Against a backdrop of sustained high oil prices and the clear intent of the government to position Saudi Arabia's economy for further growth, the country has set out on a spending programme of unprecedented scale. The vision is an ambitious one, largely focused on improving infrastructure.
The level of investment required to achieve this vision is massive. A focus on improved infrastructure requires investment into numerous areas, such as housing, roads, railways, water and wastewater projects and power. Shuaa Capital places the total value of the investment projects announced to date at over $860bn and with the Saudi electricity sector expanding at around 7% annually, it is small wonder that nearly a fifth of the projects are power related.
Over the next 20 years, around $120bn is to be spent on meeting the rising generation demand and additional investment will address issues of transmission and distribution. This expansion of the power and network capacity represents a crucial part of the wider national industrialisation plan and will be a major boost to Saudi's stated goal of becoming one of the ten most competitive economies in the world.
In achieving this, a range of opportunities seem likely to open up for key industry players – both investors and suppliers – from across the world. However, capitalising on this may depend, at least in part, on understanding the shape of the Kingdom's economy and electricity market.
AN ELECTRIC ECONOMY
Saudi Arabia has one of the highest electricity consumption rates per capita in the Middle East and with annual population growth at between 2% and 3%, combined domestic and industrial demand is rising by around 7% per year. The nation's current generating capacity is 35GW; the Industry and Electricity Ministry has estimated that an additional 30GW of generating capacity will be required by 2020 – at a cost of over $100bn in capital investment. Further predictions suggest that capacity will again need to be significantly increased within the subsequent ten years.
A number of transmission and distribution projects are also necessary to extend the coverage across the country. According to the Al Bawaba Group, there are currently around 4.7 million electricity customers throughout Saudi Arabia, located in a little over 10,000 cities, towns and villages.
By the end of 2008, a further 1,000 settlements are expected to have been brought on supply, the Saudi Electricity Company (SEC) aiming to have increased its subscriber-base by an additional million consumers by the following year. In addition, the Saline Water Conversion Corp (SWCC) – a state-owned company – anticipates a need for $50bn expenditure on desalination projects, many of which will also feature associated power generation.
Clearly, the sector has an enormous growth potential, driven not only by domestic factors but also by the regional opportunities provided by the Gulf Co-operation Council (GCC) grid, a major project to provide an integrated electricity network for the six GCC states by 2010.
The wider Saudi economy also holds a few surprises. Despite an image of vast wealth – as the home to a quarter of the planet's known reserves, the country is the world's largest exporter of oil – Saudi Arabia has faced some huge challenges in diversifying its markets, addressing employment and improving its skills base.
Although at around 24 million it has the Gulf's largest population, GDP per capita is reportedly lower than any GCC state except Oman.
However, things are changing. Between 2002 and 2007, GDP per capita almost doubled and is expected to have tripled by 2012, largely powered by high oil revenues and the country's moves towards economic liberalisation. This change to a more open economic policy has created an increasingly attractive environment for private sector participation and direct foreign investment – making wider participation in the internal power market both possible and of greater appeal.
With a reforming approach to the markets, the Saudi government has adopted a series of initiatives which have encouraged private sector involvement in driving the accelerating momentum of economic growth. For technology suppliers, the bottom line is that having historically invested around 17% of GDP in infrastructure, the current rate is approaching double that. There are clearly opportunities for development to be had.
PLANS AND PLAYERS
Unsurprisingly, new power plants rank high on the list of upcoming projects planned for the period to 2017, along with around $2.1bn of transmission schemes to provide a total length of nearly 2,500 miles. Further developments are planned as separate independent water & power projects (IWPPs) to be run on a build, own and operate (BOO) basis with a concession period of 20 years.
With the Water & Electricity Company (WEC) – a purpose-made equal-share vehicle of SEC and SWCC – acting as the single off-taker for the water and power produced, promoting the venture to private investment has deliberately been made easier. Other bodies, including Marafiq, the combined power and water utility for the industrial cities of Jubail and Yanbu, are also developing similar projects.
Interest in the wave of proposed power schemes has understandably been great, from both domestic and international players. In February, SEC issued a qualification call for companies to build, own and operate a new independent power plant fuelled by heavy fuel oil, to be located at Rabigh, 90 miles north of Jeddah; 45 companies had previously submitted expressions of interest.
February also saw the Ras Az Zawr IWPP project come to its bid-submission stage, with 19 pre-qualified companies on the list. Regional firms were well represented by Abu Dhabi National Energy Company (Taqa), ACWA Power and Arabian Bemco.
The international line-up included Malaysia's Doosan – already involved in the Shuaibah-III project – Malakoff and Powertek Berhad, Singapore's Sembcorp, Suez from France and the London-based International Power.
Inevitably, with such a large thrust spread across a swathe of individual projects, plans are often somewhat fluid and changeable. Since its inception, the Ras Al-Zour project has been expanded from its initial 2,500MW of power and 800,000m³ day of water by an additional 500MW and 200,000m³. Meanwhile, WEC has cancelled the smaller Al-Jubail project altogether. The upshot of this is that the list of potential technologies to meet Saudi's energy needs remains correspondingly open and while the nuclear route remains an option, renewable energy and green engineering also feature in the overall thinking.
A $300m, 6MW waste-to-energy plant is under construction, while in April, after meeting with Saudi Oil Minister Ali al-Naimi, the French Energy Minister Jean-Louis Borloo announced a planned cooperation between their countries over large-scale solar energy and carbon capture and storage (CCS) technology. In the light of January's signing of agreements over electricity and nuclear power between France and Qatar, however, some analysts suggest that it may only be a matter of time before the Franco-Saudi relationship moves in a similar direction.
Zawya, the leading Middle East business information company, suggests that 2008 will see the rate of year-on-year growth in earnings for SEC drop to perhaps 5%, around half the rate of the previous year. But in many ways this does not tell the entire story. With an approved budget which includes 331 new generation, transmission and distribution projects for 2008, the resulting expansion will allow the company to serve a further quarter of a million customers.
Perhaps more to the point, it bodes well for the future of the mega-projects and the opportunities they present in the newly liberalised Saudi market.