JEDDAH: The power sector's role within the Kingdom's socio-economic development is significant, especially as the country diversifies its economy away from its dependency on oil. The sector aims to strengthen the economy's industrial base, and expand its infrastructure in order to accommodate the demands of the rapidly growing population, the National Commercial Bank (NCB) said in its Saudi Power Sector Review released on Wednesday.
State-controlled power utility company, Saudi Electricity Company (SEC), has been active since its consolidation in 2000, by extending electrification to all parts of the Kingdom. Through off-take agreements with the Saline Water Conversion Company (SWCC) desalination plants, and purchased power from large contributors like Saudi Aramco, both the power and water infrastructure has largely developed over the past decade.
Nonetheless, greater generation capacity will be required over the upcoming years to sustain the Kingdom's level of economic development, in turn accentuating the extent of the challenges the sector faces. Artificially low tariffs in a highly regulated sector have led to wasteful use of electricity causing power shortages and blackouts. Accordingly, sizable funding needs have emerged as a central issue. To overcome this challenge, the Kingdom is encouraging more private sector participation investments vis-à-vis independent power/water/steam producers (IPPs, IWPPs and IWSPPs), and financiers, the report said.
Market determinants
Saudi Arabia's rapidly rising population, expansionary fiscal policies and large investments in social and physical infrastructure have exerted pressure on the existing electrical network. Total population has grown at a CAGR of 3 percent over the past decade, and is expected to continue rising at a nearly similar pace over the next five years. This steady growth of consumers has resulted in a 6 percent increase in power consumption over the same period. The accelerated pace of power consumption relative to that of population is attributed to low tariff rates, which is below production cost for the same unit, as the power sector continues to be heavily subsidized by the government. While the Saudi population is estimated to reach 31.69 million in 2015, additional pressure will be placed on energy intensive desalination plants for potable water, as well as on electricity for air conditioning during the summer months.
The abundance of oil and gas reserves provides the Kingdom with both a comparative advantage in energy costs and in funding sources. This acts as a key driver in the project market. In 2010, total contract awards in the construction sector alone amounted to SR107 billion, led by the power sector at SR38 billion, followed by residential real estate. The pace of the project market has assumed even a faster rate in 2011. Total contract awards amounted to SR179.5 billion up to Q3, with the power sector accounting for 14 percent share.
The Kingdom's 2011 budget aims to continue enhancing economic capacity, through raising the level of capital expenditure. Total capital outlay is forecast to amount to 44 percent of the SR580 billion planned budget, reaching an estimated SR255 billion. Moreover, the Ninth Development Plan (2010-2014) has also earmarked an estimated SR1.44 trillion in financial requirements for the development of social and physical infrastructure. Collectively, these factors are going to shape the power sector in the upcoming years, the NCB report added.
The power sector
In volume terms, the size of the electricity sector in the Kingdom can be estimated by accumulating the actual generation capacity of (1) SEC power plants, (2) desalination plants and (3) large producers. SEC purchases power from the latter two sources to supplement the electrical grid, specifically during peak loads. The total actual generation capacity was 49,138 MW by the end of 2010. In value terms, the market size amounted to SR27.9 billion for the same period based on SEC's total operating revenues. The Kingdom's Ninth Development Plan (2010-2014) aims to raise the generation capacity by 20,400 MW over the next 5-year period.
Over the past decade, SEC's contribution to the Kingdom's total generation capacity has averaged at 87 percent, with purchased power from desalination plants, large producers and rental diesel units supplying the rest. At the end of 2010, total electricity delivered through the electrical grid was 234,371 gigawatt hours (GW).
Electricity consumption
By the end of 2010, total electricity sold reached 212,263 GW, a 9.7 percent Y/Y increase, reaching 5,997,553 customers. The consumption level in 2010 represented an 86 percent increase from that in 2000, having grown at a CAGR of 6.4 percent over the last decade.
By the end of 2010, per capita electricity consumption was 7,822 kWh. It had grown by over 40 percent since 2000, thus increasing by a CAGR of 3.4 percent over the 10-year period. Therefore, electricity consumption, which has increased by a CAGR of 6.4 percent, not only had to accommodate for the population growth of 3.0 percent, but also for the higher per capita consumption.
For purposes of comparison, given the size of the Kingdom's economy and its GDP per capita by year end 2008 of $18,471, Saudi Arabia's per capita electricity consumption remains lower than its peers in the GCC or similar economies.
According to the NCB report about 4.9 million residential subscribers continued to command the most electrical consumption, accounting for 51 percent of the total in 2010 or 108,627 GW. This translates into an annual average demand of 22,204 kWh per household consumer; or a monthly equivalent of 1,850 kWh. This average monthly consumption is categorized in the primary tariff bracket of 5 Halalas/kWh. Therefore, the majority of revenues generated are from the lowest tariff bracket, restricting the profit margin of an industry already facing financing challenges.
Industrial consumption
Power consumption by the industrial sector grew at a CAGR of 3 percent since 2000 to reach 38,569 GW in 2010, an equivalent of 18 percent of total consumption. Twenty years ago, the share of industrial consumption was 28.3 percent at 16,666 GW, and by 2000 it fell to 24.2 percent. As more industrial plants began to rely on their independent power generation, the share of the industrial category consumption on the grid has declined.
Kingdomwide consumption
By the end of 2010, the Eastern region accounted for the highest consumption share at 31 percent, closely followed by the Western region at 30.67 percent. The Central region captured 30.03 percent, with the Southern region receiving only a smaller share of 8.29 percent. In terms of the share of industrial consumption to total consumption on a regional basis, the Eastern region accounted for the highest, at 45.10 percent. This is due to the higher concentration of industrial projects in the Eastern Province.
Peak load demand
The Kingdom's peak load demand is normally occurring during the summer months. In 2010, Saudi Arabia's peak load was 45,661 MW, having more than doubled since 2000. Over the past decade, it has grown at a CAGR of 7.7 percent, while the Kingdom's actual generation capacity has risen at a slower CAGR of 6.7 percent. This has narrowed the country's reserve margin, and tightened the demand-supply balance.
In 2002, the Kingdom's reserve margin widened to 19.7 percent. By the end of 2010, this cushion had dwindled to a mere 7.6 percent, somewhat lower than the industry norm of at least 10-20 percent. A reserve margin is needed as insurance against breakdowns in parts of the system and to ensure that electrical networks can cope with unexpected increases in demand. The Kingdom's Ninth Development Plan (2010-2014) aims to raise the reserve margin to 19.8 percent by 2014.
SEC fuel consumption
All fuel for SEC's power generation is supplied under long-term arrangements by Saudi Aramco with prices set by the government. Fuel consumption for power generation grew by 75 percent since 2000 to reach 53 million Ton of Oil Equivalent (TOE) in 2009. This was equivalent to an estimated daily consumption of 1,069,037 barrels of oil to meet the Kingdom's power needs. For the same period, the consumption of heavy fuel oil, crude oil and diesel grew by 73 percent, 75 percent and 44 percent, respectively. In 2010, crude oil continued to command the largest share, at 40 percent of fuel consumption.
The supply of crude oil, however, has come under constraint following a government decision to free up oil stocks for export and higher-end uses rather than direct burn for power generation. As a result, more gas has been allocated for power generation instead. Since 2000, gas consumption for power generation grew by 94 percent to reach 22,095 million cubic meters in 2009.
To further curb its dependence on crude, the Kingdom has commenced with initiatives that promote a more sustainable portfolio of energy sources. It is tapping into energy alternatives such as nuclear power and solar energy. The King Abdullah City for Atomic and Renew-able Energy is set up to develop nuclear technology as part of a SR300 billion drive to boost power generation over the next decade, thus allowing the Kingdom to maintain significant oil exports.
SEC financial obligations
SEC continues to face difficulties in meeting its financial obligations. In 2010, total operating revenues were SR27.9 billion, increasing by approximately 17 percent since 2009. Over the same year, net income almost doubled, growing to SR2.3 billion. However, while the recent revised hike in tariff structure improved SEC's profitability in 2010, it remains insufficient to assist the company in covering its funding requirements.
Other sizable obligations include SEC's payables. Net electricity consumers' receivables were SAR8.7 billion by the end of 2010, while its payables for the same period were equivalent to SR49.5 billion, consisting mainly of fuel costs and purchased energy.
Electricity sector financing
There are four main direct external sources of funding for SEC: (1) government loans, (2) bank loans, (3) export credit agencies (ECAs), and (4) sukuk. Indirectly, SEC in partnership with private developers are funding power generation projects through several project finance schemes. At the end of 2010, SEC had outstanding commercial debt equivalent to SR30.8 billion.
Outlook
Projecting domestic consumption to grow at its current rate of 6.4 percent per year, by 2015, total electricity consumption will reach 289,437 GW. This will correspond to a per capita electricity consumption of 9,134 kWh. The rise in per capita electricity consumption can be attributed to the rising pace of urbanization and industrialization witnessed in the Kingdom. In addition, changes in the behavior of households, on the back of attaching more importance to functional features of end-use equipment and affluence, will shift consumers into higher electricity consumption slabs. Assuming the 8-year CAGR at 1 percent of effective tariff rates, in turn, market size is forecasted to reach SR39.4 billion in nominal terms by 2015, the NCB report said.
Saudi Arabia needs to expand its power capacity and networks to support the Kingdom's ambitious industrialization plan, as well as meet its growing population demand, the report added.
© Arab News 2011
