Blocks to Saudi power expansion

Saudi Arabia needs to pursue mega projects to expand its electricity production capacity to meet fast growing demand but such projects are beset with challenges including low power tariffs and high domestic consumption, the Gulf Kingdom’s largest bank said on Sunday.

Actual power general capacity in the largest Arab economy reached 49,138 MW by the end of 2010, having risen at a 10 year CAGR of 6.7%, National Commercial Bank (NCB) said in a study sent to ‘Emirates24|7’.

But overall consumption and peak load demand grew at 10 year CAGRs of 6.4 per cent and 7.7 per cent, respectively, amounting to 212,263 GW and 45,661 MW.

NCB said this rapid pace of consumption has dwindled the Kingdom’s reserve generation capacity to a mere 7.6 per cent, just below the industry norm of 10–20 per cent.

“Saudi Arabia needs to expand its power capacity and networks to support the Kingdom’s ambitious industrialisation plan, as well as meet its growing population demand,” the study said.

Its estimates showed that actual generation capacity and peak load demand growth will maintain the same pace over the next 5 years, narrowing the reserve margin to around 2.3 per cent.

However, projects in the Execution and EPC (bid) phase between 2011–2015 will amount to a total of 28,369 MW, it said.

“Assuming these projects materialize, this will bring total actual generation capacity to 76,487 MW. This would result in a feasible reserve generation capacity of 15.4 per cent, by 2015,” it said.

“Nonetheless, there are a number of challenges facing the industry. First, artificially low tariffs in a highly regulated sector have resulted in squeezed profit margins and an inefficient use of electricity.”

It said tariffs for non-residential consumers were revised in July of 2010 in an attempt to reduce subsidy and improve profitability.

Industrial and governmental consumer groups were subjected to higher rates, thereby cross-subsidizing residential subscribers who account for the largest share of demand.

“The second challenge in the power sector is the rising fuel consumption, as the government wishes to reserve crude oil for export purposes. The kingdom is tapping into alternative sources of energy, such as nu-clear and solar power, as a means of providing a more sustainable portfolio of energy sources.”

The study said the third challenge is the large amount of funding required for SEC’s projects and IPPs. It added that the private sector’s finance, operation and management of the Kingdom’s power sector are considered essential if Saudi Arabia is to meet its demand requirements over the forecast period.

“Banks face concentration risks, which may be over-come through syndication, as well as the risk of an asset-liability mismatch,” it said.

“Nonetheless, from a bank ability perspective, the appetite in project finance is strong for the Saudi power sector, given the nature of the PPAs which are strengthened by the credit-worthiness of SEC as the off-taker. Pass through fuel conversion models are an added incentive for private developers, as they bear no risk. The competitive tariff proposals are also a result of quality EPC contracts and the type of equity injection.”

NCB expected rapid growth in demand in Saudi Arabia’s power sector over the forecast period and said the healthy appetite from banks towards the sector, signals increased confidence, especially for private developers.

“Together with accessing capital market funding, SEC continues to have state support from the Saudi government, which provides it with ongoing and important debt cushions for its funding needs over the medium-term. This adds credence to its strategic role as the kingdom’s main power utility player.”

NCB’s forecasts showed domestic power consumption would grow at its current rate of 6.4 per cent per year to reach a total 289,437 GW in 2015. This will correspond to a per capita electricity consumption of 9,134 kWh.

It attributed the rapid increase in per capita electricity consumption to the rising pace of urbanization and industrialization witnessed in the kingdom.

“In addition, changes in the behavior of households, on the back of attaching more importance to functional features of end-use equipment and affluence, will shift consumers into higher electricity consumption slabs,” it said.

“Assuming the eight-year CAGR at 1 per cent of effective tariff rates, in turn, market size is forecast to reach SR39.4 billion in nominal terms by 2015.”

It noted that over the next three years, the Saudi Electricity Company plans to add a further 7,250 ckm of lines to its transmission network. It also intends to continue expanding the network coverage by adding 87 new substations with an additional capacity of approximately 26,000 MVA.

The total expenditure for upgrading the transmission network is estimated at SR12.95bn annually over the next five years NCB said.

As for expanding, maintaining and improving its distribution network, SEC is estimated to spend SR7bn annually over the same period.

The company’s capital expenditure are forecast to peak in 2012 at SR35.5 billion and then moderate to reach SAR22.3bn by 2014.

“As the independent power sector develops, SEC is anticipated to scale back its expenditures, specifically on power generation projects.”

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