Rapid changes are under way in Oman’s utilities sector, with further adjustments expected over the next several years. Increasing demand for power and water and an expanding role for private sector firms are the two most significant factors affecting the industry. Much of the increased demand stems from a growing, yet relatively spread out population, in addition to a surge in industrial development over the past four decades.
Demand
The Oman Water and Power Procurement Company (OPWPC) estimates that peak power demand across the sultanate will increase from 4193 MW in 2011 to 7271 MW in 2018. Demand in the Main Interconnected System (MIS), which runs through the north of Oman, is forecast to grow by 8% per annum, from 3845 MW in 2011 to 6600 MW in 2018. The OPWPC calculates that demand for power in an isolated system located around the city of Salalah should grow at 10% annually, with demand expected to increase from 350 MW in 2011 to almost 700 MW in 2018. A number of major power projects are being built to meet rising demand. These include combined-cycle gas turbine, natural gas fired plants in Sohar, Sur and Barka. When operational, these should supply a combined 3490 MW. An independent water and power project was recently finished in Salalah, and another independent power project in Salalah could be completed by 2016.
Water demand is also expected to increase substantially. With the exclusion of Salalah, the OPWPC estimates demand for water across the sultanate to grow by 5% per year, from 196m cu metres per day in 2011 to 269m cu metres in 2018. Peak water demand in Salalah should rise at 6% per annum, from 62,000 cu metres per day in 2011 to 95,000 cu metres in 2018, according to the OPWPC. Construction is under way, however, to increase water supply. For example, an independent water project that is expected to supply 191,000 cu metres of water per day is being built in Al Ghubrah. The plant is scheduled to become operational in 2014. In addition, a desalination plant with a capacity of 20,000 cu metres of water per day is being built by Majis Industrial Services near the Port of Sohar, according to the OPWPC. Majis expects the desalination facility to be commissioned by early 2013.
Key Players
Government restructuring of the sector began in 2004 with a new law promulgated by Royal Decree 78 of 2004. The decree laid the foundation for the transfer of electricity production, distribution and procurement from the public sector to private industry. This will be accomplished by shifting existing utilities-related activities to smaller compan ies that could be transferred to private hands at a later point.
In addition, independent power producers will implement all future power generation projects. The decree also called for the establishment of an independent regulator, the Authority for Electricity Regulation (AER). The AER is responsible for protecting consumer interests, encouraging competition and securing the supply of power and related water services across the sultanate.
The Public Authority for Electricity and Water (PAEW) operates as a policy formation body over electricity. The PAEW was established by Royal Decree 92 of 2007, and is also the drinking water utility in the country, with the exclusion of the Dhofar governorate in the south. And, while there is no official water regulator, the PAEW effectively fills this role too. Royal Decree 78/2004 established the Electricity Holding Company (EHC) as an umbrella body to hold the shares of newly formed generation, transmission and distribution firms. The EHC is a joint stock company and effectively holds the shares of the government’s nine power companies.
Electricity
Power generation in Oman has become almost completely privatised. A number of generation firms operate, including Al Rusail, Wadi Al Jizzi, SMN Barka, Sohar Power and Al Ghubrah. Excluding Wadi Al Jizzi and Al Ghubrah, which are owned by the EHC, all the generation firms are now privately owned and required to list on local exchanges. There are three main electricity systems: the MIS in the north, the Salalah System in the south and a separate system serving rural areas. Oil company Petroleum Development Oman’s interconnected system, supplies electricity to its sites in the central region. Power in the MIS is delivered by the Mazoon, Majan and Muscat distribution companies, which are owned by the EHC. A fourth firm, the Rural Areas Electricity Company (RAECO), distributes power to more remote areas, and the Dhofar Power Company (DPC) is the only distributer in the Salalah System. RAECO is a wholly owned subsidiary of the EHC and the DPC is almost entirely government-owned through the EHC. Also owned by the EHC, the Oman Electricity Transmission Company (OETC) is the only transmission firm in the MIS system. The OETC transfers electricity from private sector generation firms to government-owned distribution companies. Although the OETC was set to be privatised in 2008, plans were delayed in the wake of the global credit crunch, and authorities have yet to set a new target date.
The OPWPC is the sole procurement body in Oman and is a wholly owned subsidiary of the EHC. One of its main responsibilities is to forecast future power and water needs, and predictions are published annually in the OPWPC’s “Seven-Year Statement”. Although these only cover expected demand in MIS and Salalah, the body also consults with RAECO and other sector participants when making estimates. The OPWPC is charged with securing required power from generation firms, which it does via power purchase agreements. After the power is sourced, the OPWPC sells volumes to distribution companies through bulk supply tariffs. The body also carries out financial transactions for water supply, selling contracted water volumes to the PAEW through bulk supply tariffs. Consumers pay a permitted tariff distribution charge set by the government.
Competition
One of the more important structural changes in the sector is a plan to introduce new power-supply firms into the market. Spearheaded by the AER, legislation would increase competition in an effort to improve customer service and ensure that none of the existing suppliers monopolise the market. The AER is reportedly moving closer to implementing the new measures, though no timeframe has been announced. The authority has explained that new power-supply firms will not be introduced until there is a clear separation of accounts in every segment of the industry. This will give supply companies a better understanding of what costs they can expect to incur when competition is increased. Preparatory steps have already been taken by the regulator. In 2009, for example, the AER set separate price controls for supply and distribution, resulting in different formulas for each function.
Launched in May 2005, RAECO is the only vertically integrated company in the sultanate’s power sector, and it is responsible for every step of the power supply chain for more isolated areas. These areas serviced by RAECO can be roughly divided into three zones: the Musandam governorate, which is the sultanate’s northern peninsula; the Al Wusta governorate, which essentially makes up the middle part of the country; and the Dhofar governorate, Oman’s southernmost region.
RAECO owned almost 50 power plants as of 2011, all operating on diesel fuel. RAECO’s electricity customer base grew 5% in 2011, from 21,700 in 2010 to over 22,600. Domestic customers made up 70% of the 2011 total, consuming almost half of RAECO power supply that year. Government buyers used around a quarter of supplied power, and commercial customers utilised 20% of the total. Around half of RAECO’s customers were located in the Musandam governorate in 2011. Customers in the Al Wusta and Dhofar governorates accounted for 33% and 17% of the total, respectively. As about 70% of RAECO’s costs accrue from fuel expenses, the firm is working to raise efficiency by focusing on demand-side management. RAECO is in the process of increasing plant productivity. The state-owned body is also closing down its least efficient power plants and linking those loads to more efficient plants nearby. The more efficient facilities are to undergo expansion before the added power loads are interlinked.
Water Supply
RAECO also operates six reverse osmosis water desalination plants. Unlike its electricity services, the company does not distribute the water, but sells it at the station gate to the PAEW, which then distributes the water in bulk supply. Four of the plants are in Al Wusta, with one each in Musandam and Dhofar. According to RAECO’s most recent annual report, the company produced roughly 1.4m cu metres of desalinated water in 2011. This represents an increase of over 47% from 2010 when it produced 960,000 cu metres. Over 90% of water production was carried out by the four Al Wusta plants. Oman initially sourced its supply from groundwater, but this began to change 20 years ago when the sultanate’s first desalination plants were built. More have followed as demand for water continues to grow. This rising demand can be attributed to several factors, including economic development, a growing population and the expansion of supply networks. Demand has been reduced to an extent as measures have been taken to decrease network losses.
New Assets
Steps are also being taken to increase the water supply. The PAEW, for example, is undertaking projects worth a total of $339m in the north-western governorate of Dhahirah and the interior Al Dakhiliya governorate. These include three water distribution networks in the Bahla and Samail wilayats (provinces) and Jabal Al Akhdar. The networks will incorporate stations and reservoirs, to be built to support pumping capacity, water filling stations and the extension of existing desalination plants. The construction of water purification systems, stations and tanks to reinforce pumping, and transmission lines and networks for water distribution are also proposed PAEW projects. Phase 1 of these projects will provide water to villages in the Izki and Samail wilayats, and supply projects for several villages in Samail were recently put up for tender.
A number of other water supply projects are still in the design phase. These aim to supply Bidbid wilayat, several villages in Ibri wilayat and a number of villages in Bahla wilayat. Plans to extend the Al Massarat distribution network are further along. With the tendering process in motion, the PAEW expected to award the project in the last quarter of 2012, and over 337 km of distribution networks and transmission will be built in addition to water tanks and stations. The authority also reported that the tender for a 342-km network expansion project in Nizwa city was awarded.
In the Bahla wilayat, the PAEW is overseeing the construction of an integrated desalination facility in Al Awaifiya that is supplying a small local community. The project involves providing and installing desalination units as well as rehabilitating previously drilled wells.
While efforts are under way to extend networks and build desalination facilities, other methods are also being employed to increase water supply. The government-owned Haya Water, for example, operates a water reuse system that supplies the Muscat governorate with treated effluent. Much of this is bought by the Muscat Municipality and used primarily for agricultural purposes. Responsible for the wastewater management of all commercial, government and residential properties in the governorate, Haya Water produces 70,000 cu metres of treated effluent every day. It also converts solids from its treatment plants into a compost known as kala, which is mainly used for agriculture.
Capacity
Haya Water handles 54,000 cu metres of sewage per day and anticipates that this will eventually rise to more than 110,000 cu metres. The firm’s long-term strategy includes increasing production to 220,000 cu metres per day and expanding its reuse system to reach 80% of residential properties in Muscat by 2018. The firm is focusing expansion efforts on districts such as Seeb and Bawsher, replacing existing septic tanks with a piped connection to wastewater treatment services. System connectivity throughout the city currently stands at 22%. In addition to maximising resources by converting wastewater, Haya Water prevents contamination of Muscat’s underground reservoirs. If wastewater effluent is not collected, septic tanks overflow, potentially polluting the city’s water reserves.
On the electricity side, a better understanding of consumption patterns could help consumers conserve electricity usage. “The sector is looking to adopt new technologies, such as automatic meters that read residential consumption in homes and are easily understood by the resident,” Ahmed Bin Saif Al Mazrouy, the general manager of Majan Electricity, told OBG. Steps are also being taken to increase efficiency. The AER aims to reduce energy losses in the MIS to 10% by 2014, according to a May 2012 report in the English-language Muscat Daily. While the body has yet to finalise an incentive mechanism to encourage firms to increase efficiency, it is considering further measures such as cost-reflective tariffs and alternative energy solutions. “There are several ongoing initiatives to educate Omanis on the benefits of efficient electricity consumption. These will boost awareness of alternative solutions, save electricity during times of peak demand and reduce outages,” Abdullah Al Badri, the general manager of Muscat Electricity Distribution Company, told OBG.
Efforts to encourage green building practices should also increase power and water efficiency. In 2012 the Oman Green Building Council (OGBC) was established to study, support and promote eco-construction. A non-profit, non-government organisation, the OGBC is a member of the World Green Building Council, which was established in the US in the late 1990s and is composed of a consortium of member groups. The OGBC’s founding team includes engineers, architects, leaders in the power and energy sectors, environmental consultants, real estate developers and other members of Oman’s construction and real estate industries.
Going Green
Electricity and water efficiency should increase further as a result of efforts made by The Research Council (TRC), an Omani policymaking body and funding organisation. Charged with expanding research and innovation in the sultanate, TRC is working to encourage eco-construction research through its Oman Eco House Design Competition. Contestants are given the challenge of designing, building and operating a house that uses water and power efficiently, and is also cost-effective to build. All public and private higher education institutions offering programmes related to architecture, engineering and design have been invited to participate in the competition. The winner is expected to be announced in September 2013.
Efforts are also under way to encourage energy conservation and develop renewable energy sources. For example, the Al Rusail power plant is working to reduce the environmental impact of its production by using an emissions monitoring system developed by GL Noble Denton to continuously test for levels of CO, CO 2 , NO 2 and SO 2 . Furthermore, the government has set a target for renewables to eventually contribute 15-20% of peak demand requirements, up from the current 2-3%, according to RAECO. The consultancy Ernst & Young noted in its “Renewable Energy Country Attractiveness Indices” report in February 2012, that Oman’s potential to produce solar power is one of the highest worldwide. In fact, the reported indicated that all of Oman’s energy needs could be supplied through solar power. Concentrated solar technology, which use lenses or mirrors to focus sunlight into a small area, is considered the best option for Oman’s potential solar projects. Ernst & Young notes that there are plans to build several demonstration projects capable of producing 10-50 MW of power. Grid constraints and issues with availability make onshore wind farms less attractive when compared to solar power. However, several small projects have received approval and are under construction. According to Ernst & Young these projects could expand the sultanate’s wind capacity to 750 MW. Sultan Qaboos University (SQU), with the EU-GCC Clean Energy Network, organised a two-day summit in February 2012 on assessing wind and solar resources. Speaking at the event, Ivan Moya Mallafre from Spain’s National Renewable Energy Research Centre noted that there is potential in Oman to harness wind energy year-round. He also pointed out that the coastline provides a steady supply of wind. According to another speaker, SQU associate professor Yassine Charabi, research has indicated that wind power facilities could be built in several locations throughout the country – most notably in the mountainous area north of Salalah.
Partnerships
In addition to its renewables potential, Oman’s efforts to reform and liberalise its electricity market make the country an attractive investment option. An expansive list of free trade agreements with its neighbours, as well as Western markets such as the US, gives investors further incentives. Ernst & Young also commend the sultanate for developing a successful public-private investment environment. Foreign investment should rise as a number of overseas firms are looking to enter Oman’s renewable energy market. For example, Switzerland-based wealth management firm Terra Nex announced plans in January 2012 to invest in solar energy projects in the sultanate. Working with Germany-based Middle East Best Select Group of Funds, Terra Nex plans to fund a number of solar power stations, an educational institute focused on renewable energy and two factories. One of the factories will produce solar panels, and the other will manufacture the aluminium frames used for the panels. Terra Nex’s executive director, David Heimhofer, noted in early 2012 that Oman already maintains the resources required to locally develop renewable energy projects. The sultanate has built up an established industrial base with the capacity to supply silicon and aluminium frames – both of which are used in solar panels – to domestic or overseas buyers. Yet Oman’s natural resources give the country an added advantage. Notably, the sunlight intensity in the country is high, which means solar panel can create substantially more energy in Oman than it can in a Western European county, for example. As a result, Oman provides solar power investors with a much more remunerative investment option.
Investments
Of the $2bn planned investment, equity capital accounts for $600m, with the rest procured through loans from European investors, according to Muscat Daily. Terra Nex and Sheikh Hilal bin Khalid Al Mawali, the company’s local partner, have agreed to make 40% of the project’s capital available to the public through a future initial public offering. The firm aims to complete the project within 18 months once all necessary approvals have been given. In February 2012 German solar energy provider Donauer Solartechnik made public its plans to set up an office in the sultanate. Already participating in several tenders in Saudi Arabia and Oman, the firm has chosen to set up an office in Oman to capitalise on regional opportunities and what the company sees as a promising solar market in the country. Donauer Solartechnik has listed a number of advantages in Oman, including an excellent climate for solar projects, growing societal and political awareness of the gravity of climate protection, suitable infrastructure and a stable political environment. Local industry leaders are also taking steps to move the renewables sector forward. The AER published a study on renewable energy options in 2008, which recommended a number of pilot projects that could be implemented in rural areas of Oman. The regulator invited developers to submit proposals for these pilot projects.
RAECO received about a dozen proposals regarding over 30 locations in 2009. Working with the AER and a specialist consultant, RAECO evaluated the proposals and is working to finalise a number of them. A shortlist of potential projects includes four wind turbines in two locations and four solar power facilities. According to figures outlined in RAECO’s 2011 annual report, the four wind turbines are expected to produce 4700 KW when installed. RAECO anticipates that the four solar facilities would supply somewhere between 1400 KW and 1900 KW. RAECO also plans to finalise the proposal for one of the solar projects by early 2013.
Research
While plans are in the pipeline to increase renewable power facilities, work is also under way to expand local research and development in solar energy. TRC announced plans in February 2012 to launch the Oman National Solar Energy Centre (ONSEC). In addition to general solar power research, the institute will work to strengthen the efficient transfer of technology by global companies into the country’s solar sector. Although many foreign firms manufacture quality solar products, models that have worked well in other countries may not work as well or efficiently in Oman due to humidity and dust. ONSEC will be tasked with ensuring that customisation efforts are carried out more effectively. TRC officials aim to build the new centre in cooperation with state institutions, academia and a similar institute already established in Singapore. ONSEC should be completed by early 2014.
Discussion on how to further develop the sector has not been left to ONSEC alone, and in May 2012 the PAEW staged the Annual Power and Water Summit in Muscat, which focused on strengthening the operational performance of energy assets and increasing efficiency. The event was attended by over 320 delegates from both Oman and abroad. Generating public support for renewables is also considered an important part of any future programme. Hamed bin Salem Al Maghderi, the general manager of RAECO, told OBG, “Across the utilities sector, due to the high cost of delivery, groups are implementing more water and power conservation awareness initiatives with customer interface.”
Rising In The Ranks
The ongoing evolution and growth of the utilities sector bode well for entrepreneurs and investors setting up businesses in the country. According to the “Doing Business 2012” report for Oman, a publication issued by the World Bank and the International Finance Cooperation (IFC), procuring electricity for commercial purposes in the sultanate is easier than in the Middle East and North African (MENA) region on average. The report awarded Oman a ranking of 61 (out of 183 economies), with the MENA region receiving a ranking of 71. The World Bank/IFC report calculated that it took 62 days to procure a power connection in Oman and 79 days on average in other MENA countries. Oman was well below the global average of 111 days, according to the 2012 report.
Oman’s utilities sector still has challenges to overcome. In particular, the OPWPC has noted that demand can be relatively erratic, which often makes forecasting future utilities needs difficult. While overinvestment results in expensive infrastructure going unused, underinvestment leads to poor reliability. Generally preferring to err on the side of underinvesting, the sultanate has effectively managed the power demand fluctuations in recent years by using temporary generation. Maghderi said, “Players in the Oman utilities segment are forced to rely on short-term planning because changes are drastic and continuous. This is evidence that there needs to be a move towards renewables.”
Outlook
Although challenges remain, the sector is moving forward. Demand for both power and water is climbing rapidly, creating investment opportunities as a consequence, and substantial water and power projects are under construction. “We maintain a positive outlook for the utilities sector,” said Mahmood Ibrahim Al Bahlani, senior planner of pricing and generation at the OPWPC. “Oman has the tools to build the necessary infrastructure to meet the country’s power and water demands: a relatively liberalised and progressive power sector, a stable operating environment and industry leaders keen to develop new technologies.”
