For most utilities in the Middle East, 2010 was a year of slow and steady progress. During the 2004-09 economic boom, power and water providers struggled to keep pace with demand and focused on bringing new generation capacity online.

The financial downturn, while affording little respite for most countries, has allowed some states the opportunity to assess their power and water sectors and make decisions for the future.

Kuwait, Oman and Saudi Arabia have seen little change in terms of demand, while Dubai and Bahrain – which both saw unprecedented demand growth during the boom – have been beneficiaries of the breathing space.

Power generation

Access to fuel remains the critical issue for utilities in 2011. Fuel costs impact directly on power generation and indirectly on the water sector. Almost all of the clean water provided to consumers in the Middle East is desalinated seawater. In the absence of alternatives, countries must continue to produce water through the energy-intensive desalination process in spite of the costs. Therefore, governments stand to gain much from improving their power generation assets.

Fuel-importing countries are using the slight flattening in demand to consider different generation options. Oman and Dubai, among others, have made tentative steps in the direction of coal and renewable energy in response to gas supply insecurity and the rising costs of generating power from gas.

The issue of security of fuel supply and cost is clearly a priority for fuel-importing countries. As power generation plants operate for several decades, planners must factor in the cost of fuel over that period, as well as the current price. The long-term trend is towards increasing oil and gas prices. Therefore, alternatives such as nuclear, coal and renewable energy are gaining momentum in the region.

Abu Dhabi was the first to move in this direction by awarding a $20bn contract to the Korea Electric Power Corporation (Kepco) consortium in December 2009. The landmark nuclear power project ignited intense interest in the technology across the Middle East. Almost every country in the region has since unveiled plans to build nuclear power facilities in 2010. Supply chain issues, pressure on pricing and availability of finance are such that each country has been keen to avoid losing its place in the line.

The sheer size of nuclear power units and the consequent cost of such projects will test governments and strain the public purse. Thankfully, liquidity is returning to the region after two years of strain. Some countries will find financing projects harder than others. This is largely determined by the level of damage inflicted by the financial crisis on the perceived ability of state entities to fulfil their commitments. But as regulated assets, new power and water projects are in a good position to attract local and international financiers.

Attitudes are also changing among oil and gas exporters. In the past, the cost of fuel for domestic consumption was priced according to the cost of extraction. Countries with large oil and gas reserves are now looking at the cost of fuel in terms of the price that it could otherwise command on the international market. Whatever fuel is not used for domestic consumption can be sold and the profits used to fund social and infrastructure projects.

Landmark project

This perspective shift has led oil-rich countries, such as Saudi Arabia, to explore nuclear and renewable energy options. The kingdom unveiled its plans to build the King Abdullah City for Nuclear and Renewable Energy in 2010. The city is to span about 63 square kilometres west of Riyadh in the Tuwaiq National Park. This landmark project will focus on the research and application of nuclear and renewable energy technology. Saudi Arabia is putting its weight behind the project with all work relating to nuclear power that was previously carried out by King Abdulaziz City for Sciences and Technology (KACST) to be transferred to the new city. Solar power research will be central to the renewables component of the new city.

Design competition

Saudi Arabia is keen to take the lead in the field and has launched a competition for the contract to carry out a master plan for King Abdullah City for Nuclear and Renewable Energy.

A total of 12 companies were invited to bid to design the master plan. The proposals ranged from comprehensive real-estate plans that could hold a population of up to 750,000 to low-density developments for about 50,000 people. The selection of the winner was expected at the end of 2010 and is yet to be announced. The proposal chosen by Saudi Arabia is important because it will indicate whether the city’s function is primarily research or deployment of nuclear and renewable energy projects.

In Egypt, the government is pressing forward to make sure all of the regulatory aspects relating to its first nuclear power project are met, as part of a long-term strategy to ensure that its blackouts become a thing of the past.

However, while governments are quick to announce their intention to build nuclear power facilities, concrete progress is less forthcoming. Bahrain announced its intention to build a nuclear power plant in early 2010. It has since made little progress.

Wind power

Renewable energy is set to be another growth area in the Middle East in 2011. Jordan, a country held back by a lack of hydrocarbon resources of its own, is keen to take advantage of its vast uranium deposits and has been working for several years on building its wind-power sector. Its first project at Al-Kamshah – which will generate 30-40MW of electricity – was unveiled in 2008. The Ministry of Energy and Mineral Resources (MEMR) selected a consortium of Greek firms – Terna Energy and Vector Aeolian Parks – for the project in 2009 but progress slowed in 2010. According to a source close to the project, talks have now been revived. MEMR is tendering another wind project at Fujeij, with bids due by March.

The country is also looking at the institutional mechanisms in place to promote renewable energy. It intends to appoint consultants to advise on the establishment of a regulatory framework for renewable energy, estimating renewable energy project costs and the integration of wind farms with the existing power grid.

The Government of Jordan made the decision to allow unsolicited proposals for renewable energy projects in early 2010 in an effort to prompt the private sector to drive the industry. While this has proved relatively successful, with a handful of developers approaching the government with projects, the issue of a universal feed-in tariff remains a sticking point.

Unlike most of Europe and the US, no country in the Middle East currently has a feed-in tariff or similar standardised mechanism for promoting the use of renewable energy. Without it, developers must negotiate a power purchase agreement with the government on a project-by-project basis.

The absence of a feed-in tariff is a hurdle for developers who may not be comfortable investing money and hours into a proposal that may not have a high enough electricity price to make it economically viable.

Abu Dhabi was the first in the region to make tentative steps towards a feed-in tariff model. In 2009, the emirate revealed plans to develop an energy policy that would establish subsidies for renewable power, but it is still yet to materialise.

The model is not without its flaws. Formulating and implementing the framework from scratch is time-consuming and once in place can be inflexible. Nevertheless, the introduction of a feed-in tariff for renewable power would be a landmark event that would indicate the region’s commitment to developing a renewable energy industry.

Post-financial crisis, many governments in the Middle East are facing a dilemma. On the one hand, the crisis has put pressure on government resources to the extent that private participation is necessary.

However, the recession has also damaged market confidence in governments and banks still fear that while the probability of default is lesser with governments and government-owned entities, they are still capable of reneging on their commitments. Government guarantees still hold significant weight and developers are quick to point out the value of securing state backing, but the assurance holds less weight post-crisis.

As regulated assets, power and water projects should be protected from this to a certain extent, but again, investors are looking for long-term guaranteed offtake agreements to insulate them from volatility. Nevertheless, project finance appears to be making a welcome return.

Deal volume

In the past year, a healthy but moderate flow of projects have been announced, tendered and financed. The deal volume for power and water projects in the Middle East and North Africa region in 2010 will total a similar value to that of 2009, when $6bn of deals were closed – up from the $4bn of deals signed in 2008.

In terms of independent projects, 2011 looks set to top the previous year. Oman, Iraq, Kuwait, Syria, Saudi Arabia and the UAE could all see new independent power projects and independent water and power projects successfully financed in 2011.

Almost every country in the region is facing challenging demand forecasts for power and water, but this year is likely to see more power and water projects tendered and financed than in 2010. The year will be characterised by a series of independent projects all vying for finance. Progress in the coming year will be crucial.