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The Gulf: IWPP utopia?

An overview of the Middle East power market from the perspective of the region’s leading IWPP developer, International Power.

by John Hurst, International Power

We view the Middle East power market as one of our key growth areas, and over the last six years we have become the leading developer in the region for the development, ownership, operation and maintenance of independent water and power projects (IWPPs).

International Power’s growing power asset portfolio in the Middle East.
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The assets in the region that we have gained an interest in from 2002 to the present day are approaching a gross output of 7000 MW. Furthermore, we believe that the future potential is extremely positive as the region continues to develop at a rapid rate.

Middle East market

The focus of the Middle Eastern market is on Oman, UAE, Saudi Arabia, Qatar and Bahrain, but opportunities arising in Kuwait and Dubai should be monitored closely as the pressures to meet demand increase and the benefits of IWPPs become more apparent to the appropriate off-takers. The majority of future projects are expected to be combined power and water projects, and developers will be expected to bring experience in desalination as well as power to the table.

Currently International Power has an interest in the operation and maintenance of over 300 MIGD of desalination plant, and therefore have gained a thorough understanding of the complexities of the interaction between and the integration of power and water plant, both during the construction of a new plant and through its life cycle.

The right technology

The technology of choice has consistently been the highly efficient combined cycle gas turbine, with the levels of supplementary firing of the heat recovery steam generators adjusted to suit the steam demands of the thermal process desalination plant. The allocation of gas to power projects has come under detailed scrutiny recently because upstream allocations for other major industrial projects and LNG sales commitments are in conflict. We have seen some of our plant being requested to operate on back-up oil for extended periods this summer.

Alternative technologies are therefore being considered, and we expect that conventional oil fired power plant might be required for future major projects, with renewable technologies such as solar, waste to heat and wind given greater emphasis.

The focus on desalination technology has previously been on the thermal multi-stage flash stage process primarily because of its insensitivity to seawater quality. Significant advances in unit size to maintain competitiveness has occurred. Shuweihat in Abu Dhabi, for example, has the largest unit size installed and in operation in the world, each capable of producing 16.7 MIGD. Multi effect desalination, the other available thermal process, is another viable solution, and was introduced as the technology of choice for the Bahrain – Hidd project, which involved the addition of a further 60 MIGD.

Reverse osmosis desalination technology has also matured. The optimization of the combined power and water mix because of the wide range in power dispatch level through the year compared to the constant high water dispatch level has led to the introduction of this technology in recent bids, or a hybrid combination of thermal and reverse osmosis desalination plant.

Financial attractions

The political, legal and commercial structure of IWPPs and the success of projects implemented to date are ensuring that all new projects attract serious consideration from both international and local financial institutions, which are prepared to provide highly geared debt on a non-recourse basis at attractive premiums.

The acknowledged growth in the demand for electricity in the Middle East varies between 8-12 per dent per year. It is expected to continue at least at this level for the foreseeable future as the region attempts to develop with less reliance on oil and gas revenues, and diversify its focus into major industrial and commercial projects that include the tourist trade.

Between 1994 and 2000, the project costs of IWPPs in the Middle East were of the order of $3 billion while from 2001 to 2004 they rose to $6 billion. They are now forecast to increase to $18-20 billion between 2005 and 2008.

From this perspective alone it is not surprising that developers’ interest in this region is high. Although political issues both in the Middle East and in their home market have seen some developers leave or at least reduce their activity in the region there are now many new developers entering the region and winning power and water projects. This has the positive effect of encouraging greater competitiveness and more efficient implementation of projects, which is all good news for the off-taker.

Saudi Arabia’s decision in 2005 to proceed with IWPPs has contributed to the significant growth in the size of this market, and it is a key area for continued review and the long-term growth of companies such as International Power in this region.

Oman optimism

This country’s current market size is approximately 3000 MW. The IWPP process is well established here, with the recent Barka 2/Rusayl combined new build/acquisition of existing assets being awarded to Suez Energy.

New opportunities expected to arise in the near future are the 200 MW and 10 MIGD project in Salalah. In addition, we understand that the privatization of the existing Ghubra and Wadi Al Jizzi plants are currently under consideration.

UAE growth underway

UAE’s existing market size is approximately 8000 MW, and again the IWPP process is well established. The most recent published forecasts indicate that the market size needs to double by 2015. In our opinion this is probably a conservative estimate.

International Power made a bid for the next power and water project to be developed in Abu Dhabi, Fujairah 2, in November. The project, which is expected to be a combined 2000 MW and 100 MIGD new build, is important to our overall strategy of continued growth in the region. A gas fired combined-cycle power and hybrid desalination water plant is envisaged as the optimized solution.

Saudi Arabian prowess

It is the largest power market in the Middle East, with a present capacity of approximately 26 000 MW. Furthermore, the requirement for an additional 30 000 MW has been forecast by 2015.

The process for power and water projects in Saudi Arabia is still relatively new, and the range of technology for the power plant varies between the normal high efficiency combined-cycle gas fired plant and the crude oil fired conventional plant. The technology chosen is dependent on fuel supply allocation granted to the project.

Interestingly, the process for the completion of projects here is more complicated than in the rest of the region. Thus, it is essential to liaise with an in-country partner.

Not all projects will proceed on an IWPP basis. The timescales and fuel type are unclear. Indeed a Ras Azour project may be changed from the presently envisaged gas fired to oil fired only conventional power plant.

Qatar demand growing

Qatar’s present capacity is 3300 MW. The IWPP process is carefully controlled, with only selected international developers invited to participate with in country partners. This process has been undertaken for three projects (Ras Laffan A – 750 MW with AES, Ras Laffan B – 1025 MW with International Power and most recently Mesaieed – 2000 MW with Marubeni).

Increased infrastructure and greater power demand are envisaged in this country, and we believe many new opportunities are imminent, and therefore would look to participate in any the future IWPPs.

Bahrain ambitions

The island of Bahrain has extremely ambitious plans and is focused on becoming the leading regional finance centre for the region. The Harbour Development demonstrates this intent.

Bahrain’s existing capacity is around 2400 MW. Two IWPPs have been closed to date (Al Ezzal – 1000 MW awarded to Suez Energy and Hidd – 910 MW to International Power). We are ready to support the next project, which is under consideration by the Ministry of Electricity and Water.

Challenges ahead

An increasing number of developers are attempting to break into the market and some have succeeded. We welcome this because the size of many of the new projects means that it makes more sense to share the risks among developers, utilizing each of their specialist skills to optimize the bid.

Contractor headaches

To ensure that the finance is secured, any new plant needs to be secured under a date-certain, turnkey-engineer, procure and construct contract. There are few EPC contractors with the capability of accepting the associated risks, exacerbated by the present high level of work in the region, which means overloaded civil works contractors are not always prepared to fully support the EPC contractor until they are prepared to place orders. In addition – material availability and costing is volatile for example with copper, aluminium, brass and titanium; key equipment factories are full (especially transformers, high voltage switchgear).

EPC contractors tend to now partner considering their power and water capabilities and then decide which developer to work with in order to increase their chance of winning the contract. If the constraints become worse we can envisage further reduction in the number of EPC contractors, and therefore risk profiles that have become the norm may have to be reassessed.

We also believe that this is the reason why as a rule no more than three bids are submitted for an IWPP at the moment.

Plenty of room to grow

International Power’s primary focus is the generation of electricity, with an interest in nearly 29,000 MW of power plant in 18 countries and five core regions – Europe, North America, Australia, Asia, and of course the Middle East. At present just six per cent of our portfolio is located in the Middle East, but there is ample room and opportunity for further development within the region.

The significant increase in demand for power is here to stay for the foreseeable future and we are committed to support as best we can the provision of the generation capability in the long-term to meet it.