Saudi Arabia switches on power sector reforms

Saudi Arabia switches on power sector reforms
GUESTROW GERMANY MARCH 07 Electricity pylons stand at sunset on March 7 2011 near Guestrow Germany According to a recent report partially funded by the German government Germanys electricity grid requires an additional 3500km of transmission capability and EUR 6 billion in investment in order to accomodate planned alternative energy projects including solar parks and both landbased and offshore windparks Photo by Sean GallupGetty Images
Published: 17 October 2018 - 7 a.m.
By: Baset Asaba

The Arab Petroleum Investments Corporation (APICORP), the multilateral development bank focused on the energy sector, published its latest research report today. This month’s report discusses how Saudi Arabia urgently needs to resolve the imbalance of current demand for power as against, and assesses possible options.

Demand for electricity in Saudi Arabia has risen by 6.6% per year since 2006, and while the government has previously invested in installed capacity to increase it from 60GW in 2010 to 82GW currently, which is not sustainable.

It puts unmanageable pressure on the state energy budget, and Saudi Electric Company (SEC), the state utility is also borrowing at all-time highs.

The government has therefore begun plans to reform the sector. Having seen a third consecutive year of budget deficits, it is keen to have a more sustainable resource allocation plan.

This also comes at a time when the Kingdom is pursuing an ambitious plan to diversify its economy and allow for greater participation from private sector. The power sector is perhaps one of the most suitable industries for privatisation.

The government previously announced that it would break SEC up into four power-generating companies, one transmission and one distribution company. This is a first step towards market liberalisation, which has long been overdue.

Much uncertainty remains on the timing of these reforms, which were first announced to take place by the end of 2016. The plan will centre on allocating SEC’s power-generating assets to four companies, with the likelihood that these companies will be offered to local and international investors.

The new market structure implies that the government will keep the single-buyer model and maintain its monopoly in the transmission and distribution networks. This will make the power-generating element of the sector more competitive and could eliminate some of the inefficiencies prevailing in the current model where the state owns most of the power-generating capacities.

However, reform could also come in the form of a multiple buyer approach – where wholesale buyers compete amongst themselves to purchase power from generators.In this structure, wholesale buyers sell their electricity to one or more transmission/distribution companies who then sell to consumers. Multiple buyers will enable price signals to work and government involvement will be reduced as the market becomes more liquid.

Integrating renewable energy in the new market structure will also be important. The Kingdom announced plans to seek $30-50bn in investments by 2023 to help meet the 9.5GW target for solar and wind energy, and the first utility-scale solar project was recently awarded to ACWA Power.

The 300MW Sakaka PV project – to be located in the AL-Jawf region - achieved a world-record price of $0.02342/kWh and will operate under a long term PPA.

The government also introduced a series of price reforms to help reduce demand growth. It first raised electricity prices at the end of 2015 by up to 100% for some consumption brackets, although the final price was still very low. A second round of price hikes followed in 2017. This inevitably has had an impact on electricity demand growth.

Mustafa Ansari, Senior Economist at APICORP, commented: “The government has begun a process of overhauling the power sector. On the supply side, a market structure reform with the breakup of SEC is imminent while on the demand side, the government will try to tackle rising demand by liberalising electricity prices and introducing efficiency measures."

"While these reforms are long overdue, they are certainly a step in the right direction. But the lack of clarity on how consumers will respond to price hikes, as well as the unclear future structure of the power sector and uncertainty surrounding the renewable-energy integration form the key challenges.”

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