By Oliver Cornock
Oliver Cornock on why Kuwait is facing domestic power problems despite holding 8% of global oil reserves.
For a country that holds around eight percent of global oil reserves, it may be difficult to believe that Kuwait faces domestic power concerns.
Kuwaitis have been experiencing record temperatures in June, prompting power outages in a number of residential areas and bringing to light concerns over the country's pressing need for increased power generation capacity.
The nation has one of the world's highest per capita consumption rates of electricity, and during the summer months, when temperatures hover around 50°C, it is estimated that around 70 percent of energy is consumed by air conditioning units.
At present output levels, Kuwait is capable of producing 11,200MW of electricity. Yet on June 13, with soaring temperatures in the low 50s, consumption reached a record 10,823MW (98.5 percent of grid capacity).
Analysts forecast demand to reach around 11,000MW during the coming few months, up 13.4 percent from last year's peak summer demand of 9961MW.
Considering that most countries strive to operate with a spare capacity of around 15 percent, authorities in Kuwait have been setting up emergency meetings and working out strategies to ensure summer outages do not become a regular occurrence.
Kuwait has not built new plants since 1998, and over that period has seen an annual average growth rate in power demand of 8%. While new power plants are in the planning and construction stages, no new plants are set to come on-line until next summer at the earliest.
In September 2009 the government signed a $2.7bn deal with General Electric and Hyundai Heavy Industries of South Korea to build a 2000MW gas-fired plant at Subbiya in the north of the country. The plant is expected to be operational in June 2011 and produce 1320MW, with an additional 680MW to be produced by 2012.
In the meantime, it is believed that deteriorating cabling has caused up to 80 percent of the recent outages experienced, prompting calls for immediate efforts on maintenance and repairs. Walid K Al Hashash, the chairman of Aref Energy, told OBG: "While the government is spending billions building new power plants, for far less money and with more immediate results, they should also invest in refurbishing and improving the efficiency and output of existing ones."
Existing power and desalination plants are owned and operated by the Ministry of Electricity and Water, and many believe improvements in quality and delivery could be made through privatisation.
Faisal Hamad Al Ayyar, the vice-chairman of Kuwait Projects Company (KIPCO), said: "Evidence shows that when a sector is opened to market competition, customer service and product delivery improve dramatically. However, unlike other economies where the primary role of privatisation is to bring investment funding, what Kuwait requires is private sector expertise."
To this end, in May parliament passed a bill to allow private sector involvement in the operation of the country's power plants. The legislation allows for the establishment of shareholding companies to build new power and water desalination plants in the country, the first time private entities will have a stake in the local power sector.
Under the terms of the law, up to 50 percent of shares in the company will be sold to nationals in an initial public offering, while the government and state institutions will hold up to 24 percent of newly formed companies. The remaining 26 percent will be sold to publicly listed Kuwaiti companies or foreign companies approved by the government.
While it is believed that investments in new power facilities and an engagement with the private sector will result in additional supply down the road, equally important from many observers' view is the need to better manage electricity demand and discourage excessive consumption.
The residential sector accounts for around 60 percent of the total current load, with the government heavily subsidising electricity and charging households a mere $0.07 per kilowatt hour, about half the average price in the US. In addition, many households do not pay their bills and are rarely penalised for not doing so.
According to Dr Saad Akashah, an advisor the Arab Fund for Economic and Social Development, "There is huge wastage and overuse of electricity in this country, and it is harming future generations. So long as electricity is essentially free, people will not concern themselves with how much they use. We do not need to get rid of subsidies entirely, but should introduce some tiered pricing that charges people an affordable rate while at the same time making them think before they consume."
The financial implications of such high energy usage are also significant, not only for industries concerned over a steady supply of energy, but also for the government due to the high fuel bill and large capital investments.
According to the Kuwait Institute for Scientific Research, if current demand trends persist, Kuwait will need to add another 14,000MW in generating capacity by 2025, bringing overall capacity to 25,000MW at a cost of KD7bn ($24.1bn). The accompanying fuel bill to meet this extra capacity would reach approximately KD3.8bn ($13.1bn), at current prices.
As a stop-gap measure, the government has signed deals with Shell and Vitol in 2009 and April 2010 respectively for the import of approximately 500,000 cu ft per day of liquefied natural gas to help fuel its power stations. In addition to the environmental benefits of being a cleaner-burning alternative, importing gas is considered less costly than using export-revenue-earning oil-derived fuels to generate electricity.
In the longer term, Kuwait is hoping to boost its natural gas production and has targeted levels of 5bn cu ft per year, up from current level of 1.2bn cu ft of non-associated gas from its northern gas fields.
To achieve this, the government has enrolled the help of Royal Dutch Shell, signing a deal estimated at $700m in February that will entail the energy giant providing expertise and technology to help tap the complex reservoirs.
Oliver Cornock is Middle East specialist, Oxford Business Group's Regional Editor in the GCC.
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