The heat is on for Kuwait

Kuwait City.

"Evidence shows that when a sector is opened to market competition, customer service and product delivery improve dramatically," says Faisal Hamad Al Ayyar, vice hairman of the Kuwait Projects Company (KIPCO).
 

"However, unlike other economies where the primary role of privatisation is to bring investment funding, what Kuwait requires is private sector expertise."

To this end, in May parliament passed a bill to allow private sector involvement in the operation of the country's power plants.

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FEATURED COMMENT I am confused about Kuwait. They are spending $700M - the first installment of a $24.1B for the 14 GW expansion is only   1 Comments Read more comments »

The legislation allows for the establishment of shareholding companies to build new power and water desalination plants in the country, the first time private entities will have a stake in the local power sector.

Under the terms of the law, up to 50 percent of shares in the company will be sold to nationals in an initial public offering, while the government and state institutions will hold up to 24 percent of newly formed companies.

The remaining 26 percent will be sold to publicly listed Kuwaiti companies or foreign companies approved by the government.

While it is believed that investments in new power facilities and an engagement with the private sector will result in additional supply down the road, equally important from many observers' view is the need to better manage electricity demand and discourage excessive consumption.

The residential sector accounts for around 60 percent of the total current load, with the government heavily subsidising electricity and charging households a mere $0.07 per kilowatt hour, about half the average price in the US.

In addition, many households do not pay their bills and are rarely penalised for not doing so. According to Dr Saad Akashah, an advisor the Arab Fund for Economic and Social Development, "there is huge wastage and overuse of electricity in this country, and it is harming future generations.

So long as electricity is essentially free, people will not concern themselves with how much they use. We do not need to get rid of subsidies entirely, but should introduce some tiered pricing that charges people an affordable rate while at the same time making them think before they
consume."

The financial implications of such high energy usage are also significant, not only for industries concerned over a steady supply of energy, but also for the government due to the high fuel bill and large capital investments.

According to the Kuwait Institute for Scientific Research, if current demand trends persist, Kuwait will need to add another 14,000MW in generating capacity by 2025, bringing overall capacity to 25,000MW at a cost of $24.1
billion. The accompanying fuel bill to meet this extra capacity would reach approximately $13.1 billion, at current prices.

As a stop-gap measure, the government has signed deals with Shell and Vitol in 2009 and April 2010 respectively for the import of approximately 500,000 cubic feet per day of liquefied natural gas to help fuel its power stations.

In addition to the environmental benefits of being a cleaner-burning alternative, importing gas is considered less costly than using export-revenue-earning oil-derived fuels to generate electricity.

Kuwait is also hoping to boost its natural gas production and has targeted levels of 5bn cubic feet per year, up from current level of 1.2 billion cubic feet of non-associated gas from its northern gas fields.

To achieve this, the government has enrolled the help of Royal Dutch Shell, signing a deal estimated at $700 million in February that will entail the energy giant providing expertise and technology to help tap the complex reservoirs.