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OTHER NEWS 23 Feb 2016

Saudi Arabia’s foreign reserves can cover deficits on a temporary basis but electricity sector reform is needed

Insight piece by Pöyry Management Consulting provides an in-depth analysis of the possible areas for reform in the Kingdom of Saudi Arabia’s electricity sector.

23 FEBRUARY 2016: The new point of view “A country in transformation: three areas to reform the electricity sector of Saudi Arabia” by Pöyry Management Consulting details how the Kingdom of Saudi Arabia should approach the structural reform away from oil announced in its 2016 budget.

In Saudi Arabia, oil sales represent over 70% of the government’s revenue however oil prices (per barrel) fell from $ 115 in 2014 to $ 30 in January 2016. This dramatic fall has resulted in a budget deficit of SR326 Billion in 2015 and in its 2016 budget the Kingdom of Saudi Arabia announced its intention to implement structural reform and reduce dependence on oil. Pöyry Management Consulting recommends looking at actions to reduce electricity growth, development of renewable capacity and institutional reform to instigate long-term significant benefits.

As the government has used oil revenues to provide citizens with electricity and water at low price levels, peak demand has grown rapidly. Oil consumption within the country has doubled since 2000 to 37 barrels per capita annually which is reducing the amount of oil that can be exported now and in the future. In December 2015, tariff increases were announced however Pöyry believe these changes alone will have limited impact on electricity demand growth and suggest the key criteria for comprehensive tariff reform.

In the insight piece, Brendan Cronin, Head of Management Consulting Middle East at Pöyry states that, “separately from tariff reform, an industrial demand-side response programme should be developed. There is roughly 5GW of generation capacity in the Kingdom that runs less than 100 hours per year. Flattening the load shape by getting industrial consumers to reduce their demand during these hours could avoid the need for this capacity and save significant costs.”

Pöyry also highlights that Saudi Arabia should focus their efforts on the development of renewable capacity. The cost of solar PV has fallen by 75% over the past five years and it is likely that long-term contract prices in the Gulf Cooperation council will fall to $50/MWh in 2016, from the current level of $60 MWh. Pöyry adds that initial additions of solar PV would displace oil-fired generation, which even at the current oil price, has an economic cost significantly more than this. A target of at least 15% renewable electricity by 2025 should be aggressively pursued.

The third and final area that Pöyry Management Consulting advises the Saudi government to focus on would be institutional reform as the structure of the electricity sector needs to evolve. One of the barriers to reform in the Kingdom is the perceived overlap between responsibilities and activities in the sector. Cronin notes that one example of this is the present confusion amongst developers as to who will be responsible for different elements of the renewable deployment programme with KA-CARE, SEC and Saudi Aramco all taking overlapping roles.

There are ongoing discussion on the privatization of SEC and other organisations. While this would raise considerable revenue for the Kingdom in the short term, the longer –term goal should be to promote efficiency and improve investment decisions. In the long-term, there would be significant benefits in creating a wholesale spot market for electricity. This would allow increased cross-border trading of electricity which would be mutually beneficial for the Kingdom and other GCC countries.

Additional information by:

Metin Parlak
H+K Strategies

+44 207 413 3771

James Townsend
External Communications Manager, Pöyry

+44 7824 145091

About Pöyry

Pöyry is an international consulting and engineering company. We serve clients globally across the energy and industrial sectors and provide local services in our core markets. We deliver management consulting and engineering services, underpinned by strong project implementation capability and expertise. Our focus sectors are power generation, transmission & distribution, forest industry, chemicals & biorefining, mining & metals, transportation and water. Pöyry has an extensive local office network employing about 6,000 experts. Pöyry’s net sales in 2015 were EUR 575 million and the company’s shares are quoted on Nasdaq Helsinki (Pöyry PLC: POY1V).