Fresh connection

11 November 2002

GCC leaders will head for Doha at the end of the year to discuss a raft of ambitious initiatives including a unified currency. In the surroundings of the GCC's fastest growing economy, they will also ponder another set of issues: the interconnection of Gulf electricity grids.

The project has been under consideration since the 1980s, but has gained fresh momentum since 2001 with the formation of the GCC Interconnection Authority (GCCIA) in Dammam. This year has seen the appointment of Mohammed al-Zarah as its chief executive officer, and the launch of a tender to update the financial study.

'We are finalising the selection of a financial consultant to update the project study and expect the award by the end of the year,' says Al-Zarah. 'The study is expected to be completed before the third quarter of 2003. Request for proposals is expected to start within the second quarter of 2004. Phase one will be operational within the fourth quarter of 2007 and full interconnection in 2010.'

The new developments have led seasoned grid watchers to adjust their perceptions of the project. 'The grid is now a far more serious proposition than it was, mainly because it now has a dedicated authority with a chief executive and chairman [Khaled Wahab al-Khan, undersecretary at Bahrain's Ministry of Electricity & Water],' says a senior consultant who has been following the project for years. 'But there are still some major obstacles to be overcome in making the project workable.'

Fareed Zedan, now governor of Saudi Arabia's power regulator, the Electricity Services Regulatory Authority, was a senior consultant on the GCC grid project for many years. 'Mega-projects take a lot of time, and are vulnerable to political difficulties,' he says. 'This has been made clear many times for this project in the past years. But at the moment I can't see any specific political threats to the project.'

Indeed, notwithstanding the tremors radiating from the Iraq crisis and occasional sniping between Riyadh and Doha, the GCC is enjoying good internal relations. The resolution of longstanding border disputes in recent years - most notably between Qatar and Bahrain - has allowed the states to concentrate on more constructive pursuits.

The agreement two years ago to unify import tariffs by 2005 was a notable achievement. Cross-border projects are moving forward too: the planned Dolphin pipeline will export gas from Qatar to the UAE, while the friendship bridge between Qatar and Bahrain will help to cement that relationship.

Significant political problems remain, however. Talking big on policy is one thing, allowing neighbours to flick your electricity switch is another. The nitty-gritty of a power-trading agreement and the location of the main control centre are still to be determined, and neither lends itself to compromise.

But the question of sovereign control over power is not new. In the increasingly deregulated world of Gulf power, a measure of control has already shifted from governments to the private sector, a trend that could be extended through the grid project as the private market expands.

In terms of engineering, the project is relatively straightforward. The only technical obstacle - the Saudi grid operates on 60 Hz, while the other GCC states use 50 Hz - can be easily overcome through the construction of a back-to-back high-voltage direct current (HVDC) converter station at Ghunan in the Eastern Province.

Capacity savings

Nevertheless, there is considerable work still to be done in updating the details of the original grid study carried out by Canada's Hydro-Quebec International and SNC Lavalin, Saudi Consulting Services and Gulf Investment Corporation (GIC). This will take in costs - put originally at more than $1,700 million; the benefits in terms of generating capacity savings, originally estimated at 4,000 MW between 1998 and 2010; the projected internal rate of return; and the proposed financing model.

One of the main tasks of the new financial adviser will be to review the original financing model. GIC originally looked at five separate options, including developing the project on a build-operate basis. In the end, it recommended that a new body, the GCCIA, should be set up with the six member states as shareholders and that the project should be financed through a 65:35 debt/equity package.

'Over the past 10 years, the regional power sector has grown significantly and changed dramatically with the introduction of private developers into generation,' says the consultant. 'The new financial adviser will have to ask whether the proposed debt/equity split still makes sense. The problem with the government-owned project finance approach is that the first thing the banks are going to ask when approached for funding is, who will be the operator and how will the electricity be traded?'

Such complex questions of trade and ownership carry heavy regulatory implications. For this reason, Gulf and other Arab regulators are already meeting to discuss ways to respond. 'We're now forming a brainstorming group of Arab power regulators precisely to address the regulatory issues arising from a cross-border grid. We've met twice already,' says Zedan. 'In each country, the regulatory framework is different because it is tailored to the exact conditions there. But the objectives are always the same, so we can forge a common agreement on these issues.'

The key moment will be the signing of the power trading agreement, a draft of which is to be drawn up by the new consultant. It will set out the level of load allocation for each country and define the way the electricity is sold. Theoretically, national transmission companies will be the offtakers for power their neighbours want to sell. In such an environment, the role of regulators will be crucial. However, Al-Zarah says that too will be decided later.

In the Gulf, the great power savings are to be made by selling electricity between the eastern and western parts of the region, allowing those areas directly under the blistering sun to buy more electricity from those that are not. As the need for air conditioning shifts westward with the sun, so do the customers.

Market balance

In the first phase of the grid, neither the UAE nor Oman will be connected because they are still completing their own internal grids. Saudi Arabia is in the same position, so that while the first phase would connect the Eastern Province to the GCC grid, western areas would remain independent. If the kingdom took significantly longer to complete its own interconnection, the Gulf grid could struggle.

Al-Zarah recognises the importance of the Saudi grid to the broader project, but says it also creates opportunities for other GCC states. 'The completion of the Saudi national grid will provide a wider market for the GCC regional market,' he says. 'For example, the grid will allow a provider in Qatar to reach a customer in the Western Province of Saudi Arabia.'

The economics of the grid would benefit from expanding across the Gulf to Iran. 'The savings would be great if Iran could be tied to the grid,' the consultant says. 'Then you could get proper trading because Iran needs power in the winter and could export power in the summer, which is the exact opposite to the GCC requirements.' The idea makes perfect economic sense, but for political reasons is unlikely to happen soon, if at all. It is not under consideration in the existing plans.

The other economic question posed by the grid is that of market balance. As things stand, there would be more potential power providers than buyers. Although demand is growing rapidly, all countries in the region want to retain enough generating capacity to cover their own requirements.

In view of these difficulties, alternative structures are emerging for cross-border Gulf power participation. Some cite the example of Europe, where the creation of a grid has been driven primarily by bilateral arrangements rather than a multilateral approach.

Another possibility is the straightforward approach of swapping energy for power. In this case, gas-rich countries like Qatar could build and fuel power plants in other Gulf countries. The approach does not create the savings inherent in a grid, but it guarantees a high level of power supply.

Whichever method is finally chosen, one thing is clear: the Gulf must systematically address the way in which its electricity markets co-operate, and it must do this with a shared political agenda. The savings are there to be made and the markets there to be developed. For now, the GCCIA offers the most comprehensive vision of a common electricity market, and will bear the torch for all power integration projects.

For Zedan, the grid can serve another purpose in these turbulent times. 'There is now a recognition across the world that cross-border co-operation is a prerequisite for stability,' he says. 'I think this project could be a good example of that.'

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications