Valeria Camerino caught up with José Alberich, Vice President at global management consulting firm A.T. Kearney, who commented on the compelling power challenges faced by regional governments and identified possible solutions to them.

Countries across the GCC experience frequent power cuts, particularly during the summer. Why have regional governments so far been unable to find an effective and permanent solution to the problem?

There is a growing demand for electricity in the region and, due to cooling requirements in the summer months, there is an additional peak demand. Population growth and energy intensity of private and industrial consumption (six GCC countries are among the top 15 in the global ranking of per capita electricity consumption) are the main reasons for this growth. The demand is forecasted to more than triple over the next 20 years, with a peak exceeding 270 GWp.

Permanent solutions to meet this demand are being put in place, but capacity has to be expanded by up to 85 GWp in the next 10 years, with 30% of current and planned generation to be used seasonally during the summer months, but still needed to cover peak demands. In addition, there is a move towards increased use of interconnection capacity across the regional markets. Other opportunities to meet demand have yet to be designed and launched, but positive progress is being made. Some of the additional opportunities to be considered are:

• Align generation technologies and primary resources. Hydrocarbons dominate the GCC’s energy fuel mix, with natural gas playing a progressively important role as the main fuel for electricity generation. With the increased demand for gas in the petrochemical industry, current and future imbalances in gas supply are increasingly significant.

• Accelerate shift to renewable sources, in particular to solar technologies. An accelerated migration to renewable sources is a solution to a potential future scarcity of natural gas in the region (with utilities and petrochemical sector competing for it) and to improved carbon footprint of the GCC states. Leveled cost of energy calculated, based on actual value of fossil fuels in international markets, should be competitive to shave the load curve. Penetration potential of solar technologies, regardless of storage capacity associated, is high, given that the peak of solar resources coincides with peak demand periods.

• Excellence in the execution of large capital projects, related to both generation capacity and grid expansion, such as the use of models and contracting practices specific to the electricity sector (Open Season mechanism launched by ERGEG in Europe; models for trading of capacity allocation; simulations of investments depending on congestion management alternatives; …)

• Well-designed implementation of unbundling processes and regulatory schemes where market-based tariffs and price signals to educate demand can be implemented, together with initiatives to promote energy efficiency. Real demand management with pricing does not seem possible, given the consumption drivers described.

What steps should regional governments take to address this energy crisis and meet the power requirements of their fast-growing population and economies?

Firstly, there doesn’t need to be an energy crisis. Governments in the region are highly aware of the growing demand for electricity and strive to implement initiatives ensuring short-term and long-term supply.

The main issue is that oil is sold below production cost. The same applies to electricity which is highly subsidised. Many critics call for a review of the Gulf countries’ current energy policies, namely fuel and electricity subsidies, which are also seen as the main culprits for the region’s soaring energy consumption levels. However, a drastic reduction in energy subsidies could also have a dramatic impact on the region’s political stability, as recent events have shown. Is cutting subsidies the way forward or should more gradual changes be introduced? If so, what kind of regulatory framework should the Gulf countries embrace? Could you suggest specific policies that should be adopted?

Energy consumption is increasing, as mentioned, owing to increase in population and to the energy intensity of the region, which, in turn, is due to climatology and to the type of industries.

Therefore, it is difficult to manage exclusively through actions such as hourly prices/tariff periods, tariff components or discounts.

A regulatory framework applying more realistic pricing would have an impact on the demand, but at the same time, it could be a hurdle to the economic development and the quality of life in the region.

Effective policies to be adopted are those ensuring appropriate speed and stability in the deployment of renewable energy sources to meet the expected demand growth. Investing in transmission and distribution grids along with implementation of smart metering and smart grid would facilitate the integration of this additional capacity and would reduce losses.

Current plans to increase interconnection capacities (GCCIA, Seven Countries Interconnection Project) can be accompanied by regulations and market mechanisms such as market splitting, allowing optimisation of flows and supporting convergence of wholesale prices across countries.

How do you expect the situation to evolve over the coming months/years?

The demand will surge and in spite of all the efforts to meet demand, supply shortages may persist in specific local areas for years to come.

Governments are considering all the levers to meet the demand whether optimising distribution, making more use of renewable energy, promoting energy efficiency, regional interconnectivity or reviewing subsidies. All these initiatives need to run in parallel with an unbundling process.

To what extent will the recently launched GCC interconnected grid contribute to mitigating the region’s power challenges? Is the idea of a super grid connecting the GCC to Europe through North Africa hype or a possible reality?

The interconnection grid improves supply quality and reliability, load factors, and load balances through interconnecting systems with different generation mix and demand patterns. As capacities are installed, interconnection will help to solve regional and local imbalances and drive market pricing in the field of electricity.

One much-talked about super grid initiative is the Desertec project, which is designed to develop a High Voltage Direct Current (HVDC) technology grid with a one-way flow to transport renewable energy from the MENA region to Europe. Apart from this project, multiple conventional initiatives and projects have been launched in GCC and North of Africa to improve interconnection capacity within the MENA region and between this region and Europe. Examples include the ELTAM project, connections between Libya and Morocco and Italy and Spain or the Seven Countries Interconnection Project.

All in all, the idea of a super grid in the MENA region with some interconnection to Europe is a reality that has been built over the years.

The UAE is building four nuclear reactors, while Jordan has recently unveiled its nuclear plans. Saudi Arabia is also assessing nuclear options. What’s your view on Mideast’s nuclear expansion? Do you believe that it may represent a further threat to the region’s political stability?

The many announcements in countries across the globe to extend life of existing nuclear plants and to build new capacities are being radically reviewed after Fukushima.

Qatar is the world’s largest LNG producer and there are unconfirmed rumors that the UAE will open a GTL (gas-to-liquids) plant by the end of the year, as Qatar already did. What role will unconventional gases play in guaranteeing long-term security of supply across the Mideast?

Rather than about unconventional gas, the incentive around the development of GTL capacities is in the conversion of natural gas into more valued liquid derivatives, offsetting the discount with which markets penalise gas products in comparison to oil / liquids. Based on energy contents, a barrel of WTI oil is equivalent to 5.83 MMBtu of NG, and hence oil price per barrel should be 5.8 times higher than the natural gas price on a per MMBtu basis.

At price levels of around US$80 per barrel of crude, gas would be selling for around US$13.80 per MMBtu if priced in terms of energy equivalent. The reality is that gas prices in April 2010 were still at just over US$4 per MMBtu (or from the perspective of gas prices, current prices of US$4 imply an oil price of US$23 per barrel; expected 6-to-1 oil-gas price ratio standing at 20-to-1 levels). After market reaction in both Europe and Asia, the decoupling is still significant (with gas prices at an oil equivalent of around US$50 per barrel). Monetising natural gas with GTL processes continues to be economically very attractive and would improve balances of liquid derivatives in the region.

Renewables are also high on regional governments’ agendas. However, for the time being both solar energy and wind are not cost-competitive. Furthermore, there are a number of technical challenges that need to be addressed (i.e. PV efficiency is reduced by dust and high temperatures, wind is an intermittent source of energy and can only be found in limited areas within the GCC region). Will large-scale deployment of renewable energies be sufficient to supply most of the required demand or could it be ineffective if not supported by the right policies?

It is true that wind resources in the region are limited, but wind turbines can still be considered as part of hybrid solutions or elements of virtual power plants in specific areas. On the other hand, the potential of solar technologies, given irradiation levels and space availability, is enormous and has not even started to be exploited yet. High temperatures should not be a problem in conventional PV and in any case, they are a challenge in CPV that is already being addressed. Other conditions are not much more severe than in locations in the south of Italy, south of Spain or some US states, where utility-scale facilities are being developed. Coating methods to protect PV equipment from dust are being applied. We believe that renewable energy sources, especially solar technologies, will reach utility scale in the GCC in the near future and will contribute in a very relevant manner to fill the generation capacity gap. In recent studies elaborated by A T Kearney in collaboration with EPIA and ESTELA, we have studied in detail the potential of PV and CSP technologies respectively. In one of them, in particular, ‘Unlocking the Sunbelt Potential of Photovoltaics’, specific analysis on PV in some GCC countries is presented.

Solar irradiation intensity in the GCC region is the highest in the world at an average of around 1800 W/m2 and, given the shape of the cost curve, it is attractive to start substituting peak capacity with renewable energy sources. In addition to any discussions around grid parity estimates, relevant studies on the GCC are intended to assess the region’s ability to secure its energy supply and to use primary resources in a way that maximises its economic development. Nevertheless, implementing the right policies and processes to support development and integration of renewable energy sources is still needed, especially seeking contribution from the private sector and end-consumers.

The UAE has one of the world’s highest energy consumption levels, although, in recent years, the governments of Dubai and Abu Dhabi and some of the smallest Emirates have made significant efforts to promote energy conservation among corporates as well as individuals. Why in your opinion, haven’t we witnessed many remarkable changes yet?

Awareness campaigns about energy and water conservation (since power used for water desalination in the GCC accounts for 15% of the power consumption) are a positive measure but don’t have a visible impact as demand is only in part driven by private consumption. Industry consumption is much more difficult to manage without interfering with the industry’s growth prospects.

The GCC countries are nevertheless moving in the right direction by unbundling processes and developing regulatory frameworks that will support demand management and energy conservation initiatives. As an example, Abu Dhabi has a deregulated generation model where ADWEC manages clients through standard and non-standard connections to the grid and further developments (IWPP programme) will contribute to the implementation of additional policies related to demand management and energy efficiency targets.

Considering that air conditioning accounts for 70% of a building’s total energy consumption, do you see district cooling and CHP as possible solutions to reducing the power demand? If yes, what are the ways to address the attendant challenges that district cooling, in particular, faces, in terms of finding acceptance in the region?

Conventional generation technologies have an efficiency of 58% while combined heat and power systems (CHP) can reach an overall efficiency of 85%. Also, district cooling systems potentially reduce the energy consumption by 40%. These technologies, if integrated with renewable energy sources, can produce cooling energy at peak temperature coinciding with the peak solar intensity and, therefore, reducing the demand peak.

Can the efficiency of turbines be improved through turbine inlet air cooling (TIAC)? Can this be deployed at a wider scale?

Using TIAC technologies on a combustion turbine increases power output during the GCC high summer temperatures by up to 35% (depending on the TIAC technology and temperature). Knowing that the capex for the technology is high, it is still up to 45% cheaper than adding capacity to an existing plant in order to compensate the drop of output during high temperature periods.

Combined with thermal energy storage technology, turbine chillers can operate during off-peak hours to produce thermal energy in the form of latent heat (static and dynamic ice) or sensible heat (chilled water and low temperature fluid storage) and utilise the stored thermal energy during peak hours for cooling the loads at the inlet air cooling coils. Another form of hybrid TIAC systems is LNG-based TIAC, where the thermal energy generated from an LNG plant to cool the inlet air of power turbine increases the achievable turbine output by around 20%. Scale in this case is obviously larger.