The announcement of Bahrain’s 1000 MW Al Ezzel project at the end of July was interesting news. Certainly it came at the perfect time with Power-Gen Middle East taking place in Bahrain just six weeks later. No doubt the region’s continuing trend towards building IPP projects and how the market might unfold will be a hot topic of discussion.
Al Ezzel is Bahrain’s first IPP project and begs the question: is this the first key step in the government’s move towards possible privatization of its power and water sector? The contract to build the plant was awarded by the Ministry of Finance and National Economy to a consortium of Tractebel EGI and its partner, Gulf Investment Corporation. Under the $500 million contract, the consortium will build, own, operate and maintain the plant and sell electricity to the Ministry of Electricity and Water under a 20-year power purchase agreement.
The project is critical to Bahrain. The Kingdom’s total generating capacity is currently 1879 MW. This includes 275 MW which has historically been available from Aluminium Bahrain (Alba) – the supply agreement between Alba and MEW will expire this year. Bahrain has experienced an average annual growth of 6.5 per cent in peak demand over the last five years. Peak demand currently stands at about 1650 MW and is projected to reach 4312 MW by 2020.
The first phase of Al Ezzel will come on line in April 2006, just at the point where projected peak demand would outstrip installed capacity. After this, another power plant with a target capacity of 3000 MW will be considered. The first phase of this plant would come on line in 2011. It is not known whether this plant will be built by the private sector.
Certainly Bahrain has been cautious in its approach to private sector participation in power when compared to other countries which have similar power needs. For example, in Qatar the average annual growth rate for power demand is around 8-9 per cent. Installed capacity is currently just under 3000 MW and forecasts expect this to reach just over 5000 MW by 2012. Qatar completed privatization of all its power and water plants in 2003.
Meanwhile Oman has an installed capacity of about 2400 MW with consumption increasing at 4-5 per cent a year. The country sold its first power plant to the private sector in 1996 and in 2001 sold a 200 MW plant in Salalah to Dhofar Power Consortium. Notably, this was the first deal in the region to cover generation, transmission and distribution. At the same time, Oman has established a number of greenfield IPP projects.
The reason for privatization of the electricity sector in these countries seems to be linked to policies of economic diversification; the promotion of foreign investment and creating private sector jobs. This may also be the thinking of the Bahrain government. Commenting on the Al Ezzel deal, Marc Josz, regional manager of Tractebel EGI said: “The government of Bahrain has successfully created an environment conducive to attracting the private sector to invest and operate in its power sector.”
Nevertheless, the benefits of privatization and unbundling in relatively small markets such as these are not obvious. In large western generation systems there may be pressure to create a situation where competition is needed to drive down electricity prices; or introduce efficiencies that seem to naturally occur in the private sector. In countries like Bahrain, this is not the case. There is also no real urgent need for the government to sell off assets to raise funds as in developing countries.
It is therefore no wonder why Bahrain has been cautious about privatization. The normal reasons do not necessarily apply. There is also little experience to draw from in the region – any benefits that its neighbours might have gained are as yet unclear.
The development of IPPs is sound practice for adding power quickly; it promotes private investment and provides private sector jobs. It also gives the national utility the opportunity to become familiar with best practices in power plant build and operation. To go beyond IPPs to full privatization is a game which Bahrain may not need to play.
Junior Isles, Publisher & Editorial Director