Privatizing the Saudi electricity sector

Abstract

Electricity demand in Saudi Arabia has been growing rapidly with an average peak demand growth rate of 6% over the past decade. Currently, the structure of the electricity industry is based on a monopoly framework dominated by a government owned utility company (Saudi Electric Company (SEC)). Furthermore, electricity prices in KSA are heavily subsidized and as a result, SEC relies heavily on government support through grants and soft loans to finance expansion projects to meet growing demand. In order to alleviate the financial dependency of the electricity sector on government funding, the system regulator (ECRA) announced major reform plans intended to encourage private sector participation in the electricity industry. This research aims to evaluate regulatory reform options available to the Saudi government for achieving privatization objectives. Chapter 1 lays the foundation of electricity regulation and addresses technical, economical, and regulatory aspects of electricity trading. Chapter 2, deep dives into the liberalization of the electricity industry in Great Britain as a pioneer case study with main take away being the importance of ownership unbundling in structural reforms. Chapter 3 provides a description of the current status of the sector in the KSA. It also discusses the regulatory options available to the government. Chapter 4 applies a mathematical model based on the concept of "Supply Function Equilibrium" to evaluate the government proposal of splitting the generation assets of SEC between four-generation companies. The model analyzes the level of market competition as a result of the proposed plan. The analysis shows that the establishment of four-generation companies will result in imperfect competition and that additional measures are needed to mitigate market power. Chapter 5 provides a summary of the proposed recommendations and suggests future work.