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Greater Power Generation Key to Sustain Saudi Arabia Growth

  • According to the National Commercial Bank 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.State controlled power utility company, Saudi Electricity Company 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 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 a vis independent power, water, steam producers and financiers.

1. 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 CAGR of 3% over the past decade and is expected to continue rising at a nearly similar pace over the next 5 years. This steady growth of consumers has resulted in 6% 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 SAR 107 billion led by the power sector at SAR 38 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 SAR 179.5 billion up to Q3 with the power sector accounting for 14% 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% of the SAR 580 billion planned budget reaching an estimated SAR 255 billion. Moreover, the Ninth Development Plan has also earmarked an estimated SAR 1.44 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.

2. 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 SAR 27.9 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% 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 GWH.

3. Electricity consumption;

  • By the end of 2010, total electricity sold reached 212,263 GW, 9.7% YoY increase reaching 5,997,553 customers. The consumption level in 2010 represented an 86% increase from that in 2000 having grown at a CAGR of 6.4% over the last decade.By the end of 2010, per capita electricity consumption was 7,822 KWH. It had grown by over 40% since 2000, thus increasing by a CAGR of 3.4% over the 10 year period. Therefore, electricity consumption which has increased by a CAGR of 6.4% not only had to accommodate for the population growth of 3.0% 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 USD 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% 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 per KWH. Therefore, the majority of revenues generated are from the lowest tariff bracket, restricting the profit margin of an industry already facing financing challenges.

4. Industrial consumption;

  • Power consumption by the industrial sector grew at a CAGR of 3% since 2000 to reach 38,569 GW in 2010, an equivalent of 18% of total consumption. Twenty years ago, the share of industrial consumption was 28.3% at 16,666 GW and by 2000 it fell to 24.2%. As more industrial plants began to rely on their independent power generation, the share of the industrial category consumption on the grid has declined.

5. Kingdom wide consumption;

  • By the end of 2010, the Eastern region accounted for the highest consumption share at 31% closely followed by the Western region at 30.67%. The Central region captured 30.03% with the Southern region receiving only a smaller share of 8.29%. 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%. This is due to the higher concentration of industrial projects in the Eastern Province.

6. 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% while the Kingdom's actual generation capacity has risen at a slower CAGR of 6.7%. 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%. By the end of 2010, this cushion had dwindled to a mere 7.6% somewhat lower than the industry norm of at least 10% to 20%. 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 aims to raise the reserve margin to 19.8 percent by 2014.

7. 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% since 2000 to reach 53 million Ton of Oil Equivalent 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%, 75% and 44% respectively. In 2010, crude oil continued to command the largest share at 40% 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% 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 Renewable Energy is set up to develop nuclear technology as part of SAR 300 billion drive to boost power generation over the next decade thus allowing the Kingdom to maintain significant oil exports.

8. SEC financial obligations;

  • SEC continues to face difficulties in meeting its financial obligations. In 2010, total operating revenues were SAR 27.9 billion increasing by approximately 17% since 2009. Over the same year net income almost doubled growing to SAR 2.3 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 SAR 8.7 billion by the end of 2010 while its payables for the same period were equivalent to SAR 49.5 billion consisting mainly of fuel costs and purchased energy.

9. Electricity sector financing;

  • There are 4 main direct external sources of funding for SEC:
  • 1. Government loans,
  • 2. Bank loans,
  • 3. Export credit agencies
  • 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 SAR 30.8 billion.

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