Growth is inevitableby Utilities ME Staff on Jul 5, 2009
Walid Fayad of Booz & Co looks at the near future of the regional utilities industry
Despite the downturn, the next year will see progress in the development of Middle Eastern utility infrastructure – simply because the region cannot afford to delay.
Current shortages must be addressed, while demographic and economic growth continue to drive long-term demand. The GCC will require the addition of nearly 60 gigawatts of power capacity by 2015, as well as twice as much desalination capacity. The region’s wastewater collection and sewage treatment capacity also need to be addressed, with wastewater treatment capacity not exceeding 25% of domestic and industrial water use in the GCC, and 15% across the broader Middle East.
In response, governments are backing essential infrastructure developments amidst the crisis, and are now supported by a recent easing in liquidity. They will continue to support developments in renewable energy, with several projects moving forward this year, and put increasing emphasis on demand management.
In developing infrastructure, the Middle East has increasingly resorted to public-private partnerships (PPPs). PPPs introduce private-sector efficiencies, transfer risk to the private sector, and alleviate government budgetary constraints. During the downturn, however, financing troubles stalled a number of projects, and governments have had to step in.
In the United Arab Emirates (UAE), the collapse of the commercial debt commitments for the Shuweihat 2 Independent Water and Power Project (IWPP) late in 2008 drove the Abu Dhabi government to accept and guarantee a bridge loan to kick-start the project. In a more radical move, the Saudi government recently decided to develop the $5.5 billion Ras Al Zour project via an engineering-procurement-construction (EPC) scheme, thus eliminating the need for commercial financing.
With the recent easing in credit markets, a number of projects will unlock during the next 12 months. The Al Dur IWPP in Bahrain, for instance, was delayed several months as raising long-term debt was not possible during the crisis; in June 2009 closing was imminent, although with a mini-perm structure. In Saudi Arabia, the Rabigh Independent Power Project (IPP) is expected to close by July 2009 with oversubscription of the US$1.9 billion debt.
In terms of the energy mix, renewables continue to emerge and will build in the coming year on their practically negligible base. In particular, the Middle East represents significant potential for solar and wind power.
Country leaders are encouraging their utilities to develop renewable energy sources in an effort to address climate change, diversify energy sources, and develop a competitive advantage with those technologies, thereby hedging against the reliance on fossil fuels. The most prominent case is the Masdar initiative in Abu Dhabi. Masdar commissioned a 10-megawatt pilot solar plant in May 2009 and is planning the development of large-scale solar and wind farms across the UAE and the region. Equally ambitious, Dubai has announced a plan to build the largest solar plant in the region.
Finally, demand management will increasingly move up the agenda. As water and other natural resources are depleting and as capacity margins erode, utilities will pay more attention to conservation measures such as water treatment and recycling, district cooling, metering, and consumer tariff incentives. Adjustments in consumer tariffs can not only help utilities contain the demand for water and electricity; they are essential to address the economic misalignment between revenues and the costs of production, transmission, and distribution.