Power surge

The Emirate of Dubai is tinkering with its approach to new power generation projects, under estimates that demand for electricity will grow by between 14 and 18 per cent annually for the next five years. Simultaneously, the smaller northern emirates of Ajman, Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain, in which the demand for power is expected to double in the next five years, are navigating uncharted political waters by bringing their own brand of innovation to new power development. This contrast in approaches is made all the more interesting by the parallel development at the federal level of a unified power grid for the United Arab Emirates (UAE).


The Dubai Electricity and Water Authority (DEWA), which owns all of Dubai’s power assets, has operated since its creation in 1992 under a non-privatisation mandate, developing all of its power plants on an engineering, procurement and construction (EPC) basis. While its neighboring emirate to the west, Abu Dhabi, and most of the Gulf Cooperation Council countries have begun to turn to independent power projects (IPP) or independent water and power projects (IWPP), Dubai has maintained that, based on the fundamentals of its business model, it can function with the efficiency of a private developer. Those fundamentals include a burgeoning population, of which more than 90 per cent are expatriates, upon whom a market-rate tariff can be imposed, resulting in a true match between production costs and revenues. The result is a level of profitability that is generally estimated to make DEWA one of the most profitable utilities in the Middle East.

The breakneck pace of Dubai’s economic and population growth, however, has caused DEWA to accelerate its new power project development schedule. It is estimated that DEWA will add more than 4,000 megawatts of new power generation capacity during the next five years, an expansion that will necessitate the construction of five or six new plants. Implementation of this aggressive plan will require DEWA to surmount some significant logistical hurdles, not least of which is ensuring the timely availability of a reliable supply of fuel for the new plants. This need will be met by the introduction of gas from Qatar through the Dolphin project into Dubai, which is estimated to occur in 2007.

The location of the plants will also prove problematic. Ideally, they would be situated on the coast in order to most efficiently provide for the intake of seawater for cooling and, in the case of combined desalination plants, water production. Of course, in an emirate with a relatively small coastline, the real property market is likely to force the location of these new power projects further inland, thereby increasing development costs.

This rapid pace of development is also spurring DEWA to consider commercial financing for its new projects for the first time. While this represents new thinking, it is difficult at this stage to determine whether it portends an opening of the power market in Dubai.

The northern emirates

By contrast, the northern emirates have not enjoyed a concentrated and growing expatriate consumer base for their power market in the recent past. Rather, with the notable exception of Sharjah, the relatively small, mostly local and more widely dispersed population of the northern emirates has meant that power generation has come by way of smaller plants, often diesel-generated, leading to significantly higher costs of production. As a result, the development and management of power and water generation facilities has been delegated by the federal government of the UAE to the Federal Electric and Water Authority (FEWA).

Nonetheless, rapid population growth and ambitious industrial and commercial development plans in the northern emirates have required a rethinking of FEWA’s approach to new power project development. Although it was speculated that the Abu Dhabi Water and Electricity Authority (ADWEA) would take over power generation activities in the northern emirates and that the Abu Dhabi Transmission and Distribution Company would administer the grid, what has in fact occurred is an opening of the market to private developers. Currently, plans are underway for an IWPP in Fujairah and an IPP in Ras Al Khaimah.

The fact that the Fujairah IWPP is being put to tender by ADWEA would seem to indicate that there has been a significant change of heart with respect to private power development, as there had been persistent fear among the northern emirates that the pursuit of private investment in their power sector would not sit well with Abu Dhabi. The project involves the acquisition of the existing 662 megawatt and 100-million-gallon-a-day plant and a 250 megawatt expansion of generating capacity. Early reports indicate that at least five major international developers will pre-qualify as bidders for the right to develop the project.

The IPP in Ras Al Khaimah on the other hand will be a 129 megawatt inside-the-fence plant developed by Al Hamra Power, a joint venture between RAK Ceramics and RAK Properties, and will provide power and chilled water to four industrial clients in that emirate, as well as to a privately developed residential community.

Private investment in the power sector of the northern emirates will benefit significantly from the desire of these emirates to spur industrial growth and stimulate private investment. Ras Al Khaimah, in particular, has been extremely aggressive in its drive to modernise and grow, and it has focused wisely on customer service, which includes streamlining bureaucratic and administrative processes. For example, the modernisation of the land registry through computerisation of the records and digital mapping using global positioning system coordinates has allowed for relatively simple recording of the real property security interests of the project’s lenders.

Despite these new developments, the IPP/IWPP model is not necessarily the shape of things to come for all future power and water projects in the northern emirates. Underscoring this fact are the recent indications that the long-planned 1,300 megawatt cogeneration facility in the emirate of Ajman, which will be developed by FEWA on an EPC basis, is moving forward. Nonetheless, it appears that creativity and forward thinking will continue to guide the approach of the northern emirates towards meeting their future power needs, and that private developers will play a key role in the development of new power generation capacity.

Patrick Campos is an associate in the Dubai office of Baker Botts