Rethinking PPP in power and water
Procurement in the GCC’s utility sector needs to move away from the current lowest cost bid mentality and towards better system efficiency and demand management
Ask most utility planners what the lowest lifecycle cost to build a power or water plant is today and you will probably get the following response: for power, either a solar-based power plant if reliability is not an issue or some form of combined-cycle gas-fired plant; for water, it is probably a technology platform based on reverse osmosis, especially if seawater is the water source.
Both of these answers are far from the truth. The power or water plant with the lowest lifecycle cost is not necessarily the one you have to build, especially if demand for the service is falling. This could come about either through increased efficiencies on the supply side or through demand management, though such measures will likely incur higher costs for the utility or procurer.
Power sector opportunities
In the power sector, the production of existing plants can be increased and/or energy efficiency could be improved to reduce throughput costs, demand could be decreased or some combination of all of these could be enacted.
Plant productivity can be improved, for instance, by introducing or enhancing heat recovery methods, thereby raising the efficiency of gas turbines.
Even more significant savings can potentially be made by measures to tackle issues on the demand side. These could include improving the envelop of both new and existing commercial buildings; adopting energy-efficient motors in industry; and promoting the use of energy-efficient appliances in the consumer segment.
Some progress has already been made in these areas, especially with the construction of new buildings with LEED Certification, but there is room to achieve a lot more.
By managing business and consumer demands, every GCC country could save billions of dollars by avoiding the building of costly new power plants altogether.
Plant productivity can be improved by introducing or enhancing heat recovery methods, thereby raising the efficiency of gas turbines
Water sector opportunities
In the water sector, there are several steps that could be taken to deliver significant savings.
In many jurisdictions, the most significant savings to realise on the supply side come from dealing with transmission and distribution water leakages. These tend to be in the 25-40 per cent range for most water utilities throughout the GCC and reducing these to 10-15 per cent results in significant savings.
Greater use of treated sewage effluent (TSE) in non-drinking applications such as irrigation and watering for animal crop production can also lead to significant savings. Not enough is being done in these areas in the GCC.
Another viable option on the water side is to convert inefficient technologies such as multi-stage flash distillation to more efficient reverse osmosis desalination technologies.
This has the added advantage of decoupling power and water and allowing for greater efficiencies. This is already being considered in a few jurisdictions such as Saudi Arabia and the UAE.
There are also demand-side measures that can be adopted to curtail the ever-growing use for water, particularly during these pandemic times when everyone is washing their hands more frequently.
This includes introducing greater use of, among others: low flow showerheads; electronic sensitive faucets; and water-efficient major appliances, especially dishwashers and washing machines. As in the case of electricity, there has been some action taken in this area, but not enough. There is still substantial room for improvement that can lead to significant water savings.
It is certainly true that governments and utilities throughout the GCC have taken certain actions in all of these areas to date, but a lot more can be achieved.
The adoption of demand-side measures would help curtail the ever-growing use of water, particularly during the pandemic when everyone is washing their hands more frequently
Procurers can play a major role in this area by adapting their existing public-private partnership (PPP) model. Rather than issuing a request for proposals (RFP) to build an 800MW power plant, a procurer can release an RFP asking bidders to submit proposals for an 800 negawatt (NW) power plant.
A NW market is a theoretical energy market where the commodity traded is a negawatt-hour, a unit of energy saved as a direct result of energy conservation measures.
The tendering process and overall procurement structure would remain the same. Bidders would submit proposals on how to achieve permanent NW power savings amounting to the equivalent of 800MW.
The key word here is “permanent”, in that whatever savings are achieved must be sustainable over the long term. Moreover, the NW can be time sensitive so that a NW saved during peak hours is valued more than one saved during off-peak hours.
Bidders would be assessed based on the cost of achieving these savings, measured in terms of a levelised NW cost, in much the same way that is done now throughout the GCC for typical independent power (water) plants or I(W)PPs. The bidder with the lowest cost is awarded the project.
How much the procurer is able to save is largely dependent on the action taken by the bidder and the costs associated with this; however, it is envisioned that savings in the billions of dollars could be identified and achieved.
By way of illustration, the below chart shows the cost of constructing and operating an 800MW power plant based on two selected technology platforms.
Levelised cost of power
We assume we are dealing with a gas-fired combined-cycle plant and a PV solar power plant. For the conventional power source, we assume most recent levelised prices bid for Fujairah 3 IPP at 4.55 $cents a kWh. Most recent prices are also assumed for the PV plant, applying 1.57 $cents.
The total lifecycle cost of the conventional plant comes in at around $8bn in present value terms, based on a 25-year power purchase agreement with a 95 per cent off-take.
The PV solar plant comes in at only $770m, though this is based on a capacity factor of only 28 per cent. To get roughly the same kWh from an 800MW, the cost would come in at about $2.8bn from three equivalent-sized 800MW plants.
Lifecycle costs identify the generation costs only. There are also expected to be added transmission and distribution costs that should ideally be taken into consideration. These costs ultimately amount to somewhere between 40 to 60 per cent of the cost of delivering power to the end user.
The key question is: what would it cost the private sector to “guarantee” that the equivalent demand of an 800 MW plant is taken off the system peak.
In all likelihood, a lot less than the cost of an 800 MW plant, whether the electricity is produced by a conventional source or by renewables.
It would seem that the private sector should be able to deliver a negawatt at a PV cost of less than $4,550 per MWh (for the gas alternative) or $1,570 per MWh for a renewable option.
Given the current situation throughout the GCC, where governments and procurers alike are being hit with both relatively low oil prices along with Covid-19, a NW IPP or IWP might be one way to achieve significant cost savings over the long run
Of course, there are a number of issues to resolve before such a negawatt IPP is actually tendered by a procurer. Measuring the negawatt claimed will be challenging, though certain rules and procedures could be put in place to ensure that the load is actually removed from the system.
Payment for removing the NW from the system might be staggered over time to ensure that the NW is indeed removed from the system. This would entail having the bidder report quarterly or annually that the NW is still being realised, and paid accordingly with liquidated damages applied if demand is back on the system.
Establishing what is allowable to constitute a NW will also be a challenge. One approach might be to issue the first NW IPP to “energy saving” firms, who could propose retrofitting certain older commercial buildings with energy-efficient lighting, air conditioning and other energy-saving devices.
The bidders would then submit their proposals that takes into account their costs to achieve NW savings compared to a predetermined baseline. Bill savings from these retrofits could then be shared with the procurer, so that this approach has the benefit of an added revenue source.
A similar approach can also be taken in the water sector, especially in regards to the retrofit market.
Given the current situation throughout the GCC, where governments and procurers alike are being hit with both relatively low oil prices along with Covid-19, a NW IPP or IWP might be one way to achieve some significant cost savings over the long run.
Granted, there are a number of obstacles to overcome to make this a workable model. However, the cost savings are potentially enormous, and may be worth a closer look, at a time when governments are seeking to minimise both their capital and operating cash outflows.
The first successful IPP in the region in the mid-1990s was not a cakewalk either, nor was the first IWP in 2007. There were substantial hurdles to overcome, and it took an innovative approach by a bold government to make it happen back then, but look where we are today. Maybe it is the time for another bold entity to step up to the plate and make another breakthrough.
About the author
Robert Bryniak is CEO of Golden Sands Management (Marketing) Consulting, a UAE-based establishment that specialises in the provision of strategic management services to both private and public sector companies in the power and water sector throughout the GCC. He has more than 30 years of experience in the power and water sector. As an independent adviser, he specialises in providing due diligence services and financial valuations, along with market analysis and business development.