GCC power markets: Growing reliance on private investments

Sunday 18/09/2016
Electricity pylons in Riyadh, Saudi Arabia.

Beirut - Private sector investments are projected to add more than 200 gigawatts (GW) of generating capacity in Gulf Cooperation Coun­cil (GCC) countries, according to a study published by the Arab Petroleum Investments Corpora­tion (APICORP). The private sec­tor participation would give GCC public utilities “a chance to catch a breath”, the study said.
APICORP foresees reliance on in­dependent power producers (IPPs) increasing as governments face lower oil prices, increasing deficits and lower budgets. The challenge is how to fit the IPPs in the larger picture of reformed markets “and not just as a short-term solution to rising demand”.
GCC electricity demand has been rising sharply in recent years, driv­en by population growth, urbanisa­tion, rising income levels, industri­alisation and low electricity prices. These factors place greater demand on power generation.
APICORP estimates that GCC power capacity needs to expand at an average annual growth of 8% from 2016-20. To meet rising de­mand, the GCC will need to invest $85 billion to add 69 GW of gener­ating capacity over the next five years. In light of lower oil prices, it will be difficult for GCC govern­ments to continue supplying cheap power. The alternative is to seek greater participation of IPPs in power generation.
GCC governments intend to re­tain their monopoly over transmis­sion and distribution networks. The government firm is to continue to sell the electricity to distribution firms, which will be responsible for selling to the final consumer. IPPs are usually offered 15-20-year power purchase agreements (PPAs) by which the government agrees to buy the electricity on a take-it-or-leave-it basis at a previously agreed price for the duration of the contract. This mitigates the de­mand-side risk. The IPPs also sign fuel supply-agreements with the government to mitigate feedstock prices.
The Saudi Electricity Company (SEC) is the kingdom’s vertically in­tegrated company. SEC owns most of the power-generating assets and almost all transmission and distri­bution networks. The government allows the private sector to enter the generating sector. As a result, most ongoing and future projects will be IPPs but SEC will hold ma­jor equity stakes. Earlier this year, the government announced long-awaited reforms. The plan calls to split up SEC, creating four-power generating companies and estab­lish a separate transmission firm.
Saudi Arabia’s estimated ca­pacity stood at around 80 GW in 2015, with SEC representing ap­proximately 60 GW with the re­mainder operated by the private sector. Plans call for the kingdom to meet rising demand with 28 GW of capacity in the pipeline. Of this, 12 GW are SEC projects while the rest are IPPs, Saudi Aramco and Saline Water Conversion Company (SWCC) projects.
Financing is a growing challenge in the kingdom. SEC’s “growing reliance on external finance might provide more opportunities for IPPs to dictate better terms”, said APICORP, adding that SEC, “which has always preferred to have a complete monopoly on power gen­eration realises the need to rely on non-government funds for its expansion programmes, and is in­creasingly relying on domestic and international financing, as well as IPPs to fill in the gap”.
The UAE power industry was devolved from the start so that the federation’s seven emirates had control over their power pro­grammes and policies.
Abu Dhabi started as early as 1998 to push for private power gen­eration and the single-buyer mod­el. Today, more than 90% of power generation in Abu Dhabi is gener­ated by IPPs, though state-owned Abu Dhabi Water and Electricity Authority (ADWEA) holding major equity in all projects.
The first independent plant went on line in 2000, being an independ­ent water and power producer (IWPP). All subsequent projects were also IWPPs until Shuweihat 3 was tendered in 2011, becoming the first IPP in the emirate.
In the medium-term, ADWEA expects the GDF Suez-operated al-Mirfa power plant to add 1.6 GW of generating capacity once com­pleted in 2017. ADWEA will also offer its 350-megawatt (MW) solar project under the IPP scheme. API­CORP estimates that ADWEA holds 60% equity in ten IWPPs and Fujai­rah and 80% of al-Mirfa.
Dubai is moving in a similar path to Abu Dhabi. The Dubai Electric­ity and Water Authority (DEWA) is also increasing its reliance on IPPs. The first clean coal power plant — the 1.2 GW Hassayan plant — was awarded in 2015 as an IPP. DEWA will hold a 51% stake in the project. Also offered under the IPP model is Dubai’s large solar park.
The UAE experience demon­strates that although state-owned DEWA and ADWEA allow for IPPs in the power sector, the two utili­ties participate as major equity shareholders. Private investment continues to attract interest due to rising demand and low country risk. This allows the government “to lock long-term contracts at very competitive rates”, concludes API­CORP.
Oman was the first GCC member to involve the private sector in the power industry. The first IPP in the region, the 270 MW al-Manah pow­er plant was implemented in 1996. Today, more than 70% of Oman’s power generation comes from IPPs. Oman’s state utility — the Oman Power and Water Procurement Company (OPWP) — holds major­ity equity stakes in all IPPs. The country plans to integrate renew­able in the power mix. The 50 MW Harweel wind farm contract has al­ready been awarded
Qatar is moving ahead with pow­er generation privatisation. Most power generation comes from IWPPs and IPPs, with the state-owned Qatar Electricity and Water Company (QEWC) holding majority shares.
Kuwait’s Ministry of Electricity and Water continues to be respon­sible for generation, transmission and distribution. The country has been slow to open its power sector. In 2013, the 1.5 GW al-Zour North gas-fired power plant was the first project to be built under the gov­ernment’s public-private partner­ship programme. The government owns 60% of the project.

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