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Analyst: MidEast power market needs private sector

Ernst & Young says monopoly, statist model may need to change.

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E&Y: Private sector help will be needed to boost generation capacity.
E&Y: Private sector help will be needed to boost generation capacity.

The long-held operating models of the GCC’s utilities, which are based on state-owned monopolies, may need to change to cope with soaring demand, according to power and utilities specialists at Ernst & Young.

With demand in the GCC growing between 6-8 percent each year, driven by high industry and population growth, utilities in the GCC must meet the soaring demand while managing changing regulations and preparing for the onset of competition, they said in a statement.

Christian von Tchirschky, MENA Power & Utilities Leader, EY, said: “Some countries, such as Saudi Arabia, will need to double their capacity – from around 50GW to 90GW – by 2020. This immense growth means utilities must act now to develop strategies to better balance demand and supply.

"Building new capacity, reducing subsidies and increasing efficiency are some of the key ways that GCC utilities can improve their operating models.”

He said building new capacity is an important strategy that utilities can use to redefine their future generation portfolio.

The UAE’s first nuclear plants are due to come online in 2017 and the development of renewable energy, particularly solar, is set to increase.

However, EY said increasing supply must be paired with curbing demand if a sustainable energy balance is to be achieved.

GCC utilities need to develop smart ways to cut consumption through strict demand side management programmes. Government pressure to reduce subsidies levels has led to the introduction of new pricing structures for nonresidential customers, while residential customers still pay relatively low tariffs for lower levels of electricity consumption and then higher prices when they reach a certain usage level.

“Getting customers to use less energy is difficult when heavy subsidies make tariffs artificially low. There is a need to increase customer awareness of the real value of electricity – and that its current price is only so low because it is subsidized. Enhancing efficiency along the value chain will also help utilities meet demand,” said von Tchirschky.

He said the push to increase efficiency may also driven by regulation that will permit the introduction of competition into the sector in the future.

“As in other parts of the world, it is expected that utilities will no longer capture 100% of the value chain, but, especially on the generation side, new market entrants will start to play a major role. The challenge for the incumbent utilities will be finding the right business model to still generate the margins they need in the future,” he added.

The first wave of competition may come through greater use of the existing interconnection that links the power systems of the GCC countries. Currently used only to support emergency shortages, the interconnection may form the basis of a future energy trading market.

EY said in the statement that it will be up to the regulators of each country to decide how much competition they will allow, and utilities will need to prepare for the different options that may evolve in their specific market.

Von Tchirschky added: “Despite the challenges, there is optimism that the forthcoming changes to the GCC utilities sector will bring positive long-term benefits. The biggest opportunities for new market entrants may lie in the services around distributed generation.

"If we think about rooftop solar installations, you’ll see new players, including international energy service companies, competing with local companies to provide these kinds of services."

 

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