Fuel shortage cuts electricity supply in northern emirates

02 December 2009

A lack of gas to fuel power plants has left the northern emirates struggling to generate all the electricity they need, which is hampering business and damaging their growth prospects

This year, many of Sharjah’s residents had to endure the sweltering heat of summer without air conditioning, and businesses were forced to reduce their working hours in August when the electricity supply in the emirate failed to meet increased demand.

The other northern emirates – Ajman, Fujairah, Ras al-Khaimah and Umm al-Quwain – did not experience significant outages in the summer, but many hundreds of their residential buildings and commercial properties run on generators, due to a lack of local electricity generation capacity.

Sharjah’s power problems are of a different nature. The emirate’s utility provider, Sharjah Electricity & Water Authority (Sewa), has sufficient generating capacity installed, but lacks the fuel – gas or fuel oil – with which to run the power plants. Power consumption in Sharjah peaked at 1,709MW in the summer, but Sewa had about 2,200MW of potential generation capacity available.

“There was plenty of capacity available but there was no fuel, so plants had to be shut down,” says one industry source.

Key fact

  • The electricity tariff for industrial customers in Sharjah was doubled to 40 fils a kilowatt hour in October

Sewa receives sufficient gas to meet Sharjah’s off-peak demand but, during the hottest months, when electricity consumption soars due to the use of air-conditioning, it has to buy in liquid fuels to enable it to increase production. This represents a huge financial burden for Sewa, and it is unable to recoup the additional cost through sales to customers because electricity prices in the emirate are kept so low.

“If you are selling power at 20 fils a kilowatt hour and it costs 90 fils to produce, you soon run out of money,” says the source.

Sewa bought as much fuel as it could afford in the summer months. Abu Dhabi also increased its electricity exports to Sharjah by 70 per cent via the Emirates National Grid, sending up to 480MW at peak times, compared with a maximum of 282MW in 2008. But even with this assistance, the supply of electricity could not match demand.

Sharjah’s gas shortage has been building up over several years. In 2001, the UAE’s Crescent Petroleum signed a 25-year supply deal with Iran’s National Iranian Oil Company to import gas into Sharjah, which would have secured the future of the emirate’s industry and the power sector. The gas contract was based on a price linked to crude, but oil prices increased sharply after the agreement was signed and politicians in Tehran demanded a revision of the price formula.

Legal dispute

Under the deal, gas deliveries were scheduled to begin in 2006, but the two parties are still engaged in a legal dispute over the contract. The infrastructure needed to facilitate imports is more or less in place, but it is uncertain when deliveries might begin.

Sewa currently receives gas from the Saja onshore field in Sharjah and from Qatar through the Dolphin pipeline, but has been unable to increase its allocations from these sources. Unless the disagreement with Iran can be resolved, it will struggle to meet peak demand next year as well.

However, Sewa’s finances will receive a welcome boost following an increase in electricity tariffs, which came into effect on 1 October. The charge for one kilowatt hour of electricity was increased to 40 fils for industrial users and to 30 fils for commercial and residential users, from 20 fils.

Despite this increase, power production in Sharjah will continue to be heavily subsidised. Sewa says the average cost of production is more than 65 fils a kilowatt hour.

Sewa’s poor financial position is one of the reasons why the emirate’s plans to build a new power plant at Hamriya have stalled, along with the uncertainty over fuel supplies and the strength of future demand in the emirate.

Although peak power demand in Sharjah was 1 per cent higher this summer than in 2008, it is unclear how electricity demand will develop over the next couple of years. In the wake of the global financial crisis, the cost of renting property in Dubai has dropped by as much as 50 per cent and many Sharjah residents are now taking advantage of the lower prices and relocating to the neighbouring emirate.

Sewa says it is holding off from making new investments in capacity until it has a clearer picture of future requirements.

“There was plenty of capacity available but there was no fuel, so plants had to be shut down”

Power industry source in Sharjah

In July 2008, Sewa issued a letter of intent for the construction of a 1,900MW power plant at Hamriya to an engineering consortium of the US’ GE and Canada’s SNC Lavalin, and ordered three gas turbines from GE. But there has been no progress on the scheme since then and a contract has never been signed. Plans for two new desalination plants have also been put on hold.

The Federal Electricity & Water Authority (Fewa), the body responsible for utility provision in the other northern emirates, no longer has to worry about adding new electricity capacity. In 2008, Abu Dhabi Water & Electricity Authority (Adwea) signed a deal with Fewa to supply it with increasing imports of electricity, reaching up to 2,500MW by 2015.

Electricity demand in the emirates covered by Fewa peaked at 1,840MW in the summer of 2009, 3 per cent higher than the maximum consumption of 1,790MW recorded in 2008. Peak exports to Fewa from Abu Dhabi in the summer of 2009 were about 909MW, compared with 758MW last year.

Fewa has about 1,120MW of generation cap-acity, but most of the power plants are small, ageing and inefficient. Since Abu Dhabi is the main contributor to the UAE federal budget, and the federation funds Fewa, the UAE has taken the view that it makes economic sense to export electricity produced by Abu Dhabi Water & Electricity Company’s (Adwec’s) more modern and cost-effective power plants to Fewa than to use its own inefficient, high-cost facilities.

Building plants

Most of the electricity supplied to Fewa and Sewa by Adwec is generated at the 890MW Fujairah 1 power and desalination complex at Qidfa. A second plant, Fujairah 2, which will also supply the northern emirates, is under construction nearby. It will have a capacity of 2,000MW and is scheduled to start up next year. A new 240-kilometre-long pipeline is being installed to take Qatari gas from receiving facilities at Taweelah in Abu Dhabi to Fujairah to fuel the facility.

“It is in Abu Dhabi’s interests to help out Fewa,” says another industry source. “If Abu Dhabi can supply electricity more cheaply than Fewa generates it itself, everyone is happy. Fewa has a guaranteed and reliable supply, and Abu Dhabi is saving money.”

When the UAE cabinet approved the proposal for Adwec to supply power to Fewa in January 2008, it was decided that Fewa would only be responsible for supplying residential customers. Responsibility for supplying commercial and industrial users, and big real estate projects, transferred to the individual emirates.

This decision compounded the power supply problems in these emirates, as the governments were given responsibility before they had time to set up their own plants, let alone secure fuel allocations for them. It has resulted in confusion, interruption to supplies to commercial users and protests from consumers.

Although the Ajman and Ras al-Khaimah authorities have both initiated projects to construct coal-fired power plants, these plans appear to have stalled because of the financial crisis. Ras al-Khaimah was interested in developing up to 4,000MW of coal-fired generation capacity and Ajman has had a feasibility study carried out for a 1,000MW plant.

In the absence of guaranteed electricity supplies, it is estimated that more than 1,000 buildings are running on diesel-powered generators in the northern emirates.

But the situation also represents a serious economic threat. Investor confidence in the northern emirate’s real estate sector has been severely dented, with buyers reluctant to purchase property without a reliable electricity supply in place.

It is also hurting industry. Steel producers have had to reduce operating rates, cement companies have had to import coal to generate their own power, and Ajman-based Crown Paper Mill has gone as far as deciding to relocate its new 23,000 tonne-a-year tissue paper machine to Abu Dhabi. Early estimates by UAE analysts of the loss to industry from Sharjah’s power cuts this summer were put at more than AED70m ($19m).

Abu Dhabi has been able to help out to a certain extent, but faces its own challenges. Electricity demand in the UAE’s capital peaked at 6,255MW this summer, a rise of 11 per cent on the maximum demand of 5,616MW recorded last year.

Consumption is expected to continue to climb for the next 10 years on the back of soaring demand for electricity from residential, commercial and industrial sectors, as the emirate implements its 2030 vision for economic development. Gas availability is growing tighter and Abu Dhabi is also considering using oil-fired power plants for the first time.

A respite in the UAE’s power problems is only likely to be felt once nuclear energy becomes available from 2017. Until then, electricity shortages in the northern emirates will continue to be a feature of the summer months, unless the individual emirates are able to come up with their own solutions.

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