Dubai to test investor appetite for power sector

30 September 2010

The planned independent water and power scheme will not only be a test of the emirate’s private power ambitions, but also bank appetite for government debt

After years of struggling to meet runaway demand, Dubai’s power sector has entered a period of consolidation. With a growing capacity cushion and the onset of a new economic reality, the emirate has managed to restore its reserve margin and started to consider private power for the first time.

Dewa is adopting a pragmatic approach, basing its forecast on an indicative growth rate of 6-10 per cent a year

Driven by high economic and population growth, soaring electricity demand placed an unprecedented strain on Dubai Electricity & Water Authority (Dewa) in the period 2005-08. In June 2005, the emirate was hit by its first major power disruption in years. In 2006, demand almost exceeded capacity forcing the emirate to import 400MW of electricity from Abu Dhabi.

Demand falls

Since then, Dewa has managed to build up its reserve margin, mainly due to a massive capacity building programme but also thanks to lower demand growth as the economy faltered. In both 2008 and 2009, the margin stood at 20 per cent, leading the emirate to virtually phase out imports from its neighbour.

Dubai power factfile, 2009
Installed generating capacity (MW)6,997
Peak power demand (MW)5,622
Growth in peak power demand (%)6
Reserve power margin (%)20
Largest generatorDewa
Number of power customers531,000
Number of IPPs/IWPPs concluded0
Additional capacity requirement by 2019 (MW)7,843
Estimated cost of required capacity ($bn)9.4
IPP=Independent power project; IWPP=Independent water and power project. Source: MEED Insight

Dewa’s reserve margin is set to widen further. The completion of M station in 2011 will provide just over 2,000MW of new capacity. The same year, an additional 390MW is due to become available from the Jebel Ali power stations augmentation programme, which involves upgrades to existing plants. As a result, Dewa estimates that it will have 9,640MW of capacity in 2012, which should be sufficient to meet demand until 2015.

Forecasting future demand growth in the emirate is difficult, on account of the uncertain economic outlook. In recent years, there have been sharp fluctuations. In 2008, peak load demand growth was estimated at 12 per cent. A year later it had halved to 6 per cent as a result of the sharp economic contraction and the collapse in the real estate market.

The latest data for 2010 suggests that there has been something of a rebound, with July peak demand showing a year-on-year increase of 9.6 per cent. Going forward, Dewa is adopting a pragmatic approach, basing its 10-year forecast on an indicative growth rate of 6-10 per cent a year.

The sharp economic downturn has had a profound impact on other areas of the power sector. In 2007, Dewa drew up a 10-year capacity building programme, which called for 17,000MW to be installed. This was based on the assumption that the peak electricity load would quadruple in the period 2006-15. Despite the first 3,000MW under the programme being tendered in 2008-09, the economic slump eventually led to the plan being scrapped altogether as the capacity was simply not needed.

As with all its previous power station contracts, Dewa was aiming to fund the programme itself and award EPC contracts. Despite developments elsewhere, the utility was a known sceptic of private power and only fleetingly considered the model in 2006-07, when it signed a memorandum of understanding with a consortium for an IWPP. Even then, the IWPP was always considered highly speculative given that the developer was responsible for the almost impossible task of securing a competitively priced fuel allocation from a third party.

However, in a major policy shift, Dewa announced in late 2009 that its next power project would be an IWPP to be built at Hassyan. Coming just weeks after the scale of Dubai’s public debt problem emerged, the need to conserve precious public funds was seen as the driving force behind the move. An added factor though was that with the growing capacity surplus, the government had time on its side to test the new procurement model and put in place the necessary frameworks.

Big test

Hassyan will not only be a test for Dewa’s private power ambitions, but also of bank appetite for Dubai government debt. Although details have still to be announced about the proposed IWPP or its financing structure, its success may well hinge on what guarantees are provided. This will be especially important for the banking community given the upset caused by Dubai World’s inability to pay its debts and the surrounding publicity that this has caused.

Dewa will continue to finance the upgrade and expansion of the transmission and distribution network, which received investment of more than $500m in 2009. In the real-estate boom years when Dubai’s population soared, the utility was having to expand the network by more than 10 per cent a year to meet demand. However, as in the generation sector, the downturn has brought some relief. The year 2010 has seen a significant decline in new substation contracts from their peak, a trend that is expected to continue for the foreseeable future.

Dubai was, along with Kuwait, the last bastion of resistance to private power in the GCC. The fact that both have launched IWPPs for the first time is an indication of how accepted the concept has now become in the region.

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