Vast infrastructure investment needed in Middle East

16 December 2008

The Middle East will require investments of more than half a trillion US dollars in electricity infrastructure to facilitate economic growth in the coming years. At the same time, several countries in the region lag behind in their infrastructure planning. Increasing supply-demand imbalances, power outages and soaring electricity prices might be the consequence, according to leading management consulting firm A.T. Kearney.

Growing demographics and wealth in the Middle East will lead to a constant increase of demand for electricity. “While investments are estimated to be more than USD 500 billion by 2030 for the region, forecasting of energy demand is not accurate. Many countries are still behind in forecasting and capacity planning,” said Dr. Dirk Buchta, Managing Director of A.T. Kearney Middle East.

“For those countries it is not apparent, where to build how much capacity - based on which kind of energy sources. As a consequence, customers could suffer from increasing supply-demand imbalances, power outages and soaring electricity prices”.

According to A.T. Kearney, the additional generation capacity needed is potentially underestimated. While economic growth in the Middle East is expected to be 7%, the buildup of generation capacity is only 4% per annum.

A further challenge is how to calculate the necessary energy efficiency increase, as utility companies in the Middle East face energy sector losses of more than 10% through theft and faulty systems. A lack of metering and governance leads to situations where utility facilities are not aware of where they lose energy – and subsequently – money.

“The structures within the electricity portfolios of the regional utility companies need to change significantly towards alternative energy sources like solar, wind and nuclear,” said Dr. Goetz Wehberg, from the Global Utilities Practice of A.T. Kearney. “In addition to large scale solar farms, smaller local units such as photovoltaic home installations must evolve."

Although many Middle East countries are discussing ambitious renewable targets – for example, achieving a 20% share of renewables in 2020 like in the EU – the regulatory framework and funding of such investments are open in most cases. Initiatives such as Masdar are only a preliminary step in leveraging the region’s solar power potential.

Key growth areas for future electricity supply are tourist hubs, economic cities and industrial zones. The six Economic Cities of Saudi Arabia for example, will have a future metro population of several million people and investment requirements for electricity generation of more than USD 4 billion.

Industrial zones such as Jubail and Yanbu in Saudi Arabia are expected to double in size within the next five years, with investments in utilities infrastructure accordingly. Additionally, countries such as Bahrain are running out of oil and need to secure their energy supply for the future. Other nations such as Jordan extensively rely on energy imports already and want to decrease their dependency.

“A sound demand forecast, capacity planning and regulatory management will be key to avoid power outages in the future“, concluded Dr. Wehberg. “To better balance supply and demand within the region and prospectively with Europe, the transmission grids in the Middle East need to become more integrated.”