Power surge: A raft of foreign investment is set to boost generation capacity

With an attractive regulatory environment for investment in electricity generation, the sector has seen new injections of foreign capital in recent months. Jordan’s privately owned distribution companies are in a similarly favourable position; their power purchase agreements (PPAs) ensure that the state-owned National Electric Power Company (NEPCO) bears the burden of increased generation costs.

PRIVATISED: Electricity generation is now largely in the hands of the private sector. The Central Electricity Generating Company (CEGCO) was privatised in 2007. As the largest generator of electricity in Jordan, CEGCO accounted for 51.8% of generated electricity in 2010. It is also an increasingly profitable business. Operating profits increased from JD16.1m ($23.35m) in 2009 to JD25.3m ($36.69m) in 2010, according to the company’s latest annual report. With rapidly growing demand for electricity in Jordan and new capacity planned at CEGCO, profits should remain strong.

In mid-2011, Enara Energy Investments acquired a 51% stake in the company from Jordan Dubai Capital, with the government and Social Security Fund retaining the remaining 49%. Enara Energy is majority-owned by Saudi-based ACWA Power International, which purchased the $10.5m stake in CEGCO with support from the World Bank. ACWA then boosted its stake in April 2012, purchasing another 25% in Enara Energy from Malaysia-based Malakoff Corporation.

The investment is hoped to increase the company’s generation capacity by rehabilitating CEGCO’s older plants and reducing electricity production costs. The majority of the plants run on more expensive diesel oil and heavy fuel oil, but ACWA is hoping to make greater use of natural gas and renewable energy.

GENERATING INTEREST: CEGCO is not the only profitable generating company to be attracting foreign investment. The Qatar Electricity and Water Company (QEWC) purchased a 23.3% stake in the Amman East Plant, Jordan’s first independent power plant (IPP), in the first quarter of 2012. The plant is majority-owned by the UAE-based AES Oasis Energy, in which QEWC now holds a 38.9% interest. It came on-line in 2009 and increased its generated electricity output to 3287 GWh in 2010, accounting for approximately 22.2% of total national generated electricity.

The generating companies are largely shielded from volatile energy markets and a large national energy bill by their PPAs. “The PPAs signed by CEGCO and Amman East have almost guaranteed them their profits,” said Allan Khalil, the coordinator of international cooperation at NEPCO. “Under these agreements, it is NEPCO’s responsibility to pay for additional generation costs,” he said, adding that the distribution companies are in a similarly fortunate position.

NEW IPPS: With such a profitable market for generating companies, the government has successfully attracted foreign investment in a number of new IPPs. The IPPs are being constructed on a build-own-operate (BOO) basis. The first to come on-line was the 370-MW Amman East Power Plant, which became was opened for operation in 2009.

In February 2012 the King officially inaugurated the second IPP: a 373-MW plant at Al Qatrana, developed and operated by the Qatrana Electric Power Company (QEPCO), which is a joint venture between the Korea Electric Power Corporation and Saudi Arabia’s Xenel Industries. Seok-Bae Yun, the CEO of QEPCO, spoke optimistically about the IPP landscape in Jordan. “IPP projects have a bright future here, given the country’s political stability, strong desire for energy independence, and business-friendly approach to investors,” he said. Indeed, with the government guaranteeing to purchase all of the IPP’s output, the project is expected to generate some $225m in annual net profits for the next 25 years.

Looking ahead, there are plans in the pipeline for a further two IPPs to be constructed. “Bids have been submitted for the third and fourth IPPs, and we are now waiting for a decision from our board of directors,” said Khalil at NEPCO. “The availability of fuel for the new power plants is an issue that needs to be addressed, but NEPCO is keen to expedite the process”.

ADDED POWER: In addition to these gas-fired plants, Jordan’s electricity generating sector is soon to see new capacity provided by two oil shale plants. Estonia-based Enefit is to construct the country’s first oil shale power plant, with a capacity of 600-900 MW, after a development agreement was signed with the government in 2008. “This power plant has been in the pipeline for around seven years, but we are now in the final stages of agreeing a PPA with NEPCO,” said Mohammad Maaitah, the vice-president at Near East Engineering, which is involved in the Enefit project.

In June 2012, a preliminary agreement was signed between Enefit and NEPCO, although this does not yet include a final PPA. “A tender for the construction of the plant will be issued imminently. After the bidder has been selected, we shall input the construction costs into our financial models, and this will allow us to determine the PPA,” said Maaitah. According to the MEMR, the plant will cut around JD350m ($507.57m) off a burgeoning national energy bill, and will begin its commercial operations in 2016, when the first 237-MW shale plant is set to come on-line.

A second, 900-MW shale plant is now expected to be built by China’s Lejjun Oil Shale Investments in the Karak region. In accordance with a memorandum of understanding signed with the government in November 2011, Lejjun Oil will perform a six-month feasibility study on the construction costs and projected electricity tariffs. If construction proceeds, the plant is expected to see investment of up to $1.25bn.

“Direct burning for electricity generation is the cheapest way to use oil shale,” said Suleiman Hiyari, a renewable and new energy expert at NEPCO. “The burning of shale and the disposal of the bulk ash is an inherently costly process, but this could be offset by relatively low costs for the construction of the plants. We have not yet finalised the tariffs, but we believe that a commercial agreement is feasible.”

As with the production of oil from shale, the feasibility of shale burning will partly depend on the cost of importing alternative fuels used for power generation, such as oil products and natural gas. If an economic crisis in the EU were to precipitate a significant drop in world oil prices, Jordan’s shale ventures could become less viable, although many in the sector still believe that geopolitical tensions in the region will serve to keep the price of oil elevated.

After buying electricity from the generating companies, NEPCO then sells the electricity on at favourable fixed rates to Jordan’s three distribution companies, all of which are privatised. The largest is the Jordan Electric Power Company (JEPCO), which distributed 61% of the electricity generated in 2010, serving Greater Amman. The Jordanian government holds a 19% stake in JEPCO, while Jordanian companies, private investors and the public own the remainder.

After JEPCO, the Electricity Distribution Company (EDCO), which is majority-owned by the Social Security Investment Fund, accounted for about 18% of the distributed electricity in 2010, serving customers in the South, the East and the Jordan Valley. EDCO itself holds the majority stake (55%) in the third distributor, the Irbid District Electricity Company (IDECO), which accounted for 15% of the distributed electricity in 2010, focusing on Irbid and the north-east.

Under their current agreements with NEPCO, the distributing companies are likely to remain profitable, as they cater to the residential, commercial and governmental sectors, for which electricity demand has been increasing steadily over the past four years. JEPCO, EDCO and IDECO have all seen their purchases from NEPCO rise by approximately 22%, 27% and 30% respectively, between 2007 and 2010.

PRICE HIKE: “Meanwhile, NEPCO is bearing the burden of the now greatly increased generation costs,” said Ghaleb Maabreh, the managing director of NEPCO. Until recently, the operating expenses and revenues of state-owned NEPCO were roughly on a par with one another; marginal profits were in fact made in 2006, 2007 and 2009. But after reductions in exports of Egyptian natural gas in 2010 forced NEPCO to spend more on diesel and heavy fuel for electricity generation, the company experienced losses of around JD160m ($232.03m). And now, with the disruptions to gas flows in 2011, matters have deteriorated further. “We are expecting losses of JD1.2bn ($1.74bn) for 2011. We also have to service our debt this year at a cost of around JD150m ($2.18m),” said Maabreh.

In an effort to offset the higher generation costs, in 2012 the government has imposed controversial hikes on the electricity tariff, which was already increased in 2011. Despite considerable resistance from the general public and commercial sector, in June the cabinet approved increases of between 6% and 35% on more power-hungry households, as well as a 20% hike on commercial customers that consume more than 2000 KWh. Together with a separate increase imposed on banks, mining companies and other large corporate consumers, the adjustments are expected to cut an estimated JD198m ($287.14m) from NEPCO’s debts. This nonetheless makes only a limited dent in the company’s annual budget deficit, which stands at around JD1.5bn ($2.18bn).

FINANCING: NEPCO’s increasing losses have led to a dramatic increase in its current liabilities. This could make it more difficult for the company to obtain financing for ongoing projects, which in recent years have included the construction and expansion of power substations. Yet in spite of the current constraints, NEPCO is hoping that much-needed expansion work will continue. “One of our projects is to construct a new substation at Amman West, as well as to add a new overhead transmission line, which will run from Qatrana to Amman West,” said Khalil, explaining that this new addition will form a crucial part of efforts to expand connectivity on the inter-Arab electric grid, through which Jordan imports electricity from Egypt.

“Several funders, including the European Investment Bank, are interested in providing loans for the project, and we are hoping for a contract to be awarded for feasibility studies by the middle of 2012,” Khalil added. The Jordanian government also believes that further cash could be injected into the project from a multi-billion dollar development fund which, according to an announcement in late 2011, is due to be established for Jordan by the GCC.

ADDED DRAW: Other expansion and efficiency projects have continued to attract foreign funding in recent months. Soft loans totalling $191m for the construction of a thermal unit at the Al Samra power plant were agreed in April 2012 by the Arab Fund for Economic and Social Development, as well as Saudi and Kuwaiti development funds. The new unit will produce an extra 150 MW but requires no extra fuel or gas to be burned, which is therefore expected to save the kingdom some $50m every year. In the same month, Jordan secured a grant of $1m for conducting studies into the implementation of smart grids by the three distribution companies.

There are plans to privatise the one remaining state-owned generator, the Samra Electric Generating Company (SEGCO), which accounted for 23.5% of Jordan’s generated electricity in 2010. However, given that many members of parliament have been raising questions in early 2012 over the government’s decision to privatise formerly state-owned companies, the authorities may find it difficult to push ahead with further privatisation efforts at present.

Privatising NEPCO is not on the cards, and the government could be unwilling to relinquish control over such an enterprise. NEPCO performs three primary functions: as the single buyer, it is the only company allowed to purchase generated electricity in Jordan; it is the bulk supplier of electricity, selling directly to industrial companies and some other outlets, such as the Queen Alia International Airport; and it is in charge of the transmission network and systems operation. But Khalil told OBG, “At some point, it is not impossible that we may consider unbundling some of these functions – a path chosen in several other countries.”