Middle East power house

The Middle East's electricity generation is expected to grow by 2% annually over the next two decades, as rapid economic growth and demographics make huge demands on the sector.

16 January 2013
The Middle East's electricity generation is expected to grow by 2% annually over the next two decades, as rapid economic growth and demographics make huge demands on the sector.

The International Energy Agency notes that the region will more than double from 1,740 tWh of electricity generation by 2035 from 824 tWh in 2010.

Natural gas, already the most dominant power generation fuel source, will account for 69% of demand by 2035, compared to 62% this year.

Meanwhile, oil will continue to be a vital fuel source for power generation till 2015, before the Middle East will finally wean itself off the precious crude, freeing it up for exports. Oil's share of electricity generation will fall from 35% in 2010 to 16% by 2035.

And despite the massive investments being poured into nuclear plants by the Gulf states, the technology will only account for 4% of power generation by 2035.

Concentrated solar power, and solar photovoltaic together will account for 5% of power generation, while make up 3%.

Over the next four years, Gulf states are expected to invest a massive USD104-billion in the power sector, leading to massive opportunities but also would could serve as a remarkable opportunity to change its consumption behaviour.

Shuaa Capital estimates the region will install 57 giga watts of new capacity with an investment of USD104-billion, to add to its existing installed capacity of nearly 108 giga watts.

Of these USD63.1 billion is expected to be invested in power generation, another 30.9 billion in distribution and USD10.7 billion in transmission.

"A recent study by APICORP indicates that installed generation capacity in the GCC is likely to expand by 53% over the 2013-2017 period at an expense of USD 63 billion," said Shuaa in a note.

"Additional expense on transmission and distribution is expected to bring total expenditure in the sector to USD105 billion. Moreover, Saudi Arabia is expected to be the biggest spender amongst the GCC nations over the coming years, with USD 80 billion worth of projects planned in the years to 2020 to expand capacity from current estimate of 51,000 MW to c. 70,000 MW."

But there is much work to be done. While, a number of power projects are under way, a vast majority of the projects will be either fuelled by natural gas or liquid fuels, impacting the country's crude and natural gas exports.

This is crucial for a region that thrives on its ability to exports its hydrocarbon riches, but Shuaa Capital's research shows natural gas and liquids will fuel 88% of the power generation by 2020, compared to 86% in 2010.

"Gas serves as the single most important fuel for power generation in the GCC. This trend is expected to continue well into the future, with EIA estimating that more than 90% of the planned incremental power generation in the region will be fulfilled by gas. Consequently, EIA estimates that the share of gas fueled plants will increase from 57% in 2010 to 67% by 2030."

Of course, the region has a power consumption problem. The IEA estimates electricity consumption in the wider Middle East region stands at just over 10000 kilogram of oil equivalent, higher than most advanced nations and higher than the United States, China and Germany.

Plus, much of it is subsidised.

"While intense heat during summers partly explains the high electricity and water consumption rates in the GCC (air conditioning accounts for 50% of electricity consumption in the region), heavy subsidization by the government also significantly curtails the need to promote conservation," notes Shuaa Capital.

"A study by Booz & Company indicates that while the real cost of electric power at market prices stands at 12 US cents per kWh for a typical GCC utility, the end-consumer pays around 4 US cents per kWh, with implicit fuel subsidies and explicit transmission and distribution subsidies accounting for the difference."

Can the Gulf states and wider Middle East can manage their power demand without hurting their economic growth and eliminating subsidies?

That will be a crucial question for most Middle East states over the next two decades.

© 2013

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