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Privatization of dual-purpose seawater desalination and power plants — structures, procedures and prospects for the future
DESALINATION ELSEVIER
Desalination 125 (1999) 209-212 www.elsevier.com/locate/desal
Privatization of dual-purpose seawater desalination and power plants structures,procedures and prospects for the future A. Kom, M. Bisanz, H. Ludwig* Fichtner GmbH & Co. KG, POB 101454, 70013 Stuttgart, Germany Tel. +49 (711) 899-5667; Fax +49 (711) 899-5459; email: [email protected]
Abstract
Whereas co-opting of independent power producers has advanced in many countries to a tried-and-tested possibility for meeting the greatly increased demand for electric power, the retention of a private company for generating drinking water and electricity in dual-purpose seawater desalination and power plants has, up to now, been put into practice for just one actual case. This is the Taweelah A2 project, which was implemented in Abu Dhabi, United Arab Emirates. Taking this privatization project as an example, the preparation, procedure and implementation of such projects are given. Keywords: Privatization; Dual-purpose seawater desalination
1. Introduction
In the countries of the Middle East, dualpurpose seawater desalination and power plants are important - - and even predominant - - components of the state-owned supply infrastructure for drinking water and electricity. Up to now, construction of new plants and expansion of existing ones was based on procedures, contract
*Corresponding author.
award, ownership and operation for the following: • preparation of master plans with analysis o f the present situation, projections of the demands for electricity and water and siting of new plants and extensions • specifications and invitation for bids for dualpurpose power and desalination plants • award of contracts under competitive bidding under criteria of capital and operating costs by the state agencies, to their own account
Presented at the Conference on Desalination and the Environment, Las Palmas, Gran Canaria, November 9-12, 1999. European Desalination Society and the International Water Services Association. 0011-9164/99/$- See front matter © 1999 Elsevier Science B.V. All rights reserved PII: S 0 0 1 1 - 9 1 6 4 ( 9 9 ) 0 0 1 4 0 - X
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A. Korn et al. / Desalination 125 (1999) 209-212
operation of plants and distribution of electricity and water by the state-owned supply structure
2. Possibilities for privatization and how these influence existing structures and procedures Privatization measures are wide-ranging and diverse, encompassing all possibilities from assigning operations of existing plants to private operators up to transfer of ownership of seawater desalination and power plants, together with their electricity and water supply networks to private enterprises. What all privatization projects have in common, presuming they go beyond just operator models, is that as early as during the master plan stage, tie-in of the privatized structures into existing integrated systems will be considered and identified. This also covers, as far as necessary, adaptation of existing structures to the changed requirements for tying in private ownership and supply systems. If for the privatization project the obligation to supply electricity and water is retained by a central agency, and if privatization is concentrated on the generation of the utility services, the supervisory utility enterprise itself will decide what influence it will exert on implementation and optimization of the technical production structures of its privatized power and desalination plants. As far as project and planning procedures are concerned, this could mean that some of the conceptual engineering activities are shifted away from the tendering agency and its consultant, and to the company offering privatization services. If the terms of reference leave open the selection of the configuration of the technical plant and facilities, then optimization under technical, thermodynamic and economic aspects of the power plant and desalination systems advances to a key competitive factor for bidders.
It is then the task of the tendering organization and its consultant, during bid evaluation, to compare various desalination and power plant configurations with regard to electricity and water products costs, but also under the aspects of their technical reliability and efficiency. To enable a complete evaluation of bids for dualpurpose plants, a computer model has been developed with which the bidders' tariff calculations could be checked and which has proved to be an important tool for identification of the most advantageous bid. Privatization of electricity and water generation will first prompt an examination of the assignment of roles between the private and public sectors. This could lead to adaptation or dismantling of the existing structures, which usually represents the first step in the direction of restructuring the electricity and water supply sectors in a country or region. Table 1 shows the possible changes.
Table 1 Role
Current system
Government Buy generationand desalination assets; Specify input parameters; Control through ownership Private sector Mostly limitedto selling a plant;
IWPP involvement Buy output (electricityand water); Specify output parameters; Control through regulation
Sellingoutput (electricity and water); Turnkey construction BOO/BOOT contract scheme
A. Korn et al. / Desalination 125 (1999) 209-212 3. Taweelah A2, the world's first independent water and power producer
Privatization and expansion of the Taweelah A desalination power plant in Abu Dhabi is a project in which a major part of the tasks, procedures and objectives described above have been put into practice. Apart from putting in place the organizational structures for tie-in of the privatized power plant component into existing facilities and supply systems, the general organizational foundation for further privatization of dual-purpose seawater desalination and power plants in Abu Dhabi was also laid. This involved, alongside planning and implementation of the new transfer and supply structures on the water and electricity sides, setting up the organization for a new, central supervisory governmental agency for regulating and monitoring Abu Dhabi's water and electricity supply. This project is therefore worth studying for the following reasons: • Worldwide, this is the first independent water and power producer (IWPP) and could thus set a precedent for similar projects. • This project has not been executed as a "negotiated deal", but instead as a "competitive tendering process". • The entire bid strategy was designed to arouse maximum interest internationally to intensify competition. • The outcome of this competitive process has set standards and benchmarks that are not confined to the Gulf Region. For successful implementation of the first IWPP, it was necessary to develop a robust technical, commercial and contractual/regulatory structure, not the least of the reasons for which to permit financing structures of maximum competitiveness. This project comprised, among others: • development, design, financing, construction, commissioning, ownership, operation and
211
maintenance of the Taweelah A2 seawater desalination and power plant development, design, financing, construction and commissioning of an extension of the 400 kV grid station as well as a new potable water pumping station and transfer of their ownership to the transmission company. 3.1. Outline description o f the technical structure
In was originally intended that the plant add net capacities of 480-580 MW of electricity and 50migd of water to the transmission and distribution systems of the Emirate of Abu Dhabi. As its main fuel, natural gas was chosen. The facility is planned as a greenfield plant, although the pre-existing infrastructure at the site - - like seawater intake, brine outfall channel as well as other systems (firefighting, roads, lighting, perimeter fence, etc.) - - is to be used jointly with the already existing plants. In their choice of power generation technology, the bidders were given a free hand. In contrast, the technology for seawater desalination was limited to the multi-stage flash (MSF) evaporation process, which currently for the specified capacity is the only one with relevant application experience on a commercial scale, and thanks to the large number of plant manufacturers, promised a highly competitive bidding process. Ultimately, this concept resulted in the submission of highly competitive bids, permitting very low electricity and water prices. 3.2. Outline description o f the contractual and regulatory structure
The model providing the basis for private sector involvement in the Taweelah A2 project is build-own-operate (BOO). The heart of the network of contractual relationships is the power and water purchase agreement (PWPA). This contains all commercial and legal rulings governing sales of the net dependable power
212
A. Korn et al. / Desalination 125 (1999) 209-212
capacity and the net dependable water capacity, the net electrical energy and the net water output, as well as deductions, penalties and compensation for any deviation from contract conditions. A further central constituent of the suite of contracts was the Taweelah A2 company shareholders' agreement. This provided the basis for establishing a single-purpose project company in which the successful bidder and a state-owned local holding company would share the capital. This split of capital holding was decided on primarily under the aspect of the development of local capital markets. It was intended that the local shares be offered, at least in part, to local investors by an initial public offering or by private placement. Other project agreements were, for example, the A2 land lease agreement and additionally - due to the common utilization of the existing infrastructure at the Taweelah site - - the shared facilities company shareholding agreement and the shared facilities land lease agreement.
as fixed costs of operation and maintenance of the plant; output payments for supply of electricity and potable water as dispatched by the National Control Center - - these cover fuel costs as well as variable costs of operation and maintenance. These payments are linked to specified quality and performance criteria such as the availability of water and power capacity, net dependable power and water capacity, fuel efficiency, etc. For reasons, not the least of which is to ensure a consistent tariff system throughout all stages of supply up to the final consumer, it was necessary to allocate the accruing costs to the tariff components as named above to properly reflect how they arise. The allocation mechanism was the physical assignment of operation and maintenance, as well as of capital cost, to the water or to the electricity generation facility.
4. Future prospects 3. 3. Outline description o f commercial structure
The commercial structure of the project was likewise regulated in the PWPA. This had to consider the intention of applying typical financing arrangements for the project. Ultimately, limited or non-recourse financing means that payback of borrowed and equity capital together with interest is on the basis only of the revenues generated by the facility itself. Acting as purchaser of the facility's output as a single buyer is a state-owned company, referred to as the Power and Water Procurer. Payments for electricity and water supplies are split into two categories: • capacity payments for provision of electricity and water generation capacities - - these have to cover the capital cost and any profit elements arising from construction of the plant, the special and shared facilities as well
Diverse expectations are made of such a privatization project, and these may be summarized as follows: • enhanced economic efficiency • shift of financial burdens to the private sector • shift of risks to the private sector • development of private skills • development of local capital markets Repercussions of privatization on the cost situation in dual-purpose seawater desalination and power plants are evident in that these are reduced for both water and electricity generation. However, the applicability of this approach to other projects and any future impact on the cost situation in general for seawater desalination will always have to be evaluated on a case-by-case basis and will depend on (1) local conditions, (2) existing infrastructure and (3) possibilities for a tie-in to existing supply systems.
Desalination 125 (1999) 209-212 www.elsevier.com/locate/desal
Privatization of dual-purpose seawater desalination and power plants structures,procedures and prospects for the future A. Kom, M. Bisanz, H. Ludwig* Fichtner GmbH & Co. KG, POB 101454, 70013 Stuttgart, Germany Tel. +49 (711) 899-5667; Fax +49 (711) 899-5459; email: [email protected]
Abstract
Whereas co-opting of independent power producers has advanced in many countries to a tried-and-tested possibility for meeting the greatly increased demand for electric power, the retention of a private company for generating drinking water and electricity in dual-purpose seawater desalination and power plants has, up to now, been put into practice for just one actual case. This is the Taweelah A2 project, which was implemented in Abu Dhabi, United Arab Emirates. Taking this privatization project as an example, the preparation, procedure and implementation of such projects are given. Keywords: Privatization; Dual-purpose seawater desalination
1. Introduction
In the countries of the Middle East, dualpurpose seawater desalination and power plants are important - - and even predominant - - components of the state-owned supply infrastructure for drinking water and electricity. Up to now, construction of new plants and expansion of existing ones was based on procedures, contract
*Corresponding author.
award, ownership and operation for the following: • preparation of master plans with analysis o f the present situation, projections of the demands for electricity and water and siting of new plants and extensions • specifications and invitation for bids for dualpurpose power and desalination plants • award of contracts under competitive bidding under criteria of capital and operating costs by the state agencies, to their own account
Presented at the Conference on Desalination and the Environment, Las Palmas, Gran Canaria, November 9-12, 1999. European Desalination Society and the International Water Services Association. 0011-9164/99/$- See front matter © 1999 Elsevier Science B.V. All rights reserved PII: S 0 0 1 1 - 9 1 6 4 ( 9 9 ) 0 0 1 4 0 - X
210
A. Korn et al. / Desalination 125 (1999) 209-212
operation of plants and distribution of electricity and water by the state-owned supply structure
2. Possibilities for privatization and how these influence existing structures and procedures Privatization measures are wide-ranging and diverse, encompassing all possibilities from assigning operations of existing plants to private operators up to transfer of ownership of seawater desalination and power plants, together with their electricity and water supply networks to private enterprises. What all privatization projects have in common, presuming they go beyond just operator models, is that as early as during the master plan stage, tie-in of the privatized structures into existing integrated systems will be considered and identified. This also covers, as far as necessary, adaptation of existing structures to the changed requirements for tying in private ownership and supply systems. If for the privatization project the obligation to supply electricity and water is retained by a central agency, and if privatization is concentrated on the generation of the utility services, the supervisory utility enterprise itself will decide what influence it will exert on implementation and optimization of the technical production structures of its privatized power and desalination plants. As far as project and planning procedures are concerned, this could mean that some of the conceptual engineering activities are shifted away from the tendering agency and its consultant, and to the company offering privatization services. If the terms of reference leave open the selection of the configuration of the technical plant and facilities, then optimization under technical, thermodynamic and economic aspects of the power plant and desalination systems advances to a key competitive factor for bidders.
It is then the task of the tendering organization and its consultant, during bid evaluation, to compare various desalination and power plant configurations with regard to electricity and water products costs, but also under the aspects of their technical reliability and efficiency. To enable a complete evaluation of bids for dualpurpose plants, a computer model has been developed with which the bidders' tariff calculations could be checked and which has proved to be an important tool for identification of the most advantageous bid. Privatization of electricity and water generation will first prompt an examination of the assignment of roles between the private and public sectors. This could lead to adaptation or dismantling of the existing structures, which usually represents the first step in the direction of restructuring the electricity and water supply sectors in a country or region. Table 1 shows the possible changes.
Table 1 Role
Current system
Government Buy generationand desalination assets; Specify input parameters; Control through ownership Private sector Mostly limitedto selling a plant;
IWPP involvement Buy output (electricityand water); Specify output parameters; Control through regulation
Sellingoutput (electricity and water); Turnkey construction BOO/BOOT contract scheme
A. Korn et al. / Desalination 125 (1999) 209-212 3. Taweelah A2, the world's first independent water and power producer
Privatization and expansion of the Taweelah A desalination power plant in Abu Dhabi is a project in which a major part of the tasks, procedures and objectives described above have been put into practice. Apart from putting in place the organizational structures for tie-in of the privatized power plant component into existing facilities and supply systems, the general organizational foundation for further privatization of dual-purpose seawater desalination and power plants in Abu Dhabi was also laid. This involved, alongside planning and implementation of the new transfer and supply structures on the water and electricity sides, setting up the organization for a new, central supervisory governmental agency for regulating and monitoring Abu Dhabi's water and electricity supply. This project is therefore worth studying for the following reasons: • Worldwide, this is the first independent water and power producer (IWPP) and could thus set a precedent for similar projects. • This project has not been executed as a "negotiated deal", but instead as a "competitive tendering process". • The entire bid strategy was designed to arouse maximum interest internationally to intensify competition. • The outcome of this competitive process has set standards and benchmarks that are not confined to the Gulf Region. For successful implementation of the first IWPP, it was necessary to develop a robust technical, commercial and contractual/regulatory structure, not the least of the reasons for which to permit financing structures of maximum competitiveness. This project comprised, among others: • development, design, financing, construction, commissioning, ownership, operation and
211
maintenance of the Taweelah A2 seawater desalination and power plant development, design, financing, construction and commissioning of an extension of the 400 kV grid station as well as a new potable water pumping station and transfer of their ownership to the transmission company. 3.1. Outline description o f the technical structure
In was originally intended that the plant add net capacities of 480-580 MW of electricity and 50migd of water to the transmission and distribution systems of the Emirate of Abu Dhabi. As its main fuel, natural gas was chosen. The facility is planned as a greenfield plant, although the pre-existing infrastructure at the site - - like seawater intake, brine outfall channel as well as other systems (firefighting, roads, lighting, perimeter fence, etc.) - - is to be used jointly with the already existing plants. In their choice of power generation technology, the bidders were given a free hand. In contrast, the technology for seawater desalination was limited to the multi-stage flash (MSF) evaporation process, which currently for the specified capacity is the only one with relevant application experience on a commercial scale, and thanks to the large number of plant manufacturers, promised a highly competitive bidding process. Ultimately, this concept resulted in the submission of highly competitive bids, permitting very low electricity and water prices. 3.2. Outline description o f the contractual and regulatory structure
The model providing the basis for private sector involvement in the Taweelah A2 project is build-own-operate (BOO). The heart of the network of contractual relationships is the power and water purchase agreement (PWPA). This contains all commercial and legal rulings governing sales of the net dependable power
212
A. Korn et al. / Desalination 125 (1999) 209-212
capacity and the net dependable water capacity, the net electrical energy and the net water output, as well as deductions, penalties and compensation for any deviation from contract conditions. A further central constituent of the suite of contracts was the Taweelah A2 company shareholders' agreement. This provided the basis for establishing a single-purpose project company in which the successful bidder and a state-owned local holding company would share the capital. This split of capital holding was decided on primarily under the aspect of the development of local capital markets. It was intended that the local shares be offered, at least in part, to local investors by an initial public offering or by private placement. Other project agreements were, for example, the A2 land lease agreement and additionally - due to the common utilization of the existing infrastructure at the Taweelah site - - the shared facilities company shareholding agreement and the shared facilities land lease agreement.
as fixed costs of operation and maintenance of the plant; output payments for supply of electricity and potable water as dispatched by the National Control Center - - these cover fuel costs as well as variable costs of operation and maintenance. These payments are linked to specified quality and performance criteria such as the availability of water and power capacity, net dependable power and water capacity, fuel efficiency, etc. For reasons, not the least of which is to ensure a consistent tariff system throughout all stages of supply up to the final consumer, it was necessary to allocate the accruing costs to the tariff components as named above to properly reflect how they arise. The allocation mechanism was the physical assignment of operation and maintenance, as well as of capital cost, to the water or to the electricity generation facility.
4. Future prospects 3. 3. Outline description o f commercial structure
The commercial structure of the project was likewise regulated in the PWPA. This had to consider the intention of applying typical financing arrangements for the project. Ultimately, limited or non-recourse financing means that payback of borrowed and equity capital together with interest is on the basis only of the revenues generated by the facility itself. Acting as purchaser of the facility's output as a single buyer is a state-owned company, referred to as the Power and Water Procurer. Payments for electricity and water supplies are split into two categories: • capacity payments for provision of electricity and water generation capacities - - these have to cover the capital cost and any profit elements arising from construction of the plant, the special and shared facilities as well
Diverse expectations are made of such a privatization project, and these may be summarized as follows: • enhanced economic efficiency • shift of financial burdens to the private sector • shift of risks to the private sector • development of private skills • development of local capital markets Repercussions of privatization on the cost situation in dual-purpose seawater desalination and power plants are evident in that these are reduced for both water and electricity generation. However, the applicability of this approach to other projects and any future impact on the cost situation in general for seawater desalination will always have to be evaluated on a case-by-case basis and will depend on (1) local conditions, (2) existing infrastructure and (3) possibilities for a tie-in to existing supply systems.