District cooling involves the installation of central chiller plants, which produce chilled water that is then distributed through pipe networks to clusters of buildings.
With air conditioning accounting for 70 per cent of peak electricity demand in the GCC, district cooling – which offers electricity savings of at least 40 per cent over conventional cooling – lends itself to large-scale real estate developments.
Just over 1.8 million tonnes of refrigeration (TR) of district cooling capacity is in operation in the GCC today, most of which has been built in the UAE over the past 10 years.
The market is set for rapid expansion: MEED Insight forecasts that an additional 6.5 million TR will be in operation in the GCC by 2015, with a further 8.4 million TR under construction, in design, or at the planning stage. The cost of the new capacity is likely to be in the region of $20bn.
Yet implementation of the GCC district cooling programme is not without its challenges:
There are technical issues, such as pipe diameter and flow-rate incompatibilities between underground networks and the buildings they are designed to serve.
There are resource issues, ranging from the limited number of chiller suppliers to water shortages.
Then there are offtake issues, which can mean that developers have to go for partial plant and chiller build-outs, a situation that can affect the financing arrangements.
District cooling companies have focused on the UAE, where the industry is five years ahead of the rest of the GCC.
Qatar and Bahrain have good prospects, but both markets are small.
Saudi Arabia has enormous potential and could make up half of GCC capacity in a decade.
In contrast, tall building restrictions in Oman and low electricity tariffs in Kuwait will hinder the industry’s development in both countries.
The largest players in the GCC district cooling market are UAE-based. The regional pioneer is National Central Cooling Company (Tabreed), which was set up in 1998 and now has subsidiaries and joint ventures throughout the region. It has been joined in the federation by a handful of joint ventures established by real estate developers, such as Union Properties, Emaar and Dubai Holding. Other leading players in the region include Saudi Arabia’s City Cool and France’s Dalkia.
To date, the sector has raised around $2.5bn in financing for its projects, most of which has been raised through medium-term loans or bonds. Project finance has been elusive and will remain so, with banks reluctant to extend long-term debt without guaranteed offtake agreements.
District cooling is a capital-intensive industry and, like the rest of the Gulf projects market, it has experienced high inflation. The cost of building capacity has more than doubled in the past three years, a reflection of steep hikes in the price of steel, cement and labour. Much of the increase has been shouldered by the contractors, which have traditionally worked on fixed-price contracts.
All the signs are that longer-term financing will become more difficult to obtain in the near future. Uncertainty also hangs over the state of the GCC real estate sector, with confidence starting to be hit in the regional freehold markets. The district cooling sector faces huge challenges to deliver on its potential, but the opportunity is there for those who can get it right.
This information is taken from the MEED Insight report GCC District Cooling: The start of a new era. To order a copy, download the order form oremailMEED Insight for more information, quoting reference DC2.
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