BMI View: Saudi Arabia will register strong growth in new oil and gas-fired capacity over our forecast period as the government attempts to meet growing demand for electricity from an expanding population. Diversification into nuclear and solar will, however, take longer than anticipated, as lower oil prices mean public spending is rationalised from 2016 onwards and costly expansion plans are pushed back.
Saudi Arabia's power sector will continue to register robust growth over our forecast period, although a sustained period of lower global oil prices is likely to drag on government-backed spending on some of the Kingdom's more ambitious long-term projects. Government investment in new thermal-fired power capacity will remain high in the near term - as the kingdom attempts to keep pace with surging demand for electricity from a growing population. Investment in the diversification of the power sector - so as to reduce the amount of oil that is burned domestically and preserve it for export - will take longer, after targets for nuclear and solar expansion we pushed back in early 2015.
A strong project pipeline and growth in thermal capacity underpins our forecasts for annual average growth in electricity generation of 4% between 2015 and 2024. New gas-fired projects, valued at more than USD23bn (according to our Key Projects Database), will be key to energy mix diversification across our 10-year forecast period. Gas expansion is, however, likely to be constrained by uneconomic gas pricing and difficulties in accessing domestic gas supplies - meaning oil will still account for 47% of total electricity generation in 2024.
Notably, we have not yet included new nuclear capacity in our forecasts as we are awaiting more clarity on the country's ambitious plans to build 16 nuclear reactors. Similarly, despite hugely ambitious plans to diversify the energy mix through the construction of 41 gigawatts (GW) of solar capacity (at a cost of USD109bn), the number of projects in the pipeline is very limited. Our reluctance to include the projects in our forecasts is supported by the government's announcement in early 2015 that it would push back its hugely ambitious solar and nuclear targets by eight years to 2040.
We believe one of the major reasons that these nuclear and solar targets were pushed back was the backdrop of a sustained period of lower global oil prices. Although Saudi Arabia will remain relatively immune to lower global oil prices over the near term (thanks to government stimulus measures etc), we believe that Riyadh will gradually rationalise public spending from 2016 onward, bringing an end to more than a decade of sustained fiscal expansion. This will not only mean that headline real GDP growth will slow, declining to 3.2% in 2016 and 2.7% in 2017, but it could also weigh on some of Saudi Arabia's more ambitious power sector targets.
Latest Trends And Developments:
In January 2015, Hashim Yamani, president of the King Abdullah Centre For Atomic and Renewable Energy (K.A.CARE), announced the decision to push back the targets for nuclear and solar development by eight years - from 2032 to 2040.
K.A.CARE later announced on its website (in June 2015) that Saudi Arabia had signed its latest nuclear cooperation deal with Russia - with a view to encouraging significant Russian participation in its nuclear new-build plans.
In April 2015, Saudi Arabia's new oil minister, Prince Abdulaziz bin Salman, said that the kingdom expects to save up to a fifth of its energy use by 2030 via an efficiency drive to prevent domestic oil consumption. We emphasise that cutting subsidies and raising domestic fuel prices will be key in deterring excessive consumption, but Prince Abdulaziz gave no indication that this politically sensitive reform was likely - something that has been typical of Saudi announcement on this issue.
In June 2015, France's Alstom and National Grid Saudi Arabia (a subsidiary of SEC) signed a MoU with a view to enhancing grid infrastructure in Saudi Arabia on a long-term basis. Under the MOU, the two parties will cooperate in the fields of standards and specifications, engineering and design, maintenance and operation and technical exchange.
The government has been working on structural reform of the power sector. In May 2014, the government took forward plans to break up SEC into four independent power-generation companies. In November 2014, the Electricity and Cogeneration Regulatory Authority (ECRA) confirmed that it had reached an agreement over the restructuring of SEC, with the unbundling set to take place in 2015. No updates had been announced at the time of writing.