Infrastructure spending features prominently in Syria’s new economic plan for the 2011-2016 period, as the government seeks to keep pace with rapidly rising electricity demand.
Deputy prime minister Abdullah al-Dardari said in February that the country’s installed power capacity would be increased by 70 per cent over the next five years, with $5bn worth of contracts already signed, which will add 5,000MW of new capacity by the end of 2013.
But this is only the beginning of the investment needed in the power sector. In 2009, the Washington-headquartered World Bank estimated Syria needs to add about 7,000MW of new capacity by 2020, at a cost of around $10.5bn, to meet consumption that is growing by some 7 per cent a year.
- $10.5bn: Amount of investment needed in Syria’s power sector
- 7,000MW: Additional capacity Syria needs by 2020 to meet rising electricity demand
- 5 per cent: Forecast growth in Syria’s real gross domestic product (GDP) in 2010
- $275m: Cost to distribution firms of Syria’s poor electricity networks
Source: Electricity Ministry; World Bank
The rise in demand for electricity is being driven by increased economic activity – the country’s real gross domestic product growth is forecast to average 5 per cent this year – and by higher residential consumption.
In 2009, Syria removed subsidies on diesel for household heating, prompting residents to switch to electric heaters to heat their homes in winter. Demand also soars in the summer months due to high air-conditioning usage and Syrians have got used to power outages of up to five hours a day.
In 2009, electricity consumption peaked at 6,500MW. Demand is forecast to rise to 11,000MW in 2015, and to around 18,000MW in 2025. At present, the country has 8,000MW of generation capacity installed.
To meet the projected increase in demand, the country hopes to attract foreign investors to finance power projects
To meet the projected increase in demand, the country hopes to attract foreign investors to help finance power projects. Three independent power projects (IPPs) are in the planning stage and five other potential sites have been identified by the Electricity Ministry.
In April, the Qatar Electricity and Water Company (QEWC) signed an agreement with the country’s largest holding company, the state-owned Syrian Qatari Holdings (SQH) to jointly develop, build, finance and operate two 450MW combined-cycle power plants in Syria. The schemes are expected to come on stream by mid-2013. SQH and QEWC are considering creating a larger consortium by taking on a power developer as a third strategic partner. The plants will be located at Sweidieh, close to the oil fields in the northeast of the country, and in the industrial city of Adra.
The sponsors say a long-term fuel supply agreement has been reached with the Petroleum & Natural Mineral Resources Ministry to deliver gas to the two facilities. Power generated by the two plants will be transferred to the national grid under a long-term power purchase agreement (PPA) or an energy conversion agreement.
The two new IPPs would start up after the first IPP planned for Al-Nasserieh, some 60 kilometres south of Damascus. In 2009, Syria’s Public Establishment for Electricity Generation & Transmission (PEEGT) prequalified two consortiums to build the 220-250MW plant. The first consortium consists of Syria’s Cham Holding and Kuwait’s Al-Kharafi group. The second group comprises Greece’s Terna Energy with Finland’s Wartsila. Further groups could be added to the shortlist.
The World Bank’s private sector arm, the International Finance Corporation (IFC), is advising on the scheme and the winning bidder will invest 50 per cent of the equity in the project company.
Public-private partnerships form a major part of the government’s strategy to boost power capacity, yet little groundwork has been done to assure investors of an attractive investment climate for IPPs.
“From an investor point of view, [Syria] is still well down the learning curve in terms of engaging. Investors are looking at potential projects, but in terms of getting real engagement with PEEGT and getting a PPA in place, I’d be doubtful of that being achieved in the short term,” says a foreign consultant working on a Syrian electricity project.
Aware of such concerns, PEEGT is tapping foreign expertise, bringing on board the UK’s Mott MacDonald as a technical adviser on the Al-Nasserieh IPP.
The build-own-operate model is also being touted for a new renewables project, a planned 50-100MW wind farm at Al-Sukhna, near Palmyra, for which PEEGT is currently seeking a consultant. An alternative proposal would involve the plant being built at Al-Hijana, 50km south of Damascus. The successful bidder will design, finance, build, own and operate the wind farm under a 20-25 year contract.
At the same time as pursuing privately-funded schemes, PEEGT is also expanding power capacity through investment in traditional turnkey projects. In February, the 750MW Deir Ali combined-cycle power plant began commercial production.
The Electricity Ministry has also awarded contracts this year for upgrades to existing facilities Iran’s Mapna was awarded a E280m ($362.5m) contract to boost capacity at the Jandar plant in the west of the country by 450MW, to take its total capacity to 1,150MW. China National Electric Equipment Corporation is to upgrade the Zara plant, near Homs, adding 600MW of capacity at a cost of $400m.
Meanwhile, India’s Bharat Heavy Electrical Limited has been awarded a $450m contract to convert the Tishreen facility into a combined-cycle power plant. The project is being supported by financing from the Kuwait-based Arab Fund for Economic & Social Development and the Jeddah headquartered-Islamic Development Bank.
The 680MW Banias power station northwest of Damascus, which currently runs on heavy fuel oil, will be converted to run on feedstock supplied from the Palmyra gas fields. The switch to gas makes economic sense for Syria, with the country having invested heavily in the sector in recent years.
A track record in awarding the first public-private project will create momentum on the financing
A major new gas project near Homs was inaugurated in November 2009. The South Central Area gas plant will produce about 2.5 billion cubic metres a year (cm/y) of treated gas, which the government says will boost Syria’s domestic gas processing capability by almost 50 per cent.
Russia’s Stroytransgaz is building a second gas processing plant, the North Middle Area gas plant, for completion in 2011. Work is also proceeding on the development of the Hayan gas field, also in central Syria. The main treatment plant, with a 1.4 billion cm/y capacity, is on course for a late 2010 start-up.
Syria is also due to receive increased supplies of foreign gas, with the country likely to need at least 0.5 billion cm/y of imported gas a year from 2012. Since early 2008, local supplies have been supplemented by imports from Egypt via the Arab gas pipeline. Syria and Turkey signed a memorandum of understanding in 2009 to connect their gas networks. Under the deal, Syria will receive between 500 million and 1 billion cm/y of Turkish gas for five years starting from 2011.
However, if Damascus is to keep up with rising electricity demand, it will need to do more. The government has set a target to produce 5 per cent of its electricity from renewable sources by 2011. It also needs to stem rising losses caused by inefficient transmission and distribution networks.
The World Bank estimates system losses cost distribution firms $275m a year. Technical and commercial losses now stand at 27 per cent of demand, undermining the attractiveness of the sector to foreign investors. Low electricity tariffs also make the sector less attractive for private developers.
The average tariff in Syria is $0.442 a kWh, this is comparable to oil-producing states in the region, but much lower than non-oil rich neighbours, such as Jordan and Lebanon. The low tariffs are insufficient to cover operating costs in the power sector, according to the World Bank, let alone investment needs. The tariff is particularly low for residential consumers at an average of $0.273 a kWh.
The sector’s ability to finance the $10.5bn-worth of investment required – $7bn in generation and $3.5bn to rehabilitate and expand transmission and distribution networks – from its own resources and through the private sector, requires both loss reduction and an adjustment of electricity tariffs and input fuel prices, says the World Bank.
Syria has made some important moves to bolster its electricity sector. The country’s focus on boosting natural gas supply has paid dividends, freeing up substantial volumes of fuel for new facilities; but Syria’s challenge now is to galvanise investor appetite by executing its first IPP at Al-Nasserieh. This would provide a model for future privately financed power generation projects.
It would also give local financiers and contractors useful experience in executing power schemes.
“Establishing a successful track record in awarding the first few public-private projects will create momentum on the financing of these schemes by both local and international financiers,” says one Syrian banker.
Changes to banking regulations requiring private institutions to increase their minimum capital from $33m to $220m are intended to enhance local banks’ capacity to lend to large-scale infrastructure projects.
Syria’s wider economic reform programme is still a work in progress. But if it is to keep the air-conditioning units running over the summer and the electric heaters working in the winter, Damascus needs to maintain the momentum in order to encourage investors to sustain their interest in Syria’s emerging power sector opportunities.