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Sat 21 Nov 2009 04:00 AM

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Power play

Nicholas Carter, head of Abu Dhabi‘s Regulation & Supervision Bureau, talks costs, competition and climate change.

Power play
Power play
Foreign interest in Abu Dhabi’s utilities market, which turned over $3.3bn last year, has stayed robust.
Power play
Khadija bin Braik, senior environmental engineer, RSB.
Power play
Ali Qasem Al Mashjari, production manager, RSB.

Meet the man responsible for powering the UAE's largest emirate. Nicholas Carter, head of Abu Dhabi‘s Regulation & Supervision Bureau, talks costs, competition and climate change.

Most Abu Dhabi residents wonder what might happen when oil dries up. Nicholas Carter worries about water.

And that's not just because the emirate has less rainfall than the Sahara desert, but astonishingly drinks in more water per capita than anywhere else on earth. It's because, as head of the agency that regulates the emirate's utilities sector, should the city's water and power supply fall behind its frenetic growth, the blame lands at his door.

"It's an enormous challenge to ensure that supply meets demand," Carter, director general of the Regulation & Supervision Bureau (RSB) says with a faint smile; "but it's a crucial one."

Enormous is the word. Last year the emirate soaked up 38,543 GWh (gigawatt-hours) of electricity and 208,844 MG (million gallons) of water, an eight percent increase on the previous year. These figures are set to soar by between seven and eight percent annually over the next five years, according to the Abu Dhabi Water and Electricity Authority (ADWEA) - and that's without factoring in a population forecast to hit 3.1 million by 2030.

ADWEA last week announced plans for a massive power and water desalination plant that, on completion, will churn out more than 1,500MW of electricity and up to 100MG of water per day. The privately-run plant - the emirate's ninth - will go to tender in the first quarter of 2010.

To keep the lights burning, Carter says, Abu Dhabi will need to blueprint in at least another three such behemoths by 2016, or risk falling behind demand.

"We need three [plants] by 2016. Demand will be about double what we have now," he says, noting the emirate's electricity consumption has been untouched by the financial crisis. "Peak [power] demand now is about 7,000MW, so we think it will be around 14,000MW by then."

While the number of electricity customers in the emirate rose last year by 4.1 percent; their consumption of power rose by a jolting 12.9 percent.

RSB was established in 1999, a by-product of the decision to scrap Abu Dhabi's old Water and Electricity Department. The agency is chiefly tasked with ensuring the city's utilities infrastructure keeps pace with its rampant economic and domestic growth, and that customers are protected in the emirate's semi-monopoly system. It's no exaggeration, notes Carter, to say Abu Dhabi's future hinges on its success.

"A secure supply is crucial in building the emirate," he says, raising an eyebrow. "I would argue it's more important than roads, even telecoms. Electricity and water sustains lives. It's fundamental to any economic growth."

According to the World Bank, Africa's businesses lose 56 days of production a year to its flickering power supply. That's more than one in five working days.

Abu Dhabi, the UAE's wealthiest emirate, has in the past relied on foreign investment to shore up its power plants and water desalination projects. Under the so-called independent water and power project (IWPP) model, plants are built and run by private firms, but a 60 percent stake is ringfenced by the government.

Each of the city's eight IWPPs has a twenty-year agreement to sell its electricity and water output to Abu Dhabi Water and Electricity Company (ADWEC), the emirate's sole buyer, at a fixed rate. This tariff, which is agreed when the plant is put out to tender, is the only competitive part of the supply process.

"Our principal duty is to look after customers in a monopoly," says Carter. "If we were regulating Cadbury's, then it wouldn't matter because customers have a choice whether or not to buy its products."

In countries such as the UK, plants feed into a central dispatch unit. The cheapest units are dispatched on to the national grid first, encouraging providers to keep their prices down.

"Here, customers don't have a choice with utilities," says British-born Carter. "So though you can allow private investors to own these companies, it can't come at the expense of good value services."

The balance is maintained largely through regulation. For example, the market share of any foreign shareholding is restricted to 25 percent to "stop a kind of Enron bubbling up and wrecking the whole industry if it goes bust," Carter says. Prices are also heavily subsidised by the state, which shoulders more than 50 percent of the unit cost.

"It's up to the government to decide what the distribution company will charge, and they then make up the difference in subsidy," he says. "It's a legacy issue, the idea that people should have the right to water and electricity at a low price."

Not that a lack of traditional price competition has dissuaded foreign investors from investing in the sector. Despite the financial crisis, appetite for Abu Dhabi's utilities market, which turned over $3.3bn last year, has stayed robust. The emirate last month sealed a $2.15bn financing deal for its Shuweihat 2 water and power complex, one of the biggest financing deals the region has seen this year.

ADWEA owns 60 percent of the $2.72bn project, with the remaining 40 percent split between France's GDF Suez and Japan's Marubeni. On completion, the plant will boost capacity by 1,507MW of power and 100MG of water.

Abu Dhabi's ninth IWPP, as announced by ADWEA last week, is expected to draw widespread interest from foreign developers when it goes to tender in Q1.

"This structure attracts people," shrugs Carter. "Because of its structure, it allows innovation. New entrants can come here and are guaranteed to generate - providing we give them a licence - an income. You can't do that in really any other country. It's a very vibrant sector."

Despite being run as a semi-monopoly?

"It's competitive for this region," he says, frowning. "Look, however you dress it up, companies won't come here unless they can see a steady political state, that's reasonably secure, with good laws and transparency.

"Each one [IWPP] is worth about $2bn, so it's a lot of investment. The next one will probably be $2.5bn. And the firm that owns 40 percent - when 80 percent of the cost of that project is actually foreign investment, foreign loans - they are going to want to see the likelihood of a good return."

The game is changing, though, partly because of a growing awareness of the threat of climate change. As home to the world's first carbon-neutral, zero-waste complex, Masdar City, and host to the International Renewable Energy Agency, Abu Dhabi needs to put its money where its mouth is on green policies. For the utilities sector, this means an increasing emphasis on green goals.

Currently, IWPPs are set energy efficiency goals as part of their twenty-year deal with ADWEC. Plants are rewarded if they cut the amount of fuel needed to generate each unit, and penalised if they burn too much.

"The purpose is basically to improve efficiency and to minimise the use of energy in producing a megawatt," Carter explains.

Interestingly, RBS is also considering making better use of Abu Dhabi's large industrial firms, many of which generate electricity as a by-product of their core business. These firms could be issued with supply licenses to sell their spare units on to the emirate's grid, potentially to trade with other large, power-hungry companies.

On a smaller scale, the agency is also in talks with Masdar City on the possibility of fitting solar panels to villa roofs.

"This would create renewable energy at the point of the customer, which they could then sell back to the distribution company.," he explains. "We're dealing with that now, how we can structure the tariff."

Another key issue is water consumption; an area where water-strapped Abu Dhabi soaks in more than anywhere else in the world. Carter is acutely aware that this mantle doesn't fit well with the emirate's green ambitions.

"Look, consumption isn't high because people are wasteful, but because 80 percent of the water that is delivered is used for irrigation," he says shortly. "That is the issue and it distorts the per capita [rate]. It's crops - the water is mainly used for crops."

That said, a whopping 20 percent of water is lost each year, potentially through leaks, illegal connections or other means. RSB is hustling to get that volume below 10 percent, but is realistic about its chances.

"It's a very hard task. There comes a point where it's simply costing too much to reduce the leakage," says Carter. "There is a value in water, and an operational cost and a cost of capital. We don't want the government to say; ‘you are costing five times the amount of letting it leak.

"But something like 95 percent of the water that is collected is recycled now, so we are getting there."

In many cities, the utility is a favourite whipping boy. Consumers complain of poor service, and the long wait times for new connections. In the UAE, where new housing estates are reared almost overnight, the utility sector has its work cut out to keep pace. Carter, however, looks like he relishes the challenge.

"Over the next five to ten years, the way we operate will change enormously," he says. "There are lots of exciting schemes about and we consult on them all.

"Ultimately, it's going to be a very advanced sector. That's the good thing about how fast Abu Dhabi is growing; we don't have a legacy system to worry about."

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