UAE to diversify energy supply

16 March 2011

The UAE is enjoying the benefits of its power capacity building investments, but needs new generation and feedstock options to plug the predicted gas deficit and meet growing demand


The most immediate new capacity will come from an EPC contract for 2,000MW at Jebel Ali M station

Source: Dewa

A period of consolidation is usually a time for reflection. The softening of demand for electricity in 2009 granted this opportunity to the UAE, and particularly to Dubai. The expansion that saw the electricity peak demand growth rate triple from an average of 5 per cent in the early part of the millennium, to 15 per cent in 2006 and 2007, fell to 6 per cent in 2009. During this time, Dubai Electricity and Water Authority (Dewa) worked tirelessly to double installed capacity in the emirate from 3,822MW in 2005 to 7,830MW today.

In a deal … worth about $20bn, Kepco will build four pressurised water reactor nuclear power stations

During the same period the requirement for desalinated water also soared, peaking at more than 12 per cent growth in 2006. In 2010, peak requirement was 287 million gallons a day (g/d) versus an installed capacity of 330 million g/d. In 2005 installed capacity was only 187 million g/d.

Maintaining margins in the UAE

Although power imports were required from Abu Dhabi to supplement provision during peak demand in 2006 (400MW) and 2007 (700MW), Dewa fought its way back to a 20 per cent reserve margin in 2008. This remained in 2009 and climbed to 21 per cent in 2010 despite a recovery in peak demand.

UAE peak power demand
 Peak 2009 (MW)Peak 2010 (MW)Growth rate (%)Installed capacity (MW)Reserve margin (%)
Abu Dhabi7,6808,525e11e12,100e*30
Northern Emirates1,8401,969e71,014**
e=Estimate based on forecast growth rate. *=includes Fujairah 2 IWPP. **=2009. Sources: Dewa; MEED Insight

From 5,622MW in the summer of 2009, peak demand hit 6,161MW in July 2010 representing growth of 9.6 per cent. Dewa chief executive officer and managing director Mohammed al-Tayer was bullish about the growth.

“The continuing increase in demand for water and electricity in Dubai is a clear indication that the economic, commercial and construction cycles in Dubai returned to their previous prosperous conditions,” he said when announcing the peak figures.

Dewa is understood to be planning new capacity on the basis of 6-10 per cent growth in power demand and 3-7 per cent growth in desalination demand. In a high growth scenario of 10 per cent, as witnessed in summer 2010, Dewa will need an additional 8,510MW to meet the demand of 16 gigawatts (GW) and at the same time maintain the current reserve margin. The most immediate new capacity will come from a traditional engineering, procurement and construction contract for 2,000MW and 140 million g/d at Jebel Ali M station. This is scheduled to become operational by mid-2011.

Based on a cumulative peak growth rate of 9 per cent per annum, the UAE is set to require 40,000MW by 2020

UAE white paper

In the medium term, Dewa is courting the private power sector on the 1,500MW Hassyan 1 independent power project (IPP). The UK’s HSBC bank, law firm Clifford Chance and consultant Mott MacDonald are advising on the scheme which will mark the emirate’s first foray into private generation. Project details are currently being specified with a view to launching the tender in the second quarter of 2011. Regulatory and strategic reviews have now been completed.

Success on this project is expected to launch a raft of further IPPs and independent water and power projects (IWPPs) in the emirate, but it must overcome the challenges of first-time IPP delivery, with the largest of those being securing project finance.

Abu Dhabi, on the other hand, is set to reach financial close on its ninth independent power plant in 2011. Banks are expected to sign documents for the $1.3bn debt package on the 1,600MW Shuweihat 3 IPP at the end of March, with a view to achieving financial close by the end of April. Financing is divided between Japan Bank for International Cooperation ($370m), Export-Import Bank of Korea ($370m) and a commercial bank tranche for $360m. The price range is understood to be 175 to 250 basis points above the London Interbank Offered Rate (Libor), an interest rate at which banks can borrow funds from other banks in the Libor market.

The project follows Abu Dhabi’s well-practised model, where the developer takes a 40 per cent share in the special project company, Abu Dhabi National Energy Company (Taqa) takes 54 per cent and the Abu Dhabi Water & Electricity Authority (Adwea) the remaining 6 per cent.

Nuclear energy in the UAE

Although Oman was the first Gulf state to deliver an IPP at Manah, many in the industry believe that it was the speed and successful delivery of Abu Dhabi’s first IWPP Taweela A2 in 1999 that really opened the floodgates to today’s buoyant developer market. That same pioneering attitude is now set to see Abu Dhabi become the GCC’s first nuclear power nation.

Despite progress being made in Saudi Arabia, Kuwait and Bahrain, Abu Dhabi is a long way ahead having signed contracts with Korea’s Kepco in late December 2009. The Kepco, Samsung and Hyundai Engineering & Construction joint venture was competing against the French consortium of Areva, GDF Suez and Total, and a US/Japanese team of GE and Hitachi.

Kepco was always the lowest bidder, but Enec gave the US and French consortia three attempts to make their prices more competitive, fuelling speculation that a western bid would be the ultimate winner. But after six months of negotiations, the lowest bid from the Korean joint venture won out, with France as second place and the US bidding highest.

In a deal set to be worth about $20bn, Kepco will build four pressurised water reactor nuclear power stations (APR1400s), the first of which will begin operation in 2017 and is expected to remain operational until 2077. All four plants are scheduled to be running by 2020 delivering 5,600MW. Energy experts note that the timeframe is ambitious, considering that the timescales required to go through the licensing and regulatory framework can be a challenge for any nation undertaking this for the first time. So far progress has been smooth.

In September 2009, UAE President Sheikh Khalifa bin Zayed al-Nahyan passed a law governing the peaceful use of nuclear energy that established the Federal Authority for Nuclear Regulation (FANR). With its motto “get it right, right from the start” the UAE hired a leading international expert, William Travers formerly of the International Atomic Energy Association, to run the authority. FANR is currently working on a review of Enec’s licence application to construct units 1 and 2 of the first nuclear power plant at Braka in the Western Region.

“We will assess this construction application very thoroughly,” said Travers on receiving the application in December 2010. “We will make sure that any power plant in the UAE is built safely, securely and is used only for peaceful purposes.”

In evaluating the case for nuclear power in its white paper ‘Policy of the United Arab Emirates on the Evaluation and Potential Development of Peaceful Nuclear Energy’, the UAE identified some major issues for the emirate and its long-term power needs. Based on a cumulative peak growth rate of 9 per cent per annum, the UAE is set to require 40,000MW by 2020. But gas availability over the same period is only expected to be able to provide a maximum of 25,000MW, leaving only liquid fuels to fill the gap.

Coal-fired generation is one option being considered by Dewa, which is currently reviewing nine bids from consultants to conduct a study into a power plant using coal. In early January, MEED reported that the study would be divided in two phases. The first is a preliminary analysis on the type of technology, coal and sourcing strategy, including logistics and infrastructure requirements, as well as environmental impacts of building the emirate’s first coal-based power plant. The second will cover the development of the conceptual design for the first coal-fired power plant for Dewa, along with the requests for proposals and the assessment and development of new regulatory elements for clean coal-based power plants.

However, industry insiders are sceptical that this option is a serious contender, especially following Oman’s decision to drop its Duqm coal-fired plant for environmental reasons. Even the UAE white paper is unfavourable to the idea. “While the evaluation of coal-fired power generation established its lower relative price compared to liquids-fired power generation, its widespread use within the UAE would have an even more severe detrimental effect on environmental performance, while also raising thorny issues related to security of supply,” says the report.

UAE gas reserves

At the same time, Abu Dhabi is working on developing its considerable sour gas resources.  In January 2011, Abu Dhabi National Oil Company signed a deal with US Occidental to work in joint venture on the $10bn Shah sour gas development. It took nine months to find a new partner following the decision by ConocoPhillips to withdraw from the scheme in April 2010.

Developing sour gas, with its high levels of hydrogen sulphide, is a major challenge for Adnoc and Occidental, which is understood to have a 40 per cent stake in the scheme. A total of 1 billion cubic feet a day (cf/d) will be removed from the site, but only 540 million cf/d of processed gas will remain. The sulphur byproduct will be processed and sold on. But as worldwide sour gas production increases, sulphur prices fall putting more price pressure on the economics of sour gas. With 50 per cent of the region’s gas being sour there is certainly a major incentive for energy firms to exploit the reserves given the rising energy forecasts.

Although the Gulf in general is looking to renewables, the UAE white paper sets out the limitations. “Evaluation of alternative energies, including solar and wind suggest that, while these options could be deployed within the UAE, even aggressive development could only supply 6-7 per cent of peak electricity demand by 2020.”

With peak demand requirement expected to be 43,484MW at current growth rates by 2020, this corresponds to just 3,000MW. Nuclear power has greater potential with the first four plants delivering 5,600MW by this date. Although it has a comfortable 30 per cent reserve margin, Abu Dhabi will be required to increase exports to the northern emirates in the coming decade. Ensuring gas availability and successful delivery of the nuclear programme in Abu Dhabi will be key to meeting demand throughout the UAE.

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