GCC utilities facing challenges

According to power and utilities specialists at EY, the long-held operating models of the GCC’s utilities, which are based on state-owned monopolies, are facing several challenges.

With demand in the GCC growing between 6-8 per cent each year, driven by high industry and population growth, utilities in the GCC must meet the soaring demand while managing changing regulations and preparing for the onset of competition.

Christian von Tchirschky, MENA Power & Utilities Leader, EY: "Some countries, such as Saudi Arabia, will need to double their capacity – from around 50GW to 90GW – by 2020. This immense growth means utilities must act now to develop strategies to better balance demand and supply. Building new capacity, reducing subsidies and increasing efficiency are some of the key ways that GCC utilities can improve their operating models."

Building new capacity is an important strategy that utilities can use to redefine their future generation portfolio. The UAE’s first nuclear plants are due to come online in 2017 and the development of renewable energy, particularly solar, is set to increase.

However, increasing supply must be paired with curbing demand if a sustainable energy balance is to be achieved. GCC utilities need to develop smart ways to cut consumption through strict demand side management programmes. Government pressure to reduce subsidies levels has led to the introduction of new pricing structures for nonresidential customers, while residential customers still pay relatively low tariffs for lower levels of electricity consumption and then higher prices when they reach a certain usage level.

"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 subsidised. Enhancing efficiency along the value chain will also help utilities meet demand," said Tchirschky.

The push to increase efficiency is also driven by regulation that will permit the introduction of competition into the sector in the future. GCC utilities need to benchmark against their peers in other markets and exploit the opportunities that come 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.

"As in other parts of the world, it is expected that utilities will no longer capture 100 per cent 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 the future," said Tchirschky.

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. 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.

GCC utilities have the opportunity to learn from other global markets that have experienced similar challenges. Utilities often underestimate the impact of competition and the need to adopt their operating models early, ahead of regulatory changes, to safeguard their margins.

GCC countries will need to introduce of feed-in tariffs and other incentive schemes to accelerate the implementation of renewable energy to incentivize the best technologies and avoid the kind of unfocused implementation we have seen in other markets.

"Despite the challenges, there is optimism that the forthcoming changes to the GCC utilities sector will bring positive long-term benefits. The biggest opportunities for new market entrants may lie in the services around distributed generation. If we think about rooftop solar installations, you’ll see new players, including international energy service companies, competing with local companies to provide these kinds of services. The greatest lesson we can learn from other markets is how the pressure on utilities from competition can dramatically enhance efficiency along the value chain, including better customer service," concluded Tchirschky.




 

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