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GCC utilities facing power challenges
Government subsidies make energy prices artificially low, claims Ernst and Young
April 28, 2014 1:17 by kippreport
The long-held operating models of the GCC region’s utilities, which are based on state-owned monopolies, are facing several challenges, according to power and utilities specialists at Ernst & Young (EY). With high industry and population growths, the demand for power and utilities is growing, between six per cent and eight per cent each year. Hence, utilities in the GCC region must meet the soaring demand, while managing changing regulations and preparing for the onset of competition.
Christian von Tchirschky, Mena Power and Utilities Leader at EY, says: “Some countries, such as Saudi Arabia, will need to double their capacity, from approximately 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.”
Progress is being made in that the UAE’s first nuclear plants are due to begin operation in 2017 and the development of renewable energy, particularly solar, is set to increase.
However, EY adds that increasing supply must be paired with curbing demand if a sustainable energy balance is to be achieved. GCC utilities must now develop smart ways to cut consumption through strict demand-side management programmes. The pressure from government 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 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,” explains Christian.
Regulatory changes herald competition
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 learn from their peers in other markets and exploit the opportunities that come from automation and more customer-centric activities.
“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 incumbent utilities will be finding the right business model to still generate the margins they need in the future,” adds Christian.
The first wave of competition, according to EY, may come through the greater use of the existing interconnection that links the power systems of 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 they will need to prepare for different issues that may evolve in their specific markets.
Learning lessons from other markets
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.
Christian concludes: “The greatest lesson we can learn from other markets is how the pressure on utilities from competition can dramatically enhance efficiency, alongside the value chain, including better customer service. Despite the challenges, there is optimism that forthcoming changes to the GCC utilities sector will bring positive, long-term benefits.”