Fresh start for power sector in Abu Dhabi

01 February 2011

With a change in leadership, Abu Dhabi’s power and water authority has entered a new era. But the long-standing collaboration with the private sector will continue


11GW: The private power capacity Adwea will have developed by the end of 2011

800 million g/d: The private desalination capacity Adwea will have developed by the end of 2011

GW=Gigawatts; g/d=Gallons a day. Source: MEED

Abu Dhabi Electricity & Water Authority (Adwea) is in a strong position in the GCC utility sector. It is the only regional utility able to fully meet the needs of its people and export excess capacity. The emirate has managed to do this by accurately predicting demand and executing a rolling programme of new capacity additions.

While Al-Mazrouei has yet to state his strategy for Adwea, the private power programme is set to continue

Its commitment to the privatisation of its power sector from 1999 marked it out as a pioneer in the region. The Adwea template has since been used by other utilities in the Middle East. The emirate has also turned its attention to nuclear power and renewable energy and now leads the region in these areas as well.  

Leadership change at Abu Dhabi Water & Electricity Authority

The successful implementation of these projects was overseen by Sheikh Diab bin Zayed al-Nahyan, who headed up Adwea from its creation in 1999. But at the end of 2010, the utility entered a new phase in its history.

In December, Abu Dhabi made several major changes to its Executive Council, the main body that governs the emirate. The most high-profile change was the departure of Sheikh Diab. The former head of the health authority, Ahmed Mubarak al-Mazrouei was appointed as his replacement. All eyes are now on what direction Adwea may take with Al-Mazrouei at the helm.

Sheikh Diab achieved much during his time at the utility. Abu Dhabi’s private power project programme, instigated under his leadership, is widely considered a major success. Under the programme, eight power and water projects were executed using the build, own and operate model.

Adwea has completed two phases of independent water and power projects (IWPPs) at Fujairah, a project at Umm al-Nar and four phases of IWPPs at Taweelah. It has also built an IWPP at Shuweihat, which is to be joined by another IWPP this year. By the end of 2011, Adwea will have developed more than 11GW of private power capacity and over 800 million gallons a day (g/d) of desalination capacity through its IWPP programme.

In each of the project companies, Adwea holds a 60 per cent share, while 40 per cent is held by the foreign investor. Under long-term offtake arrangements, the IWPPs are committed to selling their output to Abu Dhabi Water & Electricity Company, thereby guaranteeing supplies to the emirate. The successful programme has been replicated by other utilities in the region.

Abu Dhabi’s power programme, however, has not been without its challenges. The limited success of Abu Dhabi National Energy Company (Taqa), a public joint-stock company in which Adwea holds a 51 per cent stake, has proved damaging both to the utility and Sheikh Diab’s reputation.

The company invested heavily in overseas assets before the global credit crisis of late 2008. It is also being sued in the US by its former chief executive officer Peter Barker-Homek for up to $100m for alleged “kickbacks, bribery, accounting fraud and corruption” among other charges. The conduct of both companies has come under scrutiny as Barker-Homek claims that “Adwea was receiving the cash flow and full residual value from [Taqa’s] assets”.

Sheikh Diab also came under fire towards the end of his leadership at Adwea for issuing bonds during the financial crisis that were considered to have been priced too highly. He is also implicated in a high-profile insurance fraud case, in which the head of insurance operations at the authority is accused of embezzling AED297m ($80m).

Al-Mazrouei joins Adwea at a controversial time for the utility. While he has limited experience with Abu Dhabi’s power and water sector, industry sources say he is seen as a “safe pair of hands”. Although Al-Mazrouei has yet to articulate his strategy for Adwea, the private power programme is set to continue with the third phase of the Shuweihat power project and another plant at Taweelah in the near future.

Contract delay for Shuweihat S3 project

Sources close to the Shuweihat S3 project, say the delay in signing the final documents is purely the result of the change in leadership.

This will be Abu Dhabi’s first independent power project (IPP). The plant is due to come online in mid-2013, with a capacity of 1,600MW. A Japanese/South Korean consortium of Sumitomo and Korea Electric Power Company (Kepco) was selected by Adwea to build the project in October 2010. A power purchase agreement (PPA) between Adwea and the sponsors was expected to be signed soon afterwards. Al-Mazrouei’s appointment has delayed this slightly, but sources close to the deal have indicated that the signing is imminent.

The PPA delay has also pushed back financial close for the scheme. Project debt will be roughly split between a $370m Japan Bank for International Cooperation loan, $370m from Export-Import Bank of Korea through a direct loan and loan insurance, and a $360m commercial bank tranche.

When the Sumitomo consortium was selected to build the project, the bid had financial backing from France’s BNP Paribas and Japan’s Mizuho. Since then, the UK’s HSBC, the local National Bank of Abu Dhabi, Japan’s Bank of Tokyo-Mitsubishi and Sumitomo Bank and Saudi Arabia’s Samba Financial Group have joined the original backers.

“Once [Shuweihat S3] is signed, I think [Adwea] will move their minds on to the next project,” says a source at Adwea.

The Taweelah C IWPP is set to have a capacity of 2,400-2,600MW of power and 55-66 million g/d of desalinated water. The project was expected to be launched ahead of Shuweihat S3, but the IPP was put to the market first.

“Taweelah C could require up to $4bn of debt and the market for finance is still pretty constrained,” says a banker close to Adwea. “Getting a preferred bidder and funding in place to develop a project of the scale of Taweelah C is unlikely to occur until early 2011, so it makes sense to develop Shuweihat 3 first.”

The project gaining the most attention in Abu Dhabi’s power sector is the nuclear energy scheme, which is being developed by Emirates Nuclear Energy Corporation (Enec), rather than Adwea. It will be the first atomic power facility in the GCC and will comprise four reactors.

Nuclear scheme for Abu Dhabi

Enec filed the construction licence application for Braka units 1 and 2 with the Federal Authority for Nuclear Regulation at the end of 2010. The submission came exactly one year after the award of the $20bn contract to a South Korean-led consortium on 27 December 2009.

Enec has appointed a team of advisers to source funding for the landmark project. Details of the financing have yet to be confirmed, but industry sources say Enec will opt for a structure along the lines of Adwea’s previous IWPP projects. Kepco, the South Korean company leading the development team, will take a stake in the project company along with Enec.

The swift progress of the ambitious nuclear project will be important for Abu Dhabi and Adwea. With electricity consumption forecast to triple by 2030, driven by rapid growth of the emirate’s industrial sector, the 5.6GW facility will make a huge contribution to helping Adwea meet power demand. It will also alter Abu Dhabi’s energy mix, alleviating pressure on the emirate’s tight gas supplies.

As Abu Dhabi’s first IPP, Shuweihat S3 is also significant. It was launched after the announcement of the nuclear facility and is part of a trend towards decoupling power and water in the emirate. This is part of Abu Dhabi’s effort to pave the way for the large power capacity generated by the nuclear facility.

The nuclear plant will provide base-load capacity and peaking facilities will be needed as a result. Shuweihat S3 is to be gas-fired and therefore better able to power up and down in response to changes in demand. As such, there are provisions in place for mothballing the facility in times of low demand and the project company will receive payment based on a production and availability matrix.

Despite the distraction of the legal disputes, Al-Mazrouei joins Adwea at a time when the utility is in a strong position. Its established private power programme has served it well and the emirate has been bold in its approach towards nuclear and renewable power.

Where Abu Dhabi once pioneered electricity privatisation for others to follow, it is now a pathfinder for alternative ways of generating power. In time, this will reshape the emirate’s power sector, and that of the wider region, and it will be Al-Mazrouei who will oversee this change.

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