Power shortages 'largest single risk' to GCC growth

Power-sector requirements "pose significant operational and financial risks", says Moody's.

The need for US$50 billion (Dh184bn) of investment in GCC electricity infrastructure, led by the UAE requirements, could strain company finances and jeopardise economic expansion, according to a leading international credit rating agency. "Moody's regards fuel supply and resulting power shortages to be the single largest risk to long-term growth in the region," a team of analysts led by Philipp Lotter, a senior vice president of Moody's Investors Service, said in a report published today.

Power-sector requirements "pose significant operational and financial risks", the analysts added. Gulf power producers' ability to deliver new capacity on time is "a significant worry". Moody's singled out the Dubai Electricity and Water Authority (DEWA) as especially likely to see its financial position deteriorate due to rising fuel costs. "Given the constant rise in Dubai's energy demand and the substantial increase in installed capacity, the current gas supply arrangements will not be sufficient to satisfy all of DEWA's future capacity" the report warned.

Last year, DEWA was forced to run most of its power stations on oil purchased on spot markets "at exorbitant costs", Moody's said. Citing data from MEED, the London-based Middle East business intelligence firm, Moody's said the GCC needs nearly $50bn of investment by 2015 in power-generation, and additional investment in electricity transmission and distribution grids. Nearly 40 per cent of forecast regional capacity additions, approaching 60 gigawatts (GW) in total, are needed in the UAE, which could spend more than $19bn on new power plants in the next seven years. Dubai alone is expected to invest about $9.4bn to add 11 GW of new generating capacity. "Mega real estate projects", a Dubai speciality, are contributing to tightening electricity supplies.

"If you build completely new cities within cities, this is essentially what is driving electricity demand there," Mr Lotter said. In the UAE as a whole, "exceptional growth" - fuelled especially by huge projects in Dubai and Abu Dhabi - is eroding the country's traditional 15 per cent reserve margin in electricity ? the difference between generating capacity and expected peak demand. Tightening margins across the Gulf are endangering the region's growth prospects, Moody's said.

Exploding populations and heavy industrial investment are also exacerbating the GCC's power crunch. Blackouts are on the rise, the debt-rating agency said, and are likely to increase, "particularly where utilities are operationally and financially unable to fully execute their expansion plans". Moody's said procuring fuel for power plants would pose problems for most GCC countries: "Further government support, mainly through subsidies, may be required in some markets to ensure profitability within the industry."

"We believe that the power sector could require in excess of $35bn in project financing over the next 10 years," it said. [e-mail]