IHS Global Insight Perspective | |
Significance | A plan has been aired by Saudi Arabia's Electricity and Cogeneration Authority to split the state-controlled Saudi Electricity Company's power generation assets into four competing companies and divide the remaining distribution and transmission assets into another two outfits. |
Implications | The Saudi government has been thinking about possible reforms for a long time, but has had to overcome opposition to privatisation, as well as find a working blueprint for the reforms. A shortage of gas feedstock might, however, continue to constrain swift generation growth even after the reform. |
Outlook | The plan is hoped to finally bring more private investment into the kingdom's power sector, which keeps growing at a pace with which the state is finding it hard to keep up, although for the full benefits of privatisation and competition to filter through, a scrapping of the generous subsidies would be necessary—something that still looks politically unfeasible. |
Thinking over the Long-Term
Saudi Arabia's government has been mulling the idea of radically reforming the electricity generation, transmission, and distribution sector for many years, ever since the potential of allowing private power-generation investments through independent power projects (IPPs). Indeed, a more or less detailed plan to break up the Saudi Electricity Company (SEC) into at least four competing power-generation companies was originally floated a year ago (see Saudi Arabia: 19 March 2008: New Strategic Electricity Blueprint and Privatisations Mulled by Saudi Government).
With the kingdom's highest economic policy body favouring that plan at the time, it was obvious that it had significant backing, although the following one-year period also shows that a lot of consultation and negotiation was needed before a more detailed plan could be worked out and launched. Nevertheless, it now appears that a consensus within the extended government has been reached over the plan, and Saudi Arabia now set to move forward with speed with implementation now scheduled for mid-2010.
Breaking Up
Abdullah al-Shehri, vice governor for regulatory affairs at Saudi Arabia's Electricity and Cogeneration Authority, yesterday told Reuters that "SEC currently owns generation, distribution and transmission and we would like to see this unbundled. Our requirement is by mid-2010…our aim is to create competition and encourage privatisation". Outlining the plan further, al-Shehri said that SEC would be transformed into a holding company only, owning the four new power generation companies, as well as a transmission and a distribution company.
The plan is understood to call for an equal division of SEC's current generation capacity, which he put at about 36,000MW—giving each of the four new power producers around 9,000MW of capacity. With that base, the companies would be able both to divest generation assets in order to finance other projects, or to build strategic alliances. It still remains unclear whether the companies will have as equal a generation capacity spread over the vast country as possible, or whether they will be region-based.
Al-Shehri did not give any further information about what his regulating body might see the future holding for the two distribution and transmission companies, with further privatisation of those likely to be much more distant—if considered at all.
Outlook and Implications
Saudi Arabia's electricity demand has been spiralling for many years, on the back not only of the last few years' high oil export revenues, but also because of the strong population growth. While the latter is likely to remain robust, economic growth in Saudi Arabia is likely to take a significant hit from the fall in oil export revenue since mid-2008, and from the lower industrial growth and electricity demand that are also a by-product of the deep ongoing global recession. Nevertheless, high electricity demand growth by international measures is still expected, with al-Shehri confirming to Reuters that the kingdom was anticipating a 6% demand growth this year as new generation capacity is brought online, relieving supply constraints suffered on and off over the past decade.
In the meantime, Saudi Arabia's main problem with bringing sufficient new generation capacity online has been the lack of sufficient gas feedstock for new plants, while it has been reluctant to launch projects for new plants that are run on petroleum-based-fuel. This has eased somewhat over the past two years, and the government seems to have accepted that there will be a place for oil-based fuels in its electricity generation for quite some time, though it is also continuing a drive to develop as much associated and non-associated gas for power supplies as swiftly as possible (see Saudi Arabia: 20 March 2009: Associated Gas Demand No Longer Obstacle to Lower Crude Production—Saudi Oil Minister and Saudi Arabia: 9 March 2009: New Fields Fast-Tracked and Contracts Awarded by Gas-Starved Saudi Aramco).
SEC is partly privatised, with 20% of the company's shares having been floated on the Saudi stock market, somewhat complicating the forced break-up of the company. While it is likely that the four competing power generation companies will be offered to investors—attracting those with a presence in a high-growth market—the country's regulated and highly subsidised retail electricity price will still ensure that only the state might actually experience any benefit from the break-up and the resulting domestic competition. For the competing power generators, the measure is likely to bring their own margins under some pressure, lowering some of the Saudi Arabian generation market's attractiveness resulting from its growth.
A full deregulation and privatisation of the Saudi electricity sector and prices does, however, continue to look politically unfeasible, as current end-customer prices in the kingdom remain far below the actual cost of generation due to hefty subsidies whose abolition would spark severe popular dissatisfaction. While oil revenues have declined lately, making subsidies more burdensome for the state, the Saudi government is expecting a significant oil price rebound over the coming years, and it is thus willing to continue carrying the subsidy cost in exchange for not upsetting its population.