IPP reliance set to grow
Dependence on the single-buyer model, where a state-owned entity is the only wholesale purchaser from power-generating companies, is rising
Research by the Arab Petroleum Investments Corporation (APICORP) estimates that GCC power capacity needs will expand at an average annual rate of 8% from 2016 to 2020.
To meet rising demand, the GCC will need to invest $85bn to add 69GW of new generating capacity over the next five years. But declining oil revenues mean that GCC governments can no longer support the provision of cheap power and have looked to IPPs to play an increasing role in power generation.
Reforms are gradually picking up pace throughout the GCC, at the heart of which are the recent price hikes. Governments have increased water, electricity and fuel prices to ease the burden on state budgets.
Structural reforms are also taking place. Oman is leading GCC efforts to unbundle the power sector by privatising most of its generating assets, and is considering the privatisation of transmission and distribution. The country will become the first in the GCC to introduce spot trading in the electricity market by the end of the decade. In Saudi Arabia, state utility Saudi Electricity Company (SEC) has recently announced plans to break up into four independent power-generating bodies and an independent transmission company by the end of 2016.
IPPs offer a quick solution for governments, and they now represent the majority of new capacity, continuing to replace government power plants. Over-reliance on this strategy could have potentially negative implications. However, benefits include the ability for investments to be made in power generation without the need for governments to pay the entire upfront cost; the relative cost-effectiveness of IPP projects compared to government power plants; and shorter project execution times.