Cheap energy in UAE is over

The UAE’s electricity demand projections are staggering. Based on future development plans, the current installed capacity of energy will need to double by 2015. The amount of energy the UAE consumes is set to treble by 2020 – a reflection of a very energy-intensive lifestyle. Even as the energy-producing Middle East sells its wares in lucrative global markets, the UAE looks set to suffer from the resulting demand and price rise. The UAE has one of the highest per capita gas consumption rates in the world. Until recently, the assumption was that demand growth would be met by creating additional generation capacity, fed by limitless gas resources. Governments in the region acted in line, seeking to locate energy intensive industries such as aluminium smelting and sponsoring the building boom. However, a significant shift occurred in the past year. Although gas, the principal fuel for power generation and desalination, is abundant in the region, the assumption that it would flow as a cheap resource to underpin the UAE’s growth no longer makes sense. Abu Dhabi’s gas is increasingly used in the oil recovery process. Using this gas for electricity generation instead could cost millions of barrels of oil left unrecovered. Abu Dhabi’s untapped Shah Field gas resource can produce the equivalent of 50 per cent of current UAE consumption. However, this resource is earmarked for supporting the oil recovery process. Furthermore, the gas has a high content of sulphur which has to be removed at a cost nearly equivalent to the current wholesale price. Qatar has instituted a gas development moratorium until 2011 to preserve its valuable resources for future projects. It has invested in special plants that allow its gas to be marketed anywhere in the world, attracting world market prices. Iran has plenty of uncommitted resources, but is no longer willing to sell these at prices significantly below world market standards. Put simply, the gas rich nations of the region have the options to sell their gas in an attractive world market which has raised the benchmark for gas prices at home, particularly in the demanding UAE. No substitute Alternate fuels for power generation all have problems. Fuel oil and coal are dirtier, less efficient and so more expensive options. The cost of generating clean nuclear energy is up to twice as expensive than gas-generated electricity and is a long-term undertaking, with 10-year lead times common. At the right price – which we estimate to be in the order 100 per cent higher than current wholesale price – gas will be available. Unless governments continue to subsidise energy prices, consumers must get used to the idea of higher energy prices. It is quite possible that some energy intensive industries will suffer. A possible solution to the UAE’s fuel problem is a combination of demand management, efficiency and diversification. Price rises will eventually lead to demand elasticity. The UAE’s real estate developments need to be regulated by building codes which make cooling more efficient, and make solar generated electricity and water heating mandatory. Domestic waste water should be recycled to get more use out of costly desalination which consumes vast amounts of electricity. Such consistent use of efficiency measures and demand management could yield the equivalent of roughly 10 per cent of installed capacity over the next five years. To summarise, energy prices are likely to rise significantly from the current level. Demand elasticity should appear and consumers are likely to seek more efficient real estate offerings. The time of abundant cheap energy is over, even in the UAE. Reducing energy intensity has to be a long-term goal, but in the interim: « user pays ». – The writer is managing director, The National Investor. By Gundi Royle, Special to Gulf News