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A Vision for the Future of Electricity and Co-Generation in the Kingdom

a) An Outlook for Evolution of the Industry

For the past twenty years, many countries around the world have undertaken to reform and restructure their electricity sectors in one way or another. The reforms have usually sought to transform the traditional vertically integrated electric utility monopoly into an unbundled, market-oriented industry with active private sector participation, competition in generation and supply businesses, and regulation of the natural monopoly activities. Competition has also been introduced in the distribution activity in some countries while in others it has remained as a regulated natural monopoly activity. In order to ensure the functionality of the unbundled industry, the restructuring and regulatory design has typically established an appropriate structural, institutional, and operational framework. The reform and restructuring process normally goes through several stages, that include;

1. Establishing an appropriate legal and regulatory framework
2. Restructuring the industry
3. Regulating natural monopolies (transmission and perhaps distribution networks)
4. Corporatizing and/or privatizing existing assets and promotion of new private sector investments
5. Allowing for cost-reflective electricity tariffs of regulated activities, and
6. Creating a wholesale electricity market for competition in generation

The Authority envisages the Kingdom's electricity industry evolving along similar lines. It is currently working on the implementation of a transition stage, which involves completing and enacting the new legal and regulatory framework, introduction of a licensing regime, and preparation of appropriate codes and standards for services. It also includes unbundling SEC's corporate structure of a vertically integrated monopoly by organizing the generation and distribution into separate business lines and creating a separate transmission grid company operating independently of the generation and distribution/retail activities as well as operating on a non-discriminatory basis to provide access to all other industry participants. All these reorganized operations are expected to be run along commercial lines. Concurrently with these activities, the Authority will continue to work with stakeholders and relevant government agencies to create an enabling environment that promotes private sector participation and investment in generation through Independent Power or Water and Power Producers (I(W)PPs) Projects. During this stage also, ECRA plans to promote and effect the practice and concept of the "Parallel Market" as provided for in Article 8 of the CMD 169, that permits large consumers to obtain their requirements of electricity services directly from the suppliers of their choice on the basis of mutually agreed prices and other commercial terms. It is anticipated that this practice will pave the way for a smooth and orderly transition to a competitive electricity market to be introduced during the subsequent stages by gradually expanding the category of consumers that would be entitled to use the parallel market while maintaining the availability of a safety net in the form of approved end user tariffs. Under the proposed electricity statute, ECRA would be required, as and when the competitive market is introduced, to take into consideration existing long term electricity supply agreements executed with private investors/developers to protect their rights to realize the agreed upon returns on investment.

b) Opportunities for Private Sector Participation and Investment

One of the objectives of the proposed electricity statute is encouragement of private sector participation in the electricity industry. This is seen as essential for the development and sustainability of the electricity industry in the Kingdom. There are a number of investment opportunities for private sector participation in the electricity and water desalination industries including:

• Independent Power Projects (IPPs) and Independent Water and Power Projects (IWPPs)
• Creation of a national power transmission company
• Formation of several power generation companies from the existing SEC assets

Other options for private sector participation in the water desalination and electricity industries typically include:

• Sale of stock in the marketplace, possibly including the sale of shares to a strategic investor(s)
• Granting a concession or a lease for existing generation and water production facilities
  Granting facility management contracts
• Direct sales of selected existing power and water desalination assets

The Authority will be working in coordination with the Ministry of Water & Electricity, the Saudi Electricity Company (SEC), Saline Water Conversion Corporation, investors from the private sector and all other interested parties to select the options most suitable and beneficial to Saudi Arabia.