Upcoming projects set the stage for a diversifying sector

Rapid population growth and a host of planned investment in megaprojects across the tourism, transportation and infrastructure sectors have led to pressing new demand on Oman’s utilities sector. Already boasting a dynamic, liberalised and open market that has witnessed a number of successful power projects built and owned by private companies, Oman is now set to launch a series of new projects that will add generation and desalination capacity, helping to replace older facilities. At the same time, increasing consumption of natural gas for new power projects has led the government to embrace renewable energy projects, in line with the sultanate’s Vision 2020 economic diversification plan.

Liberalisation 

Having already undertaken large-scale projects since the 1970s such as the Al Ghubrah independent water and power plant (IWPP), Oman was the first GCC country to liberalise its utilities sector. Privatisation first began in 1996 when the United Power Company developed the Manah power project on a build-own-operate-transfer (BOOT) model, and in 2002, private firms were invited to invest in the Salalah Power System, now the Dhofar Power System. In the same year, the Oman Power and Water Procurement Company (OPWP) was established as the state’s sole purchaser of power and electricity.

Before 2004, Oman’s Ministry of Housing, Electricity and Water oversaw the generation, transmission and distribution of electricity. Then came the Law for the Regulation and Privatisation of the Electricity and Related Water Sector, also known as the Sector Law, which aimed to separate elements within the utilities industry, thereby opening the sector to private investment in independent power plants (IPPs), IWPPs and, eventually, independent water plants (IWPs). The shift towards privatisation was driven by rising consumer demand, in addition to a pressing need for modern facilities, structural reform and subsidy reduction.

Regulation 

The Sector Law established the Authority for Electricity Regulation (AER), an independent regulator that is responsible for guaranteeing open and fair competition, protecting consumer interests, and maintaining water and power supply across the county. The law also established the Electricity Holding Company (EHC), which operates under the umbrella of the Ministry of Finance and acts as a holding company for 10 firms, including power generators and distributors, the sultanate’s procurement and transmission bodies, the rural system and facilities operating in the Dhofar governorate. In addition, EHC’s holdings include Al Ghubrah Power and Desalination, Dhofar Power, Majan Electricity, Mazoon Electricity, Muscat Electricity Distribution (MEDC), Oman Electricity Transmission Company (OETC), the OPWP, the Rural Areas Electricity Company (RAEC), the Wadi Al Jizzi Power Company and the Dhofar Generating Company.

In 2007 the government established the Public Authority for Electricity and Water (PAEW), whi ch operates as Oman’s main water and power supplier outside of the Dhofar governorate and the city of Sohar. Similar to the AER, PAEW is specifically mandated to increase private investment and competition in the utilities sector, while acting as its regulator and electricity policy body. These agencies, as well as the decades-long reform process, have allowed Oman to offer the GCC’s most competitive and privatised utilities, with 12 independent operators permitted 100% private ownership of generation assets. Furthermore, according to a statement by the OPWP, the government plans to introduce a spot market for the electricity sector, with full implementation expected by 2020. This should allow for a more liberalised system based on supply and demand. Ahmed Al Subhi, CEO of utility ACWA Power Barka, told OBG, “The proposed spot market will increase the potential for competition in the power generation market by providing opportunities for new producers, as well as existing producers whose concessions will expire.”

Market Structure 

The electricity segment is comprised of three distinct markets: the Main Interconnected System (MIS), the Dhofar Power System and the rural system, which provides power to remote areas under the RAEC. The largest of these systems is the MIS, which serves the governorates of Muscat, Buraimi, and most of the Batinah, Sharqiyah and Dhahirah regions. Utilities activity is heavily concentrated within the MIS, with Muscat, North Batinah and South Batinah accounting for 76% of electricity production, 90% of related water production, 67% of supply, 55% of customer accounts and 52% of sector-related employment in 2013, according to the AER’s 2013 annual report.

The MIS consists of a single 220-KV transmission grid, which is being augmented with a new 400-KV grid station and lines, and power is supplied by 11 generating companies – nine independent and two owned by the EHC. Power and water are procured by the OPWP, transmitted and dispatched by the OETC, and supplied to consumers by the MEDC, Mazoon Electricity Company and Majan Electricity Company.

Generating companies on the MIS include the EHC’s Al Ghubrah Power and Desalination, and Wadi Al Jizzi Power companies, with the former offering 475 MW of power and 40m imperial gallons per day (MIGD) of desalination capacity; and the latter, 325 MW of power. Independent operators include Al Rusail Power Company, with 687 MW of capacity; UPC (Manah), with 273 MW; Al Kamil Power Company, with 297 MW; ACWA Power and Desalination Company, with 450 MW and 20 MIGD; Sohar Power and Desalination Company, with 600 MW and 33 MIGD; SMN Barka Power and Desalination Company, with 710 MW and 26 MIGD; Al Batinah Power Company, with 745 MW; and Al Sawadi Power Company, with 745 MW. The latest private operator to enter the sector, Phoenix Power Company is expected to open its 2000-MW Sur IPP by the end of 2014.

Dhofar Power

In the Dhofar Power System, power and water are generated by two operators: Dhofar Generating Company, with 273 MW of capacity, and the SembCorp Salalah Power and Desalination Company, offering 445 MW and 15 MIGD of capacity. Power is procured and transmitted by the OPWP and OETC, and distributed by the Dhofar Power Company, following company restructuring in January 2014. Previously, the Dhofar Power Company had been the sultanate’s only vertically integrated firm, acting as a generating company, distributor and transmitter; under the restructuring, the Dhofar Power Company retains distribution duties, the OETC acts as the transmission body, and the Dhofar Generating Company joins the SembCorp Salalah IWPP as the region’s second generating company. This model could pave the way for a proposed new IPP in Salalah, opening the market to new generating firms that would retain full ownership. The RAEC, meanwhile, oversees generation, transmission and distribution, and offers 282 MW and 2.2 MIGD in total capacity.

Consumption 

Although electricity supply has shown strong improvements in recent years, rising demand has also caused total consumption to increase dramatically. Total electricity supply in Oman increased by 1.83 TWh, or 8.7% in 2013, reaching 22.8 TWh, from 21 TWh in 2012, according to the AER’s 2013 annual report. Supply in the MIS increased by 8.2%, or 1.5 TWh, with the MIS accounting for 83% of total growth. The RAEC’s supply, meanwhile, expanded by 16.4% in 2013, on the back of growing demands within the residential, agriculture and fisheries, and tourism sectors, while Dhofar Power Company’s total supply grew by 11.7% in 2013 to reach total supply of 2118 GWh.

Consumption has expanded just as rapidly. The AER reported that its total number of registered customers grew by 8.7% in 2013 to reach 859,392, from 790,277 in 2012. The MIS accounted for 85.2% to the total increase, RAEC for 4.2%, and the Dhofar Power System 10.6%. The National Centre for Statistics and Information (NCSI) reported in March 2014 that electricity consumption in the sultanate jumped by 149.5% from just 8402 GWh in 2005 to 20,958 GWh in 2012. Residential usage increased by 110.9% from 4759 GWh in 2005 to reach 10,039 GWh in 2012, while commercial electricity consumption increased by 191%, from 1417 GWh in 2005 to 4214 GWh in 2012. Industrial consumption showed the largest increase, growing by 642% to reach 3436 GWh in 2012, from just 463 GWh in 2005, due to Oman’s development as an industrial centre. According to the NCSI, electricity consumption expanded by a further 8.7% in 2013 to reach 22,790 GWh.

Tariffs

Utilities prices in Oman are based on a fixed tariff schedule set for a three-year period, with current prices set in 2014 and expiring in 2017. Tariffs are classified by sector, outside of Dhofar: residential, commercial, industrial, Ministry of Defence, government, tourism and hotels, and agriculture and fisheries. Tariffs vary by sector, region, intensity of usage and time of year. For example, industrial enterprises pay 24 baisa per KWh during the summer, but just 12 baisa per KWh during the winter. For the current period, residential tariffs vary from 10 to 30 baisa per KWh depending on total usage, while the tourism and agriculture sectors are charged between 10 and 20 baisa per KWh, and the government between 10 and 20 baisa.

Tariffs remain low because Oman, like every other GCC state, sells water and power at heavily subsidised rates. For example, 42% of the total cost of electricity to the MIS was met via subsidies in 2013, compared to 58% via customer revenues, according to the AER.

Subsidies

Article 18 of the Sector Law established electricity subsidies, calculated by the AER and paid by the Ministry of Finance to licensed suppliers on an annual basis. The AER calculates three separate subsidies: first for the MIS, given to MEDC, Majan and Mazoon; and second for the RAEC. In January 2014 the Salalah Power System was restructured and rebranded as the Dhofar Power System and is now subject to the same subsidy mechanism as the MIS and RAEC.

In August 2014 the EHC announced that subsidies to the electricity sector had jumped to a record-breaking OR310m ($802.71m) in 2013, a 30% increase over OR239m ($618.87m) in subsidies in 2012. According to the EHC, subsidies were driven upwards by rapid growth in the commercial and residential consumer segments, as well as the rollout of new power projects.

The biggest beneficiary was Mazoon Electricity Company, which received OR90.5m ($234.34m) in funding, followed by the Muscat Electricity Distribution Company with OR62.7m ($162.36m); Majan Electricity, with OR55m ($142.42m); RAEC with OR50.2m ($129.99m); the Dhofar Power System, with OR30.5m; and the OPWP, with OR21.5m ($55.67m). Subsidies per unit of electricity reached OR13.7 ($35.47) per MWh in 2013.

Natural gas consumption has shown a sharp increase on the back of new electricity demand, and generating companies receive gas at $1.50 per million British thermal unit (Btu), compared to the global rate of $9. “The analysis suggests that electricity consumers derive significant benefit from indirect fuel subsidies in addition to direct subsidy,” read the AER’s 2013 report. Selling natural gas on the international market rather than supplying subsidised feedstock would allow Oman to generate higher hydrocarbons revenues. At the same time, plans to further liberalise the sector via privatisation of distribution networks will likely require subsidy reforms to make the prospect viable.

Demand And Purchase Agreements 

Recent projections from OPWP show that peak power demand is forecast to increase substantially, by an average of 10% annually, from 4455 MW in 2013 to 9133 MW in 2020. “Increasing personal income, housing starts, and continuing government investment in infrastructure projects are major contributors to continued high growth in electricity and water demand,” read OPWP’s most recent Seven-Year Statement, from 2014 to 2020. However, as OPWP’s power purchase agreements (PPAs) near expiration, and a number of facilities reach the end of their lifespan, new utilities projects will be critical for the sector to meet projected demand.

Gas turbine plants offer a 30-year lifespan, after which the investment required to keep them operational becomes economically unviable. With a number of power facilities approaching 30 years, several operators are looking to decommission their older facilities. OPWP has taken steps to extend its PPAs with these companies in recent months.

Seven-Year Statement 

In its Seven-Year Statement, OPWP announced plans to extend existing PPAs with several generating companies, which will in turn extend the life of power plants whose agreements are slated to expire prior to 2018. Contract extensions will include Al Kamil Power and Barka 1, and the company has also begun discussions with Al Ghubrah and Wadi Jizzi to extend contracts to 2020.

In addition, OPWP also revealed that a number of older generation units at Al Ghubrah are scheduled to fall out of contract after the summer of 2014, which would result in total reductions of 195 MW. Several additional units have already been extended beyond their contracts, and the Al Ghubrah Power and Desalination Company has advised OPWP it plans to decommission these units before 2018, resulting in a further reduction of 235 MW. At the same time, older generation units at Wadi Jizzi are scheduled to fall out of contract in late 2014 and 2015, resulting in subsequent reductions of 81 MW and 92 MW, respectively.

New Projects 

With consumption rising and power plants approaching the end of their natural lifespans, private contractors are set to benefit from a host of upcoming projects. The AER reported that in 2013 operators approved 276 projects worth OR128m ($357.34m), and the PAEW announced plans to invest billions in utilities projects, including an estimated $2.9bn in water infrastructure (see analysis). In May 2014 RAEC announced plans to invest over $1bn to boost power generation capacity by almost 80% by 2020.

The RAEC is also undergoing rapid development via new power and water projects. Apart from its planned investments, the company is working in conjunction with OPWP to procure an IPP in Musandam, with a net capacity of roughly 100 MW, scheduled to open in 2016.

According to a 2013 article in the Oman Observer, average cash dividend yield for the sector over the past three years was over 6% for equity holders, and over the last 10 years five listed power companies have consistently outperformed the market, returning listing gains of more than 30% on average to investors. The recent initial public offerings (IPOs) of Al Suwaidi Power Company and Al Batinah Power Company, for example, were over-subscribed by more than 10 times, garnering OR668m ($1.73bn) from investors.

According to a March 2014 report by the OPWP, six tenders for new megaprojects are expected to float before 2019, including a second IPP at Salalah, offering between 300 and 400 MW of capacity, a new IPP in Suwaiq with a projected capacity of 2600 MW, and IWPs in Quriyat, Suwaiq, Khasab, and Duqm, offering 44, 50, 3 and 2 MIGD of capacity, respectively (see analysis). “Power projects are a huge growth driver in the construction industry,” Amol Kumta, business development manager at Bahwan Engineering, told OBG. “Oman is growing at a much faster pace than anticipated, and as soon as there’s industrialised growth, obviously there will be population growth. We are seeing a boom in utilities projects as a result.”

The 2000-MW Sur IPP is perhaps the most significant recent project. Expected to open for operation by 2015, Oman’s largest power project is being developed by Phoenix Power Company, which will become the sultanate’s 12th independent operator when the project comes on-line. Phoenix Power Company is owned by a consortium including Marubeni Corporation, Chubu Electric Power Company, Qatar Electricity and Water Company, and local firm Multitech, which is part of the Suhail Bahwan Group. This project is significant in that it will enhance regional connectivity, while providing emergency support to the oil and gas industry; the Musandam IPP’s main interconnected system is integrated with Petroleum Development Oman’s power system through a 132 KV link at Nizwa, as well as to Abu Dhabi in the UAE, via a 220 KV link at Mahadha.

The Sur IPP is expected to sell its output to the Oman Power and Water Procurement Company under a 15-year PPA. The new Suwaiq IPP, however, would outsize the Sur IPP, offering 2600 MW of capacity with a total project value of $1.5bn. In June 2014 OPWP issued a request for qualifications from interested bidders, announcing it expects the IPP to become operational in 2018. Prequalified bidders are expected to be announced in early 2015.

Transmission 

Oman’s northern and southern power grids are not connected. The OETC is now in the process of upgrading its transmission network via construction of a new 400-KV grid station in Misfah, near the Izki power station in the Al Dakhiliyah governorate, as well as overhead lines connecting the Misfah station to Izki. Higher voltage allows distributors to use a lower current, and all new plants in Oman will be expected to deliver to 400-KV networks, although 220-KV lines will remain in place. The OETC is currently building two transmission lines, one between Sur and the nearby Jahloot substation, and the other between Sur and Izki, to distribute power from the Sur IPP to the national grid. The firm is expected to invest millions to upgrade its grids. Bahwan Engineering Company, Siemens, ABB, Galfar Engineering and Contracting, United Engineering Projects, and Larsen and Toubro were reported to have purchased tender documents.

Despite the delay in grid station construction, the OETC has already awarded contracts for building power switchgears at Sur and Jahloot to Turkey-based Ozdil Energy Resources. The Sur-Jahloot transmission line project was awarded to Saudi Arabia’s National Contracting Company, while the Bahwan Engineering Company will build the Sur-Izki transmission line. Serbian contractor Energoprojekt will build 400-KV overhead lines and substations, linking Sur to Jahloot.

Renewables 

The majority of Oman’s domestic energy consumption is supplied by oil and natural gas, with natural gas driving urban generation and diesel generation used in rural areas to provide non-contracted generating capacity. Rising electricity consumption has led to a corresponding hike in natural gas consumption: the OPWP estimates the sultanate will consume 10bn cu metres of natural gas annually by 2020, up from current levels of 6.7bn cu metres annually, leading the government to announce plans for a pilot solar power plant, in partnership with the private sector and the RAEC, in November 2013 (see analysis).

More recently, the RAEC announced plans in October 2014 to build the sultanate’s first wind farm, a $125m project located in the Dhofar governorate. The Harweel wind farm project will offer a total of 50 MW of capacity, enough to meet half of the governorate’s rural winter energy needs, and is expected to begin operation in 2017. The company plans to launch seven more renewable energy projects in 2015, including five solar energy projects worth an estimated OR3m ($7.8m), and two wind power plants.

Water & Sewage 

Outside of generation upgrades, the sultanate is also moving to expand and revamp its existing water treatment and sewage systems. The government has announced plans to connect 80% of households in Muscat to the water and sewage system by 2020, up from current levels of about 30%.

In September 2014 Haya Water, the city’s sole provider of water and sewage services, announced it plans to invest OR100m ($258.94m) in sewage and water projects over the next 10 years, out of a total of OR2.2bn ($5.70bn) allocated for new projects between 2002 and 2025. “Since 2002 we’ve committed about 45% of the total investment, in terms of what is in the plan or under tendering,” Said Rashid Al Asmi, Haya Water’s general projects manager, told OBG. “But 55% of that is yet to be really initiated. In order to bring 80-85% of residents into the system by 2020, we anticipate we will actually need to spend more than OR100m ($258.94m) annually, although at the moment, that number is our upper limit in terms of contractor capacity.”

Outlook 

As the sultanate continues its rapid industrialisation, the utilities sector will likely be a significant growth driver in terms of both construction contracts and private investment. Oman’s liberalised, open utilities market has already attracted dozens of private companies and consortiums.

Although a number of PPAs and the facilities with which they were signed could face the possibility of expiry and decommissioning in the medium term, the government’s ongoing liberalisation and unbundling reforms have opened the sector to future mega-projects, which will significantly bolster capacity overall.