia's main problem with bringing sufficient new generation capacity online has been the lack of sufficient gas feedstock for new plants, while it has been reluctant to launch projects for new plants that are run on petroleum-based-fuel. This has eased somewhat over the past two years, and the government seems to have accepted that there will be a place for oil-based fuels in its electricity generation for quite some time, though it is also continuing a drive to develop as much associated and non-associated gas for power supplies as swiftly as possible.
SEC is partly privatized, with 20 percent of the company's shares floated on the Saudi stock market, somewhat complicating the forced break-up of the company. While it is likely that the four competing power generation companies will be offered to investors, attracting those with a presence in a high-growth market, the country's regulated and highly subsidized retail electricity price will still ensure that only the state might actually experience any benefit from the break-up and the resulting domestic competition. For the competing power generators, the measure is likely to bring their own margins under some pressure, lowering some of the Saudi Arabian generation market's attractiveness resulting from its growth.
According to the latest forecasts from Report Linker, the country is expected to see an increase in generating capacity of 38.2 percent over the 2009-2014 period, on the back of expectations of real GDP growth averaging 3.36 percent per annum over the 2010-14 period. According to a recent estimate by Banque Saudi Fransi, investment in the Kingdom's power and water sectors will need to rise by around a third to $266.7 billion through to 2025, compared to the total investment of $400 billion planned for total infrastructure. So far, $80 billion has been budgeted for new generating capacity.
SEC expects generating capacity to be increased from the current 45GW to 70 GW by 2020 or around 3GW every year. The driving force behind this rapid increase is a combination of the country's reliance on desalination plants for its drinking water, rising demand for air conditioning and expectations that GDP per capita will rise by 42 percent over the same period.
By K.S. RAMKUMAR
© Arab News 2010
