Despite a 50 per cent tariff increase by Sharjah Electricity and Water Authority (Sewa), the emirate will still have to bear nearly half of the cost of generating, transmitting and distributing electricity.
This set up, akin to many other GCC states, is creating unsustainable demand, and will continue to pressure utility firms.
"If the price could be similar to the market price, we can say that the electricity curve will not be the same," said Dr Mahmoud Ahmed Nasreddine, Advisor to the Secretary-General of the League of Arab States. "So the GCC has to try to make the prices more acceptable and closer to market standards to be able to address this kind of demand," he said.
According to Dr Adnan Shihab-Eldin, former secretary-general of Opec, government subsidies have resulted to massive and sometimes excessive usage of the expensive energy.
"Subsidies in the GCC vary. On average you are talking about 60-70 per cent varying from almost a 100 per cent to 50 per cent," Eldin told Emirates Business. "Currently the subsidy system is inconsistent with conservation and preservation. The subsidies have to be removed but it is not necessary that they have to remove the subsidies outright."
Because of these subsidies, he said the demand has gone to unprecedented levels. Despite the recession, demand continues to grow by five to seven per cent.
"The growth in demand should come to something reasonable, about 2.5 to three per cent, which is close to the expected economic and population growth," said Eldin, who is also a board member of Kuwait's Foundation for the Advancement of Sciences.
While the removal of subsidies is not something that governments look at in the near term due to "strategic" reasons, industry experts have been expecting that there would be tariff modifications to address at least a part of the cost increase.
Industry players say the cost of power generation may shoot up by at least 100 per cent in the next two years because the price of gas – the ideal feedstock for power generation and water desalination plants – has already been increased by tenfold in less than a decade.
The UAE is still being supplied by gas contracted in earlier price. Dubai, for one, is being supplied by "cheap gas" from Abu Dhabi, and Qatar through the Dolphin Energy project and by its own fields. But this cheap supply will soon cease to flow, said energy analyst Khalid Al Awadi.
"Before, gas was very cheap. When Dubai and Abu Dhabi signed for the Dolphin Energy the price was less than a dollar, around 50 cents," he said.
With the original contracted price (50 cents to $1.3), Al Awadi said Dewa's cost of generating one kilowatt per hour (kWh) of electricity stands at Dh14 but once Dubai signs up for new supplies, the emirate will then have to buy gas at triple or quadruple the current price.
"With the old Dolphin price, the cost of producing electricity is less than 20 fils per kWh," said Al Awadi. "But with additional gas from outside at $5 per mmbtu, that would cost Dubai 40 fils and if they are going to use oil, that extra part would cost 75 fils per kWh."
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