Performance And Vulnerabilities Of ACWA Power In The Energy And Water Industry

Set out the performance of ACWA Power https://www.acwapower.com/en in relation to its main competitors/comparators from 2006 until 2018. Conduct an economic analysis of ACWA Power, its wider macro context, its market exposures and its cost vulnerabilities, including comparisons with an appropriate comparator organizations. Does your analysis of these “fundamental economics” of ACWA Power fully explain your data? If not, why not? What does your analysis reveal about the effectiveness of business strategy in the firm or especially in 2008/2009? How well equipped is the business to withstand further global economic shocks in 2019/20?

• Demonstrate your knowledge of the economic concepts introduced in the course
• Show your ability to use the concepts in the analysis of ACWA power

Company background with overview to its market

The ACWA Power is a company which is engaged in the power generation and production of desalinated water at the plants. The company is one of the leading organisations which develops, invests and operates in this field of electricity generation. In the Middle East, the ACWA Power is the leading supplier of power as well as water. Not only in Middle East but also in South Africa, North Africa and Southeast Asia, the ACWA Power has made their position in the industry of power and water supply (ACWA Power, 2018). The customers whom the company serves want to get associated with ACWA because of their sustainable ways. The company also values the investment and involvement of their stakeholders and tries to provide the maximum returns possible. The company since its establishment in the year 2004 has been trying to make its production and supply as much sustainable as possible so that they can sustain in the power and water generation industry. The company has been developing since its foundation and now it has 46 assets. There are 9 of such assets in 10 countries. These assets are in the advanced development sector.

The power utility industry as well as the water utility industry is flourishing in Oman and Middle East (ACWA Power, 2018). Through the strategies and goals of ACWA Power, it has managed to hold a leading position in the industry within its country. The mission of the ACWA Power Company is to emerge as a reliable and sustainable supplier of electricity and desalinated water.  They try to provide the best services at the minimum costs. The company wants to go beyond the profit making business and also be a part of the social development. Through the supply of electricity and desalinated water they are trying to enhance the economic growth of the various nations where they are operating (Ghaffour, Missimer and Amy, 2013). ACWA Power values the safety of their customers and believes in the performance. There are many group assets which are being evaluated by the Key Performance Indicators by ACWA. On the basis of the KPIs it is seen that over their rival firms, they are adding more value to their shareholders. ACWA Power is and continues to be the investor, developer and operator of water and power generation desalination machineries. The company co-invests at a strategic level in its own projects in order to ensure that there is a great degree of operational and technical control over the outcomes from such assets. The growth strategy of the company emphasizes on industrial and sovereign offtake markets to make sure that the expansion of the old platforms, the acquiring of the old machineries and the advancements of the projects help in attaining sustainable growth.

Company Vulnerability

The ACWA Power Company is vulnerable to many changes taking place in the power generation and water utility sector across the world. The company contributes towards the social development by providing power and water supply. However, they are dependent on the supply of the water and its availability, temperature of the water, infrastructure to generate thermoelectricity, etc. Not only is the company vulnerable to the artificial infrastructure but also dependent on the climatic change as it impacts the water resources. The demand for electricity is high but sufficient supply is not available due to generation difficulties. There is also a need for sufficient funding so that ACWA can develop their business and power. The ACWA Power Company has the costs of operation like any other power and water supply utility. The fixed costs, which are incurred by the company irrespective of its operation, are inclusive of rent, machinery, buildings, etc. On the other hand, the variable costs are incurred only when the firm is operation to generate electricity and desalinated water. These costs comprise the labour wages, materials used, utilities, etc.

(Figure: Fixed and Variable Costs)

The fixed cost is a straight line as it is constant at any point of production process. However the variable cost is an upward rising graph as these costs increase with the increase in production (Pascoe, Vieira and Thebaud, 2015).

The Gross Domestic Product in Saudi Arabia during the year 2015 has been $646 billion that has been lower as compared to the year 2014 where the GDP has been $744.34 billion. However, the GDP has been predicted to increase by 3.4 percent by the year 2018. During the year 2015, the per capita GDP has been $20,583 (Kubiszewski et al., 2013). As a result, the purchasing power of the individual has reduced over the years due to a slight decrease in GDP.

Figure: GDP of Saudi Arabia

(Source: Kubiszewski et al., 2013)

The company had to increase the overall interest rates as well as reduce government expenditure. Multiple aspects have affected the income elasticity of demand in Saudi Arabia. Since it is regarded as a normal good, a slight increase in the price by ACWA does not change the preference of the customers (Samargandi, Fidrmuc and Ghosh, 2014).  

According to Heo (2010), the GDP of the United States during the year 2017 has been 19390.60 billion US dollars that has been lesser as compared to Saudi Arabia. The GDP value of the United States indicates 31.28 percent of the world economy. Acquatec has always witnessed a positive development in the country as the demand has always been correlated positively with changes in economic output. Acquatec also involves necessary goods thus being referred to as normal commodity.        

Market Exposures

The ROCE is calculated by dividing the Earnings before tax (EBT) from the Capital employed (Total assets – Current Liabilities).

ROCE of ACWA = E 4.00b / (E 39.26b – E 16.46b) = 17.6%

ROCE of Aquatech = E 1.059b / (E 22.6b – E 7.54b) = 7.031%

According to the statistics of the two companies it is evident that ACWA power is able to on returns on its capital of 17.6 percent whereas on the other hand the same of Aquatech is way lower than that of the previous company. The industrial average or a healthy benchmark of the return on capital employed is usually considered as to be 15%. therefore it shows that ACWA power is able to earn a handsome amount of return on its capital employed which is contributed by shareholders and investors. Such a return is a great sign especially for the people who believe in continuing to invest in such companies and would expect such returns in the future as well. However the returns of Aquatic and below the industrial average which is very risky as well as unhealthy for a business enterprise. The faith of people who take interest in investing in in such companies would be lost gradually and they would not be interested anymore to invest in the near or further future.    

‘ACWA power’ concentrates more towards sustainable communities who uses renewable form of energies for increasing their volume of business in order to reduce the negative externalities taking place due high usage of toxic energies. Moreover, ACWA is also stretching its hands for attaining the public finance from all round the world. ACWA power is trying to build international customers who would work using the sustainable form of power and energies that would reduce the harmful effect on the economy. With higher degree of economic development, the industries are continuously increasing the usage of harmful substances for producing more goods and generating more profits, which is further harming the human health and degrading the air quality resulting in poor environmental protection index of several economies. Therefore, in the recent times several power-consuming industries are highly dependent on sustainable source of power, which is being provided by ACWA power resulting in higher economic profit for the organization. The manufacturing companies operating in the gulf countries are increasingly demanding sustainable form of fuel and power that would eventually increase the human development index of the gulf population. Therefore, clean form of power will highly be accepted in the gulf market also, which .depicts a wide picture of large market exposure of ACWA power. ACWA Power mainly emphasizes on industrial and sovereign offtake markets. Additionally, the firm also targets at participating in various transactions of the merchant market which is featured by the sport market electricity sales and short-term contracts with bulk buyers at taxes which are based on demand and supply aspects. Moreover, ACWA Power intends at seeking opportunities from the merchant market of turkey, Oman and Philippines. As the company is seeking at building merchant market positions for the development of expertise and knowledge of a growth segment, it also aims at limiting its exposure to such a market as its return over risk profile is very high. The company has considerate amount of exposure to the government of Saudi Arab. Despite such exposure, some amount of diversification benefit is provided by the private ownership to the investors of a location where the GRE and sovereign bonds mainly dominate the bond universe.

GDP development and Income Elasticity

Competition occurs in the market, where firms try to cancel out each other’s demand in the market and convert all the consumers towards themselves, resulting in greater business volume and greater profit margin. However, the profit margin also depends on the price elasticity of the goods and services sold in the market. Price elasticity generally measures the degree of responsiveness of the goods demanded in the economy related to its price change in the market. The economists generally use the measure of price elasticity in order to understand the demand of the goods in relation to its price. Therefore, ACWA power needs to maintain its costs structure in order to compete in the market with the rival firms. The organization must maintain a price parity that would not disturb the regular consumers of the firms and will attract more new consumers in the market.

The economic diversification as well as power market has been transforming in the Middle East region thus leading to price fluctuations. The fluctuation in price of ACWA power depends completely on the aspects that influence demand. Economic diversification strategies have mostly led to price fluctuation of ACWA power. The major aspect that has influenced its price during 2010 has been sustained low prices that have initiated a greater push for optimization. The enormous decrease in renewable pricing has also affected pricing of ACWA power. Due to increase oil pricing, the major source of power supply that is oil has began to diminish in the Middle East (Lizardo and Mollick, 2010). In the year 2018, the company witnessed price fluctuation due to increased local prices of gasoline that aimed to make power use more efficient. The government has also initiated to make an investment of $9 billion to power supply thus aiming to privatize ACWA by the year 2020. On the other hand, Acquatec has mostly witnessed price fluctuations due to change in weather circumstances. A prediction of a probable destructive natural disaster also triggers the demand for power supply thus leading to price rise. During the year 2014, the price was 91.4 million barrels every day that increased massively from 12 billion barrels per day in 2013.

Figure: Price fluctuations

(Source: Lizardo and Mollick, 2010)

The graph shows that exchange rate fluctuation has remained almost the same in both the countries such as Saudi Arabia as well as United States. As a result, it has neither impacted ACWA power nor Acquatec in an unconstructive way. The GDP in Saudi Arabia during the year 2011 was USD 577.6 billion that has been measured in terms of exchange rate. The growth of the company has been moderate enough as the country had a direct control over the operations of ACWA power (Nikbakht, 2010). During the year 2015, the nominal effective rate of exchange increased by 11.4 percent that helped the company to adjust its price levels with the trading partners.

Customer structure and degree of dependency

Figure: Exchange Rates

(Source: Nikbakht, 2010)

The comparison between the inflation rate as well as rate of exchange has been used to recognize the exchange rate pass through the domestic prices. The fixed exchange rate in Saudi Arabia has helped to maintain a strong financial stability (Jouini, 2013). On the other hand, Acquatec also witnessed a stable rate of exchange at 1 percent thus reinforcing their demand and supply position. This has increased the demand for the US dollar thus raising the demand for Acquatec energy power.  

In case of ACWA power as well as Acquatec, the government has intervened in terms of value judgments. The government has intervened in order to alter prices thus making it sure that the PED has a large impact on the competency of the policy. However, the impact of the intervention could not be predicted accurately. According to Rujing (2010), a single intervention in the power supply sector is not likely to initiate a solution to deep-rooted issues. By intervening, the government has made it easier to comprehend the market power that has helped to seek for profitable solutions to issues.

Market exposure eventually needs protection policy that would ensure running income for the organization against its investments in the operating market. If an organization is investing huge funds for developing its business in a particular market segment then it is mandatory for the organization to make protection plans that would help survive the organization from market frugalities. ACWA power has also undergone such strategic planning that would protect the organization from market externalities and help it grow with time. ACWA power has delayed its public offering in the market in order to keep its ownership intact in the growth phase. The organization is proceeding with huge amount of projects in hand and is working towards delivering them instead of gaining finances through initial public offering (IPO) in the market. The organization is also delaying the listing plans, as it would bring in vulnerabilities in the market to deal with. If the organization is enlisted in the stock market it will be facing high degree of competition that would result in reduced efficiency of the organization in supplying clean form of power in the market because it will eventually get involved in competition resulting in lower supply of sustainable resources. 

According to Kilian(2008), the gulf countries were also highly affected by the 2008 recession that took place in the US. The oil prices degraded resulting into lower profits of the oil companies situated in the gulf countries. The gross domestic product (GDP) decreased due to lower international demand, which took a toll on other power companies because the customers of the power companies were not producing goods and services hence, they were in no need of fuels and power. Therefore, considering this situations ACWA power must try to build international relationships in order to retain the minimum demand of power and water from manufacturing organization around the world. Moreover, after the economic crisis, the corporate tax rate sore high, which also affected the profit margin of the organization? In order to cope up with high tax rates, the organization tried to collaborate with several government projects that would reduce the tax margins. The business of ACWA Power is subjected to certain macro-economic risks which include the risk of inflation, foreign exchange risks and risks of interest rate. The revenues from most of the project are received in the current of the local country. These revenues are indexed majorly or fully towards the movement of the exchange rate of the USD. Hence, this results in providing protection against the volatility of the rate of exchange of the currencies. The variable and fixed revenues of the company are divided into two components, international and domestic. Both of these streams of revenue are subject to rates of inflation of the particular nations and are hence protected from the inflation risk exposure.

Technology has always been the key driver for growth in the market. If any organization uses high end technology it is beneficial for the organization as it can produce more amount of goods and services in short period of time. ACWA has also invested large amount on evolving and renewable technology that would reduce cost of delivering sustainable power resources. Investments are done in the field of wind power technology that would help in storing energies for later use or can create energies as and when needed naturally through the windmills. Therefore, it is very important to access the environment along with the economic growth, which is brilliantly undergone by ACWA power technology. 

Some of the top global competitors of the ACWA Power Company are Aquatech, Tradebe, Metito, Marafiq, CleanHabors, Veolia, and many more. The Aquatech Company is one of the biggest rivals of ACWA Power in the sector of water supply. The company is based in Pennsylvania at Canonsburg and is a much early founded company than ACWA. The two companies compete in the field of water utilities and in water supply. The revenue of the Aquatech Company is 16,799 percent of the revenue of ACWA Power. Tradebe and Metito Overseas is also giving a neck to neck competition to ACWA Power in the water and power utility fields. The company is coping up to reach the standards of its competitors so that it can sustain in the market.

Revenue in million

(Figure: Revenue of ACWA Power and its 3 top competitors)

The entrepreneurship and the ingenuity of the private sector have been utilized strategically by the company.  The competitive advantage of the company lies in their sustainability approach. The increased efficiencies of their plants and the expanding production capacity give them an added edge over their rivals. They have used latest cooling system for water supply. The fuel switches are being implemented of the advanced type. These initiatives of replacing the older systems by the latest ones are reducing the vulnerability of the company to the climatic conditions as well as natural resource supplies. The strategy of the company is to sustain in the industry in the coming decades by strengthening their energy-water security. They are now focusing on the mitigation along with adaption to adjust with the transitions taking place in the power and water utility sectors. Implementing the appropriate strategies the ACWA Power has emerged as the first ever company in the entire Saudi Arabia to win the ‘Utility Scale Renewable Energy Project’ (Power, A.C.W.A., 2018). The company does not have a very high market share in the energy and water utility sector but they have been progressing to make their place in the competitive market. The company has been concentrating on the projects in all their target zones. This helped them to emerge successful in the year 2017. The company has managed to procure and deliver good projects in the power and water supply sector. The company experienced a he increase in their net income by almost 7.5 percent. Their total numbers of 46 assets is giving them good returns or have huge future potentials. Among these 23 are operational right now, 14 of them are going through their construction stage and 9 are in advanced development phase. ACWA Power is operating in 10nations across 3 continents. Their wide reach is giving them a competitive advantage. The company is also trying to diversify their operations (Ellabban, Abu-Rub and Blaabjerg, 2014). The company makes an investment of 44 % in the internal market while 56 % is vested in domestic interests in Saudi Arabia. The use of renewable resources using wind and solar energy for 15 % of the total assets also gave the company an environment friendly image as a brand before the customers (Twidell and Weir, 2015).

Conclusion

It could be concluded that companies accomplishes competitive advantage by initiating a unique sets of attribute in addition to carrying out the business in the most ground-breaking way. It is imperative to keep in mind that changes in exchange rates might influence prices of imported commodities to a large or smaller extent, that relies on multiple aspects affecting their relationship. The strategy of the company is to sustain in the industry in the coming decades by strengthening their energy-water security. It could be inferred that in a free market system, governments initiate the outlook that markets are best suited in order to limited resources and permit the market forces of demand and supply to set prices. A prediction of a probable destructive natural disaster also triggers the demand for power supply thus leading to price rise. The demand for electricity is high but sufficient supply is not available due to generation difficulties.  

References

ACWA Power, 2018.About Us. Retrieved from: https://www.acwapower.com/en/about-us/introduction/

Ellabban, O., Abu-Rub, H. and Blaabjerg, F., 2014. Renewable energy resources: Current status, future prospects and their enabling technology. Renewable and Sustainable Energy Reviews, 39, pp.748-764.

Ghaffour, N., Missimer, T.M. and Amy, G.L., 2013. Technical review and evaluation of the economics of water desalination: current and future challenges for better water supply sustainability. Desalination, 309, pp.197-207.

Heo, U., 2010. The relationship between defense spending and economic growth in the United States. Political Research Quarterly, 63(4), pp.760-770.

Jouini, J., 2013. Return and volatility interaction between oil prices and stock markets in Saudi Arabia. Journal of Policy Modeling, 35(6), pp.1124-1144.

Kilian, L., 2008. The economic effects of energy price shocks. Journal of Economic Literature, 46(4), pp.871-909.

Kubiszewski, I., Costanza, R., Franco, C., Lawn, P., Talberth, J., Jackson, T. and Aylmer, C., 2013. Beyond GDP: Measuring and achieving global genuine progress. Ecological Economics, 93, pp.57-68.

Lizardo, R.A. and Mollick, A.V., 2010. Oil price fluctuations and US dollar exchange rates. Energy Economics, 32(2), pp.399-408.

Nikbakht, L., 2010. Oil prices and exchange rates: The case of OPEC. Business Intelligence Journal, 3(1), pp.83-92.

Pascoe, S., Vieira, S. and Thebaud, O., 2015. Allocating repairs and maintenance costs to fixed or variable costs in fisheries bioeconomic models. Applied Economics Letters, 22(2), pp.127-131.

Power, A.C.W.A., 2018. ACWA Power Wins the First Ever Utility Scale Renewable Energy Project i n Saudi Arabia. Press release, 6.

Rujing, T.X.Z.X.M., 2010. Government Intervention, GDP Growth and Local SOE Overinvestment [J]. Journal of Financial Research, 8, p.005.

Samargandi, N., Fidrmuc, J. and Ghosh, S., 2014. Financial development and economic growth in an oil-rich economy: The case of Saudi Arabia. Economic Modelling, 43, pp.267-278.

Twidell, J. and Weir, T., 2015. Renewable energy resources.Routledge.