With the utilities sector continuing its long-term shift towards privatisation, these are changing times for power, water and waste in the sultanate. The year ahead will see further private sector participation in the country’s electricity transmission and distribution networks, while a number of new desalination projects will also get under way. Oman is keen to secure greater international involvement in all sector plans, with the promotion of foreign direct investment a key part of the sultanate’s overall development strategy. The big-picture view is economic diversification away from oil and gas dependence, and utilities are playing an important role as companies turn to renewable energy, and even coal for power generation.
However, the government faces internal and external challenges to achieving more private participation in the sector. These include the fact that privatisation largely depends on global investor appetite, while growth of the domestic economy – which underpins future utilities demand – fluctuates and affects sector strategy. Recent years have seen lower oil and gas prices take their toll on this growth, with past projections of future energy needs now looking over-optimistic. Despite the economic expansion seen in 2018, the ups and downs of the international hydrocarbons market continue to reinforce the need to diversify, and privatisation of the utilities sector may provide some welcome revenue for the sultanate in the years ahead.
In keeping with the spirit of change, the way the electricity sector is administered and regulated is also undergoing re-evaluation. In October 2018 discussions began on the possibility of moving the main sector regulator, the Authority for Electricity Regulation (AER), under the umbrella of the Ministry of Oil and Gas (MOG). This was borne out of recommendations made in an energy lab that ran from March 18 to April 26, 2018, held under the auspices of the National Programme for Enhancing Economic Diversification (Tanfeedh). Tanfeedh is a government initiative to promote better coordination in the strategic development of manufacturing, tourism, transport and logistics, and mining and fisheries. As energy is central to the growth of these sectors and others, Tanfeedh hosted the lab to brainstorm ways to improve its overall delivery. The idea to bring the AER into the MOG fold was the result of a consensus that there is an over-abundance of bodies with responsibilities and interests related to electricity, including the Ministry of Finance (MoF), the Financial Affairs and Energy Resources Council (FAERC), and the Public Authority for Electricity and Water, now known as Diam.
Power & Water Structure
The MoF owns 100% of Nama Group, which was known as the Electricity Holding Company until 2004, when the first wave of restructuring and privatisation took place in the electricity and water segments. Nama Group in turn owns Nama Holding, a joint-stock company that is the custodian of the government’s shares in 10 different electricity and water generation, procurement and transmission firms. These include Oman Electricity Transmission Company (OETC), which is responsible for 95% of electricity circulation in the sultanate, and Oman Power and Water Procurement Company (OPWP), the sole electricity and water procurement agency. Nama also owns the main electricity supplier and distributor for the capital area, the Muscat Electricity Distribution Company (MEDC). Other key power administrators in Nama’s portfolio include Majan Electricity Company (MJEC), Mazoon Electricity Company (MZEC), Dhofar Power Company (DPC) and the Rural Area Electricity Company (RAECO). Two generation businesses are included in Nama’s structure as well, Wadj Al Jizzi Power and the Al Ghubra Power and Desalination Company, as is the Nama Institute for Competency Development.
For its part, FAERC is a powerful body at the centre of Oman’s governance. Together with the MoF, it oversees the sultanate’s sovereign wealth fund, the Oman Investment Fund, and has input in everything from the national budget to the price of treated waste water. It therefore has a high-level role in sector strategy, regarding both policy-making and supervision.
Meanwhile, Diam was founded on the basis of two government decrees in 2007 and 2009. Despite its original name, the body is the regulator of water, but not electricity, as the AER has oversight duty of the power segment. Diam is the primary direct water supplier to homes and businesses across Oman, performing this role everywhere except the city of Sohar and Dhofar Governorate. In the former, there is the Department of Water, and in the latter, the Water Department of the Governorate of Dhofar.
The power and water segments have evolved together in Oman due to the nature of the majority of water production. With no natural standing bodies of fresh water or permanent rivers, the country has historically relied on groundwater collected from wells and distributed via a sophisticated system of channels, known as aflaj, along with periodic rainfall. As the population grew and the economy expanded, desalination became the main supplement to dwindling groundwater resources. Desalination plants initially relied on thermal methods, boiling seawater and collecting the salt-free vapour created, distilling it back into potable liquid. This requires considerable amounts of heat best supplied by an associated power plant.
With all of Oman’s main power plants currently running on natural gas, a strong association has emerged between electricity and water, and the oil and gas sector. With the latter central to Oman’s economy – crude oil and natural gas accounted for over 40% of GDP in 2017 – the government has long had a direct role in its development, not to mention the number of state institutions with a role in the energy sector more generally.
However, 2019 will likely see a significant reorganisation of ownership in the utilities sector. Nama is due to sell up to a 49% stake in OETC and up to 70% of MEDC as the first phase of a privatisation programme. Stakes in MJEC, MZEC and DPC are also planned for offer in the coming years (see analysis).
Major developments are afoot in desalinated water production as well, with several new plants in the pipeline and an overall shift from thermal to reverse osmosis technology (see analysis). The latter not only saves on natural gas usage, but also enables the establishment of standalone desalination facilities that are no longer dependent on energy supplied by an associated power station. “OPWP does not anticipate a need both for power and water desalination capacity in a common location during the forthcoming seven-year period,” the organisation said in its “Seven Year Statement for 2017-24”. Reverse osmosis facilities can also be deployed closer to residential demand.
The waste management industry, for its part, has undergone recent changes to handle increasing volume. According to the report “Briefings from Oman: Waste Management”, published by Public Authority for Investment Promotion and Export Development in December 2016, Oman produces around 1.7m tonnes of municipal solid waste (MSW) per year, with an average per capita production of over 1.2 kg per day. This adds up to one of the world’s highest daily outputs, at 4263 tonnes per day. The annual figure is set to increase dramatically to around 4.6m tonnes in 2020.
The Oman Environmental Services Holding Company (be’ah) was established in 2007 and granted responsibility for solid waste management across the country by royal decree in 2009. In recent years be’ah has worked hard to transfer collection and disposal duties to private sector operators in each governorate, and the task was completed near the end of 2017. Making collection and disposal more efficient, and adopting new technologies and better environmental protection standards are the main goals sought through privatisation.
The private sector bodies that have taken up local services provision are mostly internationals. The UK’s Averda has the contract for Al Dakhiliyah and Dhofar, and Spain’s Urbasar operates in Al Batinah South. Al Batinah North and Musandam governorates have gone to a consortium of India’s Ramky Enviro Engineers, the UAE’s Imdaad and Oman’s own Khimji Ramdas, while Portugal’s Suma does business in Al Sharqiyah South. Be’ah also owns three health care waste plants that are now operated by Averda: the Al Multaqa facility, which has two lines of incinerators and autoclaves, and receives waste from the Muscat, Al Dakhiliya, Al Sharqiyah North and Al Sharqiyah South governorates; a space in Sohar that serves Al Batinah North, Al Batinah South, Al Buraimi and Al Dhahirah; and the Thumrait facility, which takes health care waste from Dhofar.
At the close of 2018 be’ah was nearly finished shuttering the country’s 317 dumpsites, all of which are no longer deemed environmentally and hygienically suitable. Every site will have been shut down by the end of 2019, with the company establishing new landfill sites and transfer stations in their place that meet higher environmental standards.
Other institutions with a role in the waste management industry include the Ministry of Environment and Climate Affairs, which looks at policy in these areas for the sultanate as a whole, and various environmental standards agencies within the different municipalities. In Muscat, for example, the Directorate General of Health Affairs has the power to inspect and raise the alarm over improper waste disposal, with fines for this ranging between OR100 and 1000 ($260-2600) for individuals caught dumping waste in wadis (valleys), open spaces and public squares.
The year 2018 was a landmark in the collection of accurate data about waste production in the sultanate. Figures were collected during the Eid Al Adha holiday for the first time, with both quantity and type of waste logged. This can now be used as a clear benchmark to measure future waste production.
The year also saw a step forward in waste-to-energy efforts. In October 2018 the OPWP issued two tenders for consultancy services in the development of a plant that would be able to turn around 1.4m tonnes of waste into power annually. The 50-MW project run by an independent power producer (IPP) is likely to be awarded in early 2019, with commercial operations scheduled to begin in 2023.
The sultanate enacted a ban on exporting certain categories of waste in September 2018, with the idea that this would start to create the quantities of feedstock necessary for waste-to-energy schemes in the future, as well as for other recycling initiatives. “This will allow Oman to become the incubator for companies that would bring values out of many types of recycling activities,” Youssef Barake, CEO of Averda Oman, told OBG. “This is a very good step.” Classes of waste to stay in the country include plastics, paper, used oils, electronic waste, used tyres and scrap metal.
Electricity & Water Networks
In 2018, 97-98% of electricity generation in Oman was fired by natural gas – chiefly from open-cycle gas turbine facilities – with the remainder supplied by smaller, diesel engine generators. The electricity network is divided into three parts: the Main Interconnected System (MIS), RAECO and the Dhofar Power System (DPS). MIS is by far the largest, supplying the capital and six other governorates, mostly in the north of the country. Within the MIS are 15 IPPs and independent water and power producers (IWPPs), with eight currently supplying both utilities. The IPPs and IWPPs receive natural gas from Petroleum Development Oman.
The electricity and water produced by the plants goes to a single purchaser, the OPWP. It then sells the water to the PAEW, while the electricity is sent to four distribution companies: MEDC, MJEC, MZEC and DPC. These firms pay the OETC to use its transmission network, which has 400-KV, 220-KV and 132-KV systems. MIS is also linked to the UAE via a 220-KV line, which forms part of the GCC Interconnector, or “Gulf Super Grid”. Run by the GCC Interconnection Authority, this enables transmission among all six member states.
The MIS’ water network currently covers Muscat, Al Batinah North, Al Batinah South, Al Dakhiliyah and Al Buraimi. The governorate of Ad Dhahirah will be added to this in 2020, when a new pipeline is due to be completed. These governorates are covered by three PAEW supply zones: Muscat, Barka and Sohar. In mid-2018 Muscat received desalinated water from the Ghubrah independent water project (IWP), Ghubrah II IWP and Qurayyat Temporary IWP, as well as transfers from Barka. Potable water for Barka was supplied by the Barka and Barka II IWPs, while Sohar’s desalinated water came from the Sohar IWP. Demand for desalinated water is expected to grow greatly in the years ahead, thus new plants are in the pipeline (see analysis).
RAECO, meanwhile, is a small, vertically integrated system covering central Oman and the exclave of Musandam. It serves the port city of Duqm at the middle of the country’s coastline via a 67-MW, diesel-fuelled power plant. Duqm’s power supply is changing, however, with a gas-fired electricity and water project approved by Oman Oil Company and Thailand’s Gulf Energy Development in September 2018. This $483m project will have an installed power generation capacity of 326 MW and an installed water production capacity of 1667 cu metres per hour. Operations are set to begin in 2020, with output then ramping up in step with the water and power needs of the Duqm oil refinery (see Energy chapter). Duqm is also slated as the location for Oman’s first coal-fired power project. Tender documents for the major 1200-MW facility will be issued by OPWP to pre-qualified firms near the end of 2018.
Like Duqm, the governorate of Musandam is undergoing rapid development. While small diesel generators have traditionally supplied the exclave with power, November 2017 saw the inauguration of a 120-MW, duel-fuel generation facility owned by Musandam Power Company. Built by Wärtsilä of Finland, which also holds the operation and maintenance contract, the facility’s engines run primarily on natural gas, but can switch to light fuel oil if necessary.
The DPS, in the south of the country, has three generation companies that also supply power and water to the OPWP. The OPWP then sells electricity to a single distribution firm, the DPC, which also uses the OETC grid. The DPC supplies both the busy port city of Salalah and the sparsely populated rural areas around it, with roughly 100,000 customers in total. It has 33-KV and 11-KV overhead lines, 33 primary substations and 11, 415-KV distribution substations.
Cost of Business
According to the OPWP’s 2017 annual report, the company purchased some 31,345 GWh from the MIS, 3224 GWh from the DPS and 189 GWh from Musandam. In terms of demand growth, peak demand in the MIS rose from 3845 MW in 2011 to 6116 MW in 2017, averaging 8% expansion each year. For the DPS, growth was also around 8% per annum over the 2011-17 period, rising from 348 MW to 552 MW. Demand for power in the sultanate is highest in summer, when air conditioning units are run. In July, demand is usually more than twice the level seen in January.
The average cost per MWh paid by the OPWP in 2017 ranged from OR16.48 ($42.80) from the MIS to OR49.91 ($130) in Musandam, with OR25.63 ($66.55) per MWh from the DPS. However, consumers continue to pay the same rates across Oman, as a system of electricity subsidies is in place. The cost of this has long been a concern for the government, with the subsidy bill totalling OR287.1m ($745.6m) in 2014 and OR497m ($1.3bn) in 2016. In 2017 the government introduced a new cost-reflective tariff scheme for large consumers, which helped reduce the subsidy bill to OR456m ($1.2bn).
Developing a Spot Market
The OPWP purchases electricity and desalinated water from IPPs and IWPPs through power purchase agreements (PPAs), and power and water purchase agreements (PWPAs). These are usually for a fixed term, with a set amount to be bought by the OPWP. The body’s contracted capacity from IPPs and IWPPs stood at 8187 MW for 2018, according to the OPWP’s 2017 annual report, with this rising to 9764 MW in 2019 and declining to 6823 MW in 2024. Growth in 2019 will be driven by two large-scale power stations coming on-line: a 1500-MW plant at Ibri and the 1700-MW Sohar III plant.
The PPA and PWPA system is about to change, however, in two significant ways. First, the OPWP is developing an electricity spot market for the MIS region. Operational trials for this are due to begin in 2019, with commercial operations across the sultanate starting by the end of 2020. Progress is reportedly on schedule, with mid-2018 seeing the company announce that it had begun procurement of a market management system and was recruiting for the Market Operation Centre, which will be within the OPWP. The idea behind the spot market is to increase flexibility, allowing smaller generators that do not have PPAs to contribute, while also keeping the market open to IPPs and IWPPs whose purchase agreements may not have been renewed.
This wholesale market is expected to be more efficient and transparent if successfully implemented. However, much still depends on the provision of solid IT infrastructure, as well as clear separation between the OPWP’s roles as spot market administrator and sole purchaser, though the AER will take on regulatory oversight of the new market as well.
Under the spot system, power generators make daily offers for the following day, with participation compulsory for those over a certain size. Firms with existing PPAs or PWPAs will continue to be governed by those, resulting in a hybrid system, at least in the initial stages. IPPs and IWPPs will also be expected to participate in helping with initial modelling and price setting. This participation should increase confidence in the system so that when purchase agreements expire, the power and water companies will be familiar with the system and willing to keep supplying it. Some practical questions remain, however. The OPWP and power and water companies were in negotiations in the second half of 2018 over the content and administration of new licences that will be offered for participation in the spot market in place of PPAs and PWPAs.
The second key change is the Power 2022 Procurement Process. This will affect four generation companies that have PPAs due to expire that year: Al Kamil, Barka I, Rusail and Sohar I. The project is set to introduce a new procurement system that will create a benchmark for deciding whether or not an offer made by a generation firm for a new contract is competitive. This will require all data on costs and tariffs to be supplied to the OPWP, with this then compared to the benchmark and a transparent decision made. If the numbers do not stack up, the producer will need to make changes to bring their offer into alignment.
The four firms currently supply some 1900 MW of capacity between them; with the new project only looking for about 700 MW in 2022. This raises the possibility that not all of the companies involved will emerge with a new deal. This also illustrates the current over-capacity in some parts of the system.
In 2017, for example, during peak demand in July, a 445-MW plant run by Dhofar Generating Company was operating at 43% capacity, while the 358-MW Al Ghubrah Power and Desalination Company facility was at 68%. Other plants, however, were at full capacity, including the 674-MW SMN Barka Power Company plant and the 427-MW facility of ACWA Power Barka. The new Power 2022 arrangement aims to rationalise capacity with new PPAs, while also taking into account purchases from the spot market, which will be developing during the period in question.
Shifts are also under way in the energy composition of the electricity supply. In December 2017 the government embarked on a new fuel diversification policy (FDP), under which the OPWP plans to introduce some 2600 MW of renewable energy projects through to 2024, as well as a coal-fired power station in Duqm. Through the FDP, renewable energy will contribute around 10% of the power generation total by 2025, while coal will add a further 3000 MW by 2030.
Green energy will be concentrated in the solar and wind spheres, with the first tender for a 500-MW solar project at Ibri having been announced in December 2017. In November 2018 the OPWP announced the three final bidding consortia: the UAE’s Masdar, in partnership with France’s Solar Total and China’s Jinko; Saudi Arabia’s ACWA Power, along with Kuwait’s Gulf Investment Corporation and Alternative Energy Projects Company; and Japan’s Marubeni in alliance with Qatar’s Nebras Power, Oman’s Bahwan Renewable Energy Company and Oman Gas Company.
The final group won a separate 100-MW photovoltaic (PV) plant contract tendered by Petroleum Development Oman in January 2018 for a facility to be built at Amin. The winning bidder for the Ibri plant will likely be announced in early 2019, and the facility is expected to cost in the region of $500m. Furthermore, in October 2018 the OPWP issued a request for proposals for consultancy services related to another large-scale PV facility with a capacity of 500-1000 MW, which is known as the Solar 2022 IPP Project.
While renewable energy remains largely untapped in Oman, solar power is not entirely new to the sultanate, with household rooftop panels and smaller, experimental plants in operation for some time. In March 2018 the AER’s Sahim Phase 1 project got under way. This initiative aims to secure solar panels to 30% of the sultanate’s residential buildings over the next few years (no specific timeline has been provided), with the pilot phase targeting the sale and installation of 1000-3000 systems. May 2018 then saw the AER approve an incentive-based tariff system under which surplus power generated from the panels can be sold back to the grid at bulk supply rates. Residential consumers account for some 47% of the sultanate’s power consumption, thus the Sahim scheme targets this class first, hoping that adoption of PV panels will reduce demand for traditional energy.
In wind power, Oman’s first wind farm, the 50-MW Harweel project in Dhofar Governorate, broke ground in August 2018. The farm is owned by RAECO and the UAE’s Masdar, and is being built by Spain’s TSK with turbines supplied by GE. If winds prove sufficient in the area, a 150-MW extension is planned for 2023. In late 2019 the OPWP plans to offer tenders for two more wind plants of 150-200 MW, which will be commissioned by 2023 to establish a solid base for wind-generated electricity in the sultanate.
Many changes lie ahead for the utilities sector in Oman, with developments across power, water and waste. The ongoing diversification and privatisation initiatives are having a clear impact on everything from the energy mix to waste disposal, and many ordinary Omanis should see services improve. Costs, however, are also on an upward trend, as subsidies are being removed. For IPPs and IWPPs, the period ahead may also be a challenging one, as the sultanate seeks to trim existing capacity and establish a new way of doing business. The spot market will be watched carefully as it rolls out, as will the results of Power 2022 and the prospects it suggests for other companies facing an eventual end to their current PPAs. Still, new desalination and power generation plants, as well as the privatisation of some Nama assets, are likely to garner interest among foreign investors as the evolving landscape takes shape.
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