In early 2009, a landmark utilities project will be commissioned. More than 20 years after it was first conceived, the first phase of the GCC electricity grid will become a reality, bringing the day closer when power produced in one Gulf state will be consumed by residents in another.

The first phase of the GCC grid, linking the networks of Kuwait, Saudi Arabia, Bahrain and Qatar, is very much a product of the new wave of thinking among governments about how to meet soaring power and water demand. “The grid was originally justified on the sharing of generating reserves, which according to our studies would save member states $12,000 million over a period of 25 years, and the need to supply power in emergency situations,” says Hassan al-Asaad, head of projects, planning and IT at the GCC Interconnection Authority (GCCIA). “But increasingly, we are looking for energy trading on a long-term basis between member states.”

The exchange plan raises the prospect of a developer building a power station in a gas-rich location such as Qatar and selling electricity, via the grid, on a 20-year wholesale basis to a customer in, for example, Kuwait. But the possibilities do not end there. In the longer term, the GCCIA plans to connect the Gulf grid to Europe via the proposed pan-Arab grid, which will stretch from Morocco in the west to Syria in the east. The benefits would be enormous, allowing electricity to be despatched across several time zones, thus giving generators the opportunity to sell excess power outside their home markets at non-peak times.

Much of the pan-Arab electricity grid is already in place, but gaps remain. There is no link, for example, between Libya and Egypt, which would connect the North African and Middle East networks. Nor is there a connection between the GCC and Egypt, although one is being studied from Saudi Arabia across the Red Sea.

Even within the GCC, there is still much work to be done. While phase two of the GCC grid is complete, between the UAE and Oman, work on the final stage, linking the northern and southern grids, is yet to begin. More critically, not all GCC members have a national grid of their own. In particular, the biggest state, Saudi Arabia, lacks an east-west connection.

Nevertheless, the GCC power grid remains hugely significant, not only as a backbone for future development, but in highlighting that co-operation between and within trading blocs can produce significant benefits. Indeed, the project has been described as an “ice-breaker” by its advocates, providing a powerful argument for other common initiatives, including a planned GCC water network, to be considered.

But on their own, grids will never be more than part of the solution to the mounting challenge of satisfying rampant demand for water and electricity in the Gulf. What is needed, consultants argue, is far greater emphasis on innovation, demand supply management and planning.

A feature of the Middle East’s utility sector over the past 50 years has been the focus on the supply side of the equation. Since the early 1970s, when the first large-scale power and desalination plants were built, regional governments have ploughed hundreds of billions of dollars into establishing an industry that now has capacity of more than 160,000 MW and 1,200 million gallons a day. The public investment, joined in the past decade by an increasing amount of private capital, has transformed the way people live, providing for the first time uninterrupted electricity and constant water supplies even in the most remote areas of the region.

But in recent years, Gulf utilities have found it increasingly difficult to keep supplies ahead of demand. In the summer of 2006, Jeddah, Kuwait City and Manama all experienced power cuts and water shortages, leading to protests by residents. Ageing infrastructure was blamed by the authorities, but in several instances it was simply a case of not enough capacity to meet the summer peak.

Three years of strong economic growth, an explosion in real estate projects and rising populations have seen an unprecedented increase in consumption, with most Gulf countries experiencing double-digit demand growth since 2005. The most extreme situation has been in Qatar. Despite more than doubling installed capacity since 2000, the state only just managed to keep electricity and water supplies ahead of consumption in 2006, after peak power demand surged by a staggering 18.5 per cent and water by 15 per cent.

Nearly all Gulf states will have to double their installed capacities over the next 10 years to meet projected demand and offset the impact of decommissioning plants built in the 1970s. It will be a tall order. Across much of the region, gas feedstock is no longer guaranteed for the utility sector, reflecting tight supplies and the growing belief by governments that the resource can be put to better use in nurturing industry. That has led to alternative energy sources, such as coal, solar and nuclear, being assessed for the first time. The cost of building capacity has also soared, reflecting limited contractor and material resources. For example, the unit cost of building multi-stage flash (MSF) desalination has risen by 60-70 per cent since 2004.

Demand, cost and gas issues are forcing a major rethink among utilities. “Officials today are much more willing to look at new ideas and approaches,” says Leon Awerbuch, president of UK-based Leading Edge Technologies (Let). “The technology itself does not change that much, but what you can do now is put forward innovation to find an optimum way of producing power and water.”

Let has been doing just that. In Sharjah, the company has installed nano-filtration technology in a hybrid configuration with existing MSF capacity, which has resulted in a 50 per cent increase in water output, without any additional power input or seawater intake capacity.

Expanding the role of the private sector is also considered crucial in raising efficiencies. Ever since Abu Dhabi demonstrated in the late 1990s that generation costs could be reduced by 10-20 per cent through private participation, the independent water and power project has become standard across the region. The next step will be introducing private involvement into transmission and distribution.

But the biggest boost the regional utility sector could receive is a reduction in consumption, which would put a brake on spiralling demand and the onerous capital investment burden. The Gulf has among the highest per capita electricity and water consumption rates in the world, in part due to the harsh summer climate, but more as a result of heavily subsidised tariffs, which encourage waste.

Conservation is becoming a priority for utilities, which are increasingly trying to educate consumers on the real value of power and water. Power and water metering programmes are under way across much of the Gulf, with the latest taking place in Al-Ain. At present, residents of the UAE city pay about $13 a month for water no matter how much they use. Once water meters are in place, householders will be charged by volume, in a move that is expected to see a substantial reduction in usage.

A more comprehensive programme is under consideration in Saudi Arabia. Here, the Ministry of Water & Electricity is working with the World Bank and the Japanese government to draw up an energy conservation and efficiency strategy. It is likely to push for more energy-efficient buildings, a 25 per cent reduction in power consumed by government facilities, and the greater application of district cooling for air-conditioning, which at present consumes more than 70 per cent of all power generated.

“If we can do all this, then we reckon we can reduce peak load growth by 10 per cent a year over the next five years,” says Fozi al-Azhar, an adviser to the ministry. “We will need a royal decree on energy conservation to achieve this: that will be a prerequisite.”

The ultimate conservation method would be tariff reform. In Saudi Arabia, the government sells power at one-third of cost, which not only encourages huge waste but also acts as a deterrent to getting the private sector involved across the whole power and water sector. If realistic tariffs were imposed, the argument goes; growth in current power demand could be cut from 7 per cent today to about 5 per cent. That would mean that the government would have to install about 1,400 MW a year of new capacity for the foreseeable future, as opposed to the current requirement of 2,000 MW.

But in a region where low-cost electricity and water is now viewed as a natural right by residents, tariff reform is a highly sensitive political issue. The last time Riyadh hiked tariffs in 2000, it had to make a hasty retreat within months following an outcry by residents. The decision cost Saudi Electricity Company billions of dollars in lost revenues and forced the utility to shelve a number of power projects.

Changing the mindset of how electricity and water is produced and consumed in the Gulf is the biggest challenge facing the utilities sector. For many involved, the current set-up is simply unsustainable. They warn that unless action is taken soon, the days of guaranteed power and water supplies for all residents will become a thing of the past. The Gulf states would not have a future to speak of.