Abu Dhabis decision to reform electricity and water tariffs, which involves charging local citizens for water for the first time, is a bold move driven by rising energy demand and budgetary pressures.
The issue of power and water subsidies has been much talked about within GCC states for several years, but due to its politically and socially sensitive nature, little has been done. Abu Dhabis announcement of plans to make sweeping changes to the sale of utilities for both local citizens and expatriates is a clear signal of how the problem has risen to the top of the governments energy agenda.
The emirates overhaul of the tariff system is due to tightening supply and demand balance, and rising pressures on state funds from the drop in oil prices.
Demand for utilities in Abu Dhabi is continuing to increase at a rapid pace, with a shortfall of both electricity and water expected in the next few years unless new capacity is brought online. While the under-construction Nuclear Power Plant will reduce pressure on electricity demand, its commissioning will actually increase pressure on the emirates water supply. The introduction of charges for local residents, and the 170 per cent price hike for expatriates, is planned to reduce consumption and unnecessary use as the reserve margin erodes.
The reform of pricing is also rooted in reducing pressure on government expenditure. The Washington-based IMF estimates that subsidies and transfers account for nearly 20 per cent of Abu Dhabis annual expenditure, and with oil prices having dropped to their lowest point in four years, the emirate has decided to act to reduce the governments burden from its populations energy use. Now Abu Dhabi has taken the lead, it will be interesting to see when the other GCC states will follow suit.