The Energy Regulation and Markets Review: United Arab Emirates
The United Arab Emirates (UAE) is a federation of the seven emirates of Abu Dhabi, Dubai, Sharjah, Ajman, Fujairah, Ras Al Khaimah and Umm al-Quwain.
The powers of the federal and the emirate governments are enumerated in the UAE Constitution. While the UAE Constitution gives the federal government exclusive legislative and executive jurisdiction over electricity services in the UAE, in practice the larger emirates of Dubai and Abu Dhabi, to some extent Sharjah, and more recently the northern emirate of Ras Al Khaimah, formulate and implement their own electricity policies. Hence, although there is a Federal Ministry of Energy (which formulates and implements the federal electricity policies), federal legislation on electricity is fairly limited. This chapter focuses on the UAE's federal laws and policies relating to the energy sector with a particular focus on the regulation of the electricity sectors in the emirates of Abu Dhabi and Dubai.
i The regulators
The Federal Ministry of Energy and Infrastructure (the Ministry of Energy) is the primary regulator at the federal level and is responsible for establishing policies for the water and electricity sectors in the UAE.
The newly established Etihad Water and Electricity (EWE) (which replaces the Federal Electricity and Water Authority (FEWA)) is the dominant player in the northern emirates and engages in all segments of the market, including generation, transmission and distribution.2 The Ministry of Energy works in conjunction with EWE (and formerly FEWA) to implement the federal government's electricity policy in the northern emirates.
Abu Dhabi's electricity sector is regulated by the Department of Energy (DOE) and the UAE Water and Electricity Company (EWEC). The DOE is responsible, inter alia, for controlling, supervising and organising the energy sector in Abu Dhabi and for issuing licences to entities engaged in the energy sector.3 EWEC is the sole provider of water and electricity in Abu Dhabi and is empowered to contract with all entities licensed to produce and distribute water and electricity in Abu Dhabi.
The main authorities regulating the electricity sector in Dubai are the Dubai Electricity and Water Authority (DEWA), the Dubai Supreme Council of Energy (DSCE) and the Dubai Regulation and Supervision Bureau (RSB Dubai).
The DSCE is the primary regulator of the energy sector in Dubai and regulates the exploration, production, storage, transmission and distribution of petroleum products and electricity. The DSCE also proposes any and all initiatives relating to the energy sector, which includes privatising its electricity assets.
RSB Dubai is authorised to regulate the electricity sector subject to the supervision of the DSCE. RSB Dubai is mainly responsible for regulating, licensing and supervising the electricity generating service providers, facilities and properties.
As with the other emirates, the main player in the electricity market is DEWA, Dubai's state-owned integrated power generation, transmission and distribution authority.
The main regulator in Sharjah is the Sharjah Electricity, Water and Gas Authority (SEWGA) (formerly the Sharjah Electricity and Water Authority (SEWA)).4 As with the other emirates, SEWGA (formerly SEWA) is responsible for the generation, transmission and distribution of electricity in Sharjah. SEWGA (formerly SEWA) is authorised to determine electricity prices and connection fees, which are subject to approval by the Ruler of Sharjah.
EWE (formerly FEWA) is responsible for the generation, transmission and distribution of electricity in the other northern emirates of Ajman, Ras Al Khaimah, Fujairah and Umm al-Quwain.
ii Regulated activities
All activities connected to the generation, transmission and distribution of electricity in the UAE are regulated and require specific licences from the relevant regulatory authorities.
iii Ownership and market access restrictions
UAE's electricity laws do not impose any specific ownership restriction on foreign investors in the UAE, nor do they necessarily require government participation in the sector.
Under Federal Law No. 2 of 2015 on Commercial Companies (the Companies Law), foreigners are permitted to own up to a maximum of 49 per cent of a UAE company (other than in the free zones) and the majority 51 per cent is required to be owned by UAE nationals. The power sector is no exception to this requirement. However, the Companies Law was amended in January 2021 to allow for 100 per cent foreign ownership, pursuant to Federal Decree-Law 26 of 2020 (the Decree). The Decree affords each emirate a level of discretion as to implementation. Our expectation is that there will be a substantial period of time before the emirate-level governments and licensing authorities (including Dubai) decide on such implementation. As such, foreigners may not be able to take immediate advantage of these changes, in a practical sense, until the implementation phase is underway.
Although the UAE free zones allow for 100 per cent foreign ownership, the free zone companies are not allowed to conduct business outside the free zones and within onshore UAE. To date, there are no power generation, transmission or distribution companies in any of the free zones in the UAE.
iv Transfers of control and assignments
Any transfer of control or assignment of an interest in an independent water and power producer (IWPP) requires the consent of the relevant regulator such as the DOE in Abu Dhabi and RSB Dubai in Dubai.
Transmission/transportation and distribution services
i Vertical integration and unbundling
The electricity transmission and distribution networks in the UAE are firmly owned and controlled by the state-owned water and power authorities, each of which enjoys a monopoly in its particular area of operation. These authorities are vertically integrated and operate in all three segments of the market.
TRANSCO operates Abu Dhabi's transmission networks. It supplies electricity from the generation companies to the two distribution companies of Abu Dhabi, each of which are wholly owned by the DOE.
DEWA is the sole purchaser of electricity in Dubai and presently owns all the generation, transmission and distribution capacity of the emirate. DEWA's transmission and distribution network is constantly being expanded as new real estate and industrial projects are set up across Dubai.
EWE (formerly FEWA) performs many of the same functions in the northern emirates with respect to electricity distribution and transmission as TRANSCO in Abu Dhabi and DEWA in Dubai. SEWGA (formerly SEWA) is the sole purchaser of electricity and presently owns all the generation, transmission and distribution capacity in Sharjah.
ii Transmission/transportation and distribution access
Although the electricity laws in Abu Dhabi contemplate private ownership in all segments of the electricity supply chain, so far private ownership has been limited to generation only.
In Dubai, a licensed entity is only permitted to sell electricity to DEWA.
The components making up the electricity tariff in Abu Dhabi are the following:
- BST, which is the charge paid by the distribution companies to EWEC for its generation costs (in turn paid by EWEC to power producers);
- TUoS, which is the charge paid by the distribution companies to TRANSCO for use of its transmission network;
- distribution use of system, which is the fee that the distribution companies charge for use of their distribution network;
- sales cost, or the cost incurred by the distribution companies for serving customers for meter reading and billing; and
- government subsidy, consisting of direct payments from the government to the distribution companies. The quantum of the subsidy allows the government to determine the electricity tariffs for different classes of consumers. The higher the subsidy, the lower the tariff charged.
The electricity tariff is determined by adding the components in points (a) to (d) and subtracting the government subsidy.
The rates charged by the state-owned power companies (EWEC, TRANSCO, ADDC and AADC) are subject to government control, exercised via the DOE. The DOE sets the revenue targets, on the basis of which the control prices are determined. The remainder of the revenue is paid as a subsidy by the government to the distribution companies. All transactions between the power sector companies and any related tariffs are required to take place on the basis of their economic costs. This helps the government keep subsidies to a minimum.
The electricity tariff in Dubai comprises electricity consumption charges, fuel surcharges and meter charges. The fuel surcharge component requires consumers to pay for any fuel cost increase using 2010 fuel prices as the benchmark, thereby passing on the risk of international fuel price fluctuations to the consumer. With effect from 1 January 2018, value added tax (VAT) at the rate of 5 per cent was implemented in the UAE pursuant to Federal Law No. 8 of 2017 (the VAT Law). Under the VAT Law, the 5 per cent VAT is payable by consumers on their electricity and water consumption. However, VAT is not applicable in respect of the municipality fee levied by the power companies in the respective emirates.
iv Security and technology restrictions
The UAE's National Cybersecurity Strategy was announced in 2019 by the Telecommunications Regulatory Authority. The strategy is based on five pillars and 60 initiatives aiming to mobilise the whole cybersecurity ecosystem in the UAE. It aims to, inter alia, establish a robust 'National Cyber Incident Response Plan' to enable a swift and coordinated response to cyber incidents in the UAE. The plan is to streamline cybersecurity incident detection and reporting, establishing a standardised severity assessment matrix to mobilise the required support and building world-class capabilities to respond to all types of cyber incidents. Protecting critical assets in the energy sector is a key focus under the strategy.5
i Development of energy markets
The electricity market for private power producers in the UAE is comprised of the state-owned water and power authorities, each of which acts as the single point of sale in its respective area of operation.
Contracts for power generation are awarded on the basis of a competitive bidding process, administered by the DOE in Abu Dhabi, DEWA in Dubai, SEWGA (formerly SEWA) in Sharjah and EWE (formerly FEWA) in the northern emirates.
ii Energy market rules and regulation
In Abu Dhabi, EWEC is required to contract with power producers for the purchase of all production capacity from licensed operators in the emirate. The DOE is authorised to allow 'bypass sales' from power producers directly to eligible consumers, subject to meeting certain criteria, but to date no bypass sale has been allowed in Abu Dhabi. Similarly, all power producers in Dubai, the northern emirates and Sharjah are required to sell the power generated exclusively to DEWA, EWE (formerly FEWA) or SEWGA (formerly SEWA), respectively.
iii Contracts for sale of energy
UAE has a single buyer market where all the electricity generated in Abu Dhabi, Dubai, Sharjah and the northern emirates is exclusively sold to EWEC, DEWA, SEWGA (formerly SEWA) and EWE (formerly FEWA) respectively under long-term power purchase agreements (PPAs).
A PPA usually has a term of about 20 to 25 years from the commencement of commercial operations and uses a two-part tariff structure for payments to IWPPs. The capacity (or availability) payments cover the fixed costs of the plant comprising of debt repayments, return on capital, depreciation and fixed operating and maintenance (O&M) costs, to be paid against the declared availability of power, irrespective of whether and how much the plant produces. The second component of the tariff allows for the recovery of variable O&M costs and fuel costs (where applicable), payable only for the electricity produced by the plant. Various payment rates are subject to annual indexation against United States and UAE inflation or the dollar–dirham exchange rate.6
iv Market developments
The Ministry of Energy, in partnership with Khalifa University and the International Renewable Energy Agency, has launched the National Integrated Energy Model. The model supports the formulation of the future of energy for the UAE, and the design of the next 50 years in the energy sector, according to the vision of the future government, representing also a roadmap for a new phase of energy sector sustainability. It also provides a common framework that brings together the stakeholders in the energy sector, and it defines the contours of the future as part of the UAE's efforts to maximise the benefits of this sector by developing strategies and foundations for work during the next phase, in line with the National Energy Strategy 2050.7 The Minister of Energy is also creating a national guide for smart buildings to employ modern and innovative technologies, and smart industries in describing the materials, specifications and design guides for the construction process. The guide will include benchmarking for qualifying contractors' capabilities and enhancing cooperation between architects, designers and contractors to improve the overall results of the construction project, including the construction index, unified smart building index; in addition to the national index for smart constructions, and building information modelling.8
Renewable energy and conservation
i Development of renewable energy
The UAE launched its Energy Strategy 2050 in 2017 under which it aims to increase the contribution of clean energy in the total energy mix from 25 per cent to 50 per cent by 2050, and to reduce the carbon footprint of power generation by 70 per cent.
A number of showcase projects have been launched in Abu Dhabi and Dubai to kick-start the development of renewable energy in the country.
Abu Dhabi established Masdar9 to spearhead the emirate's renewable energy initiative. Masdar City, a project on the outskirts of Abu Dhabi city, is proposed to be run entirely on renewable energy as a zero carbon emissions city. Masdar City has also won the rights to host the headquarters of the International Renewable Energy Agency.
Masdar currently produces 17,500MWh of electricity annually, at its solar photovoltaic power plant in Masdar City for the supply of clean power to the project. It has also launched a carbon capture and storage project in the UAE.
The DSCE developed the Dubai Integrated Energy Strategy 2030 and Dubai Clean Energy Strategy 205010 to enable Dubai to become a global centre for clean energy and green economy. In line with these strategies, Dubai aims to diversify its energy sources so that, by 2030, it can fulfil 25 per cent of its energy demand from solar energy, 7 per cent from nuclear energy, 7 per cent from clean coal and 61 per cent from natural gas. By 2050, Dubai aims to fulfil 75 per cent of its energy demands from renewable energy sources.
As part of these strategies, in January 2012, Sheikh Mohammad Bin Rashid Al Maktoum, the Ruler of Dubai, launched the Mohammed bin Rashid Al Maktoum Solar Park (Solar Park), which is expected to have a total installed capacity of 5,000MW by 2030. The project is being implemented by the DSCE in Dubai and managed and operated by DEWA.
DEWA has launched the Shams Dubai Initiative, which aims to encourage energy efficiency by equipping residential and commercial buildings with solar panels and connecting the panels to DEWA's electricity grid. In 2014, in line with this initiative, the emirate of Dubai issued Executive Council Resolution No. 46 of 2014 Concerning the Connection of Generators of Electricity from Solar Energy to the Power Distribution System in the emirate of Dubai to encourage the generation of electricity using solar panels. This Resolution enables DEWA consumers to supply power to DEWA's grid by connecting their solar panels. The power supplied to DEWA can then be adjusted against the consumer's electricity bill.
In 2015, Dubai established the Dubai Green Fund, worth US$27 billion, which provides easy loans to investors in the clean energy sector. DEWA will provide the seed capital for this Fund, with additional investment from the private sector, international banks and large investment companies.
Dubai has also established the Dubai Carbon Centre of Excellence, responsible for encouraging and developing strategies for reducing the emirate's dependence on carbon fuels and reducing carbon emissions.
Several initiatives are under consideration in the northern emirates, such as smart meters and solar plants. Furthermore, Sharjah launched SEWA 2020 Vision in 2016 to enhance power efficiency in sustainable development. The aim was to reduce power and water use by at least 30 per cent by the end of 2020.
The UAE aims to produce a significant part (approximately 9 per cent) of its electricity from nuclear technology. A nuclear policy was released in 2008, since the UAE has promulgated a regulatory framework for development of nuclear energy in the country.
The UAE has been making rapid strides in establishing its first nuclear power station, the Barakah Nuclear Energy Plant (Barakah), in Abu Dhabi. The Emirates Nuclear Energy Corporation, an Abu Dhabi government-owned company, is constructing Barakah, which will have a total capacity of 5,600MW. The project consists of the construction and installation of four 1,400MW reactors. Once the four reactors are online, the facility will deliver up to a quarter of the UAE's electricity needs.
ii Energy efficiency and conservation
The UAE has one of the highest rates of electricity consumption per capita. This high use is encouraged by the electricity and water subsidies given by the government to its citizens and, in certain emirates, to foreign expatriates. Dubai has progressively reduced and removed most of its electricity subsidies and Abu Dhabi is contemplating similar measures. Efficiency in energy use is now being recognised as one of the key issues in trying to meet the country's growing energy needs in a sustainable manner.
Abu Dhabi has a mandatory rating system for the construction of energy-efficient buildings in the emirate under the Estidama initiative. All new development communities, private buildings and villas in the emirate are required to meet the minimum of one-pearl rating. All government-led projects have been mandated to meet a two-pearl rating (the highest being a five-pearl rating).
In Dubai, all new buildings constructed (including changes or additions to existing buildings) in the emirate are required to comply with the Green Buildings Regulations to encourage sustainable building practices. Similarly, the technical guidelines issued by the Emirates Green Building Council must be complied with for retrofitting existing buildings in Dubai.
Most recently in 2019, Ras Al Khaimah launched its own regulations, the Barjeel Green Building Regulations. During the same year, the Ministry of Infrastructure Development mandated its Green Building Guidelines for Federal Buildings in the UAE. In addition, Sharjah Municipality released its first green building guidelines to be piloted in Sharjah.11
In 2019, Abu Dhabi also announced a new strategy aimed at reducing electricity consumption by 22 per cent and water consumption by 32 per cent by 2030. The core programmes under this strategy, known as Abu Dhabi Demand Side Management and Energy Rationalisation Strategy 2030, include building retrofits, demand response, efficient water use and reuse, building regulations, street lighting, district cooling, standards and labels, energy storage, rebates and awareness.
iii Technological developments
In 2019, DEWA announced its strategy to provide state-of-the-art infrastructure to manage all facilities and services through smart and connected systems that use technologies of the fourth industrial revolution including artificial intelligence, unmanned aerial vehicles, energy storage, blockchain technology and the internet of things (IoT). This supports DEWA's vision of becoming a leading and innovative sustainable corporation. The smart grid is a key component of DEWA's strategy to develop an advanced infrastructure for Smart Dubai's initiative to transform Dubai into the smartest and happiest city in the world. The smart grid includes programmes with investments of up to 7 billion dirhams that will be completed in the short, medium and long term until 2035.
DEWA is also collaborating with a number of leading international universities and research centres with respect to renewable energy, smart networks, energy efficiency and storage, and data analysis. DEWA's R&D Centre at the Solar Park (Centre) highlights four major operational areas: electricity generation from solar energy, integration of smart grids, energy efficiency, and water. The Centre's projects and programmes include internal labs to study and test system reliability, and external field testing of new technologies and equipment, including performance, reliability of solar photovoltaic panels and removal of dust. The Centre cooperates with many entities, including the National Renewable Energy Laboratory of the US Department of Energy, the Spanish National Renewable Energy Centre, as well as the United Arab Emirates University and Khalifa University on joint research and studies in renewable and alternative energy.12
The year in review
The year 2020 has without a doubt been a challenging year due to the covid-19 pandemic. Reduction in investments, relative delays in projects and a cascade of other obstructions confronted the energy sector in the UAE. However, the focus of the UAE remained on its strength to mass generate electricity from renewable energy sources. In this vein, the Abu Dhabi government successfully awarded a 2GW solar power project in the Al Dhafra region of Abu Dhabi. This project has been applauded for having the world's lowest electricity generation tariff at 1.35 cents/kWh.13
Renewable energy has a major role in the energy sector as projects are increasingly aiming at harnessing the natural resources of the UAE, particularly solar power because of its geographical location. The different phases of the Mohammed bin Rashid Al Maktoum Solar Park are on track and the aim is for it to be home to projects generating up to 5,000MW by 2030. This is in line with the Dubai Clean Energy Strategy 2050.
The UAE has been at the centre of innovation and technology and is now using technology in the power sector. This is evident from several collaborations and memoranda of understanding signed by the federal government and the government of Dubai with innovation companies dealing in technologies such as the IoT, artificial intelligence (AI) and blockchain applications in the power sector for smart energy management.
Conclusions and outlook
The UAE is geared up for and appears to be on track to meet its Energy Strategy 2050, which was launched in 2017. Backed by impressive technology, it is well equipped to meet the ever-increasing energy demands and create smart and efficient energy production and use. Energy efficiency is also a top item on the agenda.
In addition to the focus on the energy sector at home, the UAE is also collaborating with, and investing in other countries. Masdar has been deploying renewable energy technologies in a number of other countries, including Jordan, Afghanistan and Mauritania. The International Renewable Energy Agency and the Abu Dhabi Fund for Development have collaborated to support renewable energy projects in Rwanda, the Marshall Islands and the Caribbean. The UAE's efforts are designed to enhance its global leadership position via renewable energy diplomacy that will support access to affordable and sustainable sources of power for millions of people in developing countries around the world.14
1 Masood Afridi is a partner and Adite Aloke is a senior associate at Afridi & Angell.
3 The term 'energy sector' covers all activities, works and services related to the following: (1) production, treatment, storage, transportation, distribution, supply, sale and purchase of gas, oil and derivatives thereof; (2) generation, storage, transportation, distribution, supply, sale and purchase of electricity of all kinds (clean, renewable, traditional); (3) production, treatment, desalination, storage, transportation, distribution, supply, sale and purchase of water; (4) collection, treatment and disposal of sewage and waste water, and the recycling of treated waste water; and (5) production, storage, distribution and supply of refrigerated liquid for central refrigeration applications.
4 Pursuant to Sharjah Emiri Decree No. 30 of 2020, Sharjah Electricity and Water Authority's name was amended to Sharjah Electricity, Water and Gas Authority.
9 Masdar is a wholly owned subsidiary of Mubadala Development Company, one of the Abu Dhabi government's main investment arms.
10 The Dubai Clean Energy Strategy 2050 was announced by the Dubai Supreme Council of Energy as part of its participation in the World Future Energy Summit held in Abu Dhabi in January 2017. The intention of the Dubai Clean Energy Strategy 2050 is that 7 per cent of Dubai's total power output will come from clean energy by 2020, 25 per cent by 2030 and 75 per cent by 2050.
14 Mustafa Alrawi, 'UAE's commitment to renewable energy can enhance its global leadership role', The National (17 September 2018), at https://www.thenational.ae/business/energy/uae-s-commitment-to-renewable-energy-can-enhance-its-global-leadership-role-1.771107.