It has been a long time coming but at last Saudi Arabia, the Middle East’s largest power market, has announced the first equipment order for its first private power project. Under a contract signed in the middle of August, Siemens is to supply two gas turbines for a $145 million power plant it will build at Al Jubail on the Gulf Coast. The order comes more than two years after it was announced that CMS Energy, along with joint venture partner A. H. al Zamil Group, was chosen to build the 260 MW cogeneration project for Saudi Petrochemical Company (Sadaf).
The plant will be owned by Jubail Energy Company and produce electricity for Sadaf, a joint venture between Saudi Arabia’s industrial giant Saudi Basic Industries Corp. and Pecten Arabian Company, an affiliate of Shell Oil Co. The plant, which will also produce more than 500 t/h of steam, is scheduled to be completed by May 2005.
The order may seem like a small step but it’s a small step into what will be a fairly significant market. Installed power generation capacity in the kingdom is around 23 500 MW, up 5 per cent from last year. The expected annual growth rate is 6 per cent and by the year 2010, Saudi Arabia will require an additional capacity of 20 000 MW at a projected cost of $30 billion.
Saudi Arabia faces long term economic challenges, including high rates of unemployment and one of the world’s fastest population growth rates. This has called for increased government spending. In the longer term, it is estimated that the country will need about 66 GW (nearly triple the current installed capacity) at a cost of about $2 billion a year.
SEC, Saline Water Conversion Corp. (SWCC), Saudi Aramco, and the newly founded Power & Utilities Company for Jubail and Yanbu are currently constructing or planning 16 power generation projects valued at more than $1.06 billion. These projects total around 10 000 MW – significant, but still a long way short of future requirements.
The growing population is causing an increased need for public spending and the government has recognized it will need to attract private money to keep pace with the demand. Yet Saudi Arabia has been talking of attracting private sector participation in transmission and distribution for some time. The ground rules for market investment were first set set in April 2000 with the Council of Ministers Decision 169. This Decree was aimed at removing government subsidies and promoting transparency in the power sector.
It then took another two years for a clear framework to be set up when in July 2002, the Supreme Economic Council passed a resolution setting out a framework for private sector involvement in developing independent water and power projects (IWPPs). Projects identified for development would serve the capital, Riyadh as well as the cities of Jedda, Mecca, Median and Shuaiba on the west coast, and Jubail on the east coast. Saudi Arabia is hoping to attract private sector involvement for up to 60 per cent equity in IWPP projects, and is considering offtake guarantees for electricity and water produced from the plants.
The country plans to initially adopt a single buyer model with the Saudi Electric Company controlling transmission. By 2010, this will evolve into a competitive pool system with the Gulf Cooperation Council as the backbone.
The framework and set up of IWPPs is not dissimilar to that which has been adopted and seems to work well in Abu Dhabi. But let us not get too excited just yet. Saudi Arabia still faces major challenges including its legal and operating framework taxation, fuel supplies and also importantly, tariffs.
The tariff issue is one which has plagued many countries introducing private power generation and going through the privatization process. In Asia, tariffs and proposed increases to reflect the true cost of generation have caused problems in India, Indonesia and the Philippines to name but a few.
I doubt that IPPs in Saudi Arabia will face the same problems that they had in Asia but the government will still have the task of justifying tariff increases to the public. For the government, this will be no more than a marketing exercise in the form of a sensitive public relations campaign – one advantage of not having a democratically elected government.
However, with the first private project finally off the ground and several projects underway which have used financing mechanisms that are new to the kingdom’s power sector; the industry can mark this moment as the shape of things to come.
Junior Isles, Managing Editor & Associate Publisher