UAE energy minister says urgent need to cut subsidies in the region as oil prices decline

There is an urgent need to cut regional energy subsidies as government budgets are squeezed by slumping oil prices, the UAE Minister for Energy said yesterday

Opening an annual industry conference at Abu Dhabi National Exhibition Centre, Suhail Al Mazrouei said the issue of subsidies for electricity has become acute because demand continues to grow by about 9 per cent a year in the GCC countries, even while governments’ spending is under severe pressure.

“These subsidies urge most of the people in the region not to rationalise [their energy consumption] while using energy, and as you may know these figures are a great challenge for the budgets of the Arab world,” the minister said in his speech.

Mr Al Mazrouei reiterated that the government expects to spend US$35 billion on non-hydrocarbon electricity generation projects by 2020, most of which – $20bn – is accounted for by the nuclear building project at Barakah, where four reactors are expected to provide 24 to 25 per cent of the nation’s electricity demand, or 5.4 gigawatts, by 2020 if they are delivered on schedule.

The minister also reiterated the UAE’s target to reduce reliance on natural gas for power from current levels above 90 per cent to 70 per cent by 2020.

There are plans to have solar energy provide a significant portion of non-hydrocarbon electricity, although the minister said that while “we are trying to increase other eco energies [we expect] an increase in natural gas-fired generation”.

He did not say if there is a roadmap yet to reach a specific goal for solar-powered generation, or how the $15bn non-nuclear budget is being allocated.

Meanwhile, several of those attending the Abu Dhabi conference said there is a clear sign that government budget cuts are feeding through to electricity projects in the region.

“The Saudis have recently cut about half of their projects, including two we were involved with,” said Robert Giglio, a strategy and business development executive for Amec Foster Wheeler’s global power unit.

Saudi Arabia has been the biggest spender in the Arabian Gulf on power generation projects, but it has curbed its plans to move from oil-fired power plants to gas-fired and other sources. With oil much cheaper, it is more economic to burn that for electricity than to sell it on international markets and invest in gas or other projects.

Saudi Arabia and other countries in the region have revived plans to reduce subsidies, following the UAE lead, where utility bills for expatriates (the majority population) were allowed to rise to market rates at the beginning of the year, followed by a similar move for transport fuels in the summer.

But it remains a politically fraught issue. As Waleed Alsuraih, a World Bank energy specialist, pointed out, some countries in the region had to roll back subsidy cuts “within hours” in the past as their efforts faced a political backlash.

Osama Khawandanah, Saudi Electricity Company’s head of trading, said his government was initially tackling the demand side by implementing rules for the efficiency of air-conditioning units. “You know, 70 per cent of peak electricity demand in the summer in Saudi Arabia is used by air conditioning,” he said, so a relatively simple move can yield big results.

“Addressing subsidies is becoming more and more important, especially with oil prices down,” agreed Adnan Fakhro, deputy chief executive of the Bahrain Electricity and Water Authority.

He said three-fifths of Bahrain’s annual electricity consumption is subsidised by the government, but it has now required Bewa to reduce the proportion sharply over the next few years. This year it has budgeted 325 million Bahraini dinars (Dh3.16 billion) for electricity and water subsidies, falling to 31m dinar next year.

Bahrain will also follow Saudi Arabia and introduce air-conditioning efficiency standards next summer. Mr Fakhro also said that his country is looking at a phased approach to cutting subsidies, which would result in them being eliminated in four years.

This year was the first time the two big regional electricity conference were merged, reflecting the pressure on budgets.

PennWell, an American media and event company which runs the PowerGen conference, approached the League of Arab States, which runs the Exhibition of Electrical Industries in the Arab World, to combine the conferences, said Sue McDermott, senior international marketing manager for PennWell.

Attendance at this year’s combined conference seemed much lower on the opening day than at last year’s PowerGen alone, but Ms McDermott said “it’s a bit early to say … the pre-registration indicates that combining the two events would keep numbers at about the same level as [PowerGen] last year”.

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