For the technically minded, here is an interesting problem. Demand for power is rising by 4.5 percent a year. Over the next 20 years, electricity generation capacity needs to be increased from 23,000 megawatts to 70,000 megawatts. About 23,000 miles of new transmission lines also need to be laid and a sophisticated national grid needs to be put in place. The total cost is going to come to about $117 billion. The government is not going to pay much of the bill. What do you do?

This is not one of the more testing questions presented to final-year MBA students, but rather the reality facing senior figures in Saudi Arabia's electricity sector. And they are beginning to formulate some interesting answers. Part of the solution is to consolidate a diverse sector into a single company before redefining it along the three main lines of generation, transmission and distribution; another part is to actively chase private investment.

"We figured out that investment in generation is about 50 to 55 percent of total future investment, so we are now concentrating on inviting and encouraging investors, whether they are local, joint ventures or purely foreign investment for generation in Saudi Arabia," says engineer Sulaiman Al Kadi, head of the recently-formed Saudi Electricity Company (SEC).

"In addition, we are encouraging and meeting with grid companies that will build transmission lines across the nation, so that will also be an investment that will take away financial stress from the company and allow us to concentrate more on the non-inviting or less interesting investments, such as distribution and bits and pieces of transmission all over the country."

Having seen the enthusiastic response of international developers in neighboring Oman and Abu Dhabi to invitations to build and operate private power plants, there can be little doubt of the extent of interest in the biggest power market in the region.

But before this is done, the consolidation of SEC has to be finished. Made up of 11 regional power companies — including the four Saudi Consolidated Electric Company (SCECO) heavyweights — SEC is the key building block of a rationalized power sector. "We needed to develop the electricity sector on a national rather than regional level, and continue to develop it to make it more efficient," says Al Kadi.

"Soon we will have sufficient power generation capability, and then we will have a national grid that will tie us all together internally, and connect us to the GCC countries plus our neighbors in the north or south. If we still had the smaller separate consolidated companies this aim would never have been possible."

However, there are a host of issues that need to be addressed. Perhaps the most important revolve around how the tariff and subsidy regimes are to be structured. In the past the government has insisted that power be sold to consumers below cost, and has made up the difference itself.

"Having survived through the years on government subsidies, some of the companies in the consolidated companies were uneconomical and unable to survive without government assistance," says Al Kadi. "SEC is now able to stand on its own and survive all economic difficulties, make a profit and take care of all the investment for future development that is needed here in Saudi Arabia."

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