What is the single buyer model and what are the underlying reasons it is the best fit for Abu Dhabi?
CARTER: The single buyer model, and its reasons for being implemented in Abu Dhabi, is not really to do with the distribution and transmission. It is to do with the procurement of production capacity, whether that is water or electricity. The single buyer model gives investors assurance that their output will be paid for once they have built a power plant. All of the power plants in the emirate of Abu Dhabi apart from one small plant are privately operated from operating companies from all over the world including Korea, Japan, the UK, France, and more. They follow the independent water and power producer model (IWPP) whereby 40% of the equity of the company is owned by the developer and the remaining 60% is basically through a special purpose vehicle, which is essentially the government. So the structure of those companies and those projects is such that, with a firm power and water purchase agreement in place between the producer and the single buyer, the assurance of income providing electricity and water is made available. Investors look for that structure and they look for a regulatory structure; an independent regulatory body that will insure that the single buyer implements the terms under which the project is first constructed, built and run. So it is an integral part of that loop. If you are in the UK, the single buyer models are not there and it is now a more private self-dispatched model. But that is because you have a market that is far bigger than this. You have the expertise and experience in the UK that can build these plants whereas in an emerging economy, which this region is, clearly it has to import those skill sets. Therefore, people will not build power plants that nearly cost $3bn on speculation unless there is some assurance of income. Really, it helps facilitate the building of these plants rather than hinders them.
Do you think liberalization/privatization are on the horizon?
CARTER: In terms of privatization and going forward with privatization, that is to some extent a matter for the government. We as a regulatory body set the amount of money we believe these transmission companies need to operate their business efficiently. That includes the cost of capital, the investment of capital, operational costs and regulated asset values. That is the model that we use that was lifted from the UK. Whether the company is privatized or not makes no difference to the way we set the price control mechanism. The difference is in the output of the company. What was found in the UK is that companies had a far more commercial focus in terms of how they are managed, which is reflected in their ability to generate greater profits by reducing costs. If the companies here are good at their operations and good at driving down operational costs, then these companies can make a reasonable return. They can make something like 8% in real terms on the investment, which is a reasonable return for a utility monopoly organization.
The UAE is one of the worlds leading consumers of energy on a per capita basis. How are you involved in promoting water and energy conservation in Abu Dhabi? How effective have conservation campaigns been and what more can be done?
CARTER: There is no question that the UAE consumes high quantities of water and power. That in part is because of where the UAE is situated; it is a hostile environment, so it will consume high amounts of water and power. The per capita basis that is often quoted, both about electricity and water, is to some extent slightly distortive because a lot of the data for this deals with the issue of consumption by industry and for water irrigation of crops. This is often lumped in on a per capita counting basis. Of course, this does distort the results. One of the things that we have done as a regulatory body is to look at the consumption patterns of customers and we found that people living in flats in the UAE consume no more water than their counterparts in Europe and America. Yes we consume more electricity in the UAE in the summer because of the air conditioning, but the overall energy consumption could be comparable to a place like Norway where it is very cold in the winter. We have a public awareness campaign which we launched in January this year to show customers the level of subsidy the government is giving them. The feedback has been very good in that the customers had not realized that the government of Abu Dhabi pays a percentage of their power and water bills. We have now redesigned the bills with a company based in the UK and we are looking at separate bills for water and power and on top of that a smart billing system that shows customers an adequate amount of consumption for the size of the property they occupy. This is a country where people are reasonably well off. Electricity and water, even if charged at full price, would not necessarily drive behaviour change because they are fairly inelastic products. We are aiming to focus on peopleâ€™s social consciousness rather than saving money. So we feel education of the consumers of power and water is more important than pricing signals.
Coupled with all of this, we are implementing a trial for electricity consumers. We have asked 500 consumers to install meters, capable of switching to different consumption levels at different times of day, on individual devices in their villas. We will run this trial for 18 months to see if price signals do have an impact on peopleâ€™s behaviour. Another thing that has happened in the emirate is the complete installation of smart meters. Virtually all premises have solid-state electronic meters and there are also collection data hubs for those meters. So now the sector has a means of communicating with the meters by downloading data. Eventually, we would like to develop a means of communicating to the meter to maybe get some messaging into peopleâ€™s premises. All of our strategies at the moment are geared toward changing the information people receive about water and electricity. In terms of the technical aspects, we are working on a whole range of smart grids and on imbedded generation. So we are working on creating small generators that can produce energy at the point of sale, and therefore there may be some netting off arrangements, or we may pay more for energy produced at certain times. We are looking at structuring tariffs to look at this concept known as neggawatts. A neggawatt is a non-megawatt, so we pay people, and companies particularly, for not producing and taking load during certain times of day. The load here is always between 2pm and 6pm. It is extremely predictable and very weather related.
Water here has a high value because it is desalinated. Water that is carried in pipes as drinking water has a much higher value in terms of supply chain costs compared to water in the UK or other parts of the world. Because of that, the leakage of water, or what is called unaccounted for water is extremely important. We do know something like 80% of the water that is produced in this emirate ends up on the ground before it gets back to the sewer. There is a ratio that we measure called return to sewer and that ratio at the moment is about 20%. One of our strategies going forward is to increase that ratio significantly to get it up to maybe 40% to 50% and reuse that reclaimed water twice. We will try to link the beautification of the emirate to the amount of available wastewater rather than the amount of potable water. We have proposed the establishment of an irrigation company regulated by us that has a whole range of operating criteria. This will gradually move that imbalance, which is a strategy of the RSB going forward.
This is a country where people are reasonably well off. Electricity and water, even if charged at full price, would not necessarily drive behaviour change because they are fairly inelastic products. We are aiming to focus on peopleâ€™s social consciousness rather than saving money.
Abu Dhabi is continuing its economic diversification and expanding the industrial sector, what challenges does increased demand from industry present for water and wastewater operations in the emirate?
CARTER: The challenges that accompany expansion are no different here than a utility supporting the expansion of its country anywhere in the world. One of the areas that is different is the rate of expansion. We know that by 2020, the emirate is scheduled or on target to double its production of electricity. This will involve the building a number of new power plants. There are a couple of things we are trying to do there to mitigate the impact of those additional plants, particularly when it comes to water. We have this system aimed at looking at increasing wastewater usage, and believe to some extent we can reduce the need for water and therefore reduce the need to build cogeneration plants. A cogeneration plant is a water and electricity plant sitting side by side. When you remove the need to produce water, there is a lot more flexibility for where you can site your plant. You do not need the massive quantities of water. As a rule of thumb, for every 10 gallons that goes into a desalination plant, one gallon of drinking water comes out. So you have to move billions of gallons a day to produce millions of gallons of drinking water. So when you uncouple that cogeneration, it means you can site these plants much close to the site of load, or you can use nuclear plants. One of the key aspects of a nuclear plant, there is no production of water. Control water, and you can begin to look at new technologies and renewable energy, which again, there is no cogeneration aspect for. Wind, photovoltaic, concentrated solar power, all of these can be introduced without the worry of how you are going to produce more water. If you do need to produce more water, then maybe the sector will use reverse osmosis. However, due to the high level of solids in the water in this part of the world, reverse osmosis is only practical on the East coast of the country.Â So we see an expansion of plants in Fujairah, we see an expansion of electricity only plants, and particularly the nuclear plants supporting that going forward. In addition to this, we also need to look at a significant investment in the transmission system going forward. One of things we are responsible for is to ensure the transmission owner and operator uses modern techniques in the way it builds and manages its transmission network.