Independent effort: Public utilities may become a private sector responsibility

The twin concepts of independent power producers (IPPs) and independent water and power projects (IWPPs) are well established in the GCC. According to the Electricity and Co-generation Regulatory Authority of Saudi Arabia, some 24,000 MW of the region’s total capacity was derived from IPP/IWPP projects in 2010 – a figure which the authority anticipates will rise to 55,000 MW by 2015.

MANY ADVANTAGES: The popularity of the model rests on the advantages it offers regional governments facing rising electricity demand on the one hand and a desire to curtail state spending on the other: co-opting the private sector obviates the need for the government to provide massive up-front funding; the new projects benefit from private sector expertise and discipline; the cost of produced power and water is reduced by the competitive nature of the process; and a pipeline of large-scale developments with private-sector involvement does much to enhance the wider business environment of the nation, helping to make it a more favourable destination for foreign investment.

Oman was an early adopter of the IPP/IWPP model, undertaking its first project in 1996 and consistently adding to its capacity using the method ever since. Qatar and Bahrain have both successfully established numerous IPP/IWPP projects in the last decade, making them an integral part of their respective power generation strategies. However, it is the UAE and Saudi Arabia that have been particularly assiduous in their adoption of the model to meet their expanding electricity demand, accounting for all of the nearly 12,000 MW which were added to the region’s capacity by IPP/IWPP projects in 2012 and around two-thirds of the 7000 MW that is slated to be added in 2013. Kuwait is the only GCC country yet to complete an IPP/IWPP project, with the state retaining ownership of all water and power generation. This, however, is about to change.

A PRIVATE AFFAIR: Since 2008 the government of Kuwait has been establishing a regulatory framework that will allow it to harness private sector capital in the service of the nation’s power generation needs. The public-private partnership (PPP) law, Law No 7/2008, and its executive regulations set out the governance framework for the PPP programme and defines the roles of the Council of Ministers, the Higher Committee, the Partnerships Technical Bureau (PTB) and other public entities in it. In 2010 a new I(W)PP Law (Law No. 39/2010) elaborated in greater detail the building and implementation requirements to be applied to firms undertaking power and desalination projects as part of a PPP. The promulgation of the new legislation brought Kuwait into line with regional jurisdictions that had already attracted private sector investment to large power and water projects, and takes a preeminent position within the Kuwaiti legislative canon: in the case of a conflict with other legislation, including the older PPP law, the I(W)PP law is to take precedence.

Within a few weeks of the I(W)PP law’s adoption, the PTB – the body set up in 2008 to oversee the implementation of PPP projects – appointed the transaction advisor for the nation’s first IWPP project. The Al Zour North IWPP project Phase 1 is the first stage of a five phase development plan which will establish a power and water production complex with a total capacity of 4800 MW and 280m imperial gallons per day (MIGD).

Phase 1 encompasses the design, engineering, construction, operation, maintenance and transfer of a power and desalination plant with a capacity of at least 1500 MW and 102 MIGD. Located at the Al Zour North site approximately 100 km south of Kuwait City, the new plant will use combined cycle gas turbine technology to generate power and an open source desalination technology to produce water that will be delivered to a nearby reservoir via four new pipelines. The sale of the water and power from the new plant will be overseen by an Energy Conversion and Water Purchase Agreement (ECWPA) for a period of 40 years, a limit determined by the new law. In accordance with the provisions of the PPP law and I(W)PP law, a public joint stock company was set up by the government to undertake the project, with the provision that up to 40% of it would be offered to the successful developer following a competitive tendering process. A further 50% of the company’s shares are to be offered to Kuwaiti citizens through an IPO to be held prior to financial close. By March 2011, 11 consortiums comprising 23 companies had applied for the tender, a level of interest that demonstrated the efficacy of the new legislative framework in attracting private sector interest. In February 2012 the PTB selected a consortium consisting of the UK/French IP-GDF Suez, Sumitomo of Japan and local firm AH Sager & Brothers as the preferred bidder for the project. The decision represented the passing of an important milestone in the government’s plan to introduce a private-sector approach and capital to the power and water sector: as the first project of its type the scheme first had to overcome political opposition in the National Assembly which threatened to see it scrapped entirely. After two investigations, including one carried out by the State Audit Bureau, the nation’s first IWPP project was given a clean bill of health and the contract was finally awarded in January 2013.

KEY IMPLICATIONS: The significance of the Al Zour project extends further than the new electricity capacity it will bring to the national grid; the project’s successful commencement looks set to open the door to further IWPP developments with the capacity to address Kuwait’s future power and water demand. In April 2013 the PTB announced that it was seeking expressions of interest for the second phase of the Al Zour North IWPP, the deadline for which is June 2013. And while the Al Zour development has been progressing, the PTB has already started the tendering process for its second IWPP project. The site chosen for the new project is located in Al Khiran, near the southern border with Saudi Arabia. Under an earlier proposal the Ministry of Energy and Water was to establish a series of small power and water plants at the site. However, as the I(W)PP law stipulates that all power projects with a capacity of more than 500 MW must be procured using private finance and developed by the PTB, when the project was redesigned around a single, larger plant the MEW relinquished responsibility for its development.

In March 2013 the PTB appointed a consortium comprised of BNP Paribas, Chadbourne & Parke and Lahmeyer International to advise on the project, current plans for which propose a capacity of 2500 MW using conventional thermal steam technology. The proposed fuels include low sulphur fuel oil, gas oil, crude and natural gas. The seawater desalination plant will have a minimum capacity of 125 MIGD and will utilise multistage flash, multi-effect distillation or reverse osmosis technology. As with the Al Zour development, the Al Khiran IWPP project will be set up as a special purpose vehicle in which Kuwaiti citizens will be offered a stake and revenues will be governed by a 40-year ECWPA.

Both projects represent significant successes for Kuwait’s PTB and augur well for government plans to increase the role played by the private sector in new areas. Kuwait will join its GCC neighbours in successfully adding electricity capacity via an IWPP model.

You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Kuwait 2013

Energy chapter from The Report: Kuwait 2013

Cover of The Report: Kuwait 2013

The Report

This article is from the Energy chapter of The Report: Kuwait 2013. Explore other chapters from this report.