The Elements Needed to Achieve Lower Desalination Tariffs

An exclusive interview with Mr. Mohammad Abunayyan, Chairman, ACWA Power International

1. What is your vision for a new water era and the role of non-conventional water solutions to offset global water scarcity?

ACWA Power is a pioneer in renewable powered reverse osmosis desalination. We are proud to play a vital role in the lives of millions of people across Saudi Arabia and beyond, with a portfolio of 6.4 million m3/day of desalinated water delivered on a bulk basis to address the needs of state utilities and industries.

Looking towards the future, we must first recognize that the need for fresh water will continue to increase rapidly in many parts of the world, due to global economic growth, coupled with water scarcity in many parts of the world. While it is clear that the efficiency of water consumption, including the re-use of water, should always take precedence, I would anticipate that a growing number of countries will have to rely heavily on seawater desalination, and this will require significant amounts of energy. Fortunately, there has been several improvements to energy efficiency of RO desalination plants in recent years with the help of technology and AI. Concurrently, we have also been able to bring down the cost of electricity from renewable resources- which is crucial because regions with a high level of water scarcity are blessed with abundant renewable energy resources. Through our operational experience and technological know-how, ACWA Power is well positioned to serve the growing demand for desalinated water projects powered by renewable energy.

Reverse osmosis technology will continue to improve its competitiveness in the next few years, on the back of further improvements to membrane robustness, but also due to the optimizations of the entire plant (such as pre-treatment) and operations and maintenance processes (O&M), by applying algorithms on the vast amount of data we generate in our plants. It is important that we continue to prepare for the future by developing nextgeneration technologies and reducing the environmental impact of water desalination, particularly with regards to brine reduction. At ACWA Power, we are strongly engaged in these fields through our collaboration with King Abdullah University of Science and Technology (KAUST).

2. In the past 18 months we have seen groundbreaking water tariffs for desalination in the GCC capped off with the recent news about the signing of Hassayan at 0.27 US Cents.

a. Is this level of pricing sustainable or is this a temporary phenomenon?

ACWA Power has set a new price benchmark with the Jubail 3A IWP in Saudi Arabia at a tariff of 41.3 US cents per m3, beating our own world record of 2019 for Taweelah IWP, which is the world’s largest and the first partially solar powered RO plant utilizing the least energy per m3 of water produced. The trend observed in reduced or groundbreaking low tariffs for desalinated water projects could be attributed to significantly lower energy costs (when compared with other IWPs associated with solar power), falling capital costs, competitive EPC contract prices, and long concession periods.

Over the last few years, the number of desalination SWRO projects being tendered was relatively few in quantity in terms of m 3/day compared to the number of tenders we have in the market today. A clear pipeline of projects with a proper economy of scale will enable contractors to predict and optimize their cost more efficiently.

But most importantly, these prices, which are scrutinized and controlled in every project by lenders, off-takers and authorities, are also the result of a strong technical, financial and commercial optimization process developed by ACWA Power, utilizing our comprehensive industry experience gained over years of operation, thereby enabling us to achieve sound risk balance and optimal risk allocation between parties. We have been able to consistently demonstrate this advantage to the market in the past years and look to continuing this in the future.

Water tariffs result from a combination of energy costs, financing costs, EPC contract pricing, and O&M cost. Energy costs, in particular for solar PV, have seen a historic low in the past months, which has now been corrected in the market due to shortages in the PV manufacturing supply chain. At least for some time, this may put a halt to the continuous reduction of water tariffs. Furthermore, the relation between ACWA Power and EPC Contractors is based on trust and partnership which in turn results in better commercial and technical proposals. Unlike other schemes (direct EPC procurements schemes), we pay great attention to ensure that during the construction phase design reviews and milestone schedules are in accordance with the

lenders requirements and adjusted with agility when needed. Overall, we make sure the financial process is well managed with all payments, and any adjustments required, done on time. Contractors also receive substantial support from our teams in order to ensure the commercial operation of the project is achieved as per the time targets set. In terms of cost management, we take into full consideration the project life cycle cost including the design component which is a crucial element. Such proactive collaboration provides a competitive edge and leads to improved EPC prices in the long run.

Finally we optimize design based on lifecycle cost (not only EPC price) which in the long run results in having the best tariff.

b. Is there any “fine print” to this pricing? In other words, is it real or “smoke and mirrors”?

Pricing reflects the market context, but also contractual conditions. Long term off-take agreements will naturally result in lower tariffs compared to shorter term contracts. In any case, we continue to relentlessly optimize every project, in collaboration with our partners in our pursuit for better performance. That is the spirit with which ACWA Power have been able to successfully drive down costs, not only in the water desalination sector, but also in power generation and renewables.

c. It’s in all of our best interests to bring down the price of desalinated water, what needs to be done to get to this level of pricing outside of the more mature GCC market? What are the most critical levers to make this happen?

In the GCC, the Public Private Partnership (PPP) model is well structured and benefits from strong governmental support. Furthermore, banks have more appetite and liquidity for water projects in the GCC, with flexibility in financing and a wider lending base. In addition, plant capacity, site selection, cost of energy, water quality requirements and RFP conditions are some of the factors which influence the cost to water. Seawater characteristics are more challenging in the GCC, and it can be expected that plants outside the GCC have higher yield and require less equipment and therefore lower cost.

3. What’s your view on the risk level undertaken by EPC contractors for being able to achieve the current level of water tariffs?

Over the last few years, the number of desalination SWRO projects being

tendered was relatively few in quantity in terms of m3/day compared to the number of tenders we have in the market today. A clear pipeline of projects with a proper economy of scale will enable contractors to predict and optimize their cost more efficiently. Low pricing is indeed a key contributor to low tariffs and is part and parcel of the cost, risk and performance management process in project development.

4. Do you think this risk level assumption could damage the desalination sector / ecosystem, having seen the situation of several relevant past players?

In our view, the risk level is manageable as long as the EPC contractor enjoys rich experience on the Engineering component, wide market interactions with main OEMs for the Procurement component, and the right caliber of manpower skill (including subcontractors) for the Construction component. Keep in mind also that EPC risk is often mitigated by strong support from the project developers during the execution phase. In addition, Contractors with a positive cash flow are more likely to succeed in the desalination sector. With the tremendous amount of new desalination projects coming in, I believe contractors are well-placed to survive future challenges.

5. What’s your view for overcoming complex situations with the contractors?

Transparency between the EPC and developer is crucial to a successful partnership. Both parties should be deeply involved in the process of construction until reaching the Project Commercial Operation Date (PCOD).

6. What is your view on the future of wastewater reuse in the GCC region?

A vast wastewater treatment infrastructure build-out is underway in the Kingdom. Much of this demand is being procured via independent sewage treatment projects (ISTPs) and will drive potential for the sale of treated sewage effluent to industrial water users, however a more robust regulatory structure will also be necessary to facilitate this process.

7. What do you see are the future challenges for desalination?

The main challenges in our view are: the application of more stringent environmental guidelines, with the aim of minimizing brine discharge or zero liquid discharge; the further reduction of energy consumption; introducing new bankable desalination technologies to the market and shifting risks from the off takers to the private sector.

We must also recognize that water desalination technology and projects are continuing to see substantial improvement. The industry is continuing to improve performance year after year, and ACWA Power is extremely proud to be a driving force in this sector. We were delighted to see our capabilities recognized by Global Water Intelligence (GWI) when they awarded ACWA Power “Desalination Company of the Year” at the 2020 Global Water Awards and the Desalination Plant of the Year for our Shuaibah 3 IWP extension project. These accomplishments are the result of the hard work and commitment of our people and our collaboration with our partners. We are proud to play an active role in contributing to the Kingdom’s leadership in this sector, which is of increasing importance to building a sustainable future for our society and generations to come.

8. What energy challenges does desalination face?

Currently, the most efficient large seawater desalination plants consume around 2.9 kWh/m3 for seawater salinity above 35 g/kg, and it is important that this consumption is sustained over the lifetime of the plant. Further reduction for future plants will require collaboration between developers, owners, EPCs and operators with main equipment manufacturers to work on a number of items – namely, the development of better performing and robust membranes, pumps & energy recovery devices, as well as Bio fueling control.

About the Author

With more than 37 years of experience in the commercial and industrial sectors, Mr. Abunayyan serves as Chairman of ACWA POWER, Vision Invest, Dussur and numerous local and regional companies. He is widely recognized as one of the most respected leaders in the water and energy sectors. Under his leadership, ACWA POWER has grown into a leading private sector energy and water provider, achieving significant milestones since his inception of the Company. Mr. Abunayyan chairs and is a member of the Boards of Directors of several worldleading organisations, in addition to holding a number of prestigious honorary and leadership positions focused on transforming and diversifying the economy of Saudi Arabia.