How can GCC governments ensure a sufficient energy supply?
Faced with an ever rising demand for electricity, GCC governments have to adapt their policies to ensure sufficient power generation.
Demand for electricity in the region is closely linked to the need to provide cooling to its inhabitants. In the hot summer months, electricity consumption spikes to a yearly high. Similarly, daytime use of energy far outstrips nighttime use, as air conditioners battle it out with the scorching heat.
It is thus unsurprising that peak loads is a key consideration to anyone analysing the regional power sector. Abhay Bhargava, who is industry manager for energy and power systems at Frost & Sullivan, sees a constant struggle to keep power generation capacity ahead of peak demand.
“Peak demand will be increasing until 2020, and you see megawatt generation trying to follow up,” he says.
“The question that comes to mind: Whatever the government invests in generation, are they really just chasing peak loads? And is that the right way to handle your investments, or is there something else you can do? “
To underline his point, Bhargava points out that European and US power companies typically try and have a margin of around 25 percent between peak demand and installed capacity.
In comparison, demand in Kuwait reached 99 percent of capacity in July. Saudi Arabia experienced blackouts this summer as peak demand exceeded capacity. In Sharjah, power outages have become a common feature in the summer, as the emirate is unable to secure sufficient gas feedstock after a delivery arrangement with Iran failed to materialise.
Sharjah serves as a good example for an overreliance on gas, a problem that is not going to go away any time soon. “Lets look to the future: In 2020, were still talking about an excessive reliance on gas, and if you start looking at wind and other renewables that’s a really small percentage of the total,” says Bhargava.
It is not that there have been no efforts made to diversify away from gas. Abu Dhabi has taken the lead on the nuclear front, with a four nuclear reactors coming online from 2017. Saudi Arabia, and Kuwait are amongst the other countries looking into the nuclear option.
Both countries have commissioned studies looking into the feasibility of nuclear power, and Kuwait has signed a Memorandum of Understanding (MoU) with France for cooperation in developing the nuclear sector.
Yet nuclear is no easy fix. One of the big hurdles is creating adequate regulation, something that cannot be put into place overnight. “There are still a lot of regulatory constraints that impact the nuclear option, and it does take long to go down that path,” says Bhargava.
Furthermore, a rush to building up nuclear power capacity across the region could lead to shortages in the supply of fuel, and technical expertise, especially as the interest in this form of energy generation is not constrained to the GCC, but to the entire Middle East.
“If everyone hops on the nuclear bandwagon, you are going to end up with higher than projected cost. This is important from an investment perspective, and also when comparing different fuels.” So far, there is little indication that enough is being done to train up a sufficient base of skilled manpower, thinks Bhargava.
Renewable power similarly making headway in the GCC, with Abu Dhabi once again taking the leading role. The UAE’s biggest emirate has pledged to produce seven percent of its energy needs from renewable sources by 2020, and is engaged in a number of projects, ranging from building the world’s second largest concentrated solar power plant to initiating a programme for solar panels on the roof of private homes.
Significantly, Abu Dhabi is also implementing a form of feed-in tariff to accompany these efforts. Feed-in tariffs are common across the world, and are a quasi-subsidy encouraging the generation of power from renewables on a small and medium scale.
To Bhargava, tariffs are the crux of the matter, and the key tool at the disposal of governments to solve their power conundrum.
Currently, GCC utilities are selling electricity to households and industry at subsidised rates. Whereas in the US rates vary between US$0.06 and $0.11/KwH, Abu Dhabi sells its power for only $0.04/KwH.
Saudi Arabia, which recently hiked its rates, is still selling at around $0.04-0.05/KwH. Rates like these encourage wasteful consumption, and increase the burden on power generation.
Governments are hesitant to increase tariffs, fearing that this will make the nascent industries they are trying to foster. While sympathetic to such concerns, Bhargava points out that higher electricity costs have not made industry uncompetitive elsewhere.
“Of course you want to make sure the industry is competitive, but the US still manages to produce at those rates and are not being pushed out of the global set up.”
He believes that tariffs can be used to curb consumption at peak times, so bringing down the peak loads, without inhibiting economic growth. Companies should be able to adjust their production patterns to work around peak hours.
“If you are capable enough to restructure your manufacturing activities, increasing consumption at times that are not peak load, you stand to benefit as well. So the choice is still there. Its not monopolistic or dictatorial in that sense, and the tariffs will become competitive.”
If the peak load can be reduced, so is the pressure on power providers to ramp up their installed capacity to meet the worst case scenario.
Another problem with subsidising electricity is that the only way to sell at below production cost is to provide cheap feedstock. This represents a huge loss in profit, as oil and gas that could fetch good money on the international markets are instead sold at a low price to domestic power producers.
“You are actually selling it at below the market rate, the same gas that could be sold at $80 is now being sold at a 25 percent discount,” points out Bhargava. This practice continues unabated, with Saudi Arabia recently announced that it would increase its power generation based on crude oil.
Instead of using their raw materials to produce cheap fossil fuel based energy, GCC countries should sell some of this feedstock abroad at the market price, and use the resulting profits to invest heavily in renewables, says Bhargava.
“People always ask how you can subsidsise the capital costs of renewables. All you need is a marginal
shift to exporting some of the domestically committed hydrocarbons for profits to invest in new renewables projects. “
GCC member states have not been idle in terms of grid, with the GCC interconnection grid connecting the entire region by 2012. The grid is being built to prevent power outages by shifting power from one country to the next, and even laying the groundwork for a regional power market.
While Bharava is enthusiastic about the grid, he does concede that GCC countries broadly have the same peak hours, limiting the opportunity to reduce the peak loads through the timely shift of power from country to country.
There is, however, the possibility of extending the grid. Saudi Arabia and Egypt have been in talks about linking their grids with media reports predicting a tender for a US$1.5 billion project of this kind in January. Ambitious minds see the GCC linked with the EU and the Mediterranean countries, and the Desertec project, which aims to generate solar energy on a massive scale in Northern Africa.
Whatever the solution to the region’s power problems, it will not be found without thinking outside the box.