Hot demand in a cooling market

By Robin Wigglesworth
Published: June 30 2008 18:01

A large blue-panelled structure, among several new office blocks, stands over a cluster of dusty dhows in the Al Bateen area on the southern tip of Abu Dhabi island.
It is of the same size and design as a conventional building but it bears a sign that says “Energy Well Spent”. An insistent humming comes from within.
This tower block is a cooling plant. It ensures that an entire neighbourhood is temperate, even during summer, when the thermometer in the UAE capital touches 50°C. When fully operational, it will chill 1,000 villas.
The plant is operated by Tabreed, a leading cooling company. It refrigerates buildings by sending 126,000 litres of chilled water a minute through coils in the walls.
Air conditioners still dominate the roofs of Middle East buildings. But, beset by rising energy costs and criticisms of its environmental record, the Gulf is increasingly turning to district cooling. Chilling water is energy-intensive, but Tabreed estimates that district cooling uses 70 per cent less electricity than air conditioning.
“It’s economically viable, environmentally more viable and it saves the developers upfront costs, because they don’t have to put huge air conditioning units within the building,” says Abid Riaz, an analyst at EFG-Hermes, a regional investment bank.
Critics say the UAE’s carbon footprint is so bad that district cooling and other innovations are a drop in the ocean. A more effective means of improving the environmental record, they say, would be to raise subsidised energy prices.
But the Gulf construction industry is flocking to the technology. About 80 per cent of all new buildings in the UAE are being fitted with a district cooling system, according to analysts, although Tabreed’s market share is modest.
In spite of the rising popularity of its main product, which accounts for about half its revenue, Tabreed has had a tough year.
It has lost nearly a quarter of its value on the Dubai stock market because of concerns about large debt-financed capital expenditures. Profits tumbled more than 50 per cent in the first quarter to Dh10m ($2.7m) as labour costs climbed and construction delays hit UAE projects.
“Everyone in the construction business is seeing some kind of delays, and we are starting to build these delays into our projections,” says Karl Marietta, deputy chief executive.
Tabreed’s board is pushing through a change in strategy to boost short-term profitability. The company is considering selling Dh1bn of older assets a year for the next three years rather than raising money in the debt markets. This would mean selling three to seven plants a year.
“It sounds sensible to go down this route,” says Mr Riaz. “[Tabreed] are, after all, a listed company, and this could be a good short-term move for the share price. They would be selling smaller plants; the new ones are getting bigger.”
In another tacit admission of the dangers of overstretch, Tabreed last year entered into a Dh11bn joint venture with Aldar Properties, Abu Dhabi’s main real estate developer, to build a further 25 plants by 2012.
Because of the large capital outlays required to build plants, joint ventures are expected to play an increasing role in Tabreed’s business model.
According to Zawya, a regional data provider, the company at present produces 227,000 refrigeration tons, the standard measure of cooling. Of this, 220,000 tons is in the UAE and 7,000 tons in Bahrain.
With demand soaring, Tabreed has started the construction of 29 plants, which will more than treble production. Most of the output will be to meet Abu Dhabi’s planned expansion.
At the Al Bateen plant, Mohammed Khan, manager of the refrigeration utility, monitors flows of water into the plant. Only two of six cooling compressors are currently working, but the plant’s full 18,500-ton capacity has been fully committed to buildings that will be completed by 2009.
Traditional air conditioning uses about 1.7 kilowatts of energy per refrigeration ton. District cooling uses about 1kW, according to the company. “It’s just the best way to cool buildings,” says Mr Khan.
Copyright The Financial Times Limited 2008