The essentials: As economic growth continues, projects are under way to ensure adequate support

With rapid population growth and an increasingly diverse economy, Abu Dhabi’s utilities demand – including electricity, water and wastewater services – has grown considerably in recent years. The sector will need to expand at around 6-10% to meet growing water and electricity demand, meaning that utilities provision remains a top priority. Alongside meeting demand growth by increasing fossil fuel capacity, Abu Dhabi has taken steps to invest in low-carbon options such as nuclear energy, as well as renewables (including solar and wind) and is also introducing conservation initiatives.

SECTOR REFORM: Prior to the late 1990s, provision of water and power to Abu Dhabi consumers was handled by the Water and Electricity Department. In 1998, recognising the need to meet growing demand for water and power, the government unbundled production, transmission and distribution, establishing new government-owned entities and providing opportunities for the private sector to participate in production.

The Abu Dhabi Water and Electricity Authority (ADWEA) is responsible for overseeing the electricity and water sectors in the emirate. Launched in 1999, ADWEA is entirely owned by the government of Abu Dhabi, but it is a separate legal entity with financial and administrative independence. ADWEA has a number of wholly owned subsidiaries, including Abu Dhabi Water and Electricity Company (ADWEC), Abu Dhabi Transmission Company (TRANSCO), Abu Dhabi Distribution Company (ADDC) and Al Ain Distribution Company (AADC).

BREAKDOWN: ADWEC is the single buyer and seller in the sector, purchasing power and water from producers, and then selling to distribution companies under a bulk supply tariff, and contracts for energy exchanges to the Northern Emirates and GCC. ADWEC prepares demand forecasts and is responsible for purchasing and supplying fuel to the power and water producers. The single buyer model is what allows private operators to enter the sector and provide external project financing, with ADWEC guaranteeing to buy all available power and water under long-term purchasing agreements.

Meanwhile, TRANSCO receives supplies of power and water from production companies and transmits this to the distribution companies, including to other emirates and GCC Interconnection Authority member states. The company is responsible for the transmission of electricity at 400, 220 and 132 kV within Abu Dhabi, the Northern Emirates and the GCC grid. Water is transmitted through 800- to 1600-mm-diameter pipelines installed throughout Abu Dhabi and the Northern Emirates. Growth in the sector has required TRANSCO to proactively manage its asset base. “Our assets are young when compared to other transmission companies around the world,” David Copestake, managing director of TRANSCO, told OBG.

TRANSCO’s ability to manage on a global scale earned it the PAS 55 accreditation, a British standard for the management of physical assets, making it the first multi-utility in the region to reach this level of performance. Its maintenance activities are also highly ranked, having achieved class-leading performance in six out of 12 categories, according to the International Transmission Operations and Maintenance Study. TRANSCO’s success demonstrates its capacity to support the strategy of the state’s Economic Vision 2030.

“TRANSCO aims to complement the physical and economic development of the UAE through a comprehensive and balanced strategic plan that will achieve performance sustainability and optimised organisational capabilities,” said Abdulla Saif Al Nuaimi, director-general of ADWEA and chairman of TRANSCO.

Rounding out the system are distribution companies (ADDC and AADC), which distribute power and water to individual customers, providing electricity at 11/33 KV. ADDC has about 216,000 customers, while AADC reaches around 100,000 clients.

Overseeing the sector is the Regulation and Supervision Bureau (RSB), an independent body established in 1999 to ensure the availability of potable water and electricity. It also serves as a licensing body for firms seeking to undertake generation, transmission, distribution, sale or treatment of electricity, water and waste-water in Abu Dhabi. The RSB then monitors, modifies where needed and enforces conditions in these licences.

PRODUCTION: Although ADWEA wholly owns the transmission and distribution firms in the sector, production is mainly under taken by independent water and power producers (IWPPs). ADWEA also holds a stake in these entities. Each IWPP in Abu Dhabi – there are currently nine – is structured as a joint stock firm with 40% held by a foreign partner, usually a consortium. The remaining 60% is owned by a local holding company. Of this 60%, 10% is held by ADWEA and 90% by Abu Dhabi National Energy Company (TAQA). In turn, TAQA is 51% owned by ADWEA, with 24.1% held by the government-affiliated Farmers’ Fund. The remaining 24.9% is publicly traded on the Abu Dhabi stock exchange.

The first IWPP was tendered in 1998, and today IWPPs account for over 95% of ADWEA’s power and water generation. IWPPs supply power and water to ADWEC through long-term (typically 20-year) power and water purchase agreements (PWPAs). Payments under these have two components: capacity (or availability) and output (or energy) payments. The former covers the plant’s fixed costs and is paid whether or not the plant is producing, while the latter pays for variable costs incurred when the plant is generating electricity or producing water. In addition, the IWPP does not pay for the fuel it consumes – this is provided by ADWEC under an energy conversion arrangement covered by the PWPA, which eliminates fuel risk for the private firms.

FINANCING THE FLOW: IWPP contracts are awarded via a competitive bidding process that is managed by ADWEA. The authority is responsible for pre-qualifying bidders, issuing requests for proposals and selecting the successful bidder for the project. For greenfield projects, the primary criterion for a winning bid is the average price at which the IWPP will sell electricity and water to ADWEC. The IWPP partner is also responsible for securing project financing. Although sourcing financing was a major challenge in the early days of IWPPs when this type of entity was not well known, securing funds has become easier as Abu Dhabi has built up an excellent track record in this field.

According to Nicholas Carter, director-general of RSB, Abu Dhabi’s IWPPs are an attractive investment. Since output is purchased by a single buyer (ADWEC), under a long-term contract, this ensures secure cash flow. Second, the existing structure allows for transparent and competitive bidding with the establishment of a published tariff for a period of at least 20 years.

Bidding rules require proposals to specify a supply price to ADWEC that will allow shareholders to earn at least a 13% rate of return on equity, providing a minimum benchmark for all potential investors. This means the equity injection is relatively low compared with the loan amount – some 80% of the project’s capital cost. This is, of course, one of the great advantages of this form of project finance, as the bulk of the financing to build – coupled with build-risk – comes from international lenders and not from the government. Thus, the presence of an independent regulator is important to investors and lenders alike; the body provides assurance, given that Abu Dhabi has successfully seen the establishment of nine IWPPs over more than a decade.

GROWING DEMAND: Abu Dhabi continues to expand capacity for generating electricity. In 2007 the peak electricity demand stood at 6644 MW, according to ADWEC. By 2010 this had grown to 8563 MW and to 9749 MW in 2011. These figures are reflective of demand from the emirate of Abu Dhabi, as well as exports to the Northern Emirates through the Federal Electricity and Water Authority (FEWA) and the Sharjah Electricity and Water Authority (SEWA). This increase in electricity usage can be attributed to the rapid development of Abu Dhabi, including of hotels, office buildings and malls, as well as the accompanying rise in population with the increasing number of foreign workers.

Peak global demand (that is, Abu Dhabi plus exports to FEWA and SEWA) is expected to climb to 16,244 MW by 2015. This is due to continued growth in residential, commercial and industrial demand in Abu Dhabi, as well as the growing draw on power plants given the increasing reliance on ADWEC by Abu Dhabi National Oil Company (ADNOC) for electricity supply, and an expected jump in exports to the Northern Emirates.

WIDER NET: To support energy security initiatives, TRANSCO’s transmission system will increasingly integrate with the Emirates National Grid and GCC electricity grid. “The GCC-wide electricity grid will not only enhance security of supply, but also reduce spinning reserve requirements and facilitate power transfers across the region, while providing a mechanism to mitigate against gas supply shortages and uncertainty in the levels of demand growth,” Copestake said. It will also reduce plant procurement costs by improving efficiency and plant load factors, as well as reducing overall operating costs in the integrated electricity market.

Meanwhile, exports to the Northern Emirates are expected to rise sharply in 2013, as the transmission system reinforcement is completed. Currently, the primary constraint on exports from Abu Dhabi to the Northern Emirates is transmission capacity. However, in March 2011 Sheikh Khalifa bin Zayed Al Nahyan, the UAE’s president, announced that ADWEA would build an enhanced transmission system to facilitate more electricity exports to the Northern Emirates. To date, ADWEA has invested around Dh5.3bn ($1.44bn) to establish a 400-kV network that will link all load centres in the Northern Emirates and be interconnected with ADWEA’s power system. The additional draw on ADWEC’s resources will be substantial, with Abu Dhabi’s peak exports to FEWA and SEWA expected to rise from about 2000 MW in 2011 to 2500 MW in 2013.

INPUTS: This rise requires additional fuel for transmission lines and production. In 2010 natural gas was the main fuel consumed by the emirate’s power and water plants. ADWEC purchased gas from two sources: Dolphin Energy and Abu Dhabi Gas Industries (GASCO). The former, a joint venture between Abu Dhabi’s government-owned Mubadala Development Company, Total and Occidental Petroleum, produces and transports gas from Qatar’s North Field to Abu Dhabi. The latter is a consortium of ADNOC, Shell, Total and Partex.

In 2010 ADWEC purchased about 74% of its gas from Dolphin Energy, with the balance coming from GASCO. To meet remaining need, ADWEC buys small amounts of crude oil and gas oil from ADNOC. However, ADWEC must purchase these fuels at market prices, making this a much more costly source for powering plants.

Moving forward, it is unclear from where ADWEC will source its rising demand from natural gas. Domestically, the Shah natural gas fields could prove to be an additional supply, and Dolphin may be able to increase exports to Abu Dhabi. An alternative being considered is the import of liquefied natural gas (LNG), a growing possibility following a March 2012 announcement by Mubadala Oil and Gas, a division of Mubadala Development Company, and International Petroleum Investment Company, an Abu Dhabi government-owned entity that invests in energy-related industries, that it was establishing a joint project, Emirates LNG, to import natural gas. This project would likely include the development of a new LNG regasification facility in Fujairah.

REDUCING DEMAND: While increasing supply is one solution for addressing growing power and water needs, another option is to reduce demand. The government is somewhat constrained in this regard because of a number of economic diversification efforts that will necessarily involve more power usage, such as new industrial and petrochemicals projects.

Accordingly, ADWEA and RSB have been coordinating on a number of public awareness campaigns to reduce demand for electricity from residential customers. However, the sector’s heavily subsidised prices, which are below average production costs, make encouraging conservation a challenge. Still, RSB and ADWEA have embarked on a range of educational initiatives about power and water usage and the extent of government subsidies, which could reduce consumption even without pricing changes (see analysis).

Perhaps the most publicised effort from RSB, in conjunction with ADDC and AADC, has been its new utility bill for water and electricity issued in March 2012. In addition to providing information regarding usage, the new bill also indicates the amount of government subsidy paid for the of water and electricity consumed. Residential customers will also be able to see “ideal” and “above-ideal” consumption ranges for different property types. For example, the ideal amount of electricity usage for a flat is up to 20 units per day, while the daily figure for water is given as 700 litres. About 80% of utilities bills in April 2012 fell within the ideal range, but these rates could go down in the summer months as the demand for air conditioning rises.

Another RSB programme seeks to educate consumers about peak demand, aiming to reduce electricity usage during weekday hours of 2-8pm, when draw on the power grid is highest. As of mid-2012, this programme, run by RSB’s Powerwise, was still in early stages, with the regulator working to recruit 400 volunteers for a trial that would last about 16 months. Those who agree to join the programme will have a monitor installed in their house, which will make it easier for users to see and optimise energy use. Participants will nominally be “charged” different prices for electricity usage based on time of day, but actual bills will not change. However, at the end of the trial, any savings earned will be passed on to participants. These programmes are only a sample of the various initiatives RSB is undertaking with the launch of two new offices, Powerwise and Waterwise, which aim to provide a range of services to help consumers use power and water wisely.

ALTERNATIVE SOURCES: The government is also considering alternative methods of generating electricity, such as nuclear energy and renewable sources. The goal is to supply 7% of the emirate’s generation capacity using renewable sources by 2020 (see analysis).

The push to invest in renewable energy is driven primarily by Masdar. This government-owned entity has three integrated business units and an independent, research-driven graduate university, Masdar Institute of Science and Technology. The three business units are Masdar Capital, which invests in clean energy and sustainable technologies; Masdar Clean Energy, which develops and invests in large-scale renewable power projects such as solar and wind farms; and Masdar City, a cleantech cluster and special economic zone under construction as a sustainable urban development.

Masdar is also responsible for Shams 1, a 100-MW concentrated solar power (CSP) plant, one of the largest CSP plants in the world and the first of its kind in the Middle East and North Africa. The plant is located in the western region of Abu Dhabi and should be completed by second-quarter 2013. It is being developed under a 25-year build-own-operate contract by Shams Power Company, a special purpose vehicle 60% owned by Masdar, 20% owned by Total and 20% owned by Abengoa Solar. Masdar has also invested in a photovoltaic (PV) solar plant, a 10-MW facility in Masdar City, and plans to build a 100-MW PV plant called Nour 1.

In 2008 the government published a policy for the evaluation and potential development of peaceful nuclear energy as an alternative for power and water generation in the UAE. The Emirates Nuclear Energy Corporation (ENEC) is responsible for the deployment, ownership and operation of nuclear energy plants in the UAE. It currently oversees the work of Korean Electric Power Corporation, the contractor chosen in 2009 to design, construct and operate four nuclear energy plants to be located in Al Gharbia. The first of the four plants, each of which will have a capacity of 1400 MW, is to come on-line in 2017, with one additional facility completed each year until 2020. Nuclear energy will provide baseload electricity to power growth while saving 12m tonnes of CO emissions each year.

CLEAN UP: Another element of utilities – the sewer system, mostly pertaining to the disposal of waste-water – is equally important given development and economic growth. A growing population creates a growing burden on the system, and the government has accordingly invested in an upgrade and expansion of sewage transfer and treatment. Efforts include building four new sewage treatment plants, which are being established in partnership with the private sector on a build-own-operate-transfer basis. They are known as independent sewerage treatment plants (ISTPs) and are similar to IWPPs in terms of ownership structure. Following a bidding process in 2008 to determine these partners, two entities – Al Etihad Biwater Waste Water and Al Wathba Veolia Besix Waste Water – were established, each responsible for two plants. Combined, these four facilities, three of which were operational as of mid-2012, will increase the daily wastewater treatment capacity by more than 800,000 cu metres.

The emirate is also investing in expanding its system of sewer tunnels used to carry wastewater to treatment plants. The Strategic Tunnel Enhancement Programme (STEP) involves the construction of a 41-km-long tunnel to carry wastewater from Abu Dhabi City to two ISTPs located in Al Wathba. When completed, the $1.6bn network will be able to carry 800,000 cu metres of wastewater a day, with its capacity to be increased to 1.7m cu metres per day by 2030. STEP has been under development since 2008, and as of April 2012, more than one-third of the development work had been completed, with nearly 15 km of excavations finished. The project was on schedule to be completed by early 2015. Based on the Singapore model of a main artery collecting the bulk of wastewater under gravity conditions and a final pump up to the surface at the receiving end, the programme’s expected lifespan is at least 100 years, and the project will replace many pumping stations, saving power and reducing carbon output.

OUTLOOK: Over the past decade, the Abu Dhabi utilities sector has undergone a profound shift, from an entirely government-run operation to an unbundled model with a role for the private sector. With demand for utilities expected to continue growing, more investment opportunities should arise, whether in power and desalination plants, electricity and water transmission systems, solar and wind projects, nuclear energy or the provision of sewerage services. Utilities investments do not usually make headlines, but they typically generate steady returns, which are attractive for investors, especially during uncertain global economic times.