Power & Water 2010: Activity picks up as banks begin lending

21 December 2009

Power and water schemes are getting under way as project financing slowly becomes available

The expectation in the power and water industry is that the coming year will be better than the one that is ending. Although the effect of the economic downturn has not been negative for everyone, there has been a marked slowdown in the sector over the past year, particularly in the Gulf.

For some of the region’s utilities, the downturn has had some positive effects, providing respite from the rapid growth in demand in recent years. Growth in electricity demand in Dubai halved to 6 per cent this year, for example, while in Bahrain it slowed from 8.3 per cent to 5.3 per cent.

But demand growth did not fall everywhere. In Abu Dhabi, demand for electricity grew by 11 per cent, compared with 8 per cent growth in 2008.

In Qatar, where overall economic growth is outpacing that in every other country in the region, electricity demand has grown by 14 per cent over the past year.

The year has also been characterised by falling engineering, procurement and construction (EPC) costs on new power and water plants, as a result of a reduction in the cost of building materials. Utilities across the region have been quick to respond by scrapping existing tenders and reissuing them in the hope they will attract lower bids.

In early November, contractors responded to the third tender from Dubai Electricity & Water Authority (Dewa) for its power and water project at Hassyan. A team of Spain’s Iberdrola Ingenieria y Construccion and France’s Alstom was the low bidder for the power part of the scheme, with a price of AED6.6bn ($1.8bn), while South Korea’s Doosan Heavy Industries & Construction bid AED3.5bn for the desalination part of the project.

However, the strategy of retendering projects backfired in Kuwait when a team of the US’ GE and South Korea’s Hyundai Heavy Industries won the Subiya power and water project with a bid of KD766m ($2.7bn) in June.

Power & Water

  • 11 per cent - Growth in electricity demand in Abu Dhabi in 2009
  • $2.7bn - Cost of Subiya power and water project in Kuwait
  • 2017 - Year UAE hopes to bring first nuclear capacity on stream

The Electricity & Water Ministry had scrapped a previous bid round in February, when Germany’s Siemens emerged as the lowest bidder, with a price of KD761m.

The period of retendering to save costs may be drawing to a close across the region. Con-tractors say prices are starting to creep back up.

“EPC prices will go up because the prices of materials, subcontractors and civil works are going up,” says one international contractor based in the UAE.

For independent water and power projects (IWPPs), the decline in EPC prices was counter-balanced by the rising cost of debt this year, as banks became reluctant to provide long-term project finance. But that too may now be changing, at least in some cases. In recent months, three projects have reached financial close, suggesting the market could finally be picking up.

In July, a team of Saudi Arabia’s Acwa Power International and Korea Electric Power Corporation completed financing on the Rabigh independent power project. In mid October, Abu Dhabi Water & Electricity Authority’s Shuweihat 2 IWPP reached financial close. And in mid November, almost a year after Oman Power & Water Procurement Company first named Sing-apore’s Sembcorp as its preferred bidder for the Salalah IWPP, the scheme finally secured funding.

But any recovery in project finance is likely to be slow. Developers have relied on local and Asian banks to provide long-term debt on the three IWPP projects launched this year, as Western banks, which previously provided significant amounts of debt, remain cautious.

On the Salalah project, most of the debt is being provided by -Chinese lenders. Rabigh benefited from Chinese funding as well as loans from within the region. Belgium’s Suez Energy International, developer of the Shuweihat 2 facility, brought in Japan’s Marubeni Corporation as a means to access funding from export credit agency Japan Bank for International Co-operation, which only supports projects with Japanese involvement.

“The projects are definitely there,” says one international lawyer based in the region. “But is the money there? That is harder to answer.”

The continued difficulty of raising funding has pushed up the price of debt. “The real challenge will be whether the cost of debt will be 350 or 280 basis points over Libor [the London interbank offered rate],” says the lawyer. “It certainly will not return to the level it was at three years ago. The days of 120 basis points [over Libor] are gone.”

“EPC prices will go up because the prices of materials, subcontractors and civil works are going up”

International contractor in the UAE

The health of the sector will be tested in the next year as a series of projects come to the market. Oman alone is currently moving ahead with four major power and water schemes.

In late November, Oman Power & Water Procurement Company (OPWP) awarded the last of three advisory contracts on its next project, the 1,000MW Duqm independent power project (IPP), to UK law firm Simmons & -Simmons. The plant will be coal-fired, making it the first of its type in the GCC.

Developers were also due to submit bids on 7 December for the Barka 3 and Sohar 2 IPPs. Each plant will have a capacity of 650-750MW.

Once these bids are in, OPWP will launch the Ghubrah IWPP, which will involve building a 500MW power plant that is also able produce 30 million gallons a day (g/d) of desalinated water.

Abu Dhabiis also preparing to launch its next IWPP, although questions remain over what fuel will be used to power it.

The planned Taweelah C plant has not yet received a gas allocation from state energy firm Abu Dhabi National Oil Company (Adnoc) and could therefore become the first power plant to use oil feedstock in the emirate.

Abu Dhabi Water & Electricity Authority (Adwea) has postponed issuing a request for proposals for the project while it assesses how to proceed. If the project goes ahead as a steam plant, it will have power capacity of 2,400-2,600MW and a water capacity of 55-66 million g/d.

Kuwaitsurprised many this year when it too launched an IWPP. The project, to be built at Al-Zour, will be the first time the country has departed from the EPC model.

Companies submitted bids for the consultancy contract in early November. The IWPP will include a combined-cycle or thermal power plant with capacity of 1,500MW and a 100 million-g/d desalination plant.

Despite such projects, this year has been characterised by slow activity in the Gulf, encouraging developers to look to North Africa and the Levant for fresh oppor-tunities.

There will be more such schemes in the region in the coming year. Tunisia has invited proposals for its second IPP at Bizerte by 29 January. The 350-500MW plant is due to begin operations in 2014.

Tunis is planning another IPP with a capacity of 1,200MW on the Cap Bon peninsula in the northeast of the -country.

Tunisia will export 800MW of the new plant’s capacity to Italy through a 200-kilometre-long subsea cable. Societe Tunisienne de l’Electricite et du Gaz will buy the remaining 400MW from the winning developer.

The long-delayed Safi coal-fired IWPP in Morocco, which will have 1,300MW of power generation capacity, is also still on the market. In October, state-owned utility Office National de l’Electricite extended the bid deadline on the scheme by three months to 29 January.

In the Levant, both Jordan and Syria are pushing ahead with IPPs of their own. Although smaller than their Gulf counterparts, the projects have attracted strong interest. In October, six groups of consultants bid for Jordan’s third IPP, which will be built at Zarqa. The power plant will have a capacity of 400-500MW and will begin operating in 2013 or 2014.

However, neighbouring Syria’s first IPP appears to be on hold while the International Finance Corporation, the division of the World Bank that is advising Damascus on the scheme, reviews the procurement process.

The state-owned Public Establishment of Electricity for Generation & Transmission had planned to issue a request for proposals in October after shortlisting developer groups to bid for the project. Now, it says it will be some time before this happens.

Once it does go ahead, the IPP will have a capacity of 250-350MW and will be located at Al-Nassirieh, 60 kilometres north of Damascus.

“This year has been one of slow activity in the Gulf, so developers have looked to Africa and the Levant”

Any examination of the prospects for the power and water sector in 2010 would not be complete without mention of what is perhaps the region’s most controversial project.

As the UAE moves closer to awarding a contract for the construction of what will be the first nuclear power plant anywhere in the region, speculation is mounting about which of three bidders is best placed to win.

Competing for the estimated $20bn contract are a French team of Areva, GdF Suez and Total with the US’ Bechtel Corporation and France’s Vinci; a second group of the US’ GE and Japan’s Hitachi; and a South Korean team of Korea Electric Power Corporation, Hyundai Engineering & Construction and Samsung Corporation.

The winning developer will build four reactors, each with a capacity of up to 1,600MW. The UAE government plans to bring the first reactor on line in 2017, with the other three to follow at 18-24-month intervals.

Jordan is also pursuing nuclear power, albeit it on a smaller scale. In mid November, the Jordan Atomic Energy Commission awarded a pre-construction consultancy contract to Australia’s WorleyParsons.

Under the two-year agreement, the company will evaluate which technologies to use and carry out a feasibility study for the project, which will be developed east of Aqaba. The plant will have one or two reactors with a capacity of 1,000-1,400MW each.

With so much project activity concentrated around the end of this year and the start of next, there is optimism among executives in the power and water industry that the next 12 months will mark a return to form.

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