Oman’s electricity sector stands out for its regulatory mechanism, organisational structure and clear vision. Mayank Singh reports on the step change that the sector is undergoing.
Oman’s electricity (power) and water sector is going through a tectonic shift. A look at a few illustrative figures.
In the last 40 odd years Oman’s Main Interconnected System (MIS) has initiated a generation capacity of 3,817 MW (mega watt), while from 2012-14, the country will add another 3,490MW of capacity – almost doubling the country’s electricity production base Electricity consumption per capita was 112 per cent higher in 2011 compared to 2000; out of this 77 per cent of the increase occurred since 2005, when the new structure of the sector was implemented with the passing of the Sector Law. Electricity consumption per account was 63 per cent higher than in 2000, with 87 per cent of the increase occurring between 2005 and 2011.
The number of electricity accounts per 1,000 head of population increased from 193 in 2000 to 251 in 2011 – indicating an increase in the rate of new household formation.
The number of electricity customer accounts in the Sultanate increased by 49,815, or 7.4 per cent from 677,668 in 2010 to 727,483 in 2011. From 2005 to 2011 the number of electricity accounts have increased by 197,332 or 37 per cent.
Electricity Supply in 2011 reached 18.5 TWh (terra watt per hour), 11.4 per cent higher than in 2010 and 95 per cent higher than in 2005. Gross electricity and desalinated water production increased by 10.4 per cent and 9.4 per cent in 2011, respectively.
The structure of electricity demand in Oman is changing as supply to industrial and commercial customers exceeds that of other customer categories. Industrial and commercial customers accounted for 34 per cent of total supply in 2011, up from 23 per cent in 2005.
A growing population, increased per capita income and unchanged subsidised electricity tariffs have contributed to a higher demand for electricity. A part of the increase in intensity may also be explained by higher national and personal incomes which have led to more electricity intensive homes with more air conditioning loads and higher electrical appliance usage. Says Qais Saud Al-Zakwani, deputy executive director, Authority for Electricity Regulation (AER), “There are a number of factors that are leading to a growth of electricity demand in the country and these include the growth of the Sultanate’s economy, which mean a growing demand from various free zones and the increase in large industrial customers. Changes in behavioural patterns are also leading to the consumption of more power by customers per account.”
The passing of the Sector Law and restructuring of the electricity sector as per the directives of Royal Decree No. 78/2004 has brought about a sea change in the sector’s functioning. The Royal Decree isolated various activities related to the sector and entrusted them to individual companies operating on a commercial basis, as a precursor to the planned privatisation in future. “The Sector Law ensured a clear allocation of responsibility and accountability, for example there are clear procedures for dealing with customer complaints and the authority as the statutory regulator has a responsibility to protect the interests of customers,” says Zakwani.
The Royal Decree entrusted the AER with the responsibility to govern the water and electricity sector and all the activities related to it like generation, distribution, transmission, purchase and sale of electricity and water. The authority assesses the appropriateness of a company and issues them licenses to carry out designated activities in accordance with certain legal and technical standards. Says Navneet Kasbekar, CEO, Al Kamil Power Company, “The power sector is one of the best managed sectors of the economy as it is well regulated and each of the organisations carry out their roles correctly.”
Similarly, The Oman Power and Water Procurement Company (OPWP) has been given the statutory responsibility to forecast electricity demand and set out plans to meet forecast demand while maintaining an agreed standard of system security. OPWP is obliged to publish its forecasts and plans, on an annual basis, for the forthcoming seven-year period. OPWP is also responsible for maintaining contracts for enough committed capacity to meet all the power needs of the country. Says Ahmed bin Saleh Al Jahdhami, chief operating officer, OPWP, “We are the single procurer of power and related desalinated water. While laisioning with distribution and supply companies, we do demand forecasting, generation planning and decide on the timing and capacity of new power plants required to develop the forecasted demands. Once the suggested plan gets approved by the AER we liaise with the Tender Board and other agencies to implement the project.” All new power projects in the country are developed by private companies on a build, own and operate model (BOO). While the investment for power plants comes from Independent power producers (IPP’s) or independent water and power project (IWPP) companies, OPWP commits to procure the capacity based on guaranteed availability and efficiency criteria for the tenure of the power procurement contract. These contracts are typically for a period of 15 years. OPWP buys power from I(W)PPs and sells it to supply companies at bulk supply tariffs approved by the AER. OPWP’s forecasts have been very close to the actual demand, which has seen an average growth of 8-10 per cent in recent years. In the summers of 2011 and 2012, the peak demand was forecast to exceed firm contracted capacity through existing power purchase agreements and as such OPWP ensured that this difference was bridged by contracting for temporary diesel generation. Jahdhami adds, “We have never fallen short in fulfilling customer demand. When we plan the power needs of the country, we are obliged to plan for full capacity and this includes reserve margins that need to be maintained at all times.”
The power purchased by OPWP is transmitted to the distribution companies by Oman Electricity Transmission Company (OETC). Saif Abdullah Rashid Al Sumry, chairman of the Board of Directors says, “OETC is the backbone of the transportation of power. We sit in the middle of the electricity value chain, between OPWP and distribution companies. We ensure that there is enough redundancy and backup in the system. For example, if a system needs 100MW then we maintain 200MW of capacity, so if line one goes out due to some contingency, then line 2 can take care of the demand. The effort is to ensure that customers do not experience a loss of power.” OETC has put in place best-in-class systems and has been benchmarking itself against international standards since 2010. OETC looked after transmission in Northern Oman till now, but a decision has been made to integrate the Salalah system with the MIS and work has begun on this process.
Another favourable development helping the stability of the supply is the commencement of the regional grid integration. OETC has done the phase one of the grid integration between Oman and UAE, so that the excess power can flow both ways. Says Sumry, “This is very helpful during peak demand periods especially during the summer months. This became operational in 2012 and we have already established a 220KV line for transmitting upto 400MW of power. All the GCC countries will be linked in various phases.”
With Sohar 2, Barka 3 and Sur IPP coming up OETC is gearing up for a step change in the sector by building infrastructure like overhead lines and associated cables, SCADA lines and better insulation. “Topography is a huge challenge especially due to Oman’s mountainous geographical terrain, but we learn as we go along. Moreover we work with some of the best EPC contractors like BEC, L&T, Galfar, Civilco and National Saudi Company,” says Sumry. Johan Van Kerrebroeck, CEO, SMN Power Holding adds, “The power infrastructure in Oman has developed very well. OPWP and OETC have a clear vision and a well structured approach.”
Growing customer base
There are three distribution companies – Majan Electricity Company, Mazoon Electricity Company and Muscat Electricity Distribution Company (MEDC) that take care of the distribution of electricity to various parts of the Sultanate. Says Ahmed bin Saif Khamis Al-Mazrouy, general manager, Majan Electricity, “We are licensed for two roles: buy electricity and sell it to customers. We have a customer base of 150,000 customers which is growing by 7,000-8,000 each year.” The company covers an area of 50,000 sq kms and is licensed to supply electricity to North Batinah, Barka and Buraimi. Commercial and industrial customers accounted for 50 per cent of Majan Electricity’s total power supply in 2011 supply, compared to just 21 per cent in 2005 and 40 per cent in 2010 – a reflection of the growing industrialisation of its operational area.
Mazoon Electricity Company supplies electricity in Dakiliya, Sharqiya and South Al Batinah regions. Says Zahir Abdullah Al Abri, general manager, Mazoon Electricity Company, “The company has 280,000 customers and we have been witnessing double digit growth in electricity demand in our licensed areas. In 2012-14, Mazoon Electricity will invest RO200mn in network upgradation to ensure that its infrastructure and services are in line with customer expectations.”
MEDC is licensed by AER for the distribution and supply of electricity in the Muscat governorate, covering an authorised area of 3,900 sq kms. The company has unveiled a five year business strategy for the 2012-17 period. The strategy dovetails five key areas – customer service, asset management, HR, HSE and communication. As a part of this strategy MEDC is expanding its customer service outlets. The company opened an outlet in Muscat Grand Mall recently, and there are plans to open more shops in the near future. These outlets will be open till 10pm adding to customer convenience. Says Abdullah bin Said Al Badri, CEO, MEDC, “The company has also introduced pre-paid metres for the first time in the GCC region. These metres will give customers real time feedback on their power usage and help in saving electricity.” These metres have passed the trial stage and customers will be given a choice to install such metres once the trial period is over. Applicants for temporary connection can now avail of these type of metres. These metres can be reused at different sites and will come in handy for EPC companies having multiple construction sites. MEDC has also commissioned a remote metre reading initiative. This is being rolled out in 2,000 high consumption metres initially. Self service and bill paying machines for customers are also under consideration. The company has allocated RO155mn for its current three year budget (2012-2014) for reinforcement and expansion of its distribution network to meet rising demand for supply in the governorate of Muscat. According to MEDC’s 2011 annual report, the customer base of the company has been increasing by eight per cent per annum reaching 221,500 customers.
Transmission and distribution (T&D) losses have been an area of concern for the sector in the past, but AER’s penalties and incentive scheme has brought about significant improvements in this direction. Says Zakwani, “We set losses targets for distribution and supply licensees in the Main Interconnected System along with an incentive mechanism wherein they are able to retain a portion of the savings from achieving the losses target. This started in 2008 and we set ourselves a benchmark against international standards. We still think that the T&D losses are high but they have come down substantially from 24.6 per cent in 2004 to 13.7 per cent in 2011 and we are aiming to reach 10 per cent in 2014.”
Distribution companies have been playing their part in bringing down distribution losses. In the last four years Majan Electricity’s losses have come down from 18 to 11.9 per cent. Says Mazrouy, “A majority of these losses are commercial losses, while the technical losses are four per cent, far less than the permissible seven per cent.” The company has set itself a target of bringing down commercial losses to seven per cent and technical losses down to 0.5 per cent. Mazoon Electricity has similarly brought down T&D losses from the mid 20s in 2005 to 14 per cent in 2011. As commercial losses are due to faulty metres or people tampering with the metres, these companies have stepped up the supervision and inspection of metres.
The other area that distribution are working relentlessly is the Customer Average Interruption Duration Index (CAIDI). This represents the average outage duration that any given customer would experience. For instance, in the case of Majan Electricity this figure is 52 minutes per customer per year. “Our CAIDI used to be 200 minutes; we have brought it down substantially and are looking at bringing it down to 10 minutes by strengthening our network and by deploying an asset management system for planned shutdowns,” says Mazrouy.
CAIDI for Mazoon Electricity is 65 minutes and it is targeting to bring this down to 60 minutes. Says Abri “We have been sending our people to schools and community groups like Omani Women’s Association to educate them about the need to conserve electricity. The Public Authority for Electricity and Water (PAEW) is undertaking a study with JICA of Japan to come up with a conservation policy and we expect new guidelines to come up soon.” OETC has been lending a hand in reducing losses by increasing the transmission voltage. Says Sumry, “We are trying to increase the transmission voltage from 132MW to 220KW and then to 400 KW, and this will help in bringing down T&D losses as a certain amount of electricity gets wasted while transmitting it over long distances.”
Rural Areas Electricity Company (RAECO) primarily undertakes electricity generation, transmission, distribution, supply and desalination activities in the rural areas of Oman. The company commenced operations on May 1, 2005. RAECO operates power plants for the generation and supply of electricity to the Dhofar, Musandam and Al-Wusta governorates. The power generated from RAECO’s plants in these regions is supplied directly to customers. It also operates desalination plants in Abu Mudhaibi, Sowgrah (Al Wusta), Kumzer (Musandam), Masirah (Al Sharqiyah)and Al Hallaniyat (Dhofar). The desalinated water is sold on bulk to PAEW at an approved water sales tariff.
RAECO has also been assigned the responsibility of undertaking pilot projects for exploring the potential of alternative sources of energy in the Sultanate. Says Ahmed Said Al Harthy, senior manager, Regulatory Compliance and Corporate Services, head of Renewable Energy Team, “RAECO was assigned the responsibility of undertaking pilot projects to explore the potential of solar power and wind energy sources as these are considered to be the most feasible for Oman.” RAECO has formed a renewable energy team to cooperate with the AER. The team is studying the available technology and has zeroed in on some locations that seem to be well suited for setting up alternative energy projects in Oman.
The studies and presentations have shown that there is good potential for solar and wind energy in Oman and there has been a huge interest from investors. “RAECO received 12 investor proposals to set up plants at 33 locations. This shows the huge interest of investors in Oman’s renewable energy space,” says Harthy.
The initial shortlisting included six plants with 8.6MW installed capacity. Says Harthy, “Implementing such projects will serve different objectives including testing the technology under local climatic conditions like dust, humidity, assessment of fuel savings using renewable technology, assessment of carbon-di-oxide emission reduction as compared to using fossil fuel and studying the impact of using renewable energy technologies on the security of power supply etc.” The solar power plants will be in Al Wusta and Dhofar and some of them are expected to be executed within the coming few months. Two of these projects based in Masirah and Thumrait will be based on wind energy.
AER appointed a consultant to evaluate these proposals from a technical point of view, and based on its report five projects were shortlisted. RAECO along with AER is developing a power purchase agreement on a BOO model with the shortlisted companies. RAECO is also looking at ways to synchronise these alternative energy plants with its existing diesel power plants.
AER’s Renewable Energy Resources Report in May 2008 created a lot of interest but despite the obvious potential of solar energy there seems to have been tardy progress in this direction. Jahdhami explains, “The AER study considered the potential of alternative energy sources in Oman and made clear recommendations for further detailed studies in this regard. PAEW conducted a more detailed feasibility study for developing a large scale solar power plants of upto 200MW in the country. The study has been completed and is under consideration by the government but the decision on it is still pending. Two sites were selected as optimum sites for large scale solar plants and ground monitoring stations were erected, from which data is being monitored by OPWP. Zakwani adds, “The Public Authority for Electricity and Water (PAEW) is working on a renewable energy policy and we will pursue renewable energy projects based on the policy formulated by the PAEW.”
Says Kasbekar, “Alternative energy projects are taking time and the tenders for solar power plants should have come out by now. The cost of solar panels are coming down every two-three years and I am sure that it will become quite competitive in comparison to gas fired plants soon, though for now it is still an expensive option.” In 2008 the cost of per megawatt of power generated by solar power plants was eight times more than the cost of per megawatt generated by conventional gas based plants, but the gap between the two is being bridged fast. However, putting up solar projects has its own set of challenges such as dust formation on solar panels in desert conditions and the high manual or mechanical costs for cleaning and maintaining them.
Most power plants in the country are fuelled by natural gas, and with Oman using gas for industrial clusters apart from its long term LNG commitments there have been some concerns about the availability of gas as a feedstock for electricity plants in the country. The electricity and related water sector consumed 5.3 per cent more gas in 2011 than in 2010, to support increased electricity and water production of 10.6 per cent and 9.1 per cent, respectively. Says Kerrebroeck, “Once in a while there have been hiccups in gas supply but nothing major that worries us. We do not think that the gas supply is decreasing. Gas was discovered by accident while looking for oil, but now companies are looking directly for gas and with better drilling technology, the prospects for gas look good.”
Though the government has made it clear that electricity and desalination plants are its topmost priority and that there will be no shortfall in the availability of gas for such plants, the AER is aware of the opportunity cost of using natural gas to generate electricity and this is a prime driver of its drive to tap renewable energy sources. AER’s 2011 annual report states, “Natural gas is one of the Sultanate’s most important and valuable natural resources that has supported economic development for over 30 years and will continue to do so for the foreseeable future…The gas used to produce 7.2TWh of electricity and 52 million m3 of desalinated water in 2000 accounted for 19.1 per cent of total Oman gas use. By 2011, following increases in electricity and desalinated water production of 180 per cent and 190 per cent, respectively, total gas use had increased by 124 per cent but the electricity sector’s share of gas use was 19.5 per cent, similar to its 2000 share and indicating significant improvement in gas use efficiency.
The structure of domestic gas use changed considerably between 2000 and 2011. While the electricity sector’s share remained close to 19 per cent, gas use by industrial areas and projects increased from 27.4 per cent in 2000 to 58.1 per cent in 2011. Gas use at oil fields, flared gas and other uses accounted for 22.4 per cent of total gas use in 2011, significantly less than the 53.5 per cent share in 2000. As many as 97.5 per cent of total electricity production in 2011 was fuelled by natural gas, with diesel generation accounting for just 2.5 per cent of total electricity production.
The AER believes that gas used at electricity and water facilities has a high opportunity cost. Aside from the fact that the international price of gas is substantially above the price at which gas is sold for domestic use, any increase in the volume of gas used at electricity and water facilities reduces gas available for industrial areas and projects that may generate significant national economic benefits. The Authority believes it would be sensible (in terms of fuel diversification), timely (as 3,500 MW of new MIS gas fired capacity will be commissioned by 2015) and economically beneficial to initiate the competitive deployment of renewable energy, starting with the large solar project proposed by PAEW. This would reduce the electricity sector’s reliance on natural gas, make more gas available for alternative and possibly higher value added activities, and help Oman prepare to meet future obligations arising from the successor to the Kyoto Protocol to which Oman is a Non-Annex 1 country. The authority’s renewable energy initiatives were in response to His Majesty’s direction to identify ways in which Oman can benefit from its abundant renewable energy resources and reduce its energy deficit. Despite the limited progress made to date, the Authority remains committed to working towards this goal.”
Small is beautiful
Neighbouring countries like Saudi Arabia and the UAE have put up large capacity power plants while Oman has usually gone for comparatively smaller plants. A question often raised is why did Oman not set up large power plants in the past? Says Jahdhami, “Firstly, compared to some other countries in the region, the overall installed capacity in Oman has not been as huge. Secondly, when you look at the whole system, sizing and location of new power plants are done through generation expansion modelling and in coordination with the system operator. Proximity to demand centres and system constraints are also considered in addition to economical as well as security of supply aspects. Nadeem Rizwi, CEO, ACWA Power Barka adds, “Oman has been a pioneer in the electricity sector in privatisation. The water and power sector have been managed well and they have done it at their own pace, by optimising their capacity. Too much extra capacity in the system could potentially be a waste and a financial burden.” Moreover, Oman is working on installing plants of upto 2,000MW now. Says Zakwani, “There seems to be over reliance on ensuring enough generation capacity is available on the system. Capacity is not everything; we must focus on investing in a robust network to bring that capacity to the doorsteps of customers, so there needs to be investment in the electricity infrastructure as a whole and that is happening as OETC takes steps to upgrade the transmission network and the distribution and supply licensees are working hard to upgrade their networks.”
The power sector in Oman has always had the ability to attract interest from the best of international companies and financing from local and international banks and ECAs reflecting the strength of the sector. Says Jahdhami, “Even during the global financial crisis we have been able to attract financing of planned projects because the investors’ perception of the risk of Oman is low due to a robust legal framework in the country and high confidence in the independent regulator for the electricity sector. We have been able to achieve financial closure in a challenging environment and despite the fact that the government has stopped giving guarantees to IPPs.” OPWP is rated A by two rating agencies, Moody’s and S&P.
Stock market investors and institutions have always exhibited a lot of faith in power companies, reflecting the strength of the sector. In 2004, the then AES Barka offloaded 35 per cent of its stake to the public and the IPO was oversubscribed 17 times, showing the strength and faith of investors. An Initial Public Offering (IPO) of 35 per cent of the shares of Al Rusail Power Company and SMN Barka through the listing of SMN Power Holding on the MSM was floated in September-October 2011. The IPO was oversubscribed 1.7 times.
Says Kerrebroeck, “In volatile times or uncertain times people invest in products that offer a high level of reliability and we have strong assets and a stable cash flow. Secondly we buy fuel from the government and sell electricity and water to the government, so the risk is very low. Finally, in Oman government bodies respect contracts and things are done in a professional and legal way.”
Looking ahead, the electricity sector seems to be poised for promising growth. Says Jahdhami, “We are comfortable with Sur and Barka 2 power plants, but we are not relaxing. We are considering another project in Salalah IPP II, which will have a 200-400 MW capacity and have appointed advisors for this. We are also studying the power needs of Duqm and are seeing the best way to cater for the demand.” Sumri adds, “The intent of restructuring the sector has been achieved. But it’s about time to look at a review of the business, as in any large organisational change there may be areas that are overlooked. This does not mean that we are moving in the wrong direction, but just that there is an opportunity to revisit the 2004 initiative and find the areas of improvement.” The electricity sector has come a long way since the promulgation of the Sector Law of 2004, with better efficiencies, transparency and accountability, and the Sultanate is poised to build on this strong foundation now.