Responding to demand: Boosting private sector involvement in utilities

Relatively unaffected by the global slowdown, Ras Al Khaimah has witnessed extremely rapid growth in the past decade. The emirate’s GDP grew by approximately 8% in 2011, according to RAK’s Department for Economic Development. Industry was the main driver of this growth, accounting for around 30% of GDP in the same year. The rise in GDP served to attract a raft of foreign workers to the emirate, with the population expanding from 258,000 in 2008 to an estimated 300,000 ahead of a census in 2012.

DEMAND SURGES: The upshot of this economic and population growth has been surging demand for electricity. The Federal Water and Electricity Authority (FEWA), which is responsible for supplying the Northern Emirates, including RAK, reported total generating capacity of 1080 MW in 2009, the latest year for which statistics are available. This was slightly down on 1120 MW in 2008. Peak demand in 2009, however, was 1840 MW, up from 1790 MW in 2008. As such, the Northern Emirates have been facing a considerable shortfall in electricity supply. Arguably, nowhere have the effects been felt more than in RAK, due to its sizeable industrial base.

Much of the power shortfall has been made up from imports from Abu Dhabi, which runs its own power network. However, this imported power has been prioritised for RAK’s domestic users, rather than industry. Therefore, a number of factories in the emirate have been obliged to install generators, which make for a stable supply, albeit at a cost – representing an expense that can put RAK factories at a competitive disadvantage compared to rivals elsewhere in the UAE and the wider region. This is borne out by the emirate’s own figures, which show average daily consumption was around 4m KWh in 2010, down from 4.9m KWh in 2009, reflecting increased usage of private generators.

POWERING INDUSTRY: Both the federal government and the authorities in the emirate have been considering solutions to the power crunch. Since 2008, the RAK Investment Authority (RAKIA) has operated two power plants, one each at its industrial estates of Al Hamra and Al Ghail, with respective capacities of approximately 45 MW and 84 MW. These are due to be linked by the end of 2012, creating a network dedicated to meeting the needs of industrial users that is separate from the FEWA grid.

Furthermore, in March 2011 the Federal National Council committed some $1.5bn to upgrading utilities throughout the Northern Emirates, in a bid to ensure this part of the country does not lag behind the urban centres of Abu Dhabi and Dubai. Moreover, building on the experiences of many other countries across the world, the authorities are now looking to increase private sector involvement in the utilities sector as a way to make investment go further and enable greater efficiencies.

BENEFICIAL PARTNERSHIPS: As such, the authorities are considering a number of public-private partnerships, particularly using the independent power and water plant (IWPP) model, which has been successful in many power markets where the state is significantly involved. Utico, a subsidiary of Abu Dhabi-based Ghantoot group, a construction and services conglomerate, announced in March 2011 that it had commissioned a Dh470m ($127.9m) water and power plant, the first IWPP in RAK, and the first coal-fired power station in the UAE. Utico planned to invest approximately Dh2bn ($544.4m) through 2011, of which Dh1.4bn ($381.1m) is for the plant, and the remaining Dh600m ($163.3m) for other water and recycling projects.

Current total capacity at the plant is 91.61m litres per day of water and 70 MW of electricity. The plant, which is located in the Al Hamra district of RAK, is being constructed on a build-own-operate basis and being funded through a 60:40 equity-debt formula. Half of the output will go to industrial users, including the Gulf Cement Company, while FEWA has agreed in principle to take the remaining 50%. Utico is in discussions with RAK Metals and Minerals Investments, a RAKIA subsidiary which operates coal mines in Indonesia, to source the project’s fuel.

In addition to the Utico project, there are also a number of other initiatives in the pipeline for the emirate’s power sector. RAK has agreed in principle to build a local 50-MW solar power plant that will use photovoltaic technology, in partnership with Masdar, an Abu Dhabi government entity working to encourage investment in sustainability and renewables, although no further details were available at the time of writing. FEWA has announced that it will build a new desalination plant with a capacity of 56.78m litres a day in RAK’s Al Muairidh district, to be completed by the end of 2013.

MEETING FUTURE DEMAND: However, RAK’s rate of economic expansion is such that further capacity – which would be equivalent to another large power station – will be needed within the next 5-10 years if a return to the supply crunch that took place in the late 2000s is to be avoided. Moreover, the price of electricity has become an increasing concern. FEWA currently charges industrial users approximately 40 fils per KWh ($0.11 per KWh), which is indeed higher than a number of other emirates.

Where and how to source this power is a matter of debate, however. ADWEA, the Abu Dhabi utility group, currently has excess capacity, estimated at around 10,000 MW in 2009, and has recently completed installation of 2000 MW of new generating capacity in the neighbouring emirate of Fujairah, where an interconnector to the FEWA grid is located. In 2008 ADWEA agreed to supply FEWA with electricity up to 2015, when total power imports could reach up to 2500 MW. According to Shahzad Alam Qureishi, the controller of utility accounts at Electro RAK, if power does end up coming from Abu Dhabi, this may have the effect of discouraging investment in the development of IWPPs in RAK, as investors could feel that the cheapness of Abu Dhabi power makes such projects considerably more unviable. However, Abu Dhabi is itself experiencing rapid industrial growth, meaning that its margin of spare capacity is likely to shrink in the future. Moreover, it is not clear Abu Dhabi will agree to subsidise power for industry (as opposed to residents and public services) in the Northern Emirates.

If FEWA does choose to commission more IWPPs, however, RAK is a likely candidate for them. First, the emirate has plenty of land and is considered an easy place to conduct business. According to Qureishi, “RAK is the easiest emirate in which to set up a private power station by far. There are very few restrictions; the only real constraint is fuel.”

Second, a number of state- and semi-state-owned firms are currently involved in overseas investments in energy projects, such as RAK Gas, which holds interests in exploration blocks in Tanzania, Egypt and Somaliland; RAK Petroleum, which in January 2012 merged with DNO, a Norwegian firm, creating a group that is focused on the MENA region, with assets in Yemen, Iraqi Kurdistan, Tunisia, Oman and the UAE; and RAK Minerals and Metals Investments, which has a number of investments in the Democratic Republic of the Congo, Armenia and Indonesia. Gas supplies are tight across the entire Gulf region, but if RAK is able to secure supplies through investment overseas, this would make the emirate a logical site for future power stations.

FINDING BALANCE: Moreover, RAK is also investing in the research and development of a number of alternative energy sources, which could help to solve another of the emirate’s power conundrums: pricing. While there is plenty of demand for power in RAK, the authorities have to find a balance between keeping remuneration for power investors sufficient to attract investment and keeping end-user prices competitive for industry.

Unlike many other countries in the GCC region, RAK does not enjoy the luxury of being able to devote a proportion of its own hydrocarbons wealth to subsidise the cost of power generation. On the other hand, while renewable energy sources, such as solar and wind, tends to come with high upfront costs, once such systems are installed, they offer the potential for significant savings over the long term, particularly in the form of foregone fuel costs.

With a number of solar technologies already under development in the emirate, provided the segment is backed by government support, alternative energy could be rolled out quite quickly across the emirate, thus freeing up electricity from conventional generation stations to be devoted to the wide base of industrial users. RAK has a long track record of prudent financial management (the emirate holds an “A” credit rating, currently the only government in the Gulf region to do so), which means it is likely to be able to achieve such a balance. Moreover, the experience of RAKIA, which benchmarks its rates against FEWA, shows that the emirate is indeed able to impose careful cost control on energy pricing.