The energy-hungry Middle East is starting to embrace nuclear power – but will it be enough to satisfy its mushrooming developments and expanding populations? Dominic Ellis reports.
The UAE announced the establishment of a Nuclear Energy Authority last March, with an initial capital of Dhs375m, which will look into using nuclear power to serve the country’s rising energy needs. The directive followed the signing of two agreements between the UAE and France on nuclear and military co-operation in January 2007.
The nuclear agreement provides a framework for co-operation between the two countries in the evaluation and potential use of nuclear energy for peaceful, civilian purposes.
Both countries have set up a high-level joint committee to supervise co-operation in the areas of nuclear power generation, water desalination, basic and applied research, as well as in agronomy, earth sciences, medicine and industry.
In practical terms, the deal, signed with President Nicholas Sarkozy, involves the building of two 160-MW nuclear reactors over the next decade by French firm Areva, Total and Suez. In collaboration with GCC, the UAE has approached the International Atomic Energy Agency for supervision of any potential civil nuclear activity. Talks have also been underway between the UAE and the General Electric, the world’s biggest manufacturer of power plant equipment, over a proposed nuclear energy programme
While it marks an interesting policy move, the region’s foray into nuclear is unlikely to prove the commercial panacea. Indeed, the Middle East needs to pump in more than half a trillion US dollars in electricity infrastructure to facilitate economic growth in the coming years, according to management consultancy firm AT Kearney.
To date, several countries in the region lag behind in their infrastructure planning and, for all its abundant oil wealth, increasing supply-demand imbalances, power outages and soaring electricity prices might become harsh realities.
While nuclear is definitely on the radar of the UAE – the ‘Nuclear Energy in the Gulf’ conference was held in Abu Dhabi in November – it isn’t alone in eyeing up its potential. Jordan’s government is looking into building its first nuclear power plant near Aqaba on its Red Sea coastline within the next eight years. The planned site would be able to have four individual power plants and a study will look into using nuclear energy in the country over the next 18 months.
Iran has offered a proposal to develop nuclear power plants jointly with other Gulf states. Without giving specifics, the head of the country's atomic energy organisation, Gholam Reza Aghazadeh, suggested the development of a consortium to look into building light water plants in the region at an energy conference in Tehran in December.
Growing demographics and wealth in the Middle East will lead to a constant increase of demand for electricity in the foreseeable future. The UAE has one of the highest levels of energy consumption per capita in the world; forecasts indicate that demand for utilities (electricity and water) in Dubai will rise by 12% and 14% per annum until 2010, fuelled by high population growth and high per capita income.
“While investments are estimated to be more than $500bn by 2030 for the region, forecasting of energy demand is not accurate. Many countries are still behind in forecasting and capacity planning,” said Dr Dirk Buchta, Managing Director of AT Kearney Middle East.
Additional generation capacity needed is potentially underestimated. While economic growth in the Middle East is expected to be 7%, the build-up of generation capacity is only 4% per annum, the firm believes.
A further challenge is how to calculate the necessary energy efficiency increase, as utility companies in the Middle East face energy sector losses of more than 10% through theft and faulty systems, the report states. A lack of metering and governance leads to situations where utility facilities are not aware of where they lose energy - and subsequently - money. “The structures within the electricity portfolios of the regional utility companies need to change significantly towards alternative energy sources like solar, wind and nuclear. In addition to large scale solar farms, smaller local units such as photovoltaic home installations must evolve,” said Dr Goetz Wehberg, from the Global Utilities Practice of A.T. Kearney.
Although many Middle East countries are discussing ambitious renewable targets, for example, achieving a 20% share of renewables in 2020 like in the EU, the regulatory framework and funding of such investments are open in most cases. Initiatives such as Masdar are only a preliminary step in leveraging the region’s solar power potential.
Key growth areas for future electricity supply are tourist hubs, economic cities and industrial zones. The six Economic Cities of Saudi Arabia for example, will have a future metro population of several million people and investment requirements for electricity generation of more than $4bn. Industrial zones such as Jubail and Yanbu in Saudi Arabia are expected to double in size within the next five years, with investments in utilities infrastructure accordingly. Additionally, countries such as Bahrain are running out of oil and need to secure their energy supply for the future. Other nations such as Jordan extensively rely on energy imports already and want to decrease their dependency.
“A sound demand forecast, capacity planning and regulatory management will be key to avoid power outages in the future,” added Dr Wehberg. “To better balance supply and demand within the region and prospectively with Europe, the transmission grids in the Middle East need to become more integrated.”
Large investments will be required to ensure the continuity of power to the Arabian Gulf region due to growing electricity demand, concurred Moody’s Investors Service in its Arabian Gulf Electricity Industry special comment. It found unprecedented economic and demographic growth is creating a strain on power supplies in the region.
Philipp Lotter, Senior Vice President at Moody’s Middle East in Dubai (DIFC), says: “Moody’s believes that these exceptional growth trends are likely to challenge local utilities, which will need to install significant additional capacity to meet rising demand.
Power shortages and temporary blackouts have already been seen in certain countries with tight supply margins, and these are likely to increase, particularly where utilities are operationally and financially unable to fully execute their expansion plans.”
According to estimates, up to $50bn could be spent in the GCC countries by 2015 for increased generation capacity of nearly 60,000 megawatts. Additional substantial investments will also be needed to update transmission and distribution networks.
Alternative energy sources, such as renewable and nuclear energy, are being investigated by the governments to meet the increased demand, particularly as some countries run short of gas and the region's fuel mix remains over-exposed to gas and oil.
Furthermore, continued government support, the involvement of private operators, a unified electricity grid, and more regulatory transparency could help ease the burden. “Ultimately, players in those markets that provide greater transparency in their regulatory framework and tariff-setting, and share some of the expansion burdens with private sector operators will be better positioned to embrace the future demands of the sector,” said Lotter.
Despite these challenges, the credit outlook for the sector is mostly stable. Moody’s rates four electric utilities - Dubai Electricity & Water Authority (DEWA), Abu Dhabi National Energy Company (TAQA), Saudi Electricity Company (SEC) and Oman Power & Water Procurement Company (OPWP) - in three GCC countries, all of which benefit from strong government support and the strategic importance they play in supporting the economic growth in the countries where they operate.
DEWA, the state-owned monopoly provider of electricity and water in Dubai, serves more than 480,000 customers. The company operates as a vertically integrated multi-utility, with business activities including electricity generation, transmission and distribution as well as water desalination and distribution.
Moody’s Investors Service recently issued its updated credit analysis report on DEWA to A1 ratings, reflecting the central role that the company plays in Dubai's growth strategy and the strong support it would expect to receive from local and federal governments. At the same time, ratings are constrained by the expectation of rising debt on the back of a large-scale capacity expansion programme.
“In 2008, DEWA benefited from a government tariff increase and more stable fuel procurement sources from Qatar, which significantly improved the company's margins and underlying financial performance,” added Lotter. “The major near term challenge is the company’s refinancing plan, which involves addressing a $2.2bn loan maturity by April.”
Moody’s report highlights that DEWA continues to execute an ambitious investment plan, which is expected to add 15.5 gigawatt (GW) of additional generation capacity by 2017. It believes that DEWA may benefit in the event of a temporary slow-down of Dubai’s growth, as the new capacity it will be required to install could be phased over a longer period.