In recent years, countries in the Gulf Cooperation Council (GCC) have increasingly turned to independent power projects (IPPs) and independent water and power projects (IWPPs) as alternatives to government-financed power and cogeneration plants. By shifting investment in power generation and water desalination to the private sector, these countries have been able to redirect public resources to other development priorities and to engage private-sector stakeholders in the challenge of supplying the region’s growing power and water needs.
The IPP model being used in the region, while serving to augment and diversify investment resources, presents long-term risks: The model may prove costly to governments if growth in power demand slows, and it may prove unduly constrictive if power markets liberalize. Also, the current bidding process has skewed development in favor of base-load plants, which could ultimately leave system planners struggling to meet daily and seasonal fluctuations in demand.
Changes in the way that IPPs are structured can preserve the benefits of the IPP model while substantially reducing these long-term risks. These changes include developing an “IPP liability indicator” to constantly measure the government’s outstanding liabilities, encouraging offtake sharing with industrial users, tendering IPPs to ensure a diverse range of generation assets, and adding government buyout clauses to prevent IPPs from becoming stranded assets in a future liberalized electricity market.