The Kingdom of Saudi Arabia is widely regarded by industry players to be one of the countries that have tenaciously weathered the economic downturn. Despite the crisis that crippled most of the world’s economies, the country has been continuously enjoying economic growth and expansion, and increased government investment in infrastructure projects. The development in the country’s construction sector bodes well for the HVACR industry in the Kingdom, as many industry players regard the parallel between the two as a given.
As Imad Kaba, Sales Director, Middle East and Africa Distributors, Trane, explains, “Saudi Arabia was surely in a better position to face the downturn during the economic crisis than anywhere in the region, thanks to its vast oil and financial reserves.” He points out that the government had billions of dollars of budget surplus that it used for investing in many infrastructure projects, particularly in the housing, education, health, transportation, construction, municipality and water sectors. “These new projects will also generate more jobs, hence better for the economy,” says Kaba.
He reveals that as per the information received by his company, several government-backed projects have been initiated, though a large number of these projects are currently on hold. He believes that the Government of Saudi Arabia needs to build more residential units over the next five years to meet the demands. “Saudi Arabia’s population has quadrupled over the last 40 years, creating a growing housing shortage,” he qualifies.
Altaf Khan, Business Development Manager, Johnson Controls, Saudi Arabia, endorses this view, and elaborates: “Saudi Arabia was able to withstand the effects of the crisis due to huge government spending in infrastructure projects like roads, rails, metros, airport expansion and mosques, the Makkah Haram, in particular. The government also spent in new universities, hospitals, technical colleges and housing projects.”
Mohamed Zackariah, Chief Consultant, Suhaimi Design – Protecooling, says that in his opinion, the most important reason why Saudi Arabia continued to thrive despite the economic crisis was that the developments in the country were based in a reasonable and realistic approach towards the market. “The reality component in the assessment of the market needs for developments was much higher than in other areas,” he explains, and adds that the heightened focus on development in essential sectors, like education, healthcare, industry and housing, “protected” Saudi Arabia from the effects of the economic downturn.
HVACR industry in Saudi Arabia
Tawfiq M Attari, Global Sales and Technical Director, DuctSox, provides a more HVACR industry-centric evaluation of the situation when he points out that the continuing dependency on efficient air distribution remains to be the main support for the HVACR market in Saudi Arabia: “Though some companies have faced a harsh downturn due to the economic crisis, the HVACR industry has, to some extent, been protected, and did better than most other industries,” he says.
When asked about how the construction boom in the Kingdom affects the HVACR industry, Kaba, Khan and Attari are all of the opinion that the continuous increase in infrastructure projects is a welcome driver for growth of the sector.
“The infrastructure projects, like the Makkah Haram expansion, the Harmain railways, universities and hospitals improve the HVAC equipment business,” says Khan. He thinks that the new mortgage law in Saudi Arabia can also boost the demand for HVACR equipment in the residential sector.
“Both of the industries are very closely linked with each other,” explains Attari. “Once the property and infrastructure sector grows, so does the demand for cooling.”
The HVACR industry in Saudi Arabia is estimated by the industry players to be around USD 2 billion. They are also unanimous in predicting a seven to 10% growth for the sector in the next five years. “With the Saudi Arabian Government’s continued efforts to diversify its economy, the outlook of the construction industry and, therefore, the HVACR industry, seems to be very positive,” affirms Kaba.
“The outlook of the HVACR industry in Saudi Arabia, based on the current trend of growth is very promising, considering the large developments slated for the upcoming years…. A few million TR of cooling capacity will be added within the next decade,” Zackariah confirms.
Attari endorses the prediction of continuous growth for the sector in the Kingdom and adds that due to the country’s climate, he expects that there will still be a growing demand and dependency on air conditioning products, which will ensure the upward trend for the HVACR sector in the region.
Khan, on the other hand, observes that though the outlook for the HVACR industry is generally positive, the mega construction projects have started shrinking and that government and private projects have increasingly been energy conscious, as they are now going for more energy-efficient equipment, like variable frequency drives for HVAC equipment.
Kaba seconds this observation, as he shares the view that there is a growing interest in energy efficiency and in the improvement of Indoor Air Quality in the Kingdom. “To achieve more energy efficiency and better Indoor Air Quality, there is also a trend towards more environmentally sustainable solutions, like Green Buildings,” he says. “This is partly due to the government’s concern over the rapidly increasing demand for [electricity] which translates to a reduction in the quantity of oil to sell on the world market.”
Khan, too, speaks about the growing concern over the increasing demand for electricity in Saudi Arabia: “Semi-government and private projects are cautious about energy usage for HVAC equipment. So, they are going for variable frequency drive equipment and big capacity plants are preferring water cooled chillers – either sea water or sewage water – which we have technology to cover the extreme condition requirements in Saudi Arabia.”
In addition, he also shares his insights about the announcement of the Saudi Metrology Department regarding the banning of HCFC refrigerants, like R22 and R123, effective January 1, 2015. “Due to the ban of HCFC refrigerants, semi-government and private projects are interested in HCFC-free equipment,” he says. “There is now a ban on HCFC refrigerants; so, products will move towards HCFC-free refrigerants like R134A, R410A and others.” He points out that current need for more energy-efficient equipment can drive the growth of the replacement and retrofit sector and that bodes well for the segment.
Kaba supports this view. In his opinion, replacement of equipment is taking precedence over a simple refrigerant retrofit. “We noticed that many of the existing buildings with HVAC equipment over 20 years old prefer to opt for replacement of equipment rather than refrigerant retrofit,” he reveals.
Though Attari considers the retrofit market to be “booming” at present, as many retail centres are currently under construction, he believes that it cannot be considered as a sustainable market, as it fluctuates every three or four years.
The power crisis in the Kingdom
Industry players believe that with the continuous growth and expansion of the economy of the Kingdom, energy security is fast becoming a concern that calls for urgent and heightened attention.
In his presentation during The Climate Control Conference (C3) in November 2012 in Riyadh, Eng Nasser Al-Qahtani, Vice Governor of the Electricity and Cogeneration Regulatory Authority (ECRA) in Saudi Arabia, gave valuable information regarding the country’s current energy demands. He pointed out that with the growth in population and improvement in the standards of living in the country, per capita consumption is increasing at an average growth rate of three per cent per annum from 2007.
Speaking to Climate Control Middle East, H.E. Dr Abdullah M Al Shehri, Governor, ECRA, gives additional insights into the continuously increasing per capita consumption in Saudi Arabia: “The increase in consumption is due to four factors. These factors are mainly population growth, growing per capita consumption, economic development in the country and low prices of fuel and electricity.”
In 20 years, the Kingdom’s peak electricity demand is projected to be 120 GW. The growth in demand is said to be mainly driven by the increase in the country’s GDP and the rise in investments from both government and private sectors. Al-Qahtani highlighted in his presentation that inefficiency was also a factor contributing to the spike in power demand. Al Shehri shares his thoughts and explains what, in his opinion, were the drivers to inefficiency: “Inefficiency is driven by fast economic development, lack of equipment standards that promote efficiency, lack of regulations to mandate efficiency measures, and prices that do not reflect the real cost,” he says.
In the light of the increasing concern over Saudi Arabia’s energy security, the country’s government has introduced several measures that are expected to impact the growth in energy demands. Al Shehri shares the following policies:
- Mandating insulation for buildings
- Introducing high-efficiency standards for electrical equipment
- Establishing a high-level centre (Saudi Energy Efficiency Centre – SEEC) for developing policies and implementing programmes for energy efficiency in buildings, transportation, and industry
- Establishing strong electrical grid interconnection internally and to other countries such as those in the GCC and Egypt
- Enhancing the efficiency of the electricity supply system by using high-efficiency units and encouraging cogeneration
- Embarking upon an ambitious programme for developing renewable and nuclear power
In addition to the above-mentioned measures, privatisation is also seen by the Saudi government as a key policy to increase competition in the market, and, consequently, enhance energy efficiency. In line with this, ECRA has approved the Electricity Industry Restructuring Plan (EIRP), which moves towards a competitive wholesale market. Al Shehri explains more about the objectives of the EIRP:
- Enhance competition in the supply side and demand side: This is expected to introduce smart practices to enhance efficiency, reduce cost and provide better quality services
- Encourage private sector participation in building and operating various electricity activities: This will reduce the need for government support
- Offer attractive investment opportunities for the private sector
- Focus on government subsidy to the targeted groups: This will reduce the subsidy and make it more effective
Furthermore, integration with other countries and regions is also considered by the Saudi Government as an integral component of its energy policies. Al Shehri enumerates its myriad advantages:
- Improvement of electric system reliability
- Opportunity for electric energy trading on long-term and short-term bases
- Improvement of system efficiency by exchanging power capacity during peak and off-peak periods
- Creation of stronger systems that can cater to intermittent renewable energy systems
- Enhancement of the interconnected systems to build larger power plants and benefit from economy of scale
On the ground, industry players also share their insights on how the government of Saudi Arabia is addressing the current energy crisis. Kaba points out that the government has instructed all air conditioner manufacturing companies to incorporate higher Energy Efficient Ratio (EER) in the equipment they manufacture. “There is a ‘star’ rating system currently in place, set up by Saudi Arabian Standards Organisation (SASO), where a higher number of stars indicates more efficient products,” says Kaba. He adds that new regulations also restrict the maximum power usage per square metre of space.
He points out that there currently exists a policy where the utility company exerts direct control over chiller plants in large government facilities during peak hours. “By reducing demand in this way, the utility company is able to reduce the risk of overloading the system. Trane is currently working on a number of these projects in the Kingdom and elsewhere in the Gulf,” he says.
“The power crisis is a major issue,” agrees Zackariah. He reveals that many discussions have started in the country in order to meet the growing energy demand. And to ensure energy security, government authorities may be heading in the direction of differential tariffs or some regulations mandating certain technologies like district cooling. “The power crisis is probably the single powerful factor that could shake the entire industry to clean up its act,” he observes.
Khan points out that in addition to the EER star rating system, the Saudi Government is also putting a lot of effort into creating awareness among the end-users to choose and use energy-efficient equipment. He adds that the government is increasing its efforts to find alternative sources of energy, like solar energy.
New demands, new sources
As was pointed out by the industry players and representatives from the Saudi Arabian Government, the country is currently witnessing increasing growth with high rates of demand for electricity due to the growing population and the subsidised supply of water and electricity. According to The Minister of Petroleum and Mineral Resources, reported by Clint Steyn and Marc Norman in a document from Chadbourne & Parke, released in November 2012, the increasing demand for electricity and water results in an equally increasing requirement for the non-renewable hydrocarbon resources to be used in generating power and desalinating water, which, it adds, is projected to continually rise.
The Minister, therefore, considers the use of alternative sustainable and reliable resources for generating power and producing desalinated water as a means of reducing dependency on hydrocarbon resources. The Minister, furthermore, believes that the use of alternative resources can serve as a guarantee for continuous production of water and generation of power in the future.
The Minister also highlights the economic relevance of saving hydrocarbon resources, saying that the conservation of the same can ensure that they will continue to be a source of income for the country for a longer period of time.
A Chatham House report in 2011, cited by Steyn and Norman in the same document, endorses the view that the current patterns of energy demand in the Kingdom are not only wasting valuable resources and causing excessive pollution but also rendering the country vulnerable to economic and social crises. It observes: “Saudi Arabia’s place in the world market is threatened by unrestrained domestic fuel consumption…. Its domestic energy consumption could limit its exports of oil within a decade.”
Given the current trajectory of Saudi Arabia’s energy demands, a Citigroup report in 2012 concluded that the country could cease to be an oil exporter by 2030. Considering that over 80% of the Kingdom’s government spending is dependent on oil, a shift in Saudi Arabia’s energy policy is, therefore, inevitable, it predicts.
To respond to the pressing need to find alternative sources of energy, Steyn and Norman report that the Kingdom is to launch a renewable energy programme that could see the procurement of 54,000 MW of renewable energy capacity over the next 20 years.
At a trade conference, the report continues, the Saudi Government announced plans to issue a draft request for proposals for an introductory procurement round of up to 600 MW of utility-scale solar projects in the second quarter of 2013.
The report explains that the introductory round is reported to be succeeded by two full-scale rounds. The three procurement rounds are expected to lead to the procurement of approximately 5,000 MW of solar facilities. The capacity, adds the report, is expected to split equally between photovoltaic and solar thermal projects.
The renewable energy programme to be deployed by the Saudi Government is placed under the stewardship of the King Abdullah City for Atomic and Renewable Energy (K.A. CARE), whose renewable programme’s main objective is reportedly to limit domestic oil consumption in order to boost lucrative oil exports.
Steyn and Norman add that K.A. CARE’s overall target is to generate a third of its electricity from renewable energy by 2030, which translates into around 54,000 MW of renewable facilities. Though multiple sources of renewable energy is envisaged, most of the target is expected to be reached through solar projects, with 16,000 MW in photovoltaic projects and 25,000 MW in solar thermal projects.
As of February 21, 2013, a communiqué from the Emirates Solar Industry Association (ESIA) reported that K.A. CARE has announced the launch of its Renewable Energy Competitive Procurement Portal and released a White Paper outlining how the procurement process will proceed.
This announcement, said the news release, marks the launch of a registration process for interested companies to submit feedback and obtain important information in connection with the Renewable Energy Program. It is envisaged to pave the way towards the launch of the introductory procurement round, which will consist of five to seven projects with a combined capacity of up to 800 MW.
Weathering the economic crisis of recent years is definitely a feat for any economy. Saudi Arabia has managed to continue its growth story despite the downturn that plagued a majority of the world’s economies. The rapid and continuous growth of the economy and the population of the Kingdom have resulted in a spike in its energy demand, which requires urgent attention and solution.
It has been reported that approximately 70% of all energy consumed within the built-environment is attributed to air conditioning. With the projected continuous growth of the construction industry and, consequently, the HVACR industry, industry players were unanimous in pointing out that the current drive of research and development in the industry is towards energy efficiency and cost savings.
The Saudi Government has introduced various energy policies with the aim of addressing the current power crisis. At present, Saudi Arabia has embarked upon an “ambitious” programme to tap alternative sources of energy, with particular interest in solar energy. The potential opportunities for solar power in Saudi Arabia is said to be great, and the Kingdom as a significant solar power market appears promising.
Though still facing challenges like the observed general lack of regulations and concerns for the environment, the projects envisaged by Saudi Arabia is widely considered to have the potential to change the nature of the global solar industry.