Meeting the growing demand for water and electricity in the UAE

Overview

In the United Arab Emirates (UAE), demand for water and electricity is increasing year-on-year. This is driven by growth in population, industrialisation and urbanisation. One by-product of increased demand has been an increase in public-private partnership (PPP) structuring for new construction projects in the water and electricity sectors.

In 2017, the UAE launched ‘Energy Strategy 2050’ (the Strategy) with the aim of increasing the contribution of carbon-free energy in the UAE's energy mix from 25% to 50% by 2050. The target is for the UAE's energy mix to comprise 44% clean energy, 38% gas, 12% clean coal and 6% nuclear energy. In conjunction, the Strategy aims to reduce energy consumption of individuals and corporates by 40%.

The UAE government is also targeting an overall reduction in water consumption. By 2030, the aim is for 100% of the country's desalinated water to be produced using a combination of clean energy sources and waste heat.

We examine the impact of all these factors below.

Practical Guidance

Regulations and best practices to be considered when starting a project

Federal law

The UAE has a federal system of law. On a national level, the UAE's electricity and water sectors are regulated by:

• the Ministry of Energy and Infrastructure (MEI), established under Federal Law No. 1/1972  On the Competencies of Ministries and Powers Ministers (as amended); and
• the Federal Electricity and Water Authority (FEWA) established under Federal Law No. 31/1999 Concerning the Establishment of the Federal Department of Electricity and Water. 

These laws give the UAE federal government exclusive jurisdiction over electricity and water services. However, over time, the Emirates of Abu Dhabi, Dubai and, to some extent, Sharjah have developed their own regulatory framework in the electricity and water sectors.

Throughout the last decade, a number of initiatives have been introduced to reduce market fragmentation across the different Emirates. In 2013, the UAE government announced that the Emirates National Grid would connect four previously separate electricity networks. In 2018, the Emirates of Abu Dhabi and Dubai entered into a Memorandum of Understanding to investigate connecting their water distribution networks.

Dubai

The main authorities regulating the water and electricity sectors in Dubai include:

• the Dubai Supreme Council of Energy (DSCE), established pursuant to Dubai Law No. 19/2009 on Establishing the Supreme Committee for Energy. The DSCE is the chief regulator of energy in Dubai. It regulates exploration, production, storage, transmission and distribution of electricity and petroleum products. It also proposes initiatives regarding the energy sector. This has included implementation of Dubai Law No. 6/2011 On the Organisation of Private Sector Participation in the Production of Electricity and Water in the Emirate of Dubai, which resulted in the privatisation of some of Dubai's assets in the electricity sector;
• the Dubai Electricity and Water Authority (DEWA), established pursuant to Dubai Decree No. 1/1992 on Establishment of Dubai Electricity and Water Authority (as amended). DEWA is exclusively authorised to establish, manage, operate and maintain, within the Emirate of Dubai: (i) power production facilities, power transmission and transport and distribution networks; and (ii) water desalinisation plants, water reservoirs and transport and distribution networks. DEWA is also responsible for initiating and managing projects related to generating electricity for  public benefit and the wider needs of the Emirate of Dubai; and
• the Dubai Regulation and Supervision Bureau (RSB), established pursuant to Dubai Executive Council Decision No. 2/2010 on the Establishment of an Office for the Regulation and Control of Electricity and Water Sector in the Emirate of Dubai. The RSB is authorised to regulate the electricity sector subject to the DSCE's supervision. It is mainly responsible for regulating, licensing and supervising service providers, facilities and assets that generate electricity. It also determines standards and proposed legislation governing the electricity sector in Dubai.

Abu Dhabi

Abu Dhabi's water and electricity sectors are regulated by:

• the Department of Energy (DOE), established pursuant to Abu Dhabi Law No. 11/2018 on Establishing a Department of Energy. The DOE is responsible, principally, for controlling, supervising and organising the energy sector in Abu Dhabi and for issuing licenses to entities engaged in the energy sector in Abu Dhabi;
• the Emirates Water and Electricity Company (EWEC), established pursuant to Abu Dhabi Law No. 20/2018 on the Establishment of UAE Water and Electricity Company “Public Joint Stock Company”. The EWEC is the sole provider of water and electricity in Abu Dhabi. It is obliged to adopt policies to diversify Abu Dhabi's sources of water and electricity production. It is also empowered to contract and license entities producing and distributing water and electricity in Abu Dhabi; and
• the Abu Dhabi Power Corporation (AD Power), established pursuant to Abu Dhabi Law No. 3/2019 on Abu Dhabi National Energy Company. AD Power is owned by Abu Dhabi Development Holding Company. This is mandated to own, oversee and operate construction-related state-owned enterprises in a number of sectors, including the utilities sector.

Other Emirates

The electricity and water sectors are regulated differently in the remaining Emirates of Sharjah, Ajman, Ras Al Khaimah (RAK), Fujairah and Umm al-Quwain as follows:

• In Sharjah, the main electricity and water regulator is the Sharjah Electricity and Water Authority (SEWA), established pursuant to Sharjah Law No. 1/1995 Protection of the Public Network for Electricity and Water Services in the Emirate of Sharjah (as amended). SEWA is responsible for the generation, transmission and distribution of electricity in Sharjah. Moreover, SEWA is authorised to set electricity tariffs and connection fees, subject to the approval of the Ruler of Sharjah; and
• In Ajman, RAK, Fujairah and Umm al-Quwain Etihad Water and Electricity (EWE) (formerly the Federal Electricity and Water Authority (FEWA)) established pursuant to Federal Decree-Law No. 31/2020 to carry out the duties assigned to the Federal Electricity and Water Authority, is responsible for generation, transmission and distribution of water and electricity. In addition, Ras al Khaimah Emiri Decree No. 4/2013 on the Establishment of the Electricity and Water Authority at Ras al Khaimah (RAK Authority) was established to regulate the ownership, management, operation and maintenance of power plants, desalination plants, water fields and power transmission and distribution networks located in RAK. Compared to the DOE or RSB, RAK Authority does not have detailed regulatory powers. Instead, the RAK Authority is responsible for ensuring that electricity is sold to consumers on a fair and transparent basis and maintaining standards generally.

Regulation

All activities connected to the generation, transmission and distribution of electricity in the UAE are regulated and require specific licenses from the relevant authorities.

Ownership and market access

In Dubai, DEWA is authorised to establish project companies either on its own or in collaboration with others. Dubai Law No. 22/2015 on the Organization of Public-Private Partnership in the Emirate of Dubai sets out the regulatory framework with respect to these arrangements and is designed to encourage PPP structures. Some projects already exist in Dubai where DEWA owns 51% of the PPP entity while private entities own the remaining 49%.

In Abu Dhabi, project companies in the water and electricity sectors are usually formed as joint stock companies. These companies can be created with two or more foreign joint venture parties owning up to 40% of each company. However, the DOE ensures that foreign ownership controls no more than 25% of the entire energy market. The other 60% of the joint stock companies will be owned by DOE (10% of 60%) and the Abu Dhabi National Energy Company PJSC (90% of 60%).

Transmission, transportation and distribution services

Water and power transmission and distribution in the UAE is owned and controlled by government authorities. In Dubai, DEWA owns all electricity generation, transmission and distribution capacity. DEWA is empowered to control electricity prices; however, this role has been devolved to the DSCE.

Abu Dhabi Transmission and Despatch Company (TRANSCO) operates Abu Dhabi's transmission networks. It distributes via two companies, which are both wholly owned by DOE. These two companies are: (i) Abu Dhabi Distribution Company (ADDC); and (ii) Al Ain Distribution Company (AADC). EWEC purchases energy from producers and sells it to ADDC and AADC. ADDC and AADC pay EWEC for the electricity received and charge the end consumer.

A national project was launched in 2001 to enhance integration of the individual Emirates' various water and electricity authorities. Each authority contributed a proportion of the development cost of the Emirates National Grid (NG). The NG is owned by DOE (40%), DEWA (30%), EWE (20%) and SEWA (10%). The NG is connected to the Gulf Cooperation Council ("GCC") power grid, which allows the UAE to trade electricity with other GCC nations.

Market making

The market for power purchasing in the UAE is controlled by state-owned entities. However, contracts for power production are awarded by way of a competitive bidding process that is administered by the relevant authorities in each Emirate.

In Dubai, power producers are obligated to sell their production capacity to DEWA. In Abu Dhabi, EWEC is required to contract with licensed power producers. The DOE is permitted to allow sales from producers directly to consumers. However, this has not happened yet and DEWA and EWEC remain 100% in control of the relationship between producers and consumers.

EWEC pays power generation companies an agreed tariff under Long-Term Power and Water Purchase Agreements (LTPA), which is agreed with each producer. These have terms typically up to 25 years. EWEC will pay (i) 'capacity payments', covering the producers' fixed costs of plant; (ii) plant operation and maintenance costs; and (iii) a tariff on electricity produced.

Energy mix

The vast majority of the UAE's energy currently comes from fossil fuels (mainly natural gas); however, power plants are required to stock diesel and crude oil as backup fuel. The Strategy sets out the goal of increasing the contribution of clean fuel towards the nation's energy mix from 25% to 50% by 2050. Another target is to produce 10% of the nation's energy from nuclear sources. The Federal Authority for Nuclear Regulation (FANR) is based in Abu Dhabi and was formed under Federal Law No. 6 of 2009 Concerning the Peaceful Use of Nuclear Energy. The FANR has authority to issue regulations regarding nuclear plant licensing, location, design, construction, commissioning and operation as well as setting standards for safety, transportation and storage, waste management and nuclear material protection.

How projects are financed

The way a project is financed will inevitably depend on its scale. Smaller projects tend to be financed by lenders on a 'corporate' or 'full recourse' basis. Larger projects usually require specific types of 'project finance'. This involves raising finance on a limited recourse basis for the specific purpose of developing a large and capital-intensive project, where the borrower is a Special Purpose Vehicle (SPV). Repayment terms depend on the financing arrangements. Typically, loan agreements on large-scale projects are based on Loan Market Association standard finance documents. Security is principally over project assets as opposed to the assets of the sponsors or investors.

Generally, the revenue stream for water/power infrastructure projects is paid on an availability basis through Water and/or Power Purchase Agreements, which are more commonly referred to as ‘Off-take Agreements’. In such projects, 40% of the equity in the project is normally owned by foreign investors.

In the UAE, some local banks take an active role in financing UAE-based projects. In some instances, Islamic finance structures, which are an alternative to conventional financing, have been deployed.

How to prepare relevant contracts

In the UAE, water/electricity projects use: (i) construction-only; (ii) design-and-build; and (iii) turnkey contract models for project delivery. Developers of large-scale water/electricity projects often use PPP type arrangements, where the project involves private sector investment and/or expertise.

When determining which model is most appropriate, a number of factors will need to be considered, including project nature, scale, complexity, the amount and availability of funding, the risk appetite of the parties as well as commercial, legal and technical factors.

Construction-only contracting

Arguably, construction-only contracting is the most common contracting model used in the UAE's energy and water sectors. It involves the employer engaging a professional design consultant to prepare the design and specifications for the works and engaging a contractor to carry out those works. Responsibility for the function of the project remains with the designer whilst the contractor is only responsible for performance of the works. If design defects exist, the contractor is not obligated to rectify them.

Design-and-build contracting

The design-and-build procurement model generally requires one party to design and construct the project. In some cases, an initial design may be provided by the employer, after which the responsibility for the detailed design is transferred to the contractor. Under this model, the contractor takes all the responsibility for the design and performance of the works.

PPP

Under the PPP model, a public authority engages a private entity, which is often a SPV incorporated for the purposes of undertaking the design, construction and maintenance of the project, for a specified term. The introduction of a PPP law in the UAE arguably demonstrates the country's growing interest in participating in PPP structures. In theory, the PPP model allows the employer to leverage private sector expertise efficiently in order to attain its development goals. At the same time, the model benefits private sector participants as it facilitates funding due to a governmental or quasi-governmental entity being involved.

How one might handle disputes related to these projects

The most commonly used method of dispute resolution, arising from water/electricity infrastructure contracts in the UAE, is institutional arbitration. This is due to a number of factors such as the significant expert engagement for technical issues, as well as the qualification, flexibility and technical expertise usually expected from an arbitral tribunal.

Article 24 of Dubai Law No. 6/2011 stipulates that contracts made between private sector entities and electricity or water authorities and/or with local government authorities will be governed by the applicable laws of an Emirate.

The same principle is set out in the Dubai Law No. 22/2015, which stipulates that UAE law will be the governing law of PPP contracts and that arbitration cannot be conducted outside the UAE.

As such, government and government-related employers in Dubai have historically requested submission to the Dubai International Arbitration Centre, seated in Dubai. In Abu Dhabi, employers tend to prefer to submit to dispute resolution before the Abu Dhabi Commercial Conciliation and Arbitration Centre.

Related Content

UAE Federal

• Federal Law No. 1/1972  On the Competencies of Ministries and Powers Ministers
• Federal Law No. 31/1999 Concerning the Establishment of the Federal Department of Electricity and Water

Dubai

• Dubai Law No. 19/2009 on Establishing the Supreme Committee for Energy
• Dubai Law No. 6/2011 On the Organisation of Private Sector Participation in the Production of Electricity and Water in the Emirate of Dubai
• Dubai Decree No. 1/1992 on Establishment of Dubai Electricity and Water Authority
• Dubai Executive Council Decision No. 2/2010 on the Establishment of an Office for the Regulation and Control of Electricity and Water Sector in the Emirate of Dubai
• Dubai Law No. 22/2015 on the Organization of Public-Private Partnership in the Emirate of Dubai

Abu Dhabi

• Abu Dhabi Law No. 11/2018 on Establishing a Department of Energy
• Abu Dhabi Law No. 20/2018 on the Establishment of UAE Water and Electricity Company “Public Joint Stock Company”
• Abu Dhabi Law No. 3/2019 on Abu Dhabi National Energy Company

Sharjah

• Sharjah Law No. 1/1995 Protection of the Public Network for Electricity and Water Services in the Emirate of Sharjah

Ras al Khaimah

• Ras al Khaimah Emiri Decree No. 4/2013 on the Establishment of the Electricity and Water Authority at Ras al Khaimah

This article was originally drafted by DWF (Middle East) LLP for Lexis Nexis.

DWF (Middle East) LLP has extensive experience representing clients on significant infrastructure and construction projects in the UAE. We have worked with clients in need of legal advice regarding financing, contracting and dispute resolution on these types of projects. The team's experience spans the MENA region and we have recently acted on high-value projects in the UAE, Saudi Arabia and Iraq. We are on hand if it would be useful to discuss the issues raised in this article or any other related issue.