Qatar has been experiencing particular high growth in electricity demand this summer, a consequence of a resurgent economy, a rising population and new industrial capacity. In mid May, officials reported that generators were having to cope with a 14 per cent jump in demand. In Doha’s case, $1,000 million of new investment over the last two years will ensure that capacity stays ahead of rocketing demand until 2005/06.
Others are not in such a comfortable position. Kuwait’s Ministry of Electricity & Water (MEW) says that delays in tendering the 1,000-MW Shuaiba North project threaten the security of supplies in 2003 and 2004. In Bahrain, some loadshedding has already taken place this year, reflecting the narrowing gap between supply and demand. Then there is Saudi Arabia.
Worries have been growing about the power situation in the kingdom ever since Riyadh unveiled its 25-year power demand forecast in 1998. It showed that by 2023, an additional 50,500 MW of new capacity was required to meet demand and replace ageing capacity. Although the plan highlighted that the bulk of new capacity was needed in the final 10 years of the study period, it noted that 9,200 MW would have to be installed between 2000 and 2005.
Riyadh is clearly running well behind its new capacity target. Since 1998, the only major contract awards in generation have been made at the Shuaiba site in the western region, where orders for 1,900 MW of new capacity have been placed.
Delays in tendering new capacity can largely be attributed to the extensive restructuring of the kingdom’s electricity sector, which is aimed at providing cheap power through the engagement of the private sector. Officially launched with the incorporation of Saudi Electricity Company (SEC) in April 2000, the process has seen the consolidation of the four Scecos and six smaller companies into SEC.
The restructuring has passed a number of milestones this year. In early 2002, Fareed Zedan was appointed as the new power regulator. Then in April, SEC published its first consolidated accounts. Two months later, the vice-presidents were appointed for the company’s new strategic business units (SBUs).
The progress has not been matched in the Saudi gas initiative however, which envisages three international consortia developing integrated gas projects, including up to 4,000 MW of new generating capacity. Negotiations between the eight international oil companies and the government have been deadlocked since late 2001 over differences on the internal rates of return (IRR) and the quantity and quality of gas available to the three core ventures.
Continuing delays on the gas initiative, coupled with growing concerns about an impending power shortfall, have raised the prospect of SEC and the Saline Water Conversion Corporation (SWCC) pushing ahead with their own independent water and power projects (IWPPs). ‘We want to see the gas initiative succeed,’ Electricity Services Regulatory Authority governor Zedan told the MEED power conference in mid May. ‘But it is clear that in view of the need for power, we cannot wait forever. There should be a deadline for the gas initiative. If by that date nothing has happened, then SEC and SWCC should be allowed to go ahead with their own projects.’ In such a scenario, SEC and SWCC would take over the prime sites at Jubail and Ras al-Zour in the Eastern Province and Shuaiba in the west, originally earmarked for IWPPs under the gas initiative.
How soon SEC and SWCC can launch an IWPP remains a matter of some conjecture. Zedan said at the MEED conference that the first request for proposals would definitely be out by the end of the year. If that deadline is to be met, the investor code for IWPPs will have to be issued sooner rather than later. The document will be critical in determining the success of the programme, setting out details on key issues such as guarantees and offtake arrangements.
Saudi Arabia’s impending entry into the world of private power comes at a difficult time for international developers. The bursting of the US gas bubble, the Enron affair and the economic downturn in Latin America have hit US developers especially hard and brought their rapid international expansion to a grinding halt. With their highly leveraged balanced sheets and slumping share price, the vast majority are now more interested in offloading their overseas assets than acquiring new ones.
The Gulf has not escaped. The three leading US developers in the region – CMS Energy, AES Corporation and PSEG Global – have all declined to participate in the Umm al-Nar IWPP in Abu Dhabi, which is currently out to bid. That has left the way open for European developers – the UK’s International Power, Belgium’s Tractebel with Italy’s Enelpower, and France’s TotalFinaElf – to battle it out for the estimated $1,500 million project.
Bidding on Umm al-Nar, Abu Dhabi’s fourth IWPP, has taken on added significance, as it is the first private power project to be tendered in the region since 11 September. As a result, the three proposals that Abu Dhabi Water & Electricity Authority (ADWEA) is expected to receive will be closely scrutinised by power officials elsewhere in the Middle East, seeking a price benchmark following the attacks on New York and Washington.
ADWEA’s private power ambitions are growing. Conclusion of the Umm al-Nar transaction is expected to be swiftly followed by bidding commencing on the brownfield IWPP at Mirfa. Indeed, by 2006, the utility is aiming to have private sector involvement right across the generating sector.
Having established a strong track record in IWPP development, ADWEA’s target is considered realistic. Its policy of sharing risk with international developers, extending long-term offtake agreements of 20 years and offering investors a reasonable IRR of 13 per cent has become much more attractive to developers, since the risks inherent in the merchant model were so clearly exposed by events in California. Moreover, while the number of active developers may be declining, the emirate has three – International Power, Tractebel and Total – which already have assets and are looking to take on more to achieve higher economies of scale. Finally, a major constraint on developers – the availability of large turbines – has been removed by the sharp downturn in the US power sector.
While ADWEA has concentrated on introducing private participation into generation, Oman is looking to go one step further. In late 2002, the long-awaited sector law is expected to be passed, which will pave the way for the sell-off of existing assets, including transmission and distribution, to begin in early 2003. By then, plans should also have been finalised for another grassroots IWPP, to serve the northern industrial city of Sohar.
Next year could well see a proliferation of IPPs and IWPPs. A decision is awaited in Kuwait on whether or not the 2,400-MW Al-Zour North scheme will be implemented on a build-operate (BO) basis. Three years after it dropped plans to develop Hidd phase 2 as an IPP, Bahrain is looking once again at the model for a proposed 1,000-MW plant. Across the Gulf, Iran has recently announced plans for four more IPPs, even though power purchase agreements have still to be signed and financial close reached on six others.
In the Gulf, only Dubai remains firmly wedded to the conventional financing approach. As has been the case for the past 30 years, Dubai Electricity & Water Authority (DEWA) will be financing from its own resources its next capacity addition, the 700-MW Jebel Alischeme. The situation speaks volumes about DEWA’s customer base. With an estimated 90 per cent of the emirate’s population expatriate and paying a commercial price for electricity, DEWA is reckoned to be the one Gulf utility to turn in a profit.
Egypt, one of the pioneers of private power in the 1990s, has since reverted to conventional financing models for its new generation of power stations. One reason is government concern about the foreign exchange risk in the private power projects now under way. Another is Egypt’s ability to secure concessionary finance from development agencies. The 750-MW Cairo North combined cycle power station project, financed by the European Investment Bank and two Gulf agencies, is now well under way, with most of the major contracts awarded. Finance has also been mobilised for a 1,500-MW project in Nuberiya, allowing for first tender packages to be issued by the end of 2002.
Others are embarking on the privatisation path. Jordan is due to announce legislation in August for the liberalisation of the local power sector. The government is also hopeful that negotiations can be concluded soon with Tractebel for the kingdom’s first IPP at Kherbet al-Samra. In Algeria, financial close is expected in the autumn on the ground-breaking Arzew IWPP, while in Tunisia, the UK’s BG is in talks to build the state’s second IPP.
With the majority of states in the Middle East and North Africa now embracing the concept of private power, regional competition for international capital and expertise is intensifying. The retreat of US developers has only served to raise the stakes even higher. For regional governments, the message is clear: those that can provide a strong regulatory environment, a reasonable risk allocation and a satisfactory IRR will be the winners in the private power race.