UAE electricity and water authorities appear to have come to the conclusion that when times are difficult, there is no shame in asking for help. The development boom has left most of the emirates’ utilities struggling to meet rapidly growing demand for power and water.

Dubai and the northern emirates, unable to satisfy the needs of their expanding populations, are for the first time turning to private investors.

At the same time, they rely on Abu Dhabi Water & Electricity Authority (Adwea) to supply them with a proportion of their power and water needs, and the demands on the country’s largest emirate from its neighbours are unlikely to subside in the near future.

While Abu Dhabi has adopted the private investment model, for Dubai and the northern emirates, talk of independent water and power projects (IWPP) constitutes a major change in strategy. Bringing in private developers, who fund the capital cost of building new generation capacity in return for monthly payments from government over a fixed concession period, will allow the emirates to expand their installed power and water capacity more rapidly, and at a reduced cost.

Dubai Electricity & Water Authority (Dewa) is in negotiations with a developer, who has offered to build a power and desalination plant on the Fujairah coast. If the project goes ahead, it will be the third IWPP to be built in the northern emirate, adding to Adwea’s Fujairah 1 and Fujairah 2 plants.

Inviting developers

In October, the government opened the power and water sectors in the northern emirates to private investment. Local authorities will invite developers to supply planned mega-projects with electricity and drinking water.

But there is a catch. Both in Dubai and the north of the country, developers are being told they will have to secure the feedstock for the plants themselves if their projects are to go ahead. “The key question is, is there enough gas?” says Mirko Duesel, general manager at Siemens. The answer, for now, is no.

With the exception of Adwea, the UAE’s utilities have not been able to source enough gas for power generation. Using fuel oils instead has pushed up the cost of producing electricity (see table).

“We are not worried about that,” says a senior source at Dewa. “Our units are able to run on gas and fuel oil. The problem has been much more severe this year and could become even more severe in 2008, but we are ready for it. It will cost us more but we will produce power.”

Attracting investment

There is no reason to believe private developers will find sourcing feedstock any easier than the utilities have. “This has been left to their innovation,” says Mohammed al-Hammadi, general manager of the Federal Electricity & Water Authority (Fewa), which, until recently, was responsible for power and water production in the northern emirates.

“It is the core issue. It is the intention of local governments to attract private investment for major development projects. It is out of our scope.”

Building new power generation capacity is proving too expensive for Fewa and, like the other authorities, it has turned to Abu Dhabi for help. A memorandum of understanding with Adwea could be the first step towards a long-term supply agreement. Abu Dhabi will also take over Fewa’s transmission activity, leaving it only with responsibility for distribution and peaker plants - additional generators that only begin operation when demand is particularly high.

Adwea already supplies the northern emirates with 500MW of power. Under a long-term deal, this could reach 2,500MW in 2015. It has also been providing Dubai with 700MW and Sharjah with 200MW, making it the primary generator for the whole of the UAE.

The future sustainability of this depends largely on Adwea’s projections of its own demand, based on the emirate’s plans for upcoming megaprojects and developments. Forecasts for 2007 to 2020 put the growth in its base peak electricity demand at an average of 8.1 per cent a year.

Among the UAE’s utilities, only Adwea has not suffered from shortages in power and water supply. Observers agree that its partnerships with private investors have put the authority ahead of its peers. Its organisational, financial and technical capabilities are also lauded.

The authority recently issued a request for proposals for its planned 1,600MW and 100 million-gallon-a-day Shuweihat 2 IWPP, and there are plans to expand existing plants, including Taweelah and Umm al-Nar.

Fewa is confident that its requirements have already been factored into Adwea’s projections. “The difference between Dewa and Fewa is that we have given up our generation to Adwec [Abu Dhabi Water & Electricity Company] to provide us with power,” says Al-Hammadi.

“There is a commitment from the federal government spearheaded by Abu Dhabi. We will take priority over Sewa [Sharjah Electricity & Water Authority] or Dewa.”

National grid

Trading electricity between the emirates has been made possible by the national grid, which began operation in May 2006 through an interconnection between Abu Dhabi and Dubai. Sharjah joined the grid in May 2007 and the northern emirates are expected to connect to the system by April 2008.

For now, Abu Dhabi cannot import electricity from its Fujairah 1 IWPP. Until the grid is completed, all the 500MW of power available from the plant will continue to be absorbed by the Fewa system. However, once the north of the country has been connected to the grid, this is likely to change.

More capacity will become available in the next few years, with the expansion of Fujairah 1 by 220MW and the construction of the 2,000MW Fujairah 2 IWPP. However, it is unclear what proportion of this Adwea will earmark for the northern emirates.

So is the UAE heading towards a crisis in its power and water supplies? Opinions on the matter vary. “If they did nothing there would be a problem, but action is being taken here,” says Robert Bryniak, general manager of Abu-Dhabi based Golden Sands Management Consulting, which specialises in the power and water business.

It all comes down to the ability of private developers and national utilities to source feedstock. “If it wasn’t so serious, it would be funny,” says Bryniak. “We are in the energy centre of the world and we have gas shortages. The UAE needs to import gas from Iran and Qatar, but this will take years.”

By early 2008, the amount of gas flowing from Qatar to Abu Dhabi is set to reach 2 billion cubic feet a day (cf/d). The export of an additional 1.2 billion cf/d is planned under phase two of the Dolphin project, but a moratorium on production from Qatar’s north field means this is unlikely to happen soon.

While the gas from Qatar is helpful, it is unlikely to make more significant amounts of feedstock available for power generation.

Production moratorium

It may end up only replacing gas that has so far come from Abu Dhabi National Oil Company (Adnoc) and has been put aside for oil field reinjection.

But utilities are also competing for gas with the UAE’s industrial base. Dubai Supply Authority (Dusup), which buys gas from international suppliers before distributing it to customers including Dewa, has signed a 25-year supply agreement with Dolphin Energy under which gas imported from Qatar will be transported to Dusup’s gas control station at Jebel Ali. The gas will be shared between Dewa and Dubai Aluminium Company.

There are other problems too. “Qatari gas has high sulphur content, so it has to be treated,” says Duesel. “But refining capacity is not sufficiently available.”

Some argue that if gas is unavailable, the UAE should accept the need for alternative sources of fuel. Oman is looking into developing coal-fired power stations and Saudi Arabia has decided that all of its new coastal plants will run on crude oil.

The environmentally conscious, however, would like to see much more renewable energy projects. “Renewables are not an alternative, they are an addition,” says Duesel. “They can help, but they will not solve the problem.”

Besides its feedstock issues, the UAE will need to re-evaluate its electricity and water tariff strategy. Heavy government subsidies have kept consumer prices artificially low despite rising costs (see box). Increasing tariff levels would improve utilities’ revenue streams, but could also help to manage demand.

But for now, Adwea will continue to shoulder the largest part of the UAE’s electricity and water production burden. Having delegated generation to private developers, it alone has succeeded in installing enough capacity to meet Abu Dhabi’s demand, with some to spare.

But as the emirate moves ahead with new mega-projects, it will eventually have to put its own needs above its neighbours’. In preparation for this, the other emirates will have to push ahead with their generation projects, ideally in partnership with private developers. Dubai and the northern emirates have already taken the first step.

Key challenge

Obtaining sufficient gas feedstock to produce power capacity to meet the UAE's growing demand.

Power facts

UAE 2006 Electricity Statistics

• Installed capacity: 16,758MW

• Peak demand: 11,670MW

• Peak demand growth: 7%

• Energy consumption: 58,821GWh

• Generate electricity: 62,798GWh

• Average cost of production (AED/Kwh): 0.11

Sources: Arab Union of Producers; Transporters and Distributors of Electricity; MEED

Table: Electricity forecast

Sources: Arab Union of Producers; Transporters and Distributors of Electricity

Table: Installed capacity

Sources: MEED; Adwea; Dewa

Dubai Electricity & Water Authority (Dewa)

The huge growth of Dubai’s economy has resulted in significant power and water supply problems and has left the Dubai Electricity & Water Authority (Dewa) struggling to cope. Dubai’s peak power load rose to 4,113MW in 2006 from 3,228MW in 2004.

This year, it has imported 700MW of power from Abu Dhabi to make up for its inability to supply electricity.

Dubai has an installed electricity generation capacity of 5,448MW and 278 million gallons a day of water desalination capacity. Over the next five years, it plans to increase this by about two-and-a-half times at an estimated cost of AED70.1bn ($19.1bn).

Until recently, Dewa was able to fund its growing capital expenditure from its own resources, but falling profits have forced it to seek financing elsewhere.

For the seven months to 31 July 2007, Dewa made a loss of AED223m compared with an income of AED423m over the same period the previous year. This loss of profitability meant that in 2006, the authority began raising capital through external borrowing. In a sukuk (Islamic bond) prospectus, issued to investors in November 2007, Dewa stated that it would continue to fund its future capital expenditure needs by borrowing from banks or capital market transactions.

The authority is reliant on electricity and water tariffs for its revenue, but the government has maintained these at a constant level since January 1998 (see table). The government also pays the power bills for public bodies, and covers the unpaid water bills of UAE nationals.

An increase in tariffs, though unpopular, is necessary. “While there are no expected tariff increases in the short-term, Dewa is seeking government approval for an increase in electricity and water tariffs in the future,” says the authority in its sukuk prospectus.

High oil prices have taken the greatest toll on Dewa’s profitability. The authority’s plants can run on either natural gas or fuel oils, the latter being the more expensive alternative. A shortage of natural gas for power generation has forced Dewa to rely on fuel oils. Dewa estimates that in the first seven months of 2007, the cost of diesel fuel needed to produce 1kWh of electricity was 10 times that of natural gas.

In an effort to reduce the impact of high fuel oil prices, Dewa has started buying electricity from the Abu Dhabi Water & Electricity Company (Adwec) at lower rates than its own cost of production using fuel oils. But Adwec’s price is still higher than the tariffs paid by Dewa’s customers, leaving the authority to fund the difference.

Table: Dewa budget: Fuel costs (AED '000)

*Seven months ended 31 July

Source: Dewa