Without a robust and diversified power strategy, much of Saudi Arabia's economic ambitions will fall by the wayside. Here is a look at the country's key power and electricity challenges.
There are more than 109 power projects under way in Saudi Arabia with a combined value of at least $55-billion, according to Zawya Projects Monitor.
And that may still not be enough to sate Saudi Arabia's hunger for electricity.
Saleh Al-Awaji, Saudi Arabia's Deputy Minister for Power & Electricity, noted in a recent press conference that the Kingdom has earmarked between $80 billion to $100-billion over the next ten years to meet its power demand.
In December 2010, Jadwa Investment estimated that electricity, gas and water is expected to be the fastest growing sector of the economy in 2011. "The sector has seen huge investment from the government in order to keep up with growth in demand of around 7% per year.
"Several major projects are coming to fruition in 2011, the largest of which are the Riyadh Power Plant 10, with capacity of 2,000 megawatts and the Shaibah power plant extension, with capacity of 1,200 megawatts. Together these will add around 7 percent to total power generation capacity. In addition there will be the first full year of output from the Jubail and Shuqaiq independent water and power projects, which started operations in the second half of 2010 with a combined capacity of 3,595 megawatts of power and 1 million cubic meters of water."
Jadwa estimated that the electricity, water and power sector will grow by 6.5% this year, compared to 6% last year, the highest economic growth of any economic sector in the Kingdom.
Here are the power challenges facing Saudi authorities:
- The power capacity currently is 50 gigawatts, which has more than doubled since 2000. Peak power demand stood at 41 megawatt last year, leaving very little spare capacity
- The Kingdom power needs are rising 8% annually
- The Kingdom needs 20-30 gigawatts in the next 20 years to meet the rising demand
- Independent water and power projects will add 12,000 megawatt capacity at a cost of $22-billion
- Saudi Electricity's Executive President says power projects worth $22-billion will be under way this year alone.
And much of these estimates were made before the Saudi King unleashed his $100-billion plus economic stimulus package, which will make even more demands on the country's power infrastructure.
This mega package, combined with rising populations, rising wages and construction spree has the ability to give the country a momentum, almost a super-cycle of growth that will see its economy rise by 7.5% this year, according to IMF estimates.
Also Read: Saudi Population Compendium:
Diverting Oil Production
This excessive demand will clearly strain the country's power supplies and could take valuable oil from the global market as Saudi Arabia diverts its oil production to satisfy domestic needs.
While Saudi is one of the largest producers and exporters of oil, the country is also one of the largest consumer of petroleum in the Middle East, particularly in the area of transportation fuels and direct burn for power generation.
"Domestic consumption growth has been spurred by the economic boom due to historically high oil prices and large fuel subsidies," according to the U.S. Department of Energy.
"In 2008, Saudi Arabia was the 15th largest consumer of total primary energy, of which almost 60 percent was petroleum-based and the rest natural gas. Saudi Arabia is moving forward with plans to produce power from nuclear reactors by 2020 in order to meet domestic power needs and to free up oil and natural gas for export and higher-end uses than direct burn for power generation."
This is crucial as the new stimulus package means Saudi Arabia needs to pump oil at consistently high levels to ensure it meets its domestic fiscal needs and balance its budget.
Indeed, industry figures suggest that Saudi Arabia will use 540,000 barrels of oil per day in 2011 to meet its power needs. Last year, the figure stood at 403,000 barrels per day.
Oil was the dominant fuel for Saudi Arabia in 2010, accounting for an estimated 65% of primary energy demand (PED), followed by gas at 35%, according to Business Monitor International estimates.
Not surprisingly, Saudi Arabia's new power strategy is to use other energy sources such as gas, solar, even nuclear to power the domestic economy and free up its oil production for lucrative exports.
That is a tall order and brings a number of alternative energy sources into play.
Concentratiof of Power
At the moment, much of the burden of providing Saudi Arabia's power supply rests with the Saudi Electricity Company, which generates over 90% of Saudi Arabia's power needs and supplies to five million businesses and households across the country.
With the completion of two power linkage projects between the central and western regions and the western and southern regions, SEC has linked about 95% of the country's power network and proposes to connect the remaining 5% within five years, thereby connecting all the regions to a single power grid.
"During August 2010, the company approved seven power projects worth SAR14.7 billion," notes Bahrain-based Taib Bank. "Apart from this, the SEC board approved a number of 380KV power transmission lines across 886 kilometers in addition to 380KV transformer stations at Al-Jouf, Hail and the Eastern Province with a combined capacity of 2,500 MW."
Moreover, several projects including the 800 MW power plant in Riyadh, the 110 MW Wadi Al-Dawasser plant, Duba, Qassim-2, and Rabigh-6 plants will be commissioned this year.
Taib Bank estimates that the Saudi Arabia's demand for electricity will triple to 121,000 MW by 2032.
"In order to meet this growing demand, the company awarded several contracts to expand existing capacities and for the construction of new plants during 3Q10. In November 2010, the company announced the tendering process for the 11,000 MW gas-fired Al-Qurayyah power plant fixing February 28, 2011 as the bid deadline. SEC will buy all the power produced by the plant from the winning consortium."
Strong support from the Saudi government provides SEC the ability to leverage its balance sheet if required. It is also likely to be the largest beneficiary of investments planned for the sector. In veiw of growing power demand and SEC's aggressive expansion plans, says Taib which has a positive outlook on the Tadawul -listed company.
EFG-Hermes disagrees. While the Egyptian-bank believes that Saudi Electricity, which operates as a quasi-monopoly, will benefit from growing demand for electricity in the Kingdom, "the company's intensive capital expenditure programme, highly leveraged balance sheet, and the lack of near-term catalysts support our Neutral rating," the bank argues.
What's The Alternative?
A diversification away from the SEC is inevitable. Earlier this year, Saudi Arabia signed a co-operation deal with France to develop the country's first peaceful nuclear programme. The project is expected to come on line by 2020.
The deal "allows Saudi experts to study the French technology options, their financial requirements and implications for developing qualified national human resources," according to a media statement.
Weeks later, Saudi Bin Ladin Group said it is teaming up with France's Areva to build a nuclear energy reactor.
"We want to have an energy mix to save oil, and this oil we can leverage prices so we can sell it abroad to build these facilities," Hashim Yamani, president of the King Abdullah City for Atomic and Renewables Energy, said. "Nuclear would be adequate for the base load. We'll use renewables to add more capacity. There are some variations. Gas and oil will have to continue to help."
However, the current crisis surrounding Japanese nuclear plant has cast a massive cloud over the nuclear energy sector, and it has even shaken the confidence of nuclear-energy dependent countries like Germany to revisit their nuclear energy strategy.
Analysts think that the nuclear energy has been set back by at least a few years as the full fallout of Japan's Fukushima nuclear power plant is assessed.
Saudi Arabia was hoping that nuclear energy can reduce the Kingdom's dependence on fossil fuels by half once it's fully functional, but that estimate may have to be revised in light of the crisis in the nuclear energy industry.
But Saudi Arabia has had some success in moving away from its dependence on oil for domestic power needs.
While Saudi Arabia needs desalinated water _ which is an energy-intensive process - an efficient way is to combine it with electricity generation, which uses steam.
In 2009, Saudi Arabia opened the world's largest desalination and power plant which has the capability of producing 800,000 cubic metres of water per day and 2,750 megawatts of electricity.
In addition, the country has participating in the GCC's efforts to link the power grids to reduce shortages during peak power periods.
These are small steps but a combination of these steps recently shows that the Saudi authorities are moving quickly to address the country's power needs through alternative energies, and ensure its oil production remains primarily for exports.
If the Kingdom sticks to its current energy mix dominated by oil stock feed, the Saudi authorities will need five million additional barrels per day to keep up with demand, at a cost of $700-billion, according to some estimates. That is clearly not a path the government would like to choose.
© alifarabia.com 2011
