Power & Water - Meeting demand for utilities in the Gulf

30 December 2010

Rapid population growth means the Gulf’s utility providers will have to invest billions of dollars over the next decade to keep pace with consumption

Faced with record economic expansion and high population growth over the past 10 years, the region’s utilities start the new decade struggling to meet demand for power and water.

The capacity crunch is most acute in the GCC, where growth in consumption of electricity of 10 per cent a year and 8 per cent a year for water during the 2000-08 boom years, has seen reserve capacity fall significantly in most of the region. As a result, summer power outages are now commonplace across the Middle East.

Demand for electricity in Iraq is currently about double that of installed capacity and the gap is widening

GCC governments are responding with plans to install an estimated 60,000MW of new electricity generation capacity by 2015 – some 80 per cent of current installed capacity – while desalination capacity will have to double to more than 5,000 million gallons a day (g/d) to meet projected demand.

Private power favoured in Abu Dhabi

Of all the region’s governments, Abu Dhabi is well-placed to meet projected growth in electricity consumption. With reserve power margins at 24 per cent of overall capacity, rising to about 38 per cent once power exports are included, it has the healthiest cushion between installed power capacity and demand.

A UAE national has about 86 per cent of the production and supply cost of their power and water waived

But even with this surplus capacity, Abu Dhabi will have to invest heavily throughout the coming decade in order to meet power demand in 2020 that is forecast to be 2.8 times higher than the current level. It needs to build an estimated 14.7GW of additional power capacity by 2019.

The central plank of Abu Dhabi’s capacity building strategy is to extend its private power programme, which has been the key to delivering the emirate’s healthy power and water balance. The emirate leads the region in the use of private power, with independent power project (IPP) capacity representing 32.7 per cent of total generating capacity. 

GCC power capacity, 2009-19
 Installed capacity, 2009Required total capacity, 2019
Saudi Arabia44,50084,870
Abu Dhabi10,11024,845
Source: MEED

The region’s biggest power and water expansion programme in the coming decade will be in Saudi Arabia, which requires an estimated 40GW of additional capacity by 2020 to meet demand forecasts.

Based on current development costs of $1.2m for every megawatt, Riyadh’s capacity building programme represents a considerable investment of about $48bn over the next 10 years.

Egypt and Kuwait have been among the worst affected by a lack of installed electricity generation capacity, with blackouts a regular occurrence during the summer months. Investments of about $22bn are required in each market in the decade ahead to meet rising usage, although their respective starting positions are quite different.

Egypt’s 23.5GW of installed capacity must be almost doubled to about 44.5GW by 2020, while Kuwait must increase its generation capacity by about 180 per cent to 28.7GW.

Egypt has long suffered from intermittent power access during the summer, with 2010 being the worst year so far. However, while blackouts in previous years have been limited to areas outside the capital, the effect on Cairo this year and the scale of the power cuts sparked widespread concern. The problem was not only blamed on insufficient generation capacity, but also lack of fuel and the government’s inability to manage its hydrocarbon resources effectively.

Neglected power infrastructure in Iraq

Years of conflict and neglect have left both Lebanon and Iraq with considerable power and water deficits. Lebanon’s modest 1.5GW capacity must increase to about 4GW by 2019. Demand for electricity in Iraq is currently about double that of installed capacity and the gap is widening. Consumption is growing at a rate six times as fast as new capacity is being added.

In December, Baghdad’s Electricity Ministry unveiled a 20-year masterplan that includes an IPP programme and turnkey procurement. The plan involves about $29bn of investment between 2015 and 2030, and recommends the installation of 10 simple-cycle gas turbines, 29 600MW combined-cycle turbines, 28 282MW combined-cycle turbines, two 600MW combined-cycle turbines and six 355MW combined-cycle conversion projects. A 27MW hydropower scheme is also planned.

A further challenge facing the Middle East’s power and water sector over the next decade is a worsening shortage of natural gas. With competition for feedstock increasing from the industrial sector, utility providers are no longer assured of allocations.

The rise in global energy prices over the past few years has also led to significant changes to the way fuel prices are calculated in the region. Where traditionally domestic fuel supply has been based on the cost of extraction, governments are increasingly basing prices on market prices for energy.

Elevated oil prices make it unattractive to burn fuel domestically, and, with gas in limited supply, alternative sources of energy are now being explored.

In particular, nuclear power is attracting growing attention from the region’s governments. In December 2009, Abu Dhabi awarded a consortium, led by South Korea’s Korea Electric Power Corporation, a 25-year concession to build and operate four nuclear reactors in the emirate.

Nuclear is set to play a major role in meeting future demand for electricity in the Middle East and most countries have announced plans to develop nuclear power projects. The same is true of renewable energy.

Renewables power schemes in the Middle East

Jordan and Egypt already have several renewables schemes up and running, while others have committed to the sector more recently. Abu Dhabi has placed sustainable energy as a priority area for investment and hopes to establish itself as a global centre for renewable power with its landmark Masdar project. Likewise, Saudi Arabia is expected to develop an atomic and renewable energy research centre of unparalleled size.

The private sector already plays a major role in utility provision in the Middle East, especially in the Gulf states where IPPs have been in existence since the mid-1990s, and private participation is set to develop further. In particular, the less wealthy governments in the region need to source significant private investment to deliver new power and water projects. But private sector involvement is also related to improving efficiency and gaining access to new technologies. Outsourcing the operations and maintenance of infrastructure is already being experimented with, along with the complete privatisation of utility companies. This trend is expected to continue in the coming years.

Cost of additional power capacity required, 2019 ($m)
Oman 5,712
Saudi Arabia48,444
Abu Dhabi17,682
* costs based on a unit price of $1.2m per MW of new capacity. Source: MEED Insight

Tariff reform is also likely to be an important feature of the decade ahead. At present, most consumers in the Middle East are used to paying very little or nothing for the power and water they consume. According to Abu Dhabi’s Regulation and Supervision Bureau, a UAE national has about 86 per cent of the production and supply cost of their power and water waived, while for an expatriate this figure can be about 50 per cent. And yet by regional standards, UAE consumers pay a lot for their utilities.

Water tariff reform in the Gulf

Water customers in Dubai pay $1.80-2.40 for every cubic metre of water used, while Kuwaiti consumers pay $0.60 a cubic metre and customers in Saudi Arabia pay only $0.03 a cubic metre.

With populations set to rise sharply over the next 10 years, governments will find it increasingly difficult to subsidise power and water provision. In addition to being a drain on the public purse, heavy subsidies encourage wasteful use of electricity and water. Sliding tariffs that penalise customers who use lot of power and water are gaining support in the region and have already been implemented for expatriates in Dubai, although the cost to customers is still far below the actual production cost.

GCC desalination capacity, 2009-19
 Installed capacity, 2009*Required total capacity, 2019*
Oman 137465
Saudi Arabia9001,612
Abu Dhabi6831,223
*=Million gallons a day. Source: MEED Insight

But tariff reform is controversial. Many citizens consider it their right to have free access to power and water supplies in return for the lack of political suffrage. The last time Riyadh hiked tariffs in 2000, it had to make a hasty retreat following an outcry from consumers. Most government officials recognise the need for change in private, but as yet, few are willing to sanction tariff reform in public. With the rapid and unsustainable rise in demand for power and water, this may well have changed by 2020.

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