Tim Probert, Deputy Editor
Credit crunch, financial crisis, global recession, downturn. Whatever you call it, it is here, even in the cash-rich Gulf. Understandably, much of the talk at February’s POWER-GEN Middle East conference in Bahrain concentrated on the implications for the power sector during the current economic climate.
Having read on the flight over to Manama some particularly gloomy reports that Dubai had flipped from beacon to basket case due to a 60 per cent collapse in property prices, I had been expecting similar tales of woe from the power industry. Several large independent water and power projects (IWPP) have been delayed in recent weeks, not least the $5.5 billion Ras Al Zour IWPP in Riyadh, Saudi Arabia and the Al Durr IWPP in Bahrain itself.
Most of the delays are, of course, due to financing issues. There are fewer banks actively involved in the Middle East and an increasing number of contacts on the other end of the telephone are no longer there to take the call. The squeeze in supply of credit has, perhaps unsurprisingly, pushed up the price of credit from the banks that are still looking to finance projects. In the conference halls, delegates heard that the financial crisis would not only reduce the availability of funds for infrastructure investment, but also curtail GDP growth and therefore load demand growth. AJ Goulding, of London Economics International, said that even solid, ‘no story’ projects tendered by creditworthy customers were still attracting significantly higher percentage basis points costs, adding that gilt curves had steepened – despite the almost zero interest rates in many nations leading to higher leverage costs.
Mr Goulding suggested the Gulf region needed to address tariff reform, although he acknowledged that such moves were now further away due to the downturn. Tariffs as they are, he said, offered relatively little return for power generators, something that may need to change in a capital-constrained world.
That said, the Middle East was already in an investment deficit before the current financial crisis and with load growth projected to grow at around six per cent a year, there is still a huge thirst for power and water projects in the region. Bernard Magné, economist with the International Energy Agency, said in his keynote address that the short-term financial concerns could lead to longer-term problems, and he appealed to governments to maintain investment plans.
According to Magné, the Middle East region needs to spend a total $500 billion until 2030 in its power infrastructure 62 per cent in transmission & distribution and 38 per cent in power generation in order to meet annual electricity demand growth of 4 per cent. He said: “The current financial crisis may be sowing the seeds of an energy investment crisis. Energy prices will rise again. Despite the credit crunch, the industry needs to maintain investment in order to avoid a supply crunch.”
Back in the conference halls, delegates heard that for many companies the credit crunch had almost, but not quite, come as some relief with their order books full to bursting. That said, EPCs were advised to be extremely selective in the projects they take on in the short to medium term, due to severe risks around execution.
This year’s plenary session was entitled, ‘Ten Years of Privatization’. This retrospective threw up a number of criticisms of the inefficient model of power sector privatization adopted by some Middle East nations. While independent power projects (IPP) and IWPP had delivered a huge increase in power capacity, many were concerned that transmission and distribution networks had been relatively neglected.
H.E Fahmi bin Ali Al-Jowder, Bahrain’s Minister of Works (responsible for the Bahrain Electricity & Water Authority) addresses POWER-GEN Middle East 2009 delegates
The problem, so delegates heard, stems from the fact that IPPs are paid on a fixed price availability basis and not on a per kWh production basis. Producing electricity in this way has not only led to problems with the grid, it also offers no real incentive to address the problem of inefficient transmission and distribution. Others said that there was a huge potential for conductors to be uprated in order to boost the capacity of transmission lines in the region.
To this end, the GCC interconnector was seen as offering some rays of hope. During the session, Ahmed Ali Ebrahim of the GCC Interconnection Authority announced that at 14:01 local time on 17 February, the GCC grid interconnector at Al Zour in Kuwait had been energized for the first time. The first part of the first phase of the ‘backbone’ GCC grid interconnector project the 1200 MW link with Saudi Arabia is expected to be fully operational by the end of April.
It is expected that the GCC grid will accelerate the production of new power capacity in the region particularly peak load IPPs – providing more power to end-users and a more secure power supply overall. However, those expecting the GCC interconnector to facilitate a liberalized, full-scale energy trading system as found in some parts of the world would be disappointed.
The primary aim of the GCC interconnector is to provide a shared spinning reserve, although there will be some spot trading of excess, ‘unregulated’ capacity in due course. There will need to be a major restructuring of the GCC’s power structure if ambitions of a Middle East-North Africa-European electricity trading system are to become reality.
Ambitions abound in the field of renewable energy in the Middle East. With around 3000-3500 hours of sunshine per year and vast deserts offering the required space, the region is ideal for the development of solar energy. It is perhaps unfortunate, then, that another natural resource with which the region is blessed natural gas is making solar power uncompetitive, due to subsidized supplies.
Comparing the implementation of solar energy in Europe with its potential in the Middle East Professor Andrea Vacca, CEO of Italy’s EURO ESCO, said that solar power would be unviable without government subsidy to facilitate an acceptable payback time, although relatively cheap labour costs would mitigate the need for state support.
More than two thousand power industry professionals attended POWER-GEN Middle East 2009 in Manama, Kingdom of Bahrain
Paddy Padmanathan, CEO of solar energy developer ACWA Power Projects, was greatly more optimistic. Mr Padmanathan wanted to see some government support to ‘kick-start’ solar power in the Middle East but, thanks to global research and development, he expected the technology to be competitive with natural gas – subsidized or otherwise within five years.
This statement raised a few eyebrows, leading one representative of a major global bank present at the session to ask Mr. Padmanathan if he was free during the luncheon interval!
This year’s POWER-GEN Middle East conference introduced a nuclear session. In truth, the session posed more questions than it answered.
Delegates heard that the costs of nuclear power in the Middle East compare favourably with other sources of power, it also offers Gulf nations one of the better ways to diversify its heavy reliance on natural gas fired power generation whilst simultaneously lowering some of the highest carbon footprints in the world.
However, Alistair Smith of Parsons Brinckerhoff Power said that the highly cyclical nature of power demand in the Middle East i.e. high in summer, low in winter, raised doubts over the desirability of the baseload-only, relatively constant, often very large output inherent with nuclear power stations. That said, Mr. Smith did foresee a need for a small number of reactors hooked up to a fully operational GCC interconnector, perhaps run on a joint basis between the various GCC member states.
If the Gulf was to go nuclear, then governments will need to make the region more attractive to nuclear builders by way of clear policy frameworks and provision for dealing with spent fuel.
For the second suceesive year, POWER-GEN Middle East 2009 held a water track. Three days of water-related conference sessions offered delegates a comprehensive examination of the region’s potable and wastewater potential.
A panel discussion highlighted unsustainable water management practices, which had led to an astronomically high per capita water consumption of around 600 litres a day, more than three times the average in OECD nations.
It was proffered that water could ultimately be traded in the Middle East on a credits system akin to carbon dioxide in Europe, but the first priorities are clear: improve water loss and reduce per capita consumption. Unfortunately, water is so cheap it is often sold below cost-recovery price there is little incentive to be less profligate.
The panel, which included representatives of the United Nations, Black & Veatch, Dow and the International Water Association, called for a more integrated approach to water supply management, pulling together environmental, social and sustainable polices that rewarded efficiency.
The financial crisis may lead to less investment in water technology, but more in water management practice, it was said.
When POWER-GEN Middle East returns, on 1st November 2010 in Doha, Qatar, the worst of the financial crisis should be over. In the meantime, the business of building power stations carries on as usual.