Unbundling Saudi’s power market
A consequence of Saudi Arabia’s intended economic pivot away from its reliance on oil will be a liberalisation of the country's power market through the unbundling and spinning out a number of entities in the generation and transmission sectors.
The Kingdom has been part-privatising its power generation market through the use of independent power producers (IPP) since the early 2000s. In 2003 US firm CMS Energy reached financial close on the country’s first foray into IPPs; the 250MW Jubail Energy Company cogeneration plant which became operational in 2005. Since then a number of IPPs have reached financial close; most recently the Fadhili combined heat and power project.
“The first wave of IPPs followed the enactment of the electricity law in 2005 that contemplated the liberalisation and unbundling of the market in pretty clear terms and followed the establishment of the regulator (ECRA),” Antoine Cousin, partner at law firm White & Case told IJGlobal. “The law is clear that generation, transmission, trading and distribution licenses may be issued.
“So there was a wave of IPPs taking place since 2005 with a regulatory framework in place that wasn’t really implemented because SEC was essentially operating as a single wholesale supplier without being unbundled for about 10 years.”
IPPs have been a key part of Saudi’s strategy to meet power demand growth as well as mobilise foreign capital and expertise. But the government – in the wake of lower oil prices that have put pressure on the country’s economy in recent years – is also looking to further privatise its electricity market in order to increase competition and efficiency as well as to raise money.
The country plans to split out the state-utility Saudi Electricity Company (SEC) into four independent power generation firms. Although the reorganisation has been in the pipeline since 2009, economic pressure may be spurring those reforms on; although last year an official from ECRA said the move would be complete by the end of 2016.
“The new wave of IPPs is anticipated to take place in parallel with the actual liberalisation of the market, which should see the spin-off of SEC’s activities into a number of entities,” Cousin says. “A number of companies on the generation front; a transmission business with the creation of a National Grid entity; and offtake obligations of SEC transferred to a newly established entity, the Principle Buyer (PB).”
SEC had 69,000MW of operational power capacity at the end of 2015. These assets will be split out into the four generating companies – which will also develop new projects – to increase competition in the market. These companies will later be made public through initial public offerings, bringing in private investors and their capital.
The PB – potentially not its final name – will offtake the electricity produced by the next wave of IPPs. The 5,400MW capacity PP15 is probably the most significant of these. SEC began the tender process for the gas-fired power project in November last year, inviting expressions of interest.
Last month the newly created Renewable Energy Project Development Office authority also kick-started its renewables programme, launching a request for qualifications for 300MW of solar and 400MW of wind capacity in February this year for the Sakaka and Midyan renewables projects.
When Saudi launched its very first IPP, the country’s Ministry of Finance guaranteed the obligations of SEC as the offtaker of electricity from the project. “Typically the first-in-kind project is a pilot project and in order to make investors comfortable, those projects get guarantees,” Cousin says. “Subsequent IPPs were not backed in the same way.”
The country’s government will have to make investors comfortable with the new PB in a similar way.
“My understanding is the obligations of the PB will be guaranteed by the government, at least initially,” Cousin says. “So in the same way SEC was initially backstopped by the government, the PB will be as well during the initial stages of the liberalisation process to build market confidence; and then perhaps that guarantee will fall away at some point.”
Other projects the Kingdom is planning to tender in the near future include the Rabigh 3 independent water producer and the Jubail 3 independent water and power producer. The finer details of those plants are still being decided although Rabigh 3 is expected to produce around 600,000 cubic metres of water per day (cm/d) with Jubail producing around 1 million cm/d with 3,000MW of power production capacity.