Despite high oil prices, Saudi Arabia is struggling to finance its electric power industry. The growth in demand is outstripping supply, and power-cuts are reported in many areas as both the generating and transmission networks buckle under the strain. Electricity, like most of the energy sector, is owned and run by the state, but the power industry does not enjoy the prestige or possess the financial resources of the oil industry. The government has begun to look for ways of bringing private capital into the electricity sector but it is struggling to find a formula that is attractive to outside investors.
For many years, successive Saudi governments sought to make energy available at the lowest possible price to domestic consumers. In particular, they tried to create new industries based on access to cheap oil, gas, and power, such as petrochemicals and steel-making. Even householders were meant to have access to the kingdom’s energy resources at sub-economic rates. Subsidizing electricity consumption presented few financial problems when oil prices were high, but falling oil revenues in the 1990s left state industries like electricity and gas short of funds for new investment. The government was forced to reverse its long-standing policy of restricting private participation in the energy industry and opened both gas and power to private investors, including those from overseas. In both cases, though, it has generally failed to create sufficiently attractive conditions for investment. In the case of gas, negotiations with foreign companies have been protracted and, in one case, shelved pending clarification of various points by Riyadh.
The government’s experience has, if anything, been worse in the power sector. Attempts to attract independent power producers (IPPs) have largely met with indifference abroad. A tender for a build-own-operate (BOO) scheme to expand the Shuaiba power station near Jeddah failed to attract any bids in 2000. The only real interest in private projects has been a 240MW co-generation plant being built for the state petrochemical company Sadaf, at Jubail. This year, the national oil company, Saudi Aramco invited bids to build four co-generation units under build-own-operate-transfer (BOOT) contracts. All the power is to be bought by Saudi Aramco {http://www.saudiaramco.com/bvsm/JSP/home.jsp}.
Riyadh’s main target for private finance, however, is the state-owned Saudi Electricity Company (SEC). The national utility needs to raise $90 bn over the next 20 years in order to meet the expected increase in power demand. Plans include the doubling of generating capacity to 50 GW over the next ten years, further electrification of rural areas and the expansion of the distribution network. Perhaps SEC’s most important task, however, is to ensure the provision of sufficient plants for the desalination of seawater in order to keep up with the needs of the country’s rapidly growing population. Three such projects have already been announced. SEC wants to offer them as BOO contracts, but has been unable to finalize the bidding details.
One problem for both SEC and potential IPPs is that the fuel supply arrangements for new power and desalination projects cannot be sorted out until the three main foreign gas initiatives—the so-called core ventures—have been agreed between Riyadh and the international oil companies concerned. The three core ventures are supposed to provide gas for up to 7 GW of new generating capacity.
Another major problem is the present tariff structure for electricity in Saudi Arabia. Until 2000, electricity was sold at grossly uneconomic rates for the state utility. In that year, the government raised the rates for large users, but reduced them a few months later following widespread opposition, cutting SEC’s income and plunging it into the red. Riyadh’s action not only alarmed potential IPPs, but also makes it more difficult for the government to pursue other methods of raising private finance for the electricity industry, such as the privatization of SEC.
In April 2000, the government merged the country’s ten regional power utilities and reconstituted them as a single state-owned joint-stock company. Part of the aim appears to have been to allow the sale of some of the state’s shareholding at a future date. The company is designed to operate as a commercial concern and the government hopes it will eventually turn into an international utility. Meanwhile, the trade ministry has just announced the setting-up of a new company called the National Energy Company (NEC) to participate as a private company in the country’s electricity and water industries.
Further restructuring of the kingdom’s electricity industry nevertheless remains to be done if private capital is to be attracted on a large scale. IPPs will probably require the unbundling of SEC’s main functions before committing to major investments. As a first step, generating will need to be split from electricity transmission. IPPs will also want to see a powerful and independent industry regulator.
Under present proposals, IPPs sell their output to a single buyer, in the shape of SEC. Some investors are worried about SEC’s ability to pay, given that it must sell-on the electricity at sub-economic prices under the existing tariff regime. The Ministry of Industry and Electricity says that the single-buyer model will eventually be replaced by a competitive market based on a power pool where several producers bid to supply the national grid. This, in turn, will require some diminution of the dominant position of SEC. Perhaps the most effective market-opening mechanism, however, is the proposed integration of the Saudi grid with those elsewhere on the Arabian Peninsula, which would allow private generating companies operating in more investor-friendly countries like the UAE to supply Saudi Arabia without having to set up power stations there.
© Blackwell Publishing Ltd, 2003