Powering the Gulf

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Utilities in the Gulf Cooperation Council (GCC) must meet soaring demand while managing changing regulations and preparing for competition. Christian von Tschirschky reports on the lessons that can be learned from other regions.

Christian, a partner in our Dubai office, says the long-held operating models of the region’s utilities, which are based on state-owned monopolies, are under fire due to several challenges.

Double capacity in less than a decade

The biggest challenge is keeping up with some of the world’s highest rates of energy demand growth.

“Demand in the GCC countries is growing at an average of 8% each year, driven by high industry and population growth. “Some countries, such as Saudi Arabia, will need to double their capacity – from around 50GW to 90GW – by 2020. Utilities must act now to develop strategies to better balance demand and supply.”

Building new capacity will be one of these strategies as utilities redefine their future generation portfolio. Nuclear energy is in the mix – the United Arab Emirates’ first nuclear plants are due to come online in 2017 – and the development of renewable energy, particularly solar, is set to increase.

Reduce subsidies and increase efficiency

However, increasing supply must be paired with curbing demand for a sustainable energy balance, says Christian.

“GCC utilities need to develop smart ways to cut consumption through strict demand-side management programs,” he says.

But getting customers to use less energy is difficult when heavy subsidies make tariffs artificially low. “There is a need to increase customer awareness of the real value of electricity – and that its current price is only so low because it is subsidized.”

Government pressure to reduce subsidies levels has led to the introduction of new pricing structures for non-residential customers, while residential customers still pay relatively low tariffs for lower levels of electricity consumption and then higher prices after a certain usage level.

Enhancing efficiency along the value chain will also help utilities meet demand pressures, says Christian.

“Utilities need to benchmark against their peers in other markets and exploit the opportunities from automation and more customer-centric activities.”

“They also need to tackle reduction of technical losses along the value chain, through optimization and the automation of systems and processes. This may include the implementation of smart grids.”

Regulatory changes herald competition

The push to increase efficiency is also driven by regulation that will permit the introduction of competition into the GCC utilities sector.

While this process is in the early stages and, according to Christian, “not a basis for new business models right now,” the next five years will see the beginning of a new dawn for the sector.

The changes will drive:

  • Further development of renewable energy
  • Introduction of feed-in tariffs
  • Rise of “prosumers” who both consume and sell their home-generated electricity

“Once in place, these changes will attract new players to the market who provide new services to the end customers and also to the existing utilities.”

“I expect we will see, as in other parts of the world, that utilities no longer capture 100% of the value chain, but, especially on the generation side, new market entrants will start to play a major role."

“The challenge for the incumbent utilities will be finding the right business model to still generate the margins they need in future.”

Christian says the first wave of competition may come through greater use of the existing interconnection that links the power systems of the GCC countries. Currently used only to support emergency shortages, the interconnection may form the basis of a future energy trading market.

“But it will be up to the regulators of each country to decide how much competition they will allow, and utilities will need to prepare for the different options that may evolve in their specific market.”

Learning lessons from other markets

Christian says the GCC utilities have the opportunity to learn from other global markets that already experienced these challenges.

“One of the key lessons is that utilities often underestimate the impact of competition and the need to adapt their operating models early ahead of regulatory changes to safeguard their margins."

“Another aspect is the introduction of feed-in tariffs and other incentive schemes to accelerate the implementation of renewable energy. GCC countries need to get these right to incentivize the best technologies and avoid the kind of unfocused implementation we have seen in other markets.”

Christian says the biggest opportunities for new market entrants may lie in the services around distributed generation.

“For example, you’ll see new players in rooftop solar installations, including international energy service companies, competing with local companies to provide these services.”

Bright future

Despite the challenges, Christian is optimistic that the forthcoming changes to the GCC utilities sector will bring positive long-term benefits.

“The greatest lesson we can learn from other markets is how the pressure from competition can dramatically enhance efficiency along the value chain, including better customer service.”

How we can help

Our teams in the GCC are supporting utilities to prepare and manage current and future challenges from strategy to implementation. We help:

  • Develop the right operating models
  • Define the suitable generation mix
  • Implement the smart agenda
  • Manage demand-side management programs
  • Benchmark operations
  • Improve efficiency along the value chain
  • Enhance customer focus
  • Support the introduction of enterprise-risk management solutions
  • Review, optimize and manage utilities’ large capital programs