Saudi Electricity Company (SEC)

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To better understand what electricity means for a country like Saudi Arabia, the world’s largest oil exporter and holder of reserves, our Senior Middle East Correspondent, Faisal J. Abbas,  spent a few days amidst the hustle and bustle of its ever-expanding capital city, Riyadh.

Home to more than 4.9 million people, Riyadh’s population is set to grow at four per cent per year according to 2010 figures provided by The Higher Commission for the Development of Riyadh. It is also home to some of the country’s most ambitious future projects such as the King Abdullah Financial District—the high-rise development which will host the headquarters of the Saudi Capital Market Authority, the Stock Exchange, major banks and other financial institutions. Close by, another prominent infrastructural triumph, the campus of the Princess Nora Bint Abdulrahman University for Women is currently being built over eight million square meters of land.

These gigantic ventures underway go hand-in-hand with overall development initiatives in place to cope with the increasing demands of the Kingdom’s predominantly young population of nearly 27 million people.

According to a report in the local Al Hayat newspaper, published last year, the country’s population had grown at a staggering rate of 333 per cent from 1975, when the population was estimated at 7 million people, to a startling 25 million in 2009.

To handle the predicted future growth in population, the Saudi Monarch, King Abdullah Abdulaziz, has recently ordered the building of an additional 500,000 housing units which will require a wealth of resources to construct and complete.

In parallel, the Saudi Water and Electricity Ministry recently announced that the country needs to invest 330 billion riyals as $88 billion over the next 10 years as demand for electricity continues to grow seven to eight per cent annually.

However, according to Ali Al-Barrak–President and CEO of the government-backed Saudi Electricity Company (SEC), the country’s sole power provider, it isn’t the building and maintenance of these large-scale projects or powering up the country’s massive oil operations which suck-up the bulk of the country’s power supply, but an energy requirement wholly less-expected:  70 per cent of the electricity consumed in the country goes to power air-conditioning.

Finding solutions

Not yet summer, the temperature was already 45C when IRJ met with Al-Barrak in early May.  Al-Barrak currently runs SEC from his office which occupies the 22nd floor of Riyadh’s famous Al-Faisaliah Tower; a 267 meter-high skyscraper which contains a 5-star hotel, office-block and a shopping centre.

“We are different to Europe—over here the demand peaks in summer because we require air condition, while in Europe the demand peaks in winter as people need to heat their homes,” he says.

This difference in consumption habits and times is currently the basis of a feasibility study which SEC is undertaking with the help of the World Bank to examine the possibility of exporting electricity to Europe during winter and importing it to the Kingdom in summer.

Al-Barrak also says that a project to link all six Gulf Cooperation Country (GCC) States through a power-grid has been completed with similar plans reaching their final stages to link the Saudi Western Coast with Egypt.

“In Cairo, the demand rises at night as the bulk of electricity consumption is used for lighting, whereas we need it during the day for air- conditioning,” he explains.

All of the above initiatives are attempts to meet an increasing demand for power and huge investments which the Kingdom needs.

High Growth, High Demand

“Most countries with a high population growth rate have similar challenges when it comes to catching up with this rapid growth—which means the economy and the construction movement are growing faster than the ability to build and operate power generation stations,” says Al-Barrak, elaborating that service providers are currently dealing with the results of population growth dating back 25 years ago. In essence, it is those individuals who were born around that time that are demanding housing, electricity, water and other services today.

The other concern is an increasing dependence on inefficient appliances and air-conditioning units—a matter which Al-Barrak says SEC is tackling by working closely with legislative bodies in the Kingdom such as the Ministry of Water and Electricity, the Ministry of Municipal and Rural Affairs and the Saudi Standards, Metrology and Quality Organization.

The result of these efforts isa national energy rationalisation program which has turned into a permanent national centre located at the highly influential King Abdulaziz City for Science and Technology.

However, despite breaking ground with such collaborations, Saudi Arabia simply needs more energy today and even more in the future. Al-Barrak reveals that SEC’s plan is to invest US $80 billion over the coming decade to resolve this matter.

“Some projects have been announced and are up for grabs, others are planned to be released later and some are being implemented now and will be in service within three years,” he explains, adding that demand will increase by more than 30,000 megawatts by the time we reach 2020.

“What we have now is 50,000 megawatts and we expect to reach 80,000 by the end of the decade,” he says.

SEC’s direct investments are done in parallel to The Independent Power Producers Programme, which was put into place to get the private sector to participate and as a second source of project financing. 

The programme involves the company setting up a number of power generation stations and placing them for investors to operate as developers and financers, and in some cases SEC comes in as a financer or investor with a stake that varies between 20 to 50 per cent.

SEC also operates as an ‘Offtaker’, by signing purchasing agreements over 20 years while developers compete as consortiums to offer the best price of electricity.

This flexibility has allowed  the group to develop several power generating projects, notably a Saudi/Korean venture in the coastal industrial city of Rabigh worth billions of Saudi Riyals.

A fair and transparent opportunity to all investors

“SEC guarantees all investors a high level of transparency and fair treatment throughout all our processes,” is a key message that Al-Barrak wishes to communicate to international investors.

He argues that there is a ‘good opportunity’ for investors from all around the world to come and do business with SEC, provided they qualify by having the credentials, technological know-how and financial ability.

Al-Barrak invites all interested companies to register and qualify directly though SEC’s website www.se.com.sa which contains all the necessary qualification information, be it for IPPs or EPC (Engineering, Procurement and Construction) contractors.

By the end of this year, the company may issue for international bonds which will become available, and Al-Barrak says there are several advantages to working with the group including growth, accumulated knowledge of over four decades, a good credit-scoring and the fact that SEC as a company is backed by the Saudi Government as the 74 per cent owner (a further seven per cent is owned by Saudi Aramco, the country’s national oil company, and remaining shares are traded on the Saudi Stock Market).

Interest in renewable energy

Another area which Al-Barrak defines as attractive for international investors and developers is Renewable Energy.

Although fossil fuels (gas, petrol, coal) will continue to be an essential resource for the production of electricity in years to come, Al-Barrak stresses that the Kingdom has conducted research into ways to benefit from renewable energy, particularly solar power, largely through efforts done at KASCT.  

Saudi Arabia has recently launched a dedicated initiative known as KA-CARE (King Abdullah City for Atomic and Renewable Energy) which Al-Barrak sees as an indicator to the seriousness of the matter.

He sees the nation as an ideal location for solar, mainly because electricity is needed the most during the day in summertime (to power the consumption demand from air-conditioning).

“Currently, 50 per cent of electricity is produced using natural gas and the rest is using Heavy Fuel Oil (HFO) or crude oil or to a limited extent, diesel,” explains Al-Barrak, while reassuring that SEC is happy to cooperate and support all renewable energy initiatives.

“E Pluribus Unum”

‘From many, one’ is an ideal way to describe the development and history of SEC.

The group is currently preparing to transform into a holding company while spinning off its main operating units (generation, transmission and distribution) into several limited liabilities subsidiaries.

In addition to the holding company, Al-Barrak says, SEC will continue to conduct strategic planning, buy and sell power, provide joint-operation to achieve economies of scale and issue stocks and bonds and follow up on execution.

This structure will mark a new era of growth in the story of SEC, which came to existence as a result of the unification of several separate entities.
According to Al-Barrak’s account, electricity started in Saudi Arabia in the 1960s with a number of privately owned companies that served only smaller cities selling electricity at varying tariffs.

The next phase was in the 1970s when the government decided to improve the service provided in parallel to the national development plan and decided to interfere in favour of price reduction.

After a few years, it was evident that private companies were no longer able to cope with the growth rate so the government interfered again by merging the existing 70 private electricity companies into four regional unified companies (with the government participating as a partner).

Al-Barrak argues that there were three reasons behind this decision: Firstly, to unify the electricity tariff across the Kingdom and make it affordable to all; secondly, get electricity to all Saudi regions, in particular remote areas and villages; and thirdly, to keep the management of the companies operating as a private entity, despite having the government as a major shareholder.

The unified regional companies continued to work accordingly until the 1990’s when another strategic decision was made and a holistic vision with regards to Saudi Arabia came into play.

Al-Barrak explains that this was a result of the growing importance of linking the various entities and balancing the revenue as some regional electricity companies were suffering due to the reduction of oil revenues during that period. 

The result was the unification of all regional electricity companies into The Saudi Electricity Company at the turn of the century.

Almost a decade after the unification, it seems like the same rapid growth rate which once resulted in the government taking over from the private sector to better serve the people, will now create a massive opportunity for private investors worldwide to step in and take part in powering up the future of the Kingdom.

www.se.com.sa