Acwa Power CEO highlights the need for private investment

4 June 2019 (Last Updated June 4th, 2019 12:31)

Paddy Padmanathan, chief executive of Acwa Power, says bold action is needed to address the world’s energy challenge.

Acwa Power CEO highlights the need for private investment

“The biggest challenge we face is a lack of courage,” says Paddy Padmanathan. Leaning back on a sumptuous settee in the interview suite of a five-star hotel in Dubai, the conservatively dressed chief executive of power developer Acwa Power does not look like Che Guevara or Lenin. But there is no doubting his revolutionary credentials.

Renewable energy in the Middle East

Neither his respectable appearance nor his calm delivery and depth of technical detail can mask his call for radical change in the way energy is planned, delivered and financed in the region. “The biggest thing holding us back is not to do with population growth, nor with the rapid rate of increase in energy consumption,” he says. “It is a lack of courage.”

Technology, he says, has given us so many options. “We need to be brave enough to embrace them and start getting on with deploying them.”

Padmanathan’s 35-year career in engineering and management has led him to the helm of one of the most important companies to emerge from the Middle East over the past two decades. A company that is already firmly established at the forefront of change in the region’s utilities sector, and which is set to be a driving force in the coming years.

Leading investor

Established in 2004 from a joint venture of Saudi Arabia’s Abunayyan Trading, Abdulkadir al-Muhaidib & Sons and the Mada Group to explore investments in Saudi Arabia’s power and desalinated water sector, Acwa Power is one of the region’s biggest private developer of power generation and water production, and a leading investor in renewable energy.

With power and water investments of more than $30 billion in the wider region and Asia, Acwa Power is emerging as a key player in the development of the region’s utilities as governments diversify into cleaner forms of energy and accelerate their privatisation programmes in the electricity, water and wastewater treatment sectors.

But Padmanathan is under no illusions about the challenges ahead. Whether it is in the adoption of new technology, or the way projects are financed, things must change, he says. “Old thinking has it that renewable energy is expensive, is intermittent, and that coal is cheap. But if you truly account for cost, you will find a range of cost-competitive options.

“Large parts of the world don’t have electricity because the cost of centralised electricity generation and thousands of kilometres of long-distance transmission and distribution lines are prohibitive,” he says. “But the cost of solar panels has come down dramatically to the point where you can put a panel on top of a hut to start to solve the problem. And we are starting to have smaller, more reliable batteries, which are more than adequate to serve domestic consumption, particularly for a household that has never had electricity.

“I cannot see a time when we will not need central generation,” he says. “There will be energy-intensive consumers, and there will be energy- intensive urban conurbations. But today you have got maybe 99 per cent of energy being dispatched through central generation. That will change dramatically. I can see by 2050 we could end up in a situation where only about 30-40 per cent of all the energy that is being consumed is coming from central plants. The rest of it is all distributed via rooftop, micro-grids and mini-grids.

“I expect to see solar panels on every rooftop,” he says. “We will take some energy from the system because in urban areas we consume a lot more energy, but we will also be using a lot of our own energy.

“To attract serious private sector involvement in distributed power, you need to change the business model. One house at a time is not possible. You need to find a way of aggregating sites. There are models emerging, where companies are able to cluster a region and offer regional solutions, with a little credit support from the central government as a backstop.”

Restructuring required

The Acwa Power CEO says that to achieve such innovations and to make the best of new technologies, a restructuring of the energy sector is required. “Utility companies will have to completely transform themselves. They don’t have a place in the future world.”

Padmanathan says the private sector will provide electricity and water more efficiently than the public sector, and governments should not be involved in power and water supply.

“For me, water, wastewater, solid waste are all the same in terms of being best delivered by the private sector on a bill-funded operating basis, or IPP or PPP basis,” he says. “Bringing together the technical configuration with operability and constructability and making the private sector put itself at risk in order to deliver at the lowest possible cost is the most efficient way of doing it. I’m convinced that is where this will go.

“The state should be the policymaker,” he says. “It sets the framework, it creates the level playing field because the private sector is efficient in everything it does, including abusing the rules. So we need to make sure the rules are set right and somebody is monitoring and overseeing.”

Wastewater opportunity

Padmanathan says the opening up of the region’s wastewater treatment market is a big opportunity for investors. “Wastewater is the biggest underused resource I know of,” he says. “About 80 per cent of the water we consume is for non-potable purposes. So, what is the point of spending so much money producing water somewhere, transmitting it over a long distance and then distributing it, when you can come up with solutions that are local? So you produce the wastewater here, you treat it here, you re-consume it here. Advances in membrane sciences are allowing us to start dealing with [this issue].

“What I am seeing with desalinated water will help in wastewater treatment,” he says. “An enormous amount of innovation has [taken place], particularly through material sciences, membrane sciences. That has allowed us to waste fewer membranes, and allows membranes to work much more efficiently. As a result, the cost of desalinated water has come down almost by a factor of three over the past three-to-five years. That will help because the same sort of systems is used in wastewater treatment.”

The development of the region’s utilities sector, particularly renewable energy, requires large volumes of upfront investment capital (capex). Raising this requires radical reforms in the financial sector, says Padmanathan.

“The amount of capital required is a huge challenge,” he says. “At a simple level, the difference between combined-cycle, gas-fired power and concentrated solar power is that combined-cycle, gas-fired power is capex light. You only need a little money up front. You then must buy fuel in bucket loads and put it in as you use it.

“Concentrated solar power requires seven or eight times the amount of money up front. But you have no fuel costs,” he says. “So, it is very capex heavy. We need a lot of money. That is a challenge.”

He says that while infrastructure and utilities developers need funding over long terms, banks do not want to lock away investment capital for long periods.

Padmanathan says financiers and investment houses are missing out on excellent investment opportunities as a result of the tighter financial regulations introduced following the global financial crisis in 2008.

“There is no shortage of money in the world,” he says. “But there is a huge shortage of opportunity.

“If you talk to any CEO of a bank, or an insurance company or pension fund, they will tell you that they are desperate for opportunity,” he says. “I am very popular with them because they know we do these projects at scale. They love it. They want to understand it. They want to know because they see it as stable, long-term, reliable cash flows. Because for them, what is it about? They take premiums, and then they need to pay returns over a long period of time. For them, this is perfect.

“But the challenge is that they have regulations that say they cannot allocate more than so much in infrastructure. They allocate so much for property, which has got no certainty whatsoever. I don’t understand how this works. Half of the buildings are empty half of the time. These things need to be completely redirected.

“Insurance company regulations, asset location regulations and pension fund regulations need to be revamped,” he says. “The bottom line is we need to rethink some of the draconian financial regulations we have.”

Padmanathan also says that in addition to debt financing, there are huge pools of cash waiting to be tapped. “There is a vast pool of liquidity out there, in the hands of high-net-worth individuals and private companies. We need to find mechanisms to access that money.”

MEED
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