• Home
• News Article

Qatar: Powering up for progress

January 2006
Almost all Gulf economies are seeking to reform and liberalise their power sectors. Some have placed their faith in gas fired independent power producers (IPPs), while others have opted to make desalination plants a key element of their generation mix. Qatar, for instance, is relying almost entirely on independent water and power producers (IWPPs), fed by domestic gas reserves, to provide new generating capacity.

Until 2000, Qatar's entire power sector, through generation, transmission and distribution, was owned by the government. However, in May 2000, all assets were transferred to the new Qatar Electricity and Water Corporation (QEWC) and the Qatar General Electricity and Water Corporation (Kahramaa). While other governments in the same position have sought to sell their power companies outright to foreign firms or awarded long-term management contracts, Doha opted to create a genuinely Qatari private company in the form of the QEWC.

The government continues to hold a 43% stake in the firm but the remaining equity is held by a wide variety of domestic investors with the government planning to further erode its own holding in the future. Despite the growing role of other private investors in power generation, QEWC still plays the leading role in the sector and holds equity in several IWPPs. The 750MW Ras Laffan IWPP opened in November 2004 at the Ras Laffan gas and industrial complex. The $700m plant is owned by AES of the US (55%), QEWC (25%), Qatar Petroleum (QP) (10%) and Gulf Investment Corporation (GIC) (10%). GIC is jointly owned by the six member states of the Gulf Cooperation Council (GCC) and was set up to invest in infrastructural projects across the region. The plant is fed with water by a 60km pipeline with a huge three metre diameter and, despite the complexity of combined water and power schemes, Ras Laffan was completed very rapidly.

At the opening ceremony, Abdullah bin Hamad Al Attiyah, the minister of energy and industry, said: "The Ras Laffan Power and Water Plant has the distinction of being a fast-track project. It started generating power in March 2003, almost a year to the date of laying its foundation stone, and started producing water last May. It is considered part of the country's long-term plan to ensure a continuous supply of cost effective electricity and water." The plant will mainly supply the Ras Laffan industrial zone, although surplus production will be used to supply the rest of the country.

A second IWPP is being constructed on the same site and will also be fed with gas by QP. The contract for the $900m Ras Laffan B was signed towards the end of 2004 and the first tranche of generating capacity is expected to come on stream by the start of 2007. Initial capacity of 600MW will then be stepped up to 1,025MW within two years. In March, the project consortium, led by QEWC, with a 55% stake, in association with International Power (40%) and Chubu Electric (5%), signed a 25-year take or pay power and water purchase agreement with Kahramaa for the plant's entire output. Project funding was provided by 80% debt and 20% equity. The two Ras Laffan plants are part of a wave of large scale IWPPs being developed across the region.

The two plants complement the existing 1,030MW Ras Abu Fontas B desalination plant, brought back on stream following an overhaul by Alstom in June 2002. However, additional generating capacity of 567MW should be added by 2007 as part of a fast-track development programme. Turnkey contracts to carry out the work have been awarded to two consortia, led by General Electric and Fisia. In October this year, Kahramaa signed a new 25-year power and water purchase deal with QEWC to cover the additional capacity. Kahramaa has revealed that the next IWPP will probably be a 1,000MW facility, built at Mesaieed Industrial City by 2010. The contract for the plant will be awarded under a competitive bidding process.

Electricity and water production costs on desalination plants have fallen substantially over the past decade and although power production costs are still higher on WPPs than on advanced gas fired plants, the need for more water production means the government in Doha along with other Gulf governments are prepared to create a regulatory environment that includes power purchase agreements (PPAs) that pay a premium for electricity from IWPPs. Water supply is such a major security issue that the government believes it is worth structuring the market so that power production effectively subsidises water desalination. While a greater degree of power sector liberalisation is likely in Qatar over the next few years, the need for water security means that this structure is likely to remain in place and further IWPPs will almost certainly be developed.

Nevertheless, dedicated gas fired plants are also to be developed using Qatar's massive gas reserves. In December 2004, Norwegian firm Norsk Hydro revealed it had agreed a deal with QP to construct a gas fired plant at Mesaieed Industrial City, as part of its wider agreement to develop a $3bn aluminium plant. QP will take a 51% controlling stake in the venture, with Norsk Hydro owning the remaining 49% equity. The plant, initially with a generating capacity of 1,000MW, will be fed by associated gas. Abdullah bin Hamad notes: "Qatar is a strategic location for this project and has proven natural gas reserves of more than 900 trillion cubic feet, representing secure and competitive supplies for power production. The policy of the Qatari government is to utilise the country's natural resources for economic and industrial development.

Participation in a project for primary aluminium production fits this policy." Growth in the gas sector has certainly driven the Qatari economy over the past few years and gas exports have also been buoyed by record oil receipts but unlike in many other countries in the region, the government has made the most of its success to fund diversification projects. Qatar's growing petrochemical, fertiliser and liquefied natural gas (LNG) enterprises all consume large amounts of electricity, so demand is set to rise rapidly over the next decade. The country's economic culture has also changed, so the private sector is now playing a far more substantial role. Once each of the IWPPs is complete, national generating capacity will stand at 4,304MW, up from just 1,095MW in 1990.

Until 2000, Qatari citizens were entitled to free electricity, but this allocation has now been sharply reduced and as the result of a more commercial culture, customers must pay for all power use above a certain level. Residential consumption currently accounts for 69% of all power demand but this figure is expected to fall over the next decade, probably to around 50%, as a result of rising industrial consumption. Meanwhile, total demand for electricity is expected to increase by 10% a year over the next five years. Aside from the construction of new plants, the biggest project in the Qatari power sector is the development of the Gulf Cooperation Council (GCC) power grid. The first phase of the grid development is scheduled to connect Qatar with Saudi Arabia, Kuwait and Bahrain by 2008. But while the physical infrastructure required to create the grid is being put in place, it is unlikely cross-border trading will become a major factor in the Qatari power sector for a long time to come. Some bilateral deals could be signed but a massive cultural shift will be required if state power companies and IPPs are able to treat the region as a single market.

Even competition within each member state remains limited at present. However, all six governments are committed to putting the required regulatory changes in place in order to create a genuine power pool and all are banking on power sector cooperation to drive regional cooperation as a whole.

A combination of gas fired generation and desalination technology is likely to provide the basis of power generation for a long time to come. Qatar's North Field is the biggest non-associated gas field in the world and the country also possesses the international community's third biggest gas reserves. It is unsurprising that the government is keen to make the most of domestic natural resources. While the well-publicised Dolphin scheme is distributing gas to the UAE, Oman, and possibly even to Pakistan, for power generation, the Al Khaleej Gas venture (AKG) distributes local gas domestically. If power trading with the GCC region does eventually take off, Qatar is well placed to make a killing.

© The Middle East 2006