Amid ongoing reform of subsidies, the gradual privatisation of public assets, and ambitious plans to expand seawater desalination facilities and improve sanitation infrastructure, Saudi Arabia’s utilities sector will undergo significant changes over the coming years. In order to diversify its energy mix, the Kingdom is pursuing a series of ambitious goals to increase its solar and wind capacity, while also developing its first nuclear power station.
Oversight
Significant changes have taken place to the organisation and regulation of the utilities sector in recent years. In May 2016 a royal decree dissolved the Ministry of Water and Electricity, which had previously overseen the sector. The electricity segment – in addition to petroleum and industry – now fall under the portfolio of the newly revamped Ministry of Energy, Industry and Mineral Resources (MEIMR), while the responsibility of water passed to the newly established Ministry of Environment, Water and Agriculture (MEWA).
As of February 2019 the minister responsible for the MEIMR was Khalid Al Falih – also the chairman of the board of directors of Saudi Aramco – while Abdulrahman bin Abdulmohsen Al Fadhli heads MEWA. MEWA consists of the Directorate of Water Affairs and the Directorate of Water Services, both of which have a broad range of responsibilities, from the management of non-renewable and renewable underground water, to the organisation and management of reused and treated wastewater.
The state plays a central role in the power sector, as the outright owner of the National Water Company (NWC) and the holder of a 74.3% stake in the Saudi Electricity Company (SEC). Furthermore, Saudi Aramco owns a 6.9% stake in SEC, with the remaining 18.8% of shares listed on the Saudi Stock Exchange. According to the most recent figures from the Electricity and Cogeneration Regulatory Authority (ECRA) – which oversees the provision of power and desalinated water in Saudi Arabia – SEC operated 40 power stations with a combined capacity of 58.2 GW in 2017, or 66% of total installed generation capacity. The firm is also responsible for the transmission, network maintenance, and supply to commercial and residential customers, with a total of 9.3m customers as of September 2018, according to SEC figures. The NWC is in charge of water supply and sanitation in Riyadh, Jeddah, Makkah and Taif, with regional directorates under MEWA controlling the supply in other areas.
Saudi Arabia is the largest water desalination market in the world, with installed capacity of 5m cu metres per day as of 2018. There were 29 plants producing desalinated water that year, 17 of which were owned and operated by the Saline Water Conversion Corporation (SWCC), a state-owned company which also operates the Kingdom’s water transmission network. Many desalination plants are also cogeneration facilities that produce electricity.
All companies generating electricity or desalinating water, along with independent water and power providers (IWPPs), are overseen by ECRA. The Water and Electricity Company (WEC) was initially established in 2003 as a joint operation by SEC and the SWCC, but its operation has since been taken over by the Ministry of Finance and the remit of its responsibilities was expanded. The mandate of the WEC includes the tendering of projects in desalination, cogeneration, water storage, dam construction, and the purchase and sale of water and electricity. The energy required for the desalination process is supplied by Saudi Aramco, which also serves as the sole supplier of natural gas to the Kingdom’s households and businesses. Although a gas network supplies major industrial cities, most domestic and small-scale commercial consumers rely on deliveries.
Structure
According to the 2018 household energy survey, published by the General Authority for Statistics (GaStat), 93.3% of households in the Kingdom use butane gas, of which 74.6% rely on butane cylinders and 25.4% on storage tanks. The National Gas and Industrialisation Company is responsible for the filling, marketing and wholesale distribution of propane and butane cylinders nationwide.
In 2017 the government established the Renewable Energy Project Development Office (REPDO), a new division of MEIMR, with the mandate to support the adoption and expansion of renewable energy sources. REPDO is led by a committee that includes representatives from Saudi Aramco, SEC, ECRA and the King Abdullah City for Atomic and Renewable Energy, and pursues the target of increasing renewable energy capacity to 3.45 GW by 2020 and 9.5 GW by 2023. The Public Investment Fund (PIF), the sovereign wealth fund, has also been responsible for driving renewable energy strategy, notably through a major investment in a new technology fund developed by SoftBank of Japan. In October 2018 the PIF announced it was investing $45bn in the SoftBank Vision Fund, and unveiled plans for the PIF and SoftBank to collaborate on a number of large-scale solar industry projects in Saudi Arabia valued at $200bn, which aim to manufacture 200 GW of photovoltaic energy capacity by 2030.
Utilities Policy
Vision 2030 – the Kingdom’s blueprint for economic and social reform – contains commitments to ensure the public is served by efficient and high-quality energy and water services. The document also highlights the need to reform feedstock and end-user prices so market costs of generating electricity and desalinating water are reflected in household bills, albeit with provisions that continue to protect low-income citizens. In addition to rationalising the Kingdom’s large subsidy bill, this should stimulate investment and boost competitiveness in the utilities sector.
Announced in June 2016, the National Transformation Programme (NTP) 2020 lays out targets for different government departments, as well as a comprehensive set of goals and measurable key performance indicators to be achieved by 2020. Since its inception the NTP has launched 433 initiatives and established 37 strategic objectives and 92 key performance indicators to facilitate the Saudi reform process and bring the country closer to achieving the objectives outlined in Vision 2030.
While the document has undergone a series of revisions, it has maintained its overall commitment to the sustainable use of natural resources and to improving the quality of utilities services. The most recently revised document, which was published in October 2017, outlines targets for the improvement of the water desalination system, the reduction of water pollution and the improvement of water distribution, along with a broad commitment to the improvement of electricity provision.
“One of the water sector’s key strategic objectives under Vision 2030 is to improve financial efficiency, which translates into achieving full cost recovery. The successful implementation of privatisation programmes for water and wastewater generation and distribution will enhance the sector’s efficiency,” Awaadh Al Otaibi, CEO of domestic water treatment company Miahona, told OBG.
Tariffs & Subsidiaries
Subsidy and tariff reforms are a cornerstone of ongoing efforts to improve the investment environment and rationalise state finances in Saudi Arabia. The first of these was a series of electricity price reforms implemented in 2015. Households using less than 4000 KWh per month were unaffected by the rise, but prices for consumers using between 4000 and 6000 KWh rose from SR0.12 ($0.03) to SR0.20 ($0.05) per KWh, while consumption above 6000 KWh was priced at SR0.30 ($0.08) per KWh. While these changes led to 100% price increases for some consumers, the final tariff remained low by international standards, according to figures from the Arab Petroleum Investments Corporation (APICORP), a Saudi development bank.
Meanwhile, the implementation of water price reforms – originally announced in late 2016 – experienced a series of delays following public opposition to the initial draft of the changes. In response, the government announced that subsidy reform would be a gradual process and a system of compensation would be implemented to protect lower-income households. This approach received support from the IMF in its October 2017 report on the Saudi economy. Following this, in December 2017 the government launched a programme to reimburse Saudi households for the increases in their utilities bills and for higher fuel prices, with diesel prices rising by 16.2% in 2018, according to APICORP. To be eligible for the scheme, beneficiaries must be Saudi citizens permanently residing in the Kingdom. While the 2018 budget expected SR14bn ($3.7bn) in new revenue as a result of these reforms, these gains were initially offset by the SR30bn ($8bn) allocated to the compensation scheme. That year some SR27bn ($7.2bn) was ultimately paid out as part of the programme, which is set to extend to at least 2019. While the increase in tariffs has boosted income for Saudi utilities companies, the same firms are also facing the removal of subsidies on inputs used in power stations and desalination plants.
Supply
Electricity output has increased dramatically in recent years, rising from 204.4 TWh in 2007 to 375.6 TWh in 2017, according to figures from global energy giant BP. Power generation grew by an average of 6.6% per annum in the decade to 2016, though this slowed to 1.7% in 2017.
According to the most recent data from ECRA, there were 80 power plants operating in Saudi Arabia in 2017 with a combined capacity of 88.7 GW. Of this number, 40 are directly owned by SEC, with a capacity of 58.2 GW, while two plants with total capacity of 2 GW are owned by the municipal firm Power and Water Utility Company for Jubail and Yanbu. Three IWPPs also operate within the market: Jubail Water and Power Company (2.9 GW), Shuaibah Water and Electricity Company (1.2 GW), and Shaqaiq Water and Electricity Company (1 GW). In addition, there are four independent power plants (IPPs) with a combined capacity of 9.3 GW, along with 11 other organisations operating power plants. Saudi Aramco operates eight, the SWCC runs seven and Tihama Power generation company oversees four facilities as part of a joint venture that provides power for four Saudi Aramco refineries. According to APICORP, a further 16.9 GW of generation capacity is set to come on-line between 2018 and 2020. SEC is building 7.5 GW of this additional capacity, and the remaining new plants will be built as IPPs or as facilities for Saudi Aramco or the SWCC.
These new plants will employ a range of primary fuel sources, with 34% of capacity derived from oil, 29.2% from natural gas, 23.6% from reprocessed hydrocarbons by-products, 11.5% from facilities combining gas and solar, and 1.8% from solar alone. In July 2018 the first of these power plants came on-line. The Waas Al Shamal combined gas and solar plant, which was built by SEC for SR3.8bn ($1bn), has added 1.4 GW of new installed generation capacity.
Demand
On September 2, 2018 SEC recorded peak demand across its network at 61,700 MW – up a marginal 0.6% on the previous year – coinciding with the beginning of the new school year and high daytime temperatures. According to ECRA, peak demand rose by 10.7% from 54,100 MW in 2014 to 59,900 MW in 2015, before dropping by 2.2% to 58,600 MW in 2016, then growing by 4.8% to 61,400 MW in 2017.
Meanwhile, national electricity consumption rose by 5% in 2015 to 295,000 GWh. It then registered a more modest uptick of 0.7% to 297,000 GWh in 2016 and 0.3% to 298,000 GWh in 2017, according to the most recent figures from GaStat. A number of variables appear to be at play in the slowing growth of energy demand between 2015 and 2017 – not just the rationalisation of electricity usage, but also the impact of the removal of subsidies and slower growth of the economy in 2017 (see Economy chapter).
Saudi Arabia has historically relied on underground sources and reservoirs for its water, as it possesses no permanent running surface water and on average only experiences around 100 mm of rainfall a year. A system of wells and irrigation channels known as falaj supplied farms and settlements in the past, with the mining of fossil subsurface water accelerating as the country developed. Centre pivot irrigation, which uses water pumped from an underground aquifer, has since become more widespread.
The pace of population and economic growth, however, has long outstripped the capacity of these resources to meet demand. As a result, the country has increasingly moved towards developing supply from desalination plants, particularly for domestic consumption. According to the latest figures from ECRA, there were 29 desalination plants with a combined capacity of 7.7m cu metres per day as of 2017. The most significant player in the market is the SWCC, which operates 17 plants with a total capacity of 4.6m cu metres per day, equivalent to roughly 60% of the national total. In addition, the Kingdom has 17 facilities that produce steam for a range of industrial applications, with a combined capacity of 16,200 tonnes per hour. Saudi Aramco owns most of these, operating eight steam plants with shared output of 4500 tonnes per hour, or 28% of the total.
According to the most recent figures from MEWA, total water consumption from all sources and for all sectors grew from 22.3bn cu metres per year in 2013 to 23.4bn cu metres per year in 2017, though consumption reached its highest level in 2015, at 24.8bn cu metres per year. This consumption pattern is consistently dominated by agriculture, which increased from 18.6bn cu metres per year in 2013 to 19.2bn cu metres per year in 2017, reaching a high of 20.8bn cu metres in 2015. However, municipal consumption – which includes residential usage – also rose steadily over the period, from 2.7bn cu metres per year in 2013 to 3.2bn cu metres per year in 2017. Industrial consumption, for its part, expanded steadily between 2013 and 2016, rising from 890m cu metres per year to 1.02bn cu metres per year, before stabilising to 1bn cu metres per year in 2017. Tracking this pattern, average annual per capita consumption of water increased from 249 litres in 2013 to 270 litres in 2016, before dropping slightly to 265 litres in 2017, according to data from GaStat.
Infrastructure Development
In order to adequately meet demand from a rising number of customers and improve the efficiency of its existing network, SEC is making substantial investment in its distribution. The utility had approximately 9m customers in December 2017, an increase of 492,000 customers on the previous year, according to its most recent annual report. Accordingly, its distribution network expanded by some 6.4% that year, with the addition of around 37,000 km of overhead networks and ground cables. The overall capacity of its network transformers similarly increased by 7.2%, while the distribution of transformers grew by 5.9%.
In December 2018 SEC announced plans to invest SR100bn ($26.7bn) in infrastructure over the following five years through a range of projects intended to expand electricity supply, transmission and distribution. SEC is not alone in its plans to accelerate investment. NWC announced in December 2017 that it had invested SR1.3bn ($347m) in 40 new water and sewage projects as part of efforts to meet NTP targets. It also outlined a further 33 projects with a total value of SR845m ($225m). WEC is similarly undertaking investment in desalination, water and wastewater projects, coupled with investment aimed at improving the efficiency of its overall network. In September 2018 WEC announced five public-private partnership projects that are set to deliver an additional capacity of 3.4bn cu metres of water per day.
Foreign Investment
In January 2018 the Saudi Arabian General Investment Authority (SAGIA) – the government agency responsible for overseeing foreign direct investment – announced that utilities would be one of the core sectors targeted for increased investment, with renewable energy projects taking particular precedence. In an effort to attract strategically important international investment in this arena, the government has pledged guarantees in the form of off-take agreements. These will be signed with renewables developers, providing 20 years of power purchase assurance for wind projects and 25 years for solar projects.
Clean Energy
International interest in the country’s developing renewables industry is evident; for example, five out of seven qualified bids for the 300-MW solar photovoltaic project at Sakaka in Al Jouf were reportedly 100% internationally financed. The SR1.2bn ($320m) project was ultimately awarded to Sakaka Solar Energy Company, a consortium that is 70% held by Saudi’s ACWA Power and 30% held by AlGhihaz Renewable Energy Company. The engineering, procurement and construction contract for the build was awarded to a consortium composed of India’s Mahindra Susten and the Chinese industrial equipment and renewables company Chint Group. Developed as an IPP, the project achieved financial close in November 2018, marking the first utility-scale renewable energy project to be developed under REPDO’s National Renewable Energy Programme, which was launched in 2017. Further utilities investment opportunities are also in the offing. In February 2018 SAGIA announced it was seeking $11bn to upgrade the water utilities network, with $10bn of this earmarked for desalination projects and the other $1bn for new sewage treatment plants.
The drive to attract domestic and international investment in both renewables and capacity expansion underpins the Kingdom’s goal of increasing renewable energy capacity to 3.45 GW by 2020 and 9.5 GW by 2023. To meet these objectives, REPDO is set to launch tenders in 2019 for 4.1 GW of new renewable capacity, divided between 3.3 GW of solar projects and 800 MW of wind. In January 2019 REPDO awarded Saudi Arabia’s first commercial wind contract – the SR1.9bn ($507m), 400-MW Dumat Al Jandal project in Al Jouf – to the French energy giant EDF and Abu Dhabi’s renewables investment group Masdar. The deal included a 20-year procurement agreement at an energy cost of $2.13 per KWh.
Nuclear Energy
Nuclear power plants form another important plank of the Kingdom’s commitment to cleaner energy sources. In December 2018 the government announced that it intended to facilitate the building of two nuclear power stations in the short term and a further 14 such facilities over the coming three decades. The country hopes to have 17 GW of installed nuclear capacity by 2032, enabling it to meet 15% of total projected electricity demand that year. These announcements followed a 12-day review of the country’s hard and soft nuclear infrastructure undertaken by the International Atomic Energy Agency, which concluded that the country is well placed to build its first nuclear power plant.
Outlook
Nearly three years after the publication of the guiding NTP strategy, the government is forging ahead in pursuit of the goals to substantially expand energy and water output to meet growing demand from businesses and consumers. These efforts include an emphasis on clean energy and infrastructure upgrades to improve network efficiencies. At the same time, the government has demonstrated its determination to liberalise the utilities market and introduce market prices through the elimination of subsidies, stimulating both domestic and international investment. While some aspects of the energy reform agenda have been subject to delays and amendments, there are signs of renewed momentum towards liberalisation during 2019.
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