Power and water developers hold out for lower bids

16 December 2008

Tough operating conditions have not prevented a series of power contracts being awarded this year.

The global financial crisis has made what was already a trying year for the region’s power and water industries even more difficult.

The first nine months of the year were plagued by escalating materials costs, equipment and contractor shortages, and delayed projects. The region’s utilities now face the added problem of sourcing financing for their schemes.

With banks growing increasingly reluctant to take on underwriting commitments, developers and clients are seeking innovative ways to ensure that projects go ahead on schedule. These include securing short-term finance in the form of bridge loans, or turning to export credit agencies to plug gaps in funding.

Clients themselves could step in to inject cash into their projects to ensure that demand for power, desalination and wastewater treatment is met. There are lessons to be learned from Qatar’s approach to the financing of its Ras Laffan C independent water and power project (IWPP). “The key new project in 2008 was Ras Laffan C,” says one international financial adviser.

The $3.5bn project reached financial close in August, with 20 banks sharing the commercial bank debt, and therefore spreading the risk between them. “It is an approach that fits the credit crunch environment reasonably well,” says the adviser. “Underwriting is becoming increasingly challenging, so this may be a way forward for future IWPPs - Underwriting is not worth the paper it is written on when the market is so turbulent.”

Dewa’s decision to scrap the tender for its P station is a risk - it hopes the downturn in the global economy and falling materials prices will lead contractors to lower their bid prices.

At the same time, if the economic slowdown persists, the projects market will contract, creating greater competition among contractors, and ultimately forcing them to cut their prices.

“Prices will come back down again” says one independent power consultant. “There has been overheating in the industry for the past two years and it is gradually coming to a halt.”

The soaring project prices that characterised the market for most of 2008 have also had a more direct impact on projects. Dubai Electricity & Water Authority (Dewa) scrapped bids for the first phase of its P Station project at Hassyan twice after it decided that the prices submitted by contractors were too high.

Contractors reacted to rising EPC costs by pushing for the introduction of indexation and reopener clauses in contracts to protect themselves against rising material costs and fluctuations in currency exchange rates.

But despite tight market conditions and protracted bidding processes, four major IWPPs were awarded in the region this year. Belgium’s Suez Energy International was by far the biggest winner, with awards for the Ras Laffan C IWPP, the Addur IWPP in Bahrain and the Shuweihat 2 IWPP in Abu Dhabi.

The world’s largest desalination project, the Ras al-Zour IWPP in Saudi Arabia, was awarded to a consortium of Japan’s Sumitomo Corporation, the local Aljomaih Automotive Company and Malaysia’s Malakoff International.

In addition to conventional power projects, utilities around the region have announced plans to develop alternative and renewable- energy schemes. Abu Dhabi Future Energy Company (Masdar) has led the way on green technology. The company plans to build a 100MW solar-power plant, the largest in the world by capacity, in the emirate. Neighbouring Dubai is also pushing ahead with plans for solar power.

While solar power will never make a significant contribution to the Gulf’s power generation mix, because of high costs and low generation capacity per unit, nuclear and coal-fired plants could. The UAE has taken the biggest strides towards developing nuclear power. It has set up the Emirates Nuclear Energy Corporation to regulate the sector and is currently seeking a consultant to manage the nuclear programme.

Qatar has also revealed plans to install up to 5,400MW of nuclear capacity by 2036.

At the same time, Dubai Electricity & Water Authority (Dewa) and Oman Power & Water Procurement Company are moving ahead with plans to develop the Gulf’s first coal-fired power plants.

High oil and gas prices are partly behind the drive for alternative energies. Local utilities have long benefited from heavily subsidised gas prices, but producers have had no incentive to sell their gas on the domestic market when they can secure much higher prices internationally. The result has been shortages of gas feedstock and utilities forced to burn more expensive liquid fuels in their power plants.

It is unclear how alternative and renewable energy projects will be affected by declining oil prices. Most observers say that in the short term, the consequences will be minimal. “If the financial crisis continues, eventually there will be an impact,” says Georg Brakmann, head and co-founder of Germany’s Fichtner Solar. “The price of oil is now $50 a barrel. A year and a half ago [when these projects were launched], it was $70 and people were saying it was very high.”

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