Time to flip switch for higher power prices

Power cuts are an ongoing problem in the region.

Power cuts in a UAE summer are a nightmare for residents, businesses and authorities. Food rots in the fridge, people sleep on their roofs to escape the heat, and at a time of economic troubles, industry has to close down. Sharjah recently suffered a month of blackouts. In response, Sharjah Electricity and Water Authority (SEWA) has hiked power prices by 50 per cent to cut its losses. Meanwhile, in Ras al Khaimah and Ajman, new buildings stand empty for a lack of electricity.

Is a power crisis looming for the UAE? And if so, what can be done about it? The problems have three root causes. First, global energy changed in the past decade. Oil and gas prices soared and while the Gulf gas market became integrated with the rest of the world, local gas prices did not keep up. Second, recycling these petrodollars contributed to the UAE's rapid economic growth. Electricity demand was further boosted by ambitious industrial developments, and massive property projects whose architecture was often unsuited to the climate.

Finally, while generating costs soared, cheap subsidised power remained available to a country unused to conservation. This situation was, of course, unsustainable. There is no way that electricity output could maintain these explosive growth rates indefinitely. Only massive expansions to generating capacity in Dubai and Abu Dhabi, as well as phasing new grid connections, enabled them to keep up. Now the economic downturn creates a breathing space for the northern Emirates, in particular, to solve their problems. As the Dubai Electricity and Water Authority (DEWA) chief Saeed al Tayer has indicated, the different emirates' grids need stronger interconnections. Better customer service and reliability from the utilities, and a more integrated electricity strategy at national level are also vital.

But building power stations is only half the solution. They need fuel to burn and the UAE relies almost exclusively on natural gas. In the past, domestic gas production was cheap and more than enough to meet demand. But now supply is lagging behind. Only Abu Dhabi has significant potential to step up output, and new gasfields are expensive - its flagship Shah development will cost US$10 billion (Dh36.73bn) or more.

As for imports, the Dolphin project bringing gas from Qatar was a vital and ground-breaking initiative. It has, however, not been followed by other schemes. Qatar itself is happy to complete its existing gas projects and does not plan to launch new ones until 2013, at the earliest. The only other plausible exporter nearby, Iran, is politically problematic and, as Sharjah's Dana Gas knows, it has proved difficult to conclude deals.

Liquefied natural gas (LNG) can be brought in special tankers from many exporters around the world, and Dubai plans to begin purchases next year, but LNG is expensive. And any new contracts, whether for LNG or pipeline gas, will be far above historic Gulf prices. The fallback, oil, is more polluting and even more costly. So, like many other nations, the UAE is investigating alternative energy sources. Ras al Khaimah and Ajman are considering coal-fired plants, Abu Dhabi's Masdar is working on solar and other renewable power, and there is, of course, a massive nuclear programme in the works.

Coal is cheap but dirty, worsening the UAE's already high carbon footprint. Considering DEWA's plans to trade carbon credits, coal will become a liability, unless fitted with promising but still immature "carbon capture" systems. Although solar power has clear long-term potential, it can reach at most 7 per cent of demand by 2020. Nuclear could become the backbone of generation, but the first plant will not start up before 2017.

The only solution to this conundrum is that electricity prices have to rise. Increased efficiency - "negawatts" instead of megawatts - is the fastest, cheapest and most environmentally friendly way to cover rising demand. Nobody likes higher bills. But UAE consumers cannot remain insulated from the outside world. Prices are well below realistic costs of future generation. Paying more is greatly preferable to sweating in the dark through another month of power cuts. Every dirham the Government gives to wasteful energy subsidies means a dirham less to spend on building clean power stations, creating jobs, improving roads and schools, cutting fees and funding future pensions.

Would we rather have those benefits for ourselves and our children, or do we prefer to water lush lawns in August and run air conditioning with the windows open? Information campaigns and the use of "smart meters" help, and regulations should require landlords and developers to make their buildings efficient. However, only higher prices can slow runaway demand. When prices tell us the real cost of power, it will become standard to fit solar water heaters, as at the Al Bustan Rotana hotel, better insulation, low-energy lighting and many other technologies.

The UAE, a leader in so many other fields, should be the environmental champion among Gulf states. California has the most expensive electricity in the US, but this has not derailed the state's economy - on the contrary, it is a centre for hi-tech and green innovation. DEWA's "slab tariffs" are one way of protecting vulnerable groups in society. Everyone gets a minimum amount of power at a low rate; those who want more have to pay for it. Alternatively, prices could be increased but a fixed rebate, perhaps a few hundred dirhams, could be given on the monthly bills of qualified customers. Another sensible option is to charge more for use in the summer or midday, when the system strains under the weight of demand for air conditioning.

So, the long-term future of energy supply here is assured. The current crises will be steadily overcome. To achieve this, though, electricity bills have to increase across the UAE, with careful thought for minimising social impacts. Business and residents would do well to begin planning accordingly, but rising power prices are not something to regret. They are part of the Emirates's continuing evolution into a modern, efficient and sustainable economy.

Robin M Mills is a Dubai-based energy economist and author of The Myth of the Oil Crisis [e-mail]