Enlarging the grid with an array of new power projects

In addition to ambitious production and refinery expansion plans, the Kuwaiti government is also moving to rapidly enlarge and upgrade its power grid. With recent refinery shutdowns highlighting the country’s energy vulnerabilities, and domestic consumption of heavily subsidised electricity continuing to rise, the country’s power grid is in urgent need of new supply sources. The efforts of the Partnerships Technical Bureau (PTB) to roll-out power projects under a fledgling public-private partnership (PPP) scheme have seen some recent success, with the country’s first ever independent water and power plant (IWPP) making strong progress in 2013, creating a spirit of cautious optimism that power projects will continue to gain momentum in 2014.

High Consumption Levels

Kuwait’s extreme weather and harsh environmental conditions have posed problems for developers and contractors, although private sector involvement and enhanced technical expertise should still see new builds finished on time. The real challenge for the authorities lies in reducing energy use among citizens. The Ministry of Electricity and Water (MEW) is the sole supplier of both electricity and water resources in Kuwait, and is also the central regulatory body that manages supply and demand within the country. Kuwait relies on oil and natural gas to generate electricity, although natural gas accounts for just 9.3% of total power generation, according to independent ratings agency Capital Standards.

In its 2013 “Kuwait Utilities Sector Report”, Capital Standards indicated that the country has some of the highest per-capita energy consumption in the world, owing in large part to its extreme climate. Electricity use has increased by 20% between 2009 and 2013, according to the MEW, jumping from just under 10,000 MW in 2009 to 12,060 MW in 2013.

“In 2010 our expectation was 10,500 MW of consumption, which grew to 10,890 MW because the temperature was two degrees higher than we expected. Each additional degree takes 180 MW extra from the grid. Since 2010 we’ve seen annual increases of between 2% and 5%,” Suhailah Marafie, director of the department of studies and research at the MEW, told OBG.

Rising Demand

Capital Standards reported that Kuwait uses almost 300,000 barrels per day (bpd) of oil for electricity generation, with consumption expected to rise to as high as 900,000 bpd by 2030. In addition to causing long-term environmental damage and affecting power stations’ efficiency, the projected growth in consumption will put a significant dent in the country’s oil revenues. “Availability in 2014 is 14,300 MW, compared to an installed capacity of 15,349 MW. Availability is determined by the fuel type, so we have some 1000 MW of generation unavailable due to the type of fuel needed,” said Marafie. The abundance of easily available oil led Kuwait to rely on oil to meet its electricity demand, but the discovery of non-associated natural gas in the northern Jurassic fields, coupled with the Partitioned Neutral Zone’s Dorra gas reserves, estimated at 1trn cu feet, have led the country to increasingly turn to natural gas as a new power source.

The potential benefits of replacing oil with natural gas in electricity generation are enormous. According to Abdullatif Al Houti, managing director of international marketing at Kuwait Petroleum Company, the nation sold an additional $300m of oil in 2010 by switching to natural gas for some of its energy production. As the government moves forward on the construction of a host of new power stations, gas-fired plants will account for the majority of the new builds.

Subsidies

In addition to fuel supply issues challenging growth, Kuwait’s heavily subsidised electricity has negatively affected the consumer impetus to reduce usage. Electricity in Kuwait is charged at two fils ($0.007) per KWh, a fraction of the 38 fils ($0.13) it costs to produce. Prices have remained the same since 1966, when electricity costs were cut from 27 fils ($0.09) per KWh. The MEW’s electricity and water subsidies are as high as 95% of the original cost of manufacturing, according to Marafie. With the expected increase in consumption, total subsidies are projected reach KD9bn ($31.6bn) by 2030. The budget for the fiscal year 2012/13 listed the total government subsidy for consumer services at KD6.3bn ($22.2bn). Out of this, KD3.1bn ($10.9bn) was allocated for electricity, with costs exacerbated by energy-intensive desalination plants.

Proposed Tariffs

The MEW has been working since 1993 to introduce a new tariff structure, in which the consumers will pay two fils ($0.007) per KWh for their first 6000 KWh of consumption, three fils ($0.01) per KWh for 6000-9000 KWh and five fils ($0.02) per KWh for anything over 9000 KWh of consumption. “We are helping people who use a lot of electricity to reduce their usage, but there is a mentality that people do not want to accept an increase. People pay $350 per month for mobile and internet, but they will not pay for electricity because they think it’s their right,” said Marafie.

Although Kuwait’s capacity has risen from just under 11,000 MW in 2010 to over 14,000 MW in 2014, generation growth rates are not keeping pace with demand. In a November 2013 presentation at the MENA Energy Conference hosted in Abu Dhabi, the MEW projected that new developments, including housing projects, upstream oil expansion and rising consumption in the commercial and industrial sector, will create demand for an additional 10,500 MW of power by 2020.

Private Sector Involvement

A decade ago Kuwait had one of the healthiest power reserve margins in the region, but between 2000 and 2006 the state did not award any power station construction projects, even as peak power demand grew by 8% annually during the period. An emergency power plan enacted in 2007 sought to add 1600 MW to the grid by 2009, with ever-increasing energy demands necessitating further construction of new power plants and substations. Under the 2008 PPP law, the PTB is in charge of developing all power projects with a capacity over 500 MW, with the bureau working to develop the state’s two largest projects, Al Zour North and Al Khairan, under a PPP model. The country’s IWPP law was introduced to clarify the legislation, opening the door to new IWPP projects.

The MEW’s 2010-14 budget lists 13 planned power station and desalination projects, for a total cost of KD2.8bn ($9.8bn), 27 water project plants totalling KD1.13bn ($4bn), 62 electrical transmission projects worth KD2.4bn ($8.4bn) and nine electrical distribution plans which are estimated to cost KD550m ($1.9bn). However, progress at many projects has been slow, in part due to delays in obtaining final project approval.

“The approval of projects is the problem, as it can take a long time. The process of contract review, debate and ensuring there has been no deviation in the plan can be quite protracted,” said Marafie.

Challenges

Furthermore, the ongoing trend of choosing the lowest bid in awarding tenders for new power projects could negatively impact planned facilities’ lifespans, as materials needed to withstand Kuwait’s blistering summer temperatures are many times more expensive than they would be for projects in cooler climates. “Temperatures can go as high as 55°C in the summer in the shade, and within these facilities it can reach up to 80°C. As a result, facilities really need to be over-designed, sometimes using military-grade materials that can withstand the heat and salt. The cost is four or five times higher to build power stations in the Gulf compared to in Europe,” Mazin Nayef, a technical professional specialist at the Kuwait Oil Company, told OBG.

Although the past decade saw a host of stalled projects in the energy sector, 2013 and 2014 have been marked by forward movement, necessitated by rapidly growing consumption. Work is moving ahead on Al Zour North, the country’s first IWPP, which will include a 1500-MW power plant and 486,000-cu-metre-per-day desalination facility. Al Zour North was the first project launched under the IWPP law, representing a tremendous step forward for Kuwait, which had been the last GCC member to implement an IWPP project. It will be funded by $1.43bn in private sector financing, and eventually provide 12% of Kuwait’s installed power generation capacity and around 23% of its installed desalination capacity. A consortium including GDF Suez, Sumitomo and AH Al Sagar & Brothers won the country’s first ever PPP for Al Zour, establishing a special company in which the consortium holds a 40% stake, the government holds 10% and 50% is slated to be distributed to citizens as free shares. The plant’s output will be purchased by the MEW under a 40-year long-term energy conversion and water purchase agreement. In December 2013 the group’s engineering, procurement and construction partner, a group led by South Korea’s Hyundai Heavy Industries, announced it had had won a $1.4bn tender to build the project’s first phase, expected to wrap up in 2016. The Hyundai Heavy Industries consortium is now viewed as a favourite for the planned phase two tender, for which the PTB requested expressions of interest in April 2013.

The PTB invited expressions of interest in December 2013 for its planned Al Khairan steam-turbine power plant. “Al Khairan was supposed to be a 2500-MW combined-cycle plant, but we received a land extension from the municipality, so now it will be 4500 MW. We hope to award tenders within a year,” Marafie told OBG.

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The Report: Kuwait 2014

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