-  Sweeping changes will ensure long-term sustainability of the electricity 
sector

-  Expected outcomes include more efficient power generation, increased 
reliability of service, reduction in the use of liquid fuels for electricity 
generation, and creating a more financially viable and sustainable sector 

A press conference was held on Monday 16th November 2020, organized by Saudi 
Arabia's Ministry of Energy, to announce sweeping electricity sector reforms 
that will ensure the long-term health and sustainability of the electricity 
sector and the achievements of the Kingdom's goal under Vision 2030. 

Photo - https://mma.prnewswire.com/media/1336998/Table_1.jpg 

These reforms are considered a crucial steppingstone in achieving the Ministry 
of Energy goals for the electricity sector which are in line with the goals of 
Vision 2030, and include the following: 

    -- Transition to the optimal energy mix for electricity production in the 
       Kingdom, with shift to renewable energy and efficient natural gas 
       sources; and 
    -- Increase system efficiency and the reduced use of liquid fuels for 
       energy production; and 
     -- Increase the sector's Transmission and Distribution network security 
       and reliability to enable effective integration of renewable energy 
       and interconnection with neighboring countries; and 
    -- Greater environmental compliance to reduce the sector's carbon 
       footprint 

The comprehensive reform package of measures includes the establishment of a 
revenue requirement mechanism for sector service providers and a tariff 
balancing account to compensate for the difference between the efficient cost 
to serve and the income from tariffs. 

His Royal Highness Prince Abdulaziz bin Salman bin Abdulaziz Al Saud, Minister 
of Energy, Saudi Arabia, said: 
"This announcement is a major achievement for Saudi Vision 2030 and for the 
Ministry of Energy's ambitious goals for creating a sustainable, reliable, and 
diverse power sector. The reforms are considered the largest and most extensive 
on a global scale. These reforms lay critical foundations by helping to create 
a more solid and financially viable sector attracting the required investments. 
The expected outcomes of this sweeping reform program include more efficient 
power generation, reduction in the use of liquid fuels for electricity 
generation and increased environmental protection. 

"Moreover, the reforms aim to increase the reliability and quality of service 
of the Kingdom's electricity transmission network and to facilitate the 
production of electricity from renewable energy sources, bringing it in line 
with the Kingdom's optimal energy mix for electricity production."

His Excellency Dr. Khaled bin Saleh Al Sultan, Chairman of Saudi Electricity 
Co., said: 
"With this historic comprehensive reform program, SEC's balance sheet will 
become more robust enhancing SEC's ability to fund projects and enabling it to 
execute on its strategy to contribute to the development of a stronger, more 
sustainable, and diverse electricity sector."

For Saudi Electricity Co. specifically the reforms mark the entry of the 
Company into a regulatory framework with clear rights and obligations. In 
return the Company will have the right to receive a fair rate of return of 6% 
(WACC) on its regulated asset base and fully recover its efficient 
cost-to-serve as determined by the regulator, Electricity and Cogeneration 
Regulatory Authority (ECRA). Importantly the Company will operate under a 
predictable, transparent, and stable regulatory framework with clear arm's 
length commercial relations amongst sector players and participants. The 
reforms also include the cancellation of government fees the Company had been 
paying and the reconciliation of the Company's net legacy Government 
liabilities, and the restructuring of its balance sheet. 

HSBC, financial advisor to Saudi Electricity Co., commented: 
"The creation of this financial instrument and the introduction of an 
international standard regulatory framework should enable Saudi Electricity Co. 
to maintain a more sustainable capital structure. Through the Balancing 
Account, the Government is expected to continue supporting the sector and Saudi 
Electricity Co. on a more structured and transparent basis. 

"These reforms will help improve the sector's efficiency while providing a fair 
rate of return on invested capital. Furthermore, the restructuring also 
supports a key policy objective of a safe, secure and reliable power sector 
that is financially sustainable and able to invest in projects that could 
enhance consumer service and improve reliability. Overall, these announcements 
are expected to create an attractive environment for investment in the 
electricity sector and contribute to the economic development of Saudi Arabia, 
in line with the Vision 2030 program."

The magnitude of the reform is a momentous landmark on multiple fronts, it is 
the:

    -- Largest Islamic financial transaction to be executed globally with 
       issuance of a $45 billion Mudaraba instrument (interest of 4.5%) by 
       Saudi Electricity Co. and the single largest conversion to a non-
       dilutive equity-like instrument from debt. 
    -- SEC will have the largest regulated asset base of any utility in the 
       MENA region and will have a regulated asset base which in comparable 
       to the largest utility companies in G20 countries. 
    -- The immediate deleveraging of the USD 128 billion balance sheet of 
       Saudi Electricity Co. from a debt-to-equity-ratio of 2.2 to a ratio of 
       0.6, in line with what is generally considered to be healthy debt 
       levels for a utility company of its scale. 

Strategy&, a global strategy consulting business and part of the PwC network, 
and advisors to the Ministry of Energy for the restructuring of the electricity 
sector, added:
"This demonstrates how the reforms hit the reset button on the legacy of 
decades of ad-hoc methods of addressing the financial challenges of the 
electricity sector, and put in place a robust, transparent, and stable 
regulatory framework that will ensure the financial sustainability and health 
of Saudi Electricity Co. and their ability to meet all their commercial 
obligations including fuel payment, debt service, and dividends. It also 
provides Saudi Electricity Co., the 8th largest utility globally by asset size, 
the financial strength to raise the funds necessary to invest in strengthening 
the electricity grid, enhancing the network security and reliability.

"The power system in the Kingdom could not achieve its ambitions without a 
fundamental redefinition of the sector's financial foundation and operating 
model. At this important juncture, however, the expectations from the Saudi 
Arabian power sector are much higher than ever before. The reforms have created 
important instruments for achieving the policymaker's objectives for 
modernizing and transforming the utility sector as part of the Kingdom's Vision 
2030."

Notes to editors:
Forward-looking statements are based upon reasonable assumptions, there can be 
no assurance that forward-looking statements will prove to be accurate, as 
actual results and future events could differ materially from those anticipated 
in such statements. HSBC undertakes no obligation to update forward-looking 
statements if circumstances or management's estimates or opinions should change 
except as required by applicable securities regulations. HSBC acted as 
financial advisor to SEC.

Issued on behalf of the Ministry of Energy, Saudi Arabia.

SOURCE  Ministry of Energy

CONTACT: Mr. Mohammed Al-Khodair, mohammed.khodair@moenergy.gov.sa, 00966 (0) 
11 478 7777