The Masdar initiative: Hidden costs of alternative energy

08 February 2008
Abu Dhabi has ambitious plans for its alternative and renewable energy sectors through its multi-billion-dollar Masdar initiative. However, there are doubts over the scheme’s commercial viability.

When the Abu Dhabi Future Energy Company (Masdar) initiative was formally launched in mid-January, it was met with a predictable round of approval.

The world’s largest hydrogen plant and its largest solar/thermal power scheme, the first nationwide carbon capture and storage (CCS) programme anywhere in the world, and what could be the world’s first carbon-neutral city, were all announced to great acclaim.

But questions remain over the commercial viability of the project. No gas supply has yet been agreed for the hydrogen plant, and the partners involved are at odds over how much they should be paid for the electricity and carbon it produces. There are similar issues with the three planned solar power plants.

Announcing the schemes is clearly the easy part. Getting them started will be harder, and Abu Dhabi’s commitment to the environmental cause will be tested over the coming years as it tries to translate ideas into reality.

Unknown factors

Perhaps the biggest test will be the $2.2bn hydrogen power plant Masdar plans in partnership with Hydrogen Energy, a joint venture of the UK’s BP Alternative Energy and Anglo-Australian mining group Rio Tinto. Not only will it be the largest hydrogen plant ever built, it will also be the first incorporating CCS.

The scheme is essentially being developed on a private basis, akin to the 20-25-year build-own-operate contracts used for other independent water and power projects (IWPPs) in the emirate. As a result, it faces several financial and technical challenges.

On the commercial side, the project sponsors are trying to raise financing at a competitive rate. “We will be looking for debt/equity ratios in line with other commercial IWPPs in Abu Dhabi, so about 80:20 or even 85:15,” says Ron Heyselaar, head of infrastructure projects at Masdar.

However, financiers say that because of the relatively unproven technology being used, there is far greater risk with the plant than with other conventional power-generating schemes. As a result, obtaining funds will not be simple. “It is difficult [to finance] because you are looking at technologies as well as offtake agreements that have not been applied before,” says one Gulf banker.

Tied into the project financing is the integral matter of the gas feedstock used to power the plant and the pricing of the energy it produces.

On the feedstock side, Masdar and Hydrogen Energy are still in negotiations with Abu Dhabi National Oil Company (Adnoc) for an allocation of gas. This will be split into carbon monoxide and hydrogen, with the latter used to power the plant. Even if gas is available, and that is by no means certain given the massive increase in demand over the past five years, a commercially viable price will still have to be agreed.

There is also the issue of offtake agreements. With a gross capacity of about 520MW and a net export capacity of 420MW, the development cost of the hydrogen plant equates to about $4,000 a kilowatt, compared with $1,000-1,200 a kilowatt for conventional gas-fired power generation.

For this reason, Vivienne Cox, head of BP Alternative Energy, says the developers will be looking for a “premium on the sale of electricity and water from the plant” to recoup some of the development costs.

Masdar’s Heyselaar, however, denies it will be charging more for its electricity than conventional power plants. “We will be looking for offtake rates in line with other IWPPs in the emirate,” he says.

Absorbing costs

It will be difficult for Masdar to do anything else. Abu Dhabi Water & Electricity Company (Adwec) has no way of passing on higher utility costs to its customers, because of the complex set of subsidies applied to the power and water sector, and it is highly unlikely to want to shoulder the additional financial burden itself.

The government will not take on the additional cost through further subsidies either, as that would destroy the commercial argument for the project in the first place.

However, a compromise will have to be found to placate the commercial partners involved in the scheme, such as BP.

Masdar and Hydrogen Energy will be able to recoup some of their investment through the sale of the captured carbon dioxide (CO2) to Adnoc, which will use the gas for reinjection purposes.

But there is no established mechanism for setting the price of the physical delivery of CO2, and the negotiations over pricing will presumably centre on the cost advantages it will bring to Adnoc over time.

Masdar says that by using CO2 for field reinjection, which helps to maintain pressure in a field, Adnoc will be able to free up the natural gas that would otherwise be used for this purpose. The gas could, in turn, be used for power generation or sold to industrial customers.

Perhaps more importantly, Masdar says the employment of CO2-based enhanced oil recovery will extend the life of the reservoir and increase the amount of crude that can be recovered from the field by 1.5-3 billion barrels. With the price of oil at about $90 a barrel, the potential benefits for Adnoc are vast.

Yet sources in Abu Dhabi say Adnoc is likely to drive a hard bargain over how much it pays for the captured CO2. In particular, it will almost certainly demand that Masdar takes responsibility for the considerable cost of building a gas pipeline network from the coast to the selected oilfield.

If the two sides cannot agree a price, Adnoc could even set up its own independent programme. “Adnoc is not entirely convinced that it cannot simply develop its own capture programmes and obtain its own supply of CO2,” says a consultant who has worked on government-commissioned CCS studies for nearly every Gulf state.

The same kind of challenges will be encountered on Masdar’s multi-billion-dollar nationwide CCS programme, the first of its kind in the world. Crucial to its success will be finding a long-term customer for the CO2, although, unlike the planned hydrogen plant, this will not necessarily have to be Adnoc.

“We have potentially got several customers - the northern emirates, for example,” says Sam Nader, director of Masdar’s carbon management unit. “Then, of course, there is always further afield, outside the emirates.”

Multiple customers will almost certainly be needed. Masdar hopes to reduce Abu Dhabi’s CO2 emissions by 30 million tonnes by 2012, a figure that will only increase with each new CCS project that is commissioned. Without enough customers to sell it on to, the only other viable option will be to build underground storage facilities.

There are also issues that will need to be addressed over the three 100MW concentrated solar/thermal power projects planned by Masdar. As with the hydrogen plant, the cost of the electricity will be an issue as the solar plants will be substantially more expensive to develop than conventional electricity sources. However, they have the benefit of not having to pay for their feedstock.

Potential developers say that, because the build-own-operate-transfer period of five years is so short, there will be very little time for the investment to be recouped.

“Everything will hinge on the cost Abu Dhabi is prepared to pay for the facility when the concession period ends,” says one.

Abu Dhabi is sanguine over the challenges ahead. After all, it says, if going green was easy, the type and size of projects it is talking about would have been done many times before.

Alongside the immediate energy benefits, there are also some longer-term, less-quantifiable gains for the emirate. Its public image should be enhanced by creating the world’s first zero-carbon, car-free city, although it is having to compete with the Chinese city of Dongtan, near Shanghai, for that title.

Housing 50,000 residents and more than 1,500 businesses, Masdar City will feature a personal rapid transit system, natural cooling systems, renewable energy power generation, and environmentally friendly water treatment and reuse systems.

The city is due to be completed by 2015, with the first residents moving in in 2009. But it will be hugely expensive, costing billions of dollars to house what will ultimately be only a small proportion of the emirate’s growing population.

Funding research

There is also an underlying business case to the initiative. By becoming a beacon of renewable energy, Abu Dhabi hopes to create a hi-tech manufacturing base that can create jobs and conduct research into cheaper, more efficient forms of clean energy.

Masdar’s $250m Clean Tech Fund goes hand in hand with this, by investing in technology ventures across the globe. It has also developed a sustainable technologies and advanced research programme to invest in technologies that could be developed into commercially viable businesses, and a smaller fund to provide finance and other support to start-up businesses.

It is a multi-pronged approach that not only leads by example but also tries to ensure that the investment trickles down locally.

Behind all this is the need for the emirate to reduce its reliance on oil and gas, and in the meantime its hydrocarbons will offset the cost of the initiatives. The financial reward in freeing up additional oil more than compensates for the many costs and risks of the plans.

However, this could undermine the whole notion of it being an environmentally responsible energy scheme.

While the Masdar initiative should reduce carbon emissions in Abu Dhabi, the additional 3 billion barrels of oil that could be pumped out of its oil fields as a result will be used somewhere, even if not in the UAE.

TABLE: Masdar projects

Hygrogen-fuelled power and desalination plant with integrated carbon capture420MW of electricity capacity, 20-25 million gallons a day of$2.2bnFoster Wheeler is carrying our basic engineering, with tenders for the main packages due in early 2008. Fuel supply and offtake agreements still to be determined
Solar/thermal power plant near Abu Dhabi city (first of three)100MW on five-year build-own-operate-transfer basis$300-500mnIn developer prequalification phase
Nationwide carbon capture and storageCapture of carbon dioxide emissions from existing (post-combustion) and future (pre-combustion) power and industrial facilities$10bn-plusGovernment to select first carbon project soon, with engineering stage to start immediately after. First construction tenders expected next year
Zero-emission, carbon-neutral cityDevelopment for up to 50,000 residents and 1,500 businesses$5bn-plusground breaking set for 9 February

Source: MEED

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