Rising demand has made the sector a magnet for investment

The economic success of Abu Dhabi over recent years, and the growth of its population, has led to rapidly rising demand for power and water. The authorities expect this growth to continue over the next decade, so the emirate has been pushing forward with a range of utility development projects to ensure that supply meets demand. Following reforms in the late 1990s, the sector is open to private investment, management and equity stakes in important segments such as power generation, while elsewhere, international contractors support government monopolies in developing infrastructure for the sector. The future will bring a broadening range of power and water projects as the emirate looks to diversify its utilities, with an emphasis on sustainability.

Demand Drivers

The growth of power and water demand in Abu Dhabi will provide attractive opportunities for investors and contractors for years to come, from power station construction and management through network upgrades to developing technology for demand-side management.

Power demand is growing by around 7.5% a year at present. The government-owned Abu Dhabi Water and Electricity Company (ADWEC) forecasts that gross power demand will rise to around 17.5 GW by 2020, requiring roughly 20.6 GW of installed capacity, including the Northern Emirates. It sees gross water demand rising to 1054m imperial gallons per day (MIGD). By 2030, demand will reach 26.2 GW and 1215 MIGD in ADWEC’s base-case scenario.

Demand will come from an expanding industrial sector – a major driver of economic diversification and central to the emirate’s development strategy – as well as the households of a growing population and other businesses. “It is important to sustain the growth, to be sustainable and to address infrastructure needs,” Saeed Al Suwaidi, the managing director of Abu Dhabi Distribution Company (ADDC), told OBG. “But there also needs to be a recalculation of the supply-demand dynamics to achieve better demand management.”

Supply Side

Looking at the supply side of the equation, the government is investing heavily in a range of power and water generation plants, from conventional gas-powered stations to the Gulf’s first nuclear power plant (NPP) and a promising renewables sector (see Energy chapter). The aim is to have a more diversified, cleaner power generation sector, as well as to meet rising demand. Investments are also being made in wastewater processing and technology that uses power and water more efficiently.

“The government has continued to invest in the emirate’s infrastructure, both greenfield and brownfield projects,” William Haddad, the chairman and founder of Mechanical & Civil Engineering Contractors, told OBG. “These investments are necessary in order to fulfil the objectives of Abu Dhabi Economic Vision 2030. We have seen an increase in demand for treated sewerage effluent and expanding Abu Dhabi’s wastewater network. That said, financial constraints are prioritised when undertaking such projects.”

Structure

Following reforms in 1998-99, the power and water sectors have opened up to the private sector and services have been partly “unbundled”, with regulation activities split from operation, while production, transmission and distribution, and supply were separated. Currently, transmission, distribution and sales are government run, but generation is increasingly in the hands of international investors, with all new capacity built since the sector was unbundled in 1998 procured through a competitive tendering process following the independent water and power producer (IWPP) model.

These changes established Abu Dhabi Water and Electricity Authority (ADWEA), a fully governmentowned entity, but with financial and administrative independence. Its main responsibility is to produce, transmit and distribute electricity and potable water in Abu Dhabi, though it has also recently become a power supplier to customers in other emirates both by building plants and through exports. In addition, ADWEA is responsible for overseeing the unbundling and restructuring process, with the aim of improving efficiency and cost effectiveness.

Partnerships

ADWEA forms partnerships with private sector investors for the development of power plants. Most of Abu Dhabi’s power generation comes from combined-cycle gas turbine power stations, though both nuclear and renewable energy are developing in the emirate, broadening the generation portfolio (see Energy chapter).

Development of alternative sources of energy should reduce the pressure on Abu Dhabi’s valuable natural gas supply, trim the growth of the emirate’s carbon footprint and lead to a more flexible power supply sector. It is also creating a range of opportunities for investors and contractors.

ADWEA’s fully owned subsidiary Abu Dhabi Transmission and Despatch Company (TRANSCO) owns and operates the transmission network, which comprises 400-KV, 220-KV and 132-KV lines. Two distribution companies, ADDC and Al Ain Distribution Company (AADC), both of which are ADWEA subsidiaries, operate networks of 33-KV, 11-KV and low-voltage lines.

ADWEA’s water production comes from desalination plants connected to power stations, and is transported in trunk mains pipelines of 160 mm to 600 mm in diameter through pumping stations. Supply to endusers is carried out by the distribution companies.

ADWEA has a long-term programme of privatisation for the sector. Private participation has been promoted by IWPP projects, in which ADWEA takes a 60% stake and the investor 40%. In the most recently awarded IWPP at Al Mirfa, this ratio was adjusted to 80:20.

In early 2014 Nasser Ahmed Alsowaidi, the former chairman of the Abu Dhabi Department of Economic Development, was given the position of chairman of a newly established government organisation – the Energy Authority.

ADWEC

A wholly owned subsidiary of ADWEA, ADWEC is the single buyer (or “off-taker”) of power and water from all plants. It sells the power on to ADDC and AADC. ADWEC is also responsible for guaranteeing security of supply in the emirate through short- and long-term balancing of supply and demand, including demand forecasting and planning expansion of generation capacity.

ADWEC signs long-term power and water purchase agreements (PWPAs) – usually of 20 years – with producers of electricity and water, bulk supply tariff sales agreements with distribution companies and fuel supply contracts with fuel suppliers.

The evolution in ADWEC’s role as the single buyer is expected to result in the company undertaking the procurement and tendering of future IWPPs, which was previously performed within ADWEA. ADWEC’s intention when procuring new capacity is to be technologically neutral, meaning that tenders will be issued with a specific need in terms of power or volume but will not mandate the type of technology to be used, as has been the case with previous contracts. This will give bidders the flexibility to decide which technology to propose. This change will allow for greater innovation and more competition. ADWEC has also taken proactive steps with each of the existing IWPPs to identify efficiency enhancements to save fuel.

IWPPs now account for almost all power generation capacity, with the model proving a boon for the emirate – with its rapidly rising electricity and water demand – and private investors alike. Under sector regulations, IWPP investors receive a minimum return on equity of 11% (reduced from an initial 13% to reflect changed interest rates and risk environment). For its part, the Al Mirfa project was awarded with a 20% investor equity stake and 8% return on equity. These regulations are regarded as very favourable for investors and have attracted companies from around the world to participate in the sector.

Price Controls

To ensure efficient investment and to protect the consumer on the terms and conditions of price and supply, a price control mechanism covering the monopoly companies, ADWEC, TRANSCO, ADDC and AADC, is enforced by the Regulation and Supervision Bureau (RSB), the power, water and wastewater sectors regulator.

The bureau sets a maximum allowed revenue (MAR) for each licensee, which accounts for cost of capital, depreciation and operating expenses for the activities of all the network companies. The capital allowance is based on historical investment in the sector, with the actual spending and the operator’s efficiency taken into account at the end of every price control period before a new MAR is set.

The previous price control period, known as PC4, ended in 2013. PC5 price controls came into effect on January 1, 2014 and will run until the end of 2017. They generally saw a rise in MAR, without necessarily increasing unit prices. Considerations that informed new price levels include the fact that the period encompasses the lead-up to the commissioning of Abu Dhabi’s first NPPs from 2017, bringing 5600 MW online over several years. Thus, the MAR accommodates the large capital investments that TRANSCO will be making in its network to manage this new capacity and integrate it into the emirate and federal grids.

The UAE grid is now integrated into the GCC grid, including through a 220-KV interconnector with Oman. The regional grid provides back-up power when needed – including for exports from the UAE supplied by Abu Dhabi’s power stations – but there is as yet no single regional power market for trading, a development that is not likely to be realised in the near future.

PC5 Prices

The PC5 prices for AADC and ADDC vary considerably, depending on the time of year, week and day. There are 16 bands created by three sets of variables: summer and winter, Friday and non-Friday (Friday being the primary day of rest in the UAE), and peak and off-peak hours. ADWEC charges the distribution companies tariffs that range from Dh0.05 ($0.01) per KWh off-peak on Fridays during the winter to Dh0.34 ($0.09) at peak times on weekdays in the summer. Similarly, water costs per thousand imperial gallons vary from Dh13.07 ($3.56) at non-peak times on weekdays in the winter to Dh70.94 ($19.31) at peak periods on weekdays in the summer.

For the power and desalination companies, revenues are established in PWPAs, while the revenues of the emirate’s independent sewage treatment providers are constrained by their individual sewage treatment agreements. These are subject to the purchasing licence obligations of the off-taker.

In Figures

In 2013 Abu Dhabi generated 65,492 GWh of electricity, including power exported, up 5.4% on 2012, according to the annual report of the RSB. The emirate produced 1.18trn litres of potable water (259,663m imperial gallons), up 4% in the same period. Installed power capacity totalled 13,899 MW, and water production capacity stood at 4.16bn litres (916m imperial gallons) a day. Before the end of 2013, the most recent addition to Abu Dhabi’s power and water production capacity came from Ruwais Power Company’s $2.7bn Shuweihat 2 plant, which brought around 1500 MW and 100 MIGD on-stream – fulfilling 15% of Abu Dhabi’s water needs. There were no substantial new plants built in 2012 or 2013, but in September 2014 the Shuweihat 3 combined-cycle plant came on-line, bringing another 1647 MW to the grid. The plant, built by Siemens and Daewoo, is managed by Shuweihat Asia Power Company, a consortium comprising Sumitomo Corporation of Japan, Korea Electric Power Corporation (KEPCO) and ADWEA.

This addition, and those of plants including the Mirfa thermal power station and the nuclear plant at Barakah in Al Gharbia, will help capacity to stay ahead of demand. Capacity was easily enough to cover peak demand of 11,243 MW on July 22, 2013, which included exports of 2415 MW. Peak demand for Abu Dhabi alone was 8892 MW, up 4.3% on the year.

Peak daily desalinated water production reached 3.65m cu meters (equivalent to 804 MIGD) in 2013, up 5.8% on 2012. Peak wastewater processing was 836,228 cu metres a day, up 7% and equivalent to 305.2m cu metres per year. The unit cost of waste-water processing fell 2%, to Dh7.60 ($2.07) per cu metre. Overall generation and production costs stood at Dh7.23bn ($1.97bn) in the power sector and Dh6.23bn ($1.7bn) for water.

Average unit costs were Dh0.26 ($0.07) per KW and Dh9.93 ($2.70) per 1000 litres (or one cu metre) of potable water. The sector’s turnover continues to grow, reaching Dh26.3bn ($7.2bn) in 2013, up 3% on 2012, the RSB said in its 2013 annual economic report (distinct from the general annual report, this covers the financial aspects of the sector). Electricity and water turnover grew by 3% and reached Dh14bn ($3.81bn) and Dh10bn ($2.72bn), respectively, and wastewater turnover increased 4% to Dh2bn ($544m).

In both the water and electricity sectors, turnover consists of revenue to cover the costs of production, transmission and distribution. Production accounts for over half of turnover in both segments. In the electricity segment, the remaining cost is split roughly equally between transmission and distribution and supply, while for water, transmission costs are notably higher than distribution costs.

Projects

With demand on the rise, investments in capacity are ongoing. In July 2014 ADWEA awarded a 25-year contract to France’s GDF Suez to operate the $1.5bn Mirfa power station project. The plant is expected to come on-line in phases in 2016 and 2017, and will have installed capacity of 1600 MW and 52.5 MIGD. ADWEA will own an 80% stake in the plant, with GDF Suez holding the remaining 20%. The French company has received backing from international financial institutions for the deal, which will further boost its portfolio in the UAE. It already manages Al Taweelah A1, Shuweihat S1, Umm Al Nar and Shuweihat S2, as well as Fujairah F2, with total capacity of 8800 MW and 560 MIGD.

The Mirfa project includes the acquisition of some existing power and water facilities, the development, design, engineering and construction of a new plant, and its operation. The engineering, procurement and construction was won by a consortium of South Korea’s Hyundai Engineering & Construction and Hyundai Engineering, and Italy’s Ansaldo Energia. While installed power capacity will continue to grow, ADWEC is also focusing on improving efficiency in existing plants. More effective use of gas has become a priority for the emirate as a whole, as it looks to use its natural gas resources to fuel industrial development while reducing dependence on imports. “Our major priority going forward is to create better efficiencies among IWPPs in their use of gas,” ADWEC’s managing director, Mohamed bin Jarsh, told OBG. “We are exploring ways to improve efficiency with the IWPPs.”

One pressing issue is that combined-cycle plants are not always efficient: water demand tends to be fairly constant over the calendar year, while there is a large swing factor in power demand, with usage surging in the summer months due to the use of energy-intensive air conditioning. During the winter there is considerable wastage as the turbines are kept running to produce water when demand for electricity drops.

In the longer term, ADWEC expects to “decouple” water and power production to improve efficiency and reduce overall costs, establishing stand-alone water desalination plants to meet demand for potable water. This will be particularly important as there will be less demand for new gas-fired power plants in the years following the commissioning of the Barakah NPP. To this end, the company is exploring the potential for commissioning plants using reverse osmosis.

“Another consideration is the fact that eight out of the 10 existing power and water plants are up for contract renewal before 2030,” said bin Jarsh. “This allows us to assess if the existing plants are the most economical, and whether modifications can be made to improve operational efficiency.”

Nuclear

The first electricity generation from the Barakah NPP, 300 km west of Abu Dhabi City, is expected to be produced in 2017, and will be one of the most significant developments in the history of Abu Dhabi’s energy sector. It will be the first NPP in the Middle East outside Iran, and will deliver 5600 MW to the grid from four APR-1400 reactors – more than one-third of the emirate’s current installed capacity.

The federal government established the Emirates Nuclear Energy Corporation (ENEC) in 2009 to become the owner and the licensee for the operation of NPPs in the UAE, overseen by the independent Federal Authority for Nuclear Regulation. The same year, ENEC awarded the $20.4bn contract to construct the NPP to a consortium led by KEPCO. The first reactor is expected to come on-line in 2017, with the other three starting generation by 2020. Given the sensitivity of nuclear projects in the region, the UAE consulted heavily with the International Atomic Energy Agency, and undertook not to enrich or reprocess the fuel, a process that will be conducted elsewhere.

The NPP will bring valuable baseload capacity to the country’s grid, operating in tandem with more flexible thermal (natural-gas-powered) and renewable energy facilities, which are better able to increase production during peak periods and gradually reduce it as winter approaches.

Price Rises

January 1, 2015 marked a significant moment for the utilities sector in Abu Dhabi, with a wave of price rises of water and electricity tariffs for consumers. The price increases include Emiratis paying for residential water use, and hikes in water and power prices for government-sector users, industry and expatriates. The RSB introduced bands of payment for the first time, meaning that households and businesses that use larger amounts of water or electricity will be charged more in some cases.

Nationals now have to pay Dh1.70 ($0.46) per 1000 litres of water used in residential properties, rising to Dh1.89 ($0.51) if usage exceeds an average of 700 litres per day (in apartments) or 7000 litres per day (in villas). Expatriates were previously paying Dh2.20 ($0.60) per 1000 litres at residential properties, but are now charged Dh5.95 ($1.62), rising to Dh9.90 ($2.69) if average daily consumption exceeds 700 litres in flats or 5000 litres in villas.

Due to the need to water gardens, as well as the fact that they generally house more people, occupants of villas tend to use considerably more water than those in apartments. Social card holders and those receiving social assistance or monthly benefit allowances – expatriate or national – will continue to The Gulf’s first nuclear power plant is due to come on-line in 2017, when the first of four reactors at the plant starts generation. By 2020, when the other three reactors begin operating, the plant will produce 5600 MW, a third of the current capacity on the grid. pay lower prices under the new tariff structure.

The country’s leadership – aware of the need to conserve water in a hot, dry climate and to preserve the environment – believes that government institutions should lead by example in more efficient, careful use of water and power. From January 1, 2015 government institutions have been paying Dh9.90 ($2.69) per 1000 litres of water, a considerable hike on the previous rate of Dh2.20 ($0.60). Furthermore, diplomatic mission premises will also be charged for water usage for the first time. Commercial and industrial customers have also seen the price they pay for water rise, though not by as much as in the public sector, due to the government’s desire not to hit businesses with a substantial immediate cost hike. Charges for these segments of consumers have increased from Dh2.20 ($0.60) to Dh4 ($1.09) per 1000 litres.

Agricultural enterprises – which by their nature often use a significant of water, and are seen as a vital asset in ensuring food security – saw their fee frozen at Dh2.20 ($0.60) per 1000 litres.

Power Prices

Nationals using substantial amounts of electricity – more than 400 KWh per day – saw a slight rise in the price they pay for electricity at home, up from Dh5 ($1.36) to Dh5.50 ($1.50) per KWh, while those using less than 400 KWh per day had prices frozen at Dh5 ($1.36). Expatriates are subject to a steeper hike, with prices rising from Dh15 ($4.08) per KWh to Dh21 ($5.72) or Dh29.30 ($7.98), depending on consumption levels and property type. This latter figure reflects the full cost of supply.

The price the government pays for electricity nearly doubled, to Dh29.30 ($7.98) from Dh15 ($4.08), while commercial properties saw a small rise, from Dh15 ($4.08) to Dh16 ($4.36).

As elsewhere in the world where subsidy programmes have been eased, heavy industry, a major consumer of power, has been asked to pay more to reflect the cost of production. Industrial enterprises requiring 1 MW or more of power saw charges rise from Dh15 ($4.08) to Dh30 ($8.17) at peak times, though the tariff increased by just Dh1 ($0.27) to Dh16 ($4.36) at off-peak times, and at all times for industries requiring less than 1 MW to power their operations.

These increases in utilities charges are likely to be followed by further hikes in the years to come as the emirate endeavours to move prices towards market levels, but this will be an incremental process, given the economic and social sensitivity of such moves.

The intention of the price rises is to act as a check on demand growth, and encourage residents and enterprises to use water and electricity more sparingly. Given that prices remain fairly low by international standards, particularly in light of the relatively high income levels, these hikes may only have a moderate effect on demand growth.

Initiatives

While ADWEA looks to boost power and water output over the medium to long term to meet rising consumption, the RSB has a number of initiatives that focus on demand-side management. One of the most successful is a pilot scheme of “smart meters” which switch electricity prices between peak and off-peak times, with a rebate for shifting consumption off-peak, and prices three or four times higher during peak periods.

The smart meters are linked by wireless connection to displays in the home showing householders the level of electricity consumption, and a green, amber or red light indicating potential overuse. Figures for hourly, daily, weekly and monthly usage are shown, as are graphs indicating equivalent carbon dioxide emissions for the power used.

District cooling offers another option for building owners and manufacturers to effectively address the challenges of consumption and sustainability when it comes to cooling structures. District cooling systems produce chilled water at a central plant and then transport that energy to buildings in their catchment area to be used for air conditioning and water-cooling. As a result, these buildings do not require their own chillers or air conditioners.

“There is a lot of opportunity for private sector involvement in district cooling in high-growth areas such as Al Reem Island; however, the downside risk for district cooling is that it is unregulated, and there is a need for regulation similar to that of the power sector,” Syed Basar Shueb, CEO of PAL Group, which includes a cooling services enterprise, told OBG.

Step Change

The emirate’s sewerage network is overseen by the government-owned Abu Dhabi Sewerage Services Company (ADSSC). Abu Dhabi City’s sewerage network is currently undergoing a large-scale development programme, overhauling a system that is fit for current purpose but would come under strain given the continued growth of the population. Volumes in Abu Dhabi’s sewers have been growing at a rate of around 8% per year since the early 1980s, according to figures from ADSSC.

The Dh5.2bn ($1.4bn) Strategic Tunnel Enhancement Programme (STEP) is developing one of the world’s largest gravity-driven sewerage networks, with its main tunnel running 42 km. The project also entails the construction of a new pumping station next to the Al Wathba Independent Sewage Treatment Plants. STEP’s construction includes three deep-tunnelling contracts, two of 15 km and one of 12 km, separated in order to prevent a monopoly on construction and to spread risk. Companies from Germany, South Korea, Brazil and Italy are delivering the project, with consultants from the UK and US.

Alan Thomson, ADSSC’s managing director, told OBG that the project had helped bring new players to Abu Dhabi, including Brazil’s Construtora Norberto Odebrecht, and that the expertise the participants bring (for example, CH2M’s tunnelling experience) has boosted knowledge transfer to the local workforce.

STEP is expected to be completed by the end of 2015, with commissioning in early 2016 at the latest. The system has been built with population growth in mind, and will only operate at 40% of capacity initially, said Thomson. It is not expected to reach final hydraulic capacity until well after 2030, and the main tunnel has an 80-year design lifespan. The gravity-driven system is designed to be largely maintenance-free, and is lined to prevent sewer gas damage.

Beyond STEP, ADSSC is working on a “major asset enhancement scheme” across the emirate, overhauling dated sewerage infrastructure. In Al Ain, for example, the organisation is rehabilitating sewers and pumping stations that were installed with lower quality standards some years ago.

Waste Management

The Centre of Waste Management (Tadweer) is the government entity responsible for all aspects of the emirate’s integrated waste management, including developing waste management systems, as well as collection, transportation, operation, maintenance, treatment and processing of waste. Tadweer recycled 1.94m tonnes of construction and demolition waste, as well as 6000 tonnes of plastic waste in 2014.

The overall production of recyclable materials in 2014 remained more or less the same as the previous year. The centre aims to reduce the proportion of waste that goes to landfills to the national target of 25% by 2021, by increasing recycling rates through public awareness programmes and campaigns. In doing so, it will be actively seeking international partners, and potentially contractors, to achieve its objectives and targets. “The infrastructure requirement is huge for the next five to six years,” Tadweer’s general manager, Eissa Al Qubaisi, told OBG. “We need sorting and transfer stations. We are looking at a feasible model for the investor in what we hope will be a win-win situation.” The organisation is open to deploying a range of technologies for waste management, including waste-to-energy plants.

In August 2014 Tadweer announced it would be discussing ways of increasing its cooperation and collaboration with the Japan International Cooperation Agency for the development of waste management technologies and an integrated and sustainable pest control system for the emirate. The meeting followed a memorandum of understanding signed by the two organisations in early 2014 to share expertise and explore best practices and the latest technologies in integrated waste management.

Together with the Masdar Institute of Science and Technology, Tadweer co-hosted the second EcoWaste expo in January 2015. The event seeks holistic solutions for challenges in waste management, renewable energy and water conservation, and was expected to attract more than 2000 buyers and industry experts, as well as 50 leading global companies. Tadweer and Masdar have also signed a two-year research agreement focused on improving the production process of converting waste cooking oil to biodiesel.

Outlook

Abu Dhabi’s utilities sector has been a magnet for investment over the past 15 years, as contractors and investors have looked to tap into demand growth and benefit from highly attractive terms. This trend is set to continue, but with the added dynamic of increasing diversification, as the emirate develops new facilities for renewable and nuclear energy, reverse-osmosis desalination plants and recycling infrastructure. As in the oil and gas sector, technology transfer is becoming ever more important, and government companies are increasingly keen to bring cutting-edge expertise to play as the sector grows.

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