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25 February 2024

Region needs $80bn power investment

The current Arab power output capacity stands at 155 GW, according to Apicorp. (EB FILE)

By Nadim Kawach

Arab nations need to invest nearly $80 billion (Dh293bn) into projects to boost their power production capacity in the next five years to meet a rapid growth in domestic demand, an official report said yesterday.

The projects will expand the current electricity generation capacity by nearly 50 per cent but such plans face financing problems because of the global credit tightness, said the report by the Dammam-based Arab Petroleum Investment Corporation (Apicorp), the investment arm of the 10-nation Organisation of Arab Petroleum Exporting Countries (Oapec).

Apicorp estimated the current combined Arab power output capacity at 155 GW and said nearly 60 per cent of the investments would have to be pumped by the UAE and the other members of the Gulf Co-operation Council (GCC).

"Even assuming capacity savings can and will be achieved through better load management and the implementation or enhancement of sub-regional interconnections, capacity growth, which has been worked out on a country by country basis, is expected to be much higher than that of GDP over the next decade, notwithstanding current economic contraction," said the study, authored by Apicorp's senior consultant Ali Aissaoui.

"The resulting aggregate forecast of 7.7 per cent annual increase for the period 2010-2014 translates into a five-year capacity increment of 70 GW above the estimated level of 155 GW for 2009 Therefore, with current reference costs – reflecting prevailing prices of engineering, procurement and construction (EPC) and country investment climates – the resulting capital requirements will be in the order of $80bn for the forecast period. The GCC area, which will continue to grow at the highest rate, accounts for nearly 60 per cent of this total."

The study, sent to Emirates Business, put the total cost of power projects in the GCC at about $46.5bn while the rest covered the Maghreb nations ($11.1bn), Mashreq countries ($21.2bn) and others ($1.3bn).

It said those investments are consistent with Apicorp's review of capital expansion in the overall Arab energy sector for the period 2010-2014.

The review has established that the potential investment in power and power/water generation sector (excluding transmission, distribution systems and as well as systems interconnection) accounts for 17 per cent of the potential capital investment requirements of nearly $470bn in the Arab petroleum and energy sector as a whole.

"In rolling out such programmes, however, policy makers and project sponsors will face serious challenges, including fuel gas constraints and limited funding. The power and power/water sector in the Arab region relies heavily on petroleum-fired thermal plants. In 2008, around 56 per cent of output was generated from natural gas and 40 per cent from oil products," the study said.

"The remaining four per cent was from hydro and smaller amounts of imported coal. Accordingly, this sector is the single most important industrial user of natural gas in Saudi Arabia, the UAE, Egypt, Algeria and Qatar."

Its estimates showed the capital structure of investment in those projects is around 75 per cent debt and 25 per cent equity.

However, as a result of the severe deleveraging prompted by the credit crisis, the debt-equity ratio has been reset at 70-30, resulting in an annual amount of debt close to $11.2bn per year, according to the report.

"Notwithstanding the current economic contraction, many Arab countries will need to continue to catch up with unmet potential demand for electricity and desalinated water. Rolling out the corresponding massive investment programme should remain a priority for policy makers and project sponsors," it said.

"The most critical challenge they face, however, is funding. Indeed, due to global economic conditions, public resources have been inadequate and private investment has somewhat retreated. As a result, Arab governments are faced with a difficult balancing act, stepping up to fill the current funding gap while providing the assurances critical to regaining private investment momentum," said the report.


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