The Price of Power

Economic News

22 Jul 2010
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Dubai is moving to cut electricity consumption while at the same time investing heavily to boost output and meet soaring power demands from industry, business and households.

Dubai has the dubious distinction of having one of the worst carbon footsteps in the world, with average annual per capita electricity consumption running to 20,000 KW. Combined with water usage of 130 gallons a day per person and the Emirate is repressing its utilities.

However, the Dubai Electricity and Water Authority (DEWA) has just returned the favour. As of March 1, it introduced a new pricing schedule where users will pay according to their level of consumption for both its water and electricity services. While the utility has stressed that around 80% of clients will not be affected by the new rates, based on a sliding scale of consumption, the other 20% could be hit hard in the pocket.

Saeed Mohammad Al Tayer, DEWA's chief executive officer, said it was necessary to implement responsible energy consumption strategies.

"The community has to be more reasonable in the way resources are used," Al Tayer told local press on February 28.

Under the siding scale of payments for power usage, high-end consumers could end up with electricity bills 65% more expensive this month than in February. According to a report by facilities management firm Farnek Avireal, the new price increases will have a major impact on businesses and the hospitality industry. The higher tariffs will add up $2.7m each year to the current $4m power bill of a five star hotel and $540,000 to the $810,000 presently being paid by the management of an office tower on the Sheikh Zayed Road.

Another step by DEWA to both reduce carbon emissions and increase electricity production was taken in late February, when the authority signed a memorandum of understanding (MoU) with an international consortium to undertake a study into building the world's largest hydrogen-fired power station.

Under the proposal, a 2000 MW facility will be built in two stages, the first coming on line in 2011 and the second in the following year. The plan calls for synthetic gas to be produced from coal in the US and shipped to Dubai for use in the station.

The $3bn project will not produce any emissions, in Dubai at least, though it will be more expensive to construct than a conventional power station of similar output. The hydrogen generation model is also somewhat experimental, with only a limited number of power stations using the application, an issue that might make finding financial backing difficult.

Signing the MoU on February 24, Al Tayer said DEWA was trying to diversify its production sources as much as possible to protect the environment and reduce the authority's reliance on gas for power generation.

However, Dubai is also sending out a few mixed messages over its commitment to resort to clean energy, having announced plans for building coal fired power stations to help meet electricity demands. In February, Dubai's government announced it was considering constructing plants with a combined output of between 2000 and 4000MW, using coal as the main fuel.

Dubai, along with a number of other places in the region, is actively considering developing nuclear energy, though such a proposal is more long term than the more immediate plans for coal and hydrogen fired power stations.

It has also been suggested that DEWA's restructuring of its tariffs had more to do with its poor financial results, losing $63m in the first seven months of last year. Not having increased prices for electricity since 1998, the new hikes are going to come as a shock to some.

The higher costs for utilities can be expected to flow on to prices throughout the economy, as businesses seek to pass on the pain of increased tariffs. This in turn could fuel inflation, which come analysts have predicted could hit 12% across the UAE this year.

Abdullah Al Hajri, DEWA's corporate communications manager, played down the likely impact of the increased charges, saying the higher prices will be offset by reductions in usage.

"We are trying to encourage people to conserve electricity and water," Al Hajri reported on March 3. "With minor changes to the way residents use energy, they can ensure they are not affected by higher tariffs."

It is not sure whether Dubai's businesses and citizens can switch on to lower energy consumption by being turned off by higher prices. Still, with the increase in electricity usage running at 15 to 20% a year according to DEWA figures, there is a powerful current of consumption that must be reversed.

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