GRM 2010 GRM 2011

Abstract Details

Family Name:
Al Naimi
First Name:
Title of Paper:
Effective Pricing of Water & Power with Different Perspectives
Paper Proposal Text :

Abstract—Strategic planning for water and electricity is one of the most important targets for any government around the world. Understanding potential changes in the wholesale pricing of electricity and water and its mechanism become a necessity for both supply and demand sides. This research focuses on addressing several price mechanisms that harmonize the interrelated sectors of water and electricity with a target to minimize the true costs for power and water. Moreover, it highlights the current Abu Dhabi electrical and water price allocation.
Finding ways to improve efficiency in energy and water usage is one of the most important challenges around the world. Traditionally, water and power usage in the UAE has always been high, due to the arid desert climate that features high temperatures and very high humidity levels. In fact, 65% of the energy usage in the country is dedicated to meeting two major demands; namely, water provision and air conditioning [1]. All of the above shows the need for adopting policies and strategies that harmonize the inter-related sectors of water and electricity [2].

Figure 1: Water and Electricity Production and Consumption by ADWEA.
Base on the information provided by Ministry of Energy in UAE (ADWEA), Figure 1 shows 8.17% and 7.25% increases in electricity generation and consumption respectively. Meanwhile, they show 4.1% and 4.2% increases in water production and consumption respectively [3]. These increases are associated with changes in water and electricity prices. In the Annual Economic Report of 2015, published by the UAE’s Ministry of Economy, the prices of housing, water, electricity and gas have registered significant increases during March 2015, with a rate of 2.33% compared to February 2015 [4]. On the other hand, Figure 2 shows that electricity, gas and water supply contributed to the UAE GDP economic activities by 24.613 million AED in 2014. Besides, they contributed to the GDP growth by 10.2% [5]. These increases in production and consumption within one year, coupled with price increases, represent a critical point to the UAE without ignoring the importance of water and energy sector to the country economy.

Figure 2: Electricity, gas and water supply contribute to the UAE GDP Economic [5].
In the meantime, the lowest levelized costs for power and water technique is used in cogeneration facilities in Abu Dhabi, to find the cost of water and energy production. This gives the bidders the right to allocate freely their total cost between power and water, and the same principle is used for sale to distribution companies. The major issue here is that this pricing does not reflect the exact true costs for power and water. To overcome such a challenge, wholesale pricing allocation for water and electricity in UAE should be studied and analyzed.
A. Price Mechanism
How wholesale electric prices translate into retail rates is not always clear, especially for customers who continue to take services from their local electric distribution utility, even if their utility is no longer in the generation business [6]. “Price mechanism” is an economic term that refers to the manner in which the prices of commodities affect the demand and supply of goods and services [10]. In summary, Table 1 shows some interesting findings relating to how recent literature regards the pricing mechanism.
Table 1: Pricing mechanism from the literature.
[7] This research consulted residential electricity consumers in three Australian states about their perceptions and acceptance of two cost-reflective pricing scenarios (Time-of-Use and Peak Capacity pricing) and associated technologies to support such pricing (smart meters, in-home displays and direct load control devices).
[8] Price-responsive demand is essential for the success of a smart grid. However, existing demand–response programs run the risk of causing inefficient price formation. This problem can be solved if each retail customer could establish a contract-based baseline through demand subscription before joining a demand-response program.
[9] The reform of tiered pricing for household electricity (TPHE) in China was implemented nationwide in July 2012. The main purpose of the policy is to promote reasonable resource allocation and utilization. Based on micro household-level survey data, this research investigates the effect of the TPHE on achieving the twin objectives of efficiency and equity respectively.
In the complete paper several pricing mechanisms are explained in detail
B. Price Mechanism in Abu Dhabi and International Level
At the international level, retail consumers have seen the prices they pay for electricity increase significantly after the increase in fossil fuel prices. These have led some to question the competitiveness of wholesale markets and the mechanisms used to establish wholesale prices [6]. To understand the price allocation in Abu Dhabi, we focus on Abu Dhabi Water and Electricity Company (ADWEC). Figure 3 illustrates the production and the payment flow at ADWEC. It is a wholly owned subsidiary of the Abu Dhabi Water and Electricity Authority (ADWEA) and is the single buyer and seller of water and electricity in the Emirate of Abu Dhabi. The pricing model implemented in Abu Dhabi’s water and electricity system is, quoting ADWEC, described as follows: “In Abu Dhabi, cogeneration facilities are procured as one facility based on their lowest levelized costs. See the appendix for power and water. So, bidders are free to allocate their total cost between power and water to be competitive in power and water pricing. The same is driving the actual whole pricing for ADWEC for sale to distribution companies. As this pricing does not reflect the exact true costs for power and water, an assessment is needed to have an efficient whole sale pricing for water and electricity.”

Figure 3: Flow of Production and Payments at ADWEC [12].
Abu Dhabi’s water and electricity sector is in major need of a comprehensive study that analyses the contribution of a unit of water and electricity to the UAE economy. Furthermore, the industrial, residential and governmental demand for both water and electricity should be considered in developing a personalized pricing mechanism for Abu Dhabi water and electricity sectors considering the market structure and its end user. Several scenarios can be considered.