The direction the government is now taking is to increase the participation of the private sector in utilities.

Abdullah M. ALSHEHRI Governor ELECTRICITY AND COGENERATION REGULATORY AUTHORITY

Paths to optimisation in Saudi Arabia

March 8, 2018

Abdullah M. AlShehri, governor of the Electricity and Cogeneration Regulatory Authority (ECRA), talks to TOGY about the drive for energy efficiency in Saudi Arabia, the need to increase private-sector engagement in utilities and the investment climate for electricity and power in the country. ECRA is responsible for the regulation of the electricity in Saudi Arabia, which it has been doing since 2002.

On changes to subsidies: “Some people are afraid of change, but I think if it is implemented correctly, it will work. As for the industry, they are eager for change. They want to see encouragement for the private sector, they would like to see transparency and they want to know that the costs they are paying are real costs. It is best for everyone to have a system that is transparent, stable and reliable.”

On steps towards private-sector participation: “We are therefore developing a restructuring plan for the Saudi Electricity Company which starts by unbundling the main activities – generation, transmission and distribution – into different entities and establishing a principle buyer – an independent company to buy and sell to consumers. We will establish an independent system operator to run the power plants in a way that does not discriminate regarding the operation of the plants. This will make sure investors feel comfortable investing huge amounts of money into these plants.”

Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Abdullah M. AlShehri below.

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Is Saudi Arabia moving towards increased gas output?
Yes. The electricity industry used to burn all of the gas available and then the additional needs were met through liquid fuels: crude oil, fuel oil and diesel. Lately, Saudi Aramco has invested huge amounts in developing gasfields and making gas more available. More and more plants are now burning gas, not liquid, and a much higher percentage of energy is being generated using gas.
Some plants can be retrofitted to use gas as a feedstock, but this depends on the lifetime of the plant. Investments define the lifetimes of plants and those with short lifelines do not justify retrofitting. Their operation is restricted during the peak load hours. They are only used a few hours over a few days per year and can continue burning a little fuel to meet the peak demand.

How can ECRA ensure that the electricity industry works as efficiently as possible?
We are taking several paths to optimise the investments in the electricity industry. One example of this is our request that the Saudi Electricity Company (SEC) invests in demand side management. We think this is a justifiable option and have conducted a study for this that shows it is feasible.
We are working on installing smart meters, which will mean greater flexibility for implementing time-of-use tariffs, which will change depending on the time of day. The Ministry of Energy is also now initiating a renewable energy programme, which will contribute to the reduction of peak demand, especially in the summer. A third programme is greater interconnection with neighbouring countries.
The interconnection with the electricity networks in the GCC countries has been operational since 2011. The connection with Egypt is currently being developed and maybe in the future there will be interconnection with Jordan and Turkey as well. We think these countries will be the highest contributor to peak reduction because their peak loads are in the winter while ours is in the summer. In this way, capacity will be better utilised with each country’s peaks being met through imports.

What is your relationship with the former Ministry of Water and Electricity?
We used to have the minister of water and electricity as the chairman of our board, but there has since been a royal order to give ECRA total independence. Now our chairman is appointed by the Council of Ministers and we report directly to them. The ministries of energy, water and agriculture are responsible for setting policies for the activities we are regulating. ECRA’s mandate is to make sure that these policies are implemented correctly and that the service level to consumers is kept at international standards with a reasonable cost for the consumer.
We do not report to the ministries, but we consult with all stakeholders – which may include ministries, consumers or service providers – before making any regulation. We then implement that regulation. At the same time, the ministries are expected to consult with us before issuing any policies. Although the policies come from the government, we are the ones who make sure they are implemented effectively.

Should Saudi Arabia focus more on renewable energy?
There is a commitment from the government to install 9.5 GW from renewables by 2023, mainly solar and wind, which will make up a large share of our peak demand. There will also likely be some geothermal, but not much. There will be a vast reduction in the cost of renewables and therefore they are expected to compete with conventional sources.
Since this will take some time, we want to move gradually with the implementation of renewables to make sure it does not affect grid stability. We developed a long-term plan, from now until 2040, which shows that peak demand is going to double from its current level to 2040. We need to make sure we are prepared for that.

 

Are Saudi plans for 120 GW of new capacity by 2030 feasible?
Whether we like it or not, the electricity supply must meet demand. The direction the government is now taking is to increase the participation of the private sector in utilities.
We are therefore developing a restructuring plan for the Saudi Electricity Company which starts by unbundling the main activities – generation, transmission and distribution – into different entities and establishing a principle buyer – an independent company to buy and sell to consumers. We will establish an independent system operator to run the power plants in a way that does not discriminate regarding the operation of the plants. This will make sure investors feel comfortable investing huge amounts of money into these plants.
The second stage is to allow bilateral contracts with large consumers who can contract power plants directly for their needs regardless of who owns the plant. The third stage is to move to the electricity market, which will be governed by the market forces of supply and demand.

What other plans are being implemented to increase investor confidence?
The tariffs now are still lower than the required revenue for the electricity industry. We proposed establishing a balancing fund where the tariffs will be adjusted to reach the break-even level, but on a gradual basis. Of course the funding can fluctuate as gas prices fluctuate too. During this period, the balancing fund would fill the gap so the investors can be assured that they will get their payments on time and make sure the entities they are dealing with are healthy and reliable.
These procedures are under development now and hopefully by the end of 2017, we will have most of it established. The principle buyer is established, the balancing fund is currently under discussion at the ministerial level, the independence of ECRA is established and all of this will help pave the way for private-sector participation on a wider basis.

Is the amount spent on subsidies in Saudi Arabia economically sustainable?
One of the major decisions taken recently by the Council of Ministers is to establish a “citizen account” through which the people who deserve subsidies will be given a certain amount. They can spend it on whatever they like, but everybody else should pay the actual cost of the service. The universal method of distributing subsidies usually means the rich benefit more than the poor, which is not fair. The government is paying a lot of money, but the rich do not appreciate it and the poor do not feel it.
Some people are afraid of change, but I think if it is implemented correctly, it will work. As for the industry, they are eager for change. They want to see encouragement for the private sector, they would like to see transparency and they want to know that the costs they are paying are real costs. It is best for everyone to have a system that is transparent, stable and reliable.

How do you expect the source of demand to change in the run up to 2030?
The low tariffs in the last 30 or so years gave people the impression that electricity would be cheap forever, so they built large houses with big rooms, no insulation and low standards for electrical equipment. We conducted a study for efficiency and found that almost 50% of electricity is consumed in buildings, mainly for air conditioning. We also found that the best way to reduce this burden is by using thermal insulation and improving the standards of electrical equipment.
Now we are finally seeing an impact: Low-efficiency equipment is no longer available in the market and products are graded by their electricity efficiency. Additionally, there is a royal decree which enforces insulation in buildings and the Saudi Electricity Company is making sure that this is implemented in all new buildings.
Despite these improvements, we still have almost 8 million customers inhabiting and using the old style of buildings. There should be programmes to help them modify their consumption. If the fuel prices are changed, the change in tariffs will make people think more about investing in efficiency.
We expect the energy efficiency measures will impact demand and the change in tariffs will affect cost, which will in turn affect demand. However, every 10 years we are adding 5 million new consumers. The growth rate of the population is huge, as is the economic development of the country, and these are the major drivers of this high growth rate.

How can Saudis be encouraged to be more environmentally conscious?
Education is important. Even if you insulate the building and use efficient air condition units, if you leave doors open, the effect is undone. Education is an important element of it, making sure people understand these resources are valuable and need to be utilised correctly.
Also, tariffs are the most effective tool to get people to understand certain actions and encourage people to invest in efficient products and services. We have approved the regulation for solar panels on people’s roofs. We hope that this regulation will be implemented soon.

What are the short-term goals for ECRA?
We would like to see greater private-sector participation as soon as possible because the growth of demand for power is high and electricity projects take time to be implemented. The private sector will not get involved unless things are crystal clear and they know they will get paid on time. The system operation also needs to be fair and transparent.
We are working with the government on tariff adjustments and establishing a balancing fund. All of this has to come together as a package to meet demand. The growth in demand is high and the investments required are huge. Saudi Arabia is keen to attract private-sector participation, local or international. The demand is there, the government commitment is there and we are paving the way to attract the private sector based on the best terms and practices.

Are there government directives in place to improve the efficiency of cities?
The government approved the Saudi Building Code six years ago, but it was voluntary for some time. This year I hope the Ministry of Municipal and Rural Affairs will start enforcing the conditions and requirements of the building code. These requirements are for insulation, the type of paints, direction that the buildings face and so on. Fulfilling the requirements will make buildings more efficient and save people money in the long term.

What is the current investment climate in the electricity and power sectors?
Investments in the electricity sector have slowed down. In 2016, it was the first time in over 20 years that we had negative growth in the electricity sector. This year, we are still at the level we were in 2015. The major reason for this is that the school summer holidays have been extended. They are now almost four months. Schools are off and many people travel to cooler areas. This has caused demand to slow down. However, next year schools will be open until the end of June, so I expect that next year will see a demand positive growth rate.

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