The Price of Power


Economic News

22 Jul 2010
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Qatar is stepping up its already extensive investment programme in an effort to get ahead of the country's rapidly increasing demand for electricity and water, while investigating ways to cope with the rising costs associated with increased production.

On March 26, the Qatar Electricity and Water Company (QEWC), the country's partly privatised utilities service provider, and Qatar Petroleum (QP) signed an agreement with Brussels-based Suez Energy International and Mitsui of Japan to build and operate a new power and water production facility at the Ras Laffan Industrial City (RLIC).

The $3.8bn development, due to be completed by April 2011, is part of Qatar's drive to meet growing electricity and water needs. The build-operate-own-transfer agreement foresees the construction of a combined plant that will generate 2730MW of electricity and produce 63m gallons of water a day. The plant's output will be sold to utilities distributor Qatar General Electricity and Water Corporation (Kahramaa).

The unveiling of the new project comes hard on the heels of the opening by Qatar's Emir, Sheikh Hamad bin Khalifa Al Thani, of a $900m water and electricity plant, also located at the RLIC, on March 24, the country's second such independent facility. A joint venture between QEWC, British firm International Power and Japan's Chubu Electric Power, it will add more than 400MW of electricity and 45m gallons of water daily to Qatar's utilities output.

Earlier in the month, Kahramaa awarded contracts worth $329m for the expansion of water supply networks and pipelines, while QEWC announced plans for a water desalination plant at Ras Abu Fontas.

These major infrastructure projects are considered essential. According to local press, Qatar's demand for water and electricity over the next five years is due to rise by 11% and 17% percent respectively. While existing developments and new projects are expected to more than double electricity and water output by 2012, this will come at a cost.

The massive spending on infrastructure is seen as one of the factors that has heated up inflation, with demand for building materials and labour making a significant contribution to the doubling of prices rises since 2006. Qatar's inflation rate reached around 14% in 2007, double that of the preceding five years.

In its annual review of the Qatari economy, issued at the end of December, the International Monetary Fund (IMF) warned high levels of state spending would likely undermine measures aimed at reining in inflation, such as capping rental increases.

"In light of this, directors recommended restraint in current expenditures and the phasing of development expenditures in line with the absorptive capacity of the economy and Qatar's medium-term priorities," the review said.

However, in the short term at least, it does not appear that Doha will heed the IMF's warnings. The Qatar government is due to hand down its 2008-09 budget at the beginning of April, and analysts are predicting a further increase in overall expenditure and a focus on infrastructure projects such as those being undertaken to boost utilities services.

If so, it would follow distinct pattern of the past few years. According to the Qatar Central Bank, public spending for the financial year 2004-05 was $9.9bn, climbing to $18.2bn in 2006-07, with two-thirds of this directed to major projects.

Measures to recoup some of these expenses are in the pipeline. On March 26, local press reported a committee of representatives from state agencies and authorities had been established to consider the possibility of requiring nationals to pay for the water and electricity they consume. Currently, most of these services are provided free.

Part of the costs for these services is falling directly on the QEWC, which on March 10 reported a 20% fall in net profits last year, down from $212m in 2006 to $168m last year.

Though fuelling inflation, Qatari officials are adamant the short-term price must be paid to ensure long-term security of services. Abdullah bin Hamad Al Attiyah, Qatar's deputy prime minister and minister of energy and industry, said large-scale investments such as those at Ras Laffan were essential for the future of the country.

"We need to raise power and water output to cope with consumption requirements in the country as it continues to grow," he told press on March 26.

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