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AGCC states need to invest $150b in power by 2020

DUBAI - The six Arab Gulf States will need to build 100 gigawatts of power generation capacity before 2020 to meet the growing power demand in the region, according to recent projections by World Energy Council (WEC).

Fast paced urbanisation, rapid population growth and diversification of the regional economies have resulted in ever growing energy demand. To meet the growing demand, the Six AGCC states are required to invest more than $150 billion in the next 16 years. This translates into an average investment of $9 billion a year. Considering the geographical size and the population size, Saudi Arabia is required to invest more than half (over $4.5 billion) of this amount every year.

According to the WEC study the regional governments should explore innovative ways to finance the new energy projects including creation of joint stock companies raising funds through bonds and Islamic financing. Currently, there are only a few electricity utilities in the region that can attract reasonable foreign investment, as international investors consider the Middle East too risky. Self-financing, on its own, will not be enough to pay for expansion, as many of the utility companies are dependent on budgetory support.

Most regional utility companies collect less than half their bills and the rest is subsidised by the respective governments.

Heavy government subsidies, below the cost billings make many of these companies below investment grade for both individual and institutional investors. To make these companies attractive, governments are urged to privatise electricity generation and distribution. According to WEC, cost based billing will be the first step towards independent financing of power projects in the region.

UAE has been in the forefront of privatisation of water and electricity projects among the AGCC states. Abu Dhabi Water and Electricity Authority has already privatised more than 50 per cent of the desalination and power generation projects. Although the power generation is gradually being transferred to private hands, the distribution still remains with the government.

In all AGCC countries distribution and pricing are politically sensitive issues as the people of the region have been used to subsidised power and water. In most of these states the citizens pay only a fraction of the cost of generation and distribution and in some cases enjoy free utilities.