HomeNewsCredit crunch: Can the Middle East avoid a nasty bite?

Credit crunch: Can the Middle East avoid a nasty bite?

The timing could hardly be worse. As the raging heat of summer beats down on a region vulnerable to power cuts due to often desperately overburdened national grids, reports that the credit crunch is affecting the viability of power projects all over the world are untimely and unwelcome.

The demand for power in the Middle East has never been greater. It is estimated that in the Gulf Cooperation Council (GCC) states ” Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates ” demand could outstrip supply by an eye-watering 35 per cent by 2010. The World Energy Council estimates the requirement for additional power demand in the GCC countries at 100 GW in the next ten years.

The link between economic growth and electricity consumption is well documented, but matters are coming to a head in the Gulf. The lack of spare capacity in power grids threatens to severely hamper economic growth; in June, a major retail construction development in the lesser-known emirate of Ajman was cancelled for this very reason.

Where construction projects are built they are often completed without sufficient access to the grid and, as a consequence, go uninhabited for months on end. As explored in this issue’s Country Focus, Kuwait has suffered from regular power cuts in recent years and this summer even its hospitals have been plagued by the dreaded load shedding.

Enter the credit crunch. Recent reports from India, another country experiencing rapid growth, that power companies are delaying billions of investment plans because depressed global markets are making it hard for them to raise the necessary financing are a concern.

Even Abu Dhabi, the wealthiest city in the world, is affected. Peter Barker-Homek, CEO of Abu Dhabi National Energy (Taqa) has said that problems raising capital could hold back its expansion plans. The problems experienced in India need not necessarily apply to the Middle East. After all, the stratospheric rise in the price of crude oil has left several states swimming in a vast ocean of petrodollars, a.k.a Sovereign Wealth Funds.

But despite these riches, the GCC nations cannot possibly meet its urgent need for electricity by themselves. A year after the credit crunch began major international investment banks are still, however, being ultra-cautious in their dealings with power companies. Financing for power generation in the Middle East is challenging as international and local banks cautiously weigh up the effects of the global credit crunch.

Even then, simply throwing money at the problem may not make it go away. The GCC needs to look at the limitations of its power industries, in particular its regulatory framework that is hindering investment.

Of course, the Gulf States have taken steps to address this. Governments have changed laws to permit private and foreign ownership of power infrastructure. But it is now clear that the Gulf model of deregulated markets has not led to a stampede of foreign investors falling over themselves to be part of a gold rush.

Due to the heavily subsidized, state-controlled electricity markets, Gulf States can only offer fixed power purchase agreements and not the true ‘market value’ of the electricity, many potential foreign investors say that the new frontier does not offer quite the lucrative returns as hoped.

Rising construction costs and a shortage of material and skilled operating and construction staff is also hampering efforts, while trying to figure out ways to pass on the high costs to consumers is also causing headaches for governments.

The light at the end of this rather gloomy tunnel is the GCC Interconnector, set to come online in 2010. It is hoped that this vital power grid, which will supply electricity to all GCC nations will lead the way to greater liberalization, as well as a regional electricity spot market.

The prohibitive costs of constructing and maintaining such power plants could mean that governments will have to offer a greater share of power generating utilities and other assets likely to be privatized in an attempt to increase efficiency and reduce costs.

Tim Probert