The Nexus between Renewable Energy and Power Sector Reform in Abu Dhabi

Introduction

The aim of this article is to examine renewable energy development and power sector reform efforts in Abu Dhabi, with an eye toward analyzing the interaction between the two. This article looks at the impetus behind Abu Dhabi’s interest in renewable energy as well as its efforts at power sector reform. Although there is some discussion of countrywide political and economic conditions, the focus of this article is Abu Dhabi, as it is by far the largest and most powerful emirate in the federation, and is spearheading the country’s efforts in both power sector reform and renewable energy. What follows is an assessment of Abu Dhabi’s power sector reform and renewable energy initiatives. Ultimately, I have found that while the restrictive ownership requirements associated with Abu Dhabi’s single-buyer model power sector may deter some companies, the government’s use of long-term power purchase agreements (PPAs) and R&D initiatives tremendously reduce the risks normally associated with renewable energy projects and offer the UAE an opportunity to develop its human capital.

A Brief Overview of Abu Dhabi’s Power Sector and Reform Efforts

The power sector in Abu Dhabi currently follows a single-buyer model. The buyer in this case, the Abu Dhabi Water and Electricity Company (ADWEC), purchases electricity from generation companies, transmits it over the national grid, and sells it to distribution companies, which then deliver directly to customers. The ADWEC enters into long-term PPAs with generation companies, 95% of which are roughly 40% privately-owned and entirely privately operated. The ADWEC also pays generation company fuel costs.

An independent regulator, the Abu Dhabi Regulation and Supervision Bureau (ADRSB), regulates pricing and pricing methods throughout the electricity provision supply chain, including PPAs, which is the price generation companies charge to the ADWEC, and Bulk Supply Tariffs (BST), the price the distribution companies pay to the ADWEC.[1] The ADRSB also issues licenses, required by all independent power producers (IPPs), and aims to enforce a variety of safety and performance standards on all electricity sector entities.

Power Sector Reform Efforts

Efforts at power sector reform and the transition from a single vertically-integrated and entirely state-owned entity providing all power-related services to the single-buyer model which prevails today began in 1996 with the establishment of the Privatisation Committee for the Water and Electricity Sector. The committee was tasked with looking at options for the restructuring and privatization of the sector, with the stated aims of securing supply, improving economic efficiency and quality of service, promoting private investment, creating employment opportunities for UAE nationals, and maximizing revenue from any asset sell-offs.[2]

The Committee’s findings led to the passage of Law No (2) Concerning the Regulation of the Water and Electricity Sector, which came into force in 1999.[3] Law No (2) introduced private funds into the sector and provided for the reorganization of the power sector’s singular management entity, the Water and Electricity Department (WED), into separate generation, transmission, and distribution companies.[4][5] The law also created an umbrella organization, the Abu Dhabi Water and Electricity Authority (ADWEA), to house the ADWEC, the transmission company, and the various distribution companies. The WED’s assets, liabilities, and employees have since been transferred to one of the new public companies.

The actual introduction of private capital and the divestiture of state assets have only occurred on the generation side. The government has allowed two or more joint venture partners to own up to 40% of a single generation company; however, no single joint venture may on its own possess more than 25% of the emirate’s total generation capacity.[6] The Abu Dhabi government maintains its domination over the ostensibly private power generation industry through the ADWEC, which acts as the majority shareholder in all IPPs with an ownership stake of 60% or greater.[7]

In 1997, the Privatisation Committee issued the first request for proposal (RfP) for private power generation in the country’s history; this RfP was for the construction and operation of Taweelah A2, a combined-cycle natural gas, power, and water generation plant situated on Abu Dhabi’s coastline.[8] CMS Generation, a US power company, won the bid and the administration of the contract was transferred to the ADWEC. A new holding company, Emirates CMS, was created to own and manage the new plant, with ADWEC maintaining a 60% ownership stake and CMS retaining the other 40%.[9] Responsibility for planning and contracting for new production has since been transferred to the ADWEC.[10]

Political and Economic Motives Behind Power Sector Reform

The UAE is an economically developed country that, by a large margin, is a net donor of foreign assistance. There is no evidence that its utility was suffering from the usual set of symptoms common to public utilities in developing countries, such as capital scarcity and massive debt. As such, the desire for increased economic efficiency has spurred reform efforts rather than external pressures from foreign financiers.

Current Efforts at Developing Renewables

The Abu Dhabi Future Energy Company (ADFEC), also known as Masdar [the Arabic word meaning "source"], is responsible for executing all of Abu Dhabi's renewable energy efforts. Masdar is a wholly-owned subsidiary of the Mubadala Development Company, Abu Dhabi’s primary investment vehicle for socially responsible economic diversification, and figures into Abu Dhabi’s broader economic development strategy as outlined in The Abu Dhabi Economic Vision 2030.[11] Unlike the renewable energy development efforts in other MENA countries, Abu Dhabi’s highly publicized Masdar Initiative is a multi-faceted effort aimed at transforming the emirate into a global hub for renewable energy technologies. The emirate is not merely soliciting investment and operational expertise; rather it is seeking to develop such expertise domestically. Ultimately, the government seeks to transform Abu Dhabi into a research and development center for renewables, resulting in knowledge transfers to UAE nationals.

A Renewable Energy Hub for Knowledge Transfers

Two of the Masdar Initiatives’ five “units” or programs are aimed directly at facilitating knowledge transfers: Masdar City and the Masdar Institute. Masdar City, to be situated 17 kilometers from downtown Abu Dhabi, seeks to attract the R&D headquarters of the world’s renewable energy technology companies.[12] To this end, Abu Dhabi authorities have declared Masdar City a “special economic zone,” along the lines of neighboring Dubai. These special zoning provisions will provide companies with streamlined services for registering businesses, government relations services, and visa processing, and will feature 100% foreign ownership, zero taxes on companies and individuals, zero import tariffs, and unrestricted capital and profit movements.[13] These provisions allow companies to avoid restrictions that might discourage investment such as limitations on moving profits out of the country or being required to enlist a domestic partner in order to operate.

As of 2010, Masdar’s stated goal was to attract 1,500 companies to operate and invest in Masdar City.[14] This will be difficult as there is little regional demand for renewable technology, with the UAE and other Gulf countries presently relying comfortably on oil and gas to meet their energy demands and offering little in the way of renewable energy promotion strategies and regulatory frameworks.[15] Thus far, companies’ interest in Masdar City, which has been lauded by Masdar officials, is grounded primarily in their desire to win contracts to build the city itself.

Masdar City will also house a graduate-level university, the Masdar Institute, featuring academic programs that center on clean and renewable energy technologies. The Institute was established in cooperation with MIT. According to former MIT Chancellor Phillip Clay, MIT will be working with the Masdar Institute “to develop collaborative research and create indigenous academic programs, to create a strategy for commercializing Masdar Institute's research results and to build the institute's organizational and administrative capabilities.”[16]

The first class of students began coursework in September 2009. As of October 2010, UAE nationals made up 43% of the Institute’s student body. The Institute plans to increase that percentage by creating a pre-Masters program for UAE nationals, which would act as a prep school for the Institute, providing them with a guided academic year, during which they could strengthen their academic credentials.[17]

Masdar Capital, a renewable energy investment portfolio consisting of the Masdar Clean Technology Fund (MCTF) and the DB Masdar Clean Tech Fund (DBMCTF), can also be seen as an attempt to acquire renewable energy expertise. Both funds are managed in conjunction with partner groups.[18] The MTCF is a $250 million fund managed in conjunction with Consensus Business Group, Credit Suisse, and Siemens AG, while DBMTCF is a $265 million fund managed jointly with Deutsche Bank.[19] Large stakes in renewable technology companies, especially controlling stakes, will help Abu Dhabi acquire proprietary renewable energy technology and expertise it can use to develop local industries.

Completed and Planned Renewable Energy Projects

Masdar Power is the unit directly responsible for the development and operation of renewable energy projects. At present, a 10 Megawatt (MW) photovoltaic (PV) solar plant in Masdar City and solar panels generating 2 MW atop 11 Abu Dhabi government buildings are the only active renewable energy generation projects in the emirate.[20] Another solar plant called Shams 1, billed as the largest concentrated solar power (CSP) plant in the world, is currently under construction; its capacity is expected to be around 100 MW.[21] For the sake of comparison, even the Shams 1 plant would comprise a modest portion of total energy consumption in the emirate - in order to meet the goal of 7% of energy from renewable sources, 1,600 MW will be required. In order to encourage investment in Shams 1 and promote the use of solar power as an energy source, the Abu Dhabi Ministry of Finance will subsidize the expected high cost of Shams 1 electricity through a “green payment” to ADWEC.[22] The Shams 1 plant is to follow the same ownership structure as Abu Dhabi’s other independent water and power producers, with Masdar controlling 60% of the plant and Total S.A. and Abengoa Solar each controlling 20%.[23]

Abu Dhabi also seeks to enter the carbon emissions reduction market. Its vehicle for doing so, Masdar Carbon, hopes to create value by providing carbon emissions reduction restructuring for carbon-emitting companies that will then be reimbursed under the United Nations Clean Development Mechanism program.[24] The company claims to be working on a massive carbon capture and storage project that will capture carbon emitted by Emirati heavy industry and subsequently inject it into Abu Dhabi’s oil and gas fields for enhanced recovery.

The Advantages of Reform and the Current Model

Abu Dhabi’s single-buyer model enables renewable energy development in several ways. Abu Dhabi’s current power sector policies offer a stable, relatively low-risk environment for attracting renewable energy investment funds and the development of renewable sources. Indeed, the government’s extreme economic power and authoritarian political system enable it to easily direct economic resources towards socially beneficial projects. The ADWEC's capital resources are tied to the Abu Dhabi treasury, and are thus virtually unlimited. Hence, the ADWEC will undoubtedly be willing to shoulder would-be visceral financial threats to renewables projects. As a result, the 60:40 ownership ratio that the ADWEC offers effectively acts as a loan guarantee. The UAE’s credit rating, on par with the U.S., stands at AA.[25]

The ADWEC’s use of long-term PPAs that offer generation companies full-cost recovery pricing for 20 year periods exemplifies the emirate’s willingness to shoulder risk. These PPAs provide renewable energy developers with an economic foundation. Solar and wind construction and operation outfits with PPAs in hand are more able to secure financing from private investors; they signal to investors that the government is willing to bear the potential economic costs associated with the project.

Finally, the 60:40 model, combined with ADWEC’s ownership of Abu Dhabi Transmission and Despatch Company (TRANSCO), ensures would-be renewable developers access to the national grid upon completion of their projects. The same cannot be said for renewable developers in unregulated markets, such as Texas, where wind farms constructed in the western part of the state are having difficulty reaching their customer base in the eastern part of the state due to a lack of grid access and face political opposition to the construction of necessary transmission lines.[26] The government has also shown a great deal of flexibility regarding the operating procedures of private partners, allowing them to subcontract as necessary.

Disadvantages

On the other hand, a single-buyer model and limited ownership mean that there is little opportunity for firms to maximize profits through competitive business practices in the same way that they could in Texas, where there exists the possibility for complete private ownership and direct contracting with end-users.[27] Firms’ profit-maximizing and efficiency calculations within the context of the Abu Dhabi power sector are likely to be vastly different than those same calculations in the context of a truly competitive market. For example, regardless of whether firms invest sizable amounts of capital in a plant, the obstacle to full ownership and profit-maximization on capital investments remains. In the context of renewables, this could prevent firms from investing in the necessary cutting-edge technologies that could make Abu Dhabi a globally competitive renewable energy producer.

Continuing with this logic, allowing firms the right to own new plants, renewable or otherwise, would necessitate a variety of other structural reforms, which would greatly diminish the Abu Dhabi government’s level of control over the power sector, and thus diminish its ability to dispense key gifts to its citizens in the form of free water and extremely cheap electricity. If firms were given full ownership, then they would surely demand fair access to consumers. However, it would be difficult for the Abu Dhabi government to convince firms that they are providing this as long as some generation companies, along with transmission and distribution networks, are owned by the same umbrella organization. ADWEC could easily cross-subsidize generation at some of its plants by offering those plants cheaper access to the grid.

Were the Abu Dhabi government to retain its vertically-integrated monopoly, it would have to be upfront with companies regarding the accounting practices of each ADWEA subsidiary. Currently, ADWEC publishes the bulk supply tariff, which is the price of electricity sold to distribution companies.[28] Yet, the price of electricity detailed in ADWEC’s purchase power agreements with IWPPs remains unpublished.

Conclusion

Abu Dhabi’s approach to renewable energy is unique among MENA region countries, as are the drivers behind its power sector reform efforts. The primary reason for this relates to the emirate’s economic position as a wealthy country with a highly developed power sector infrastructure and near complete territorial electrification. The country’s high levels of development and traditional authoritarian political structures have created a unique set of incentives, challenges, and opportunities for Abu Dhabi’s leaders.

While other MENA countries see both renewable energy and power sector reform as a means to achieve more acceptable living standards, the view in Abu Dhabi seems be more focused on using renewable energy as a means to promote its international standing and influence. Indeed, the majority of government funds dedicated to renewable energy are spent either on the construction of Masdar City or on investments in research centers and companies that develop projects in other parts of the world. Abu Dhabi has moved to provide renewable energy services to foreign populations before having fully developed its own internal renewable energy capacity. While seemingly ironic, this strategy fits with the country’s plan to concentrate on developing renewable technology expertise.

The country’s power sector reform efforts and present structure may offer just the right kind of environment to allow renewable energy companies an opportunity to carve out a small but growing market niche in the country. Full privatization of the sector would surely undermine the development of renewables, regardless of whether the government offered feed-in tariffs. The government is able to mitigate risks associated with renewable energy projects in myriad ways that private sector entities never could nor would. Perhaps as the price of oil continues to rise and domestic supplies diminish, the emirate will redouble its efforts to develop renewable energy capacity locally. At this point, the technology may be commercially viable to the extent that privatization would serve only to drive down prices as opposed to price out desired sources. Abu Dhabi’s renewable energy initiatives, though ridiculed by many critics as being more stylish than substantive, may actually be quite sensible.