With a growing population and an economic development plan focused on industrial expansion, Oman’s utilities sector is looking to keep pace with rising demand. Fortunately, as far as the country’s power sector is concerned, market reforms stretching back almost two decades ensure that it is among the most competitive in the GCC, well capable of ramping up production in line with the sultanate’s growth. Current priorities for the utilities sector include completing a waste management investment programme, encouraging the growth of renewable energy and further honing the regulatory environment. Also moving up the agenda is the issue of energy subsidies, as low oil prices place the government budget under increasing pressure. In light of this, maximising efficiency will be a priority, with efforts likely to be focused on ensuring the best use is made of Oman’s natural resource endowment.
In Figures
According to the National Centre for Statistics and Information, Oman’s population reached 4.3m in 2015, having grown by 7.5% since 2014; the latest figures from the World Bank, meanwhile, put GDP at $81.8bn for 2014, and GDP growth at 4.6%. In light of these figures, Oman’s energy demand appears to be outstripping growth: total electricity supply in the sultanate grew by 10.4% in 2014, reaching 28.3 TWh, while energy intensity (MWh per account) increased by 2.4% to 27.1 MWh per account.
In comparison with demand, gross electricity production was also considerably higher in 2014, growing 10.45% to 28.76 TWh. Mid-year figures for 2015 would appear to indicate that production growth is accelerating, with total production to the end of June 2015 reaching 15.29 TWh, representing year-on-year growth of 13.8%. Indeed, demand forecasts from the Oman Power and Water Procurement Company (OPWP) predict continued robust growth for the next seven years, and procurement plans for additional production capacity reflect this.
OPWP figures show that, in absolute terms, demand growth remains strongest in the residential consumer segment. Despite falling as a percentage of the total share of customer accounts (from 75.5% in 2013 to 75% in 2014), residential customers’ share of total consumption actually increased, from 47.3% to 47.5%. In absolute terms these figures reflect a 10.85% growth in residential demand, rising from 10.79 TWh to 11.96 TWh. By comparison, industrial demand grew from 3.69 TWh to 4.19 TWh, an increase of 13.55%, while commercial demand rose from 4.53 TWh to 5 TWh, resulting in 10.4% growth. Demand from government users was more stable, rising by only 0.11 TWh to reach 3.29 TWh.
Beyond the electricity sector, the sultanate continues to increase its desalination capacity in order to reduce dependency on ground water aquifers. Gross related water production (i.e., production from desalination plants associated with power stations) reached 211m cu metres in 2014, an annual increase of 7.1%.
Sector Formation
Oman was the first GCC country to begin liberalising its power sector, with the first build-own-operate-transfer (BOOT) contract for power generation signed in 1996. Regulatory reform began eight years later in 2004 with the Oman Electricity Market Structure Royal Decree No. 78/2004.
This decree was instituted through the Law for the Regulation and Privatisation of Electricity and Related Water Sector, more frequently referred to as the Sector Law. The Sector Law established the independent Authority for Electricity Regulation (AER), alongside a clearly differentiated market structure within the power sector, divided between the functions of production, transmission, distribution and supply. Through the Sector Law, prior public holdings in the sector were transferred to the Electricity Holding Company (EHC), controlled by the Ministry of Finance. In 2007 the government established the Public Authority for Electricity and Water (PAEW), an offshoot of the Ministry of Housing, Electricity and Water (MHEW). PAEW assumed all sector law responsibilities from the MHEW. The PAEW acts as the main provider of water within Oman and also holds an overarching regulatory function for the electricity and water sectors.
In contrast to power and potable water, Oman’s wastewater sector is of relatively recent provenance. Haya Water (formerly Oman Wastewater Services Company) was established in 2002 with a mandate to provide a water reuse system for the Muscat Governorate. Since then it has proceeded with an OR1.25bn ($3.2bn) canalisation and treatment programme that is anticipated to connect 80% of properties in Muscat by 2020.
Power
Owing to the sultanate’s size and varying population density, Oman’s power sector consists of three separate networks. By far the largest is the main interconnected system (MIS), which serves the Muscat and Buraimi Governorates, as well as the South Batinah, Dakhliyah, Sharqiyah, North Batinah and Dhahirah regions. Transmission within the MIS is the responsibility of the Oman Electricity Transmission Company (OETC), which is owned by the Omani government through the EHC. The OETC currently operates transmission systems at 220 Kv and 132 Kv, although works are under way to introduce a 400-Kv system as a backbone to the main central power plants. The first two of these 400-Kv networks, to upgrade the Sur and Nizwa plants, are scheduled for completion in the second quarters of 2015 and 2016 ,respectively.
In 2014 the MIS transmitted 25 TWh of power generated by 11 licensed generation or desalination companies, as well as from other OPWP purchases. It supplied a total of 22.1 TWh to MIS customers. Two of these – Wadi Al Jizzi and Al Ghubrah – are publicly owned through the EHC. The remainder of the companies are privately owned, and sell power to the OPWP through long-term power purchase agreements (PPAs). Power in the MIS is then supplied to consumers through three EHC-owned distributors: the Muscat Electricity Distribution Company, and the Majan and Mazoon electricity companies.
Alongside the MIS, two smaller transmission networks serve the southern Dhofar region and Oman’s rural areas. The Dhofar power system (DPS) follows a similar structure to the MIS, with two privately owned power generation companies selling wholesale to the OPWP through an OETC-managed grid. This power is then distributed by the Dhofar Power Company. In 2014 the DPS supplied a total of 2327 GWh of electricity. The rural areas system falls outside of OPWP/OETC responsibility, although the OPWP often assists with procurement. A single EHC-owned company, the Rural Areas Electricity Company (RAEC), which in 2014 supplied 747 GWh of power, instead provides generation, transmission and supply.
New Capacity
With demand currently growing at around 10% a year, the OPWP must plan ahead to ensure that network capacity keeps up. As such, the company produces a rolling seven-year advance statement, which it updates on an annual basis and which contains information on anticipated tenders for new generation capacity. The 2015 statement foresaw the issuing and awarding of two new tenders in the power sector for independent power plants (IPPs) at Ibri, expected to have early power in January 2018 and full capacity in April 2019, and Sohar, expected to run at full capacity by January 1, 2019, and with aggregate capacity in the range of 2850-3150 MW. These relatively large tenders reflect a recent trend within Omani power procurement toward more significant capacity: April 2015, for instance, saw the inauguration of the new Sur IPP, with contracted capacity of 2000 MW. The PPA for Sur was signed in 2011 with Phoenix Power Company, and is the largest in Oman. Further IPPs currently under implementation include smaller facilities at Musandam and Salalah 2, with contracted capacity of 120 MW and 445 MW, respectively.
Electricity Efficiency
With the exception of temporary generation and some smaller rural facilities, all of Oman’s contracted capacity until now has been for gas turbine power plants. According to industry figures, Oman’s power sector has improved the efficiency of its gas utilisation by 21% over the past decade, and the OPWP hopes to improve efficiency by a further 5% in 2015. However, under government encouragement the OPWP has also recently indicated that it will begin considering renewable energy sources for larger scale PPAs to serve the MIS and Dhofar grids (see analysis). In particular, the OPWP has indicated that, subject to government approval, it intends to approve one or more solar plants with aggregate capacity up to 200 MW for the MIS. Procurement is anticipated to take place in either 2015 or 2016, with operations beginning in 2019, and prospective sites have been identified near Adam and Manah. Alongside solar power, RAEC is in the process of tendering a 50-MW wind farm project in collaboration with Masdar of Abu Dhabi. The $125m project will be located near Harweel in the Dhofar region, and, according to GRID magazine, will cover an area of 200,000 sq metres and feature up to 25 turbines. The OPWP, which will purchase power from the plant through a PPA with RAEC, expects the farm to be operational by 2017, and is currently evaluating wind data from the site to simulate its likely contribution to the Dhofar Power System.
As well as these projects on the MIS and DPS grids, RAEC already has plans under way to expand its initial $1m solar project for the rural grid at Mazyona to a further three sites, with a possibility of seven in total. The Mazyona project, which was commissioned on May 5, 2015, is expected to have an annual generation capacity of 558 MWh, or approximately 307 Kw at peak capacity. With RAEC currently relying on diesel generators to produce most of its electricity in far flung rural locations, the Mazyona solar plant is set to save some 155,000 litres of diesel per year. According to RAEC sources, feasibility studies have already been conducted on the three new sites (to be located in Duqm, Masirah and one other region), and tendering was expected at the end of 2015.
Sector Developments
Alongside new capacity, the power sector is also witnessing a number of other developments on the investment and regulatory fronts. In May 2015 the OETC launched its maiden bond issue on international debt markets with a $1bn, 10-year note – the largest-ever international issue by an Omani entity, and the first investment-grade bond to be issued by an Omani corporation. The note, which saw total offers in excess of $2.7bn from interested foreign investors, was able to secure a coupon rate of 3.958%, representing a spread of 190 basis points on US treasury bonds. The money will be used by the OETC to refinance existing debt, as well as for capital expenditure on ongoing and future projects.
At around the same time as the OETC bond issue, Phoenix Power Company announced its plans to hold an initial public offering (IPO) for a 35% stake in the previously mentioned 2000-MW Sur IPP. The IPO, which was open to both local and international investors, ran until June 8,2015 and was expected to raise OR56.3m ($145.7m), with shares offered at OR0.11 ($0.28). Phoenix predicted an annual dividend averaging 7.3% for the next five years, which according to market sources was enough to see the offering oversubscribed by 15 times. Peter Jones, executive managing director of Phoenix Power Company, told OBG, “Investments in the utilities sector [in Oman] are attractive because they are relatively risk free and the companies are insulated from external shocks by government guarantees.”
Phoenix Power is a consortium representing Marubeni Corp, Chubu Electric Power Co, Qatar Electricity and Water Company, and Omani firm Multitech. According to sector licensing regulations, IPPs with majority foreign ownership must hold an IPO within four years of formation.
Regulation
On the regulatory front, a number of significant changes are planned to come into effect over the next two years (see analysis). Foremost among these are the introduction of cost-reflective tariffs for large-scale non-residential consumers, due to enter into force in January 2016 for new accounts and one year later for existing customers. This is likely to be accompanied shortly after by the introduction of a spot market for electricity generation, which OPWP and AER are currently anticipating to enter into effect in 2018, though pre-existing PPA contracts will continue to be honoured. The move to a spot market may give added significance to another key recent development: the accession of Oman to the GCC electricity grid. Oman began official cooperation with the GCC Interconnection Authority in 2015, following the issuance of Royal Decree No. 25/2015. While previously the sultanate had benefitted indirectly from physical interconnection of the GCC systems in moments of emergency, the new agreement provides a legal framework that may form the future basis for the import and export of energy, as well as provide added stability to the network.
With regard to stability, AER is also beefing up its guidelines to deal with possible threats from cyberattack. A recent audit by the regulator found “a low level of security awareness” against potential threats to critical power and water infrastructure. New regulations are therefore due to be launched that will make cybersecurity part of the licensing obligations for companies operating in the sector. Assisting the AER in drafting a regulatory framework and baseline standard base will be UK consultancy firm PA Consulting.
Water
Similarly to the power sector, Oman’s water sector is also experiencing strong demand growth, with OPWP reporting an increase in demand for the MIS and DPS zones of 7% in 2014, reaching a total of 207.4m cu metres. Early forecasts for 2015 predict demand to rise a further 8% in the MIS and 9% in the DPS reaching 226m cu metres in the MIS/DPS. OPWP anticipates demand to continue to rise at the same rate through 2021, eventually reaching 328m cu metres.
Meeting such demand, however, has proven a greater challenge than in the power sector. Severe water shortages were seen in 12 provinces in 2015, apparently caused by technical problems at the Sohar desalination plant (which is contracted to supply 33m imperial gallons per day [MIGD] of desalinated water). The shortages, which affected a quarter of a million people, were most severe in early May 2015, although intermittent stoppages had been reported as far back as February and continued into June.
According to the PAEW, however, the problem of intermittency will be resolved once the Al Ghubrah desalination plant (with a capacity of 42 MIGD) becomes operational, anticipated some time in the first quarter of 2016. The $300m Al Ghubrah facility will be the first independent water project (IWP) to fall under the new category of “desalination facility of a special nature”. This relates to changes to the Sector Law undertaken in 2013 (RD47/2013) covering desalination facilities that are neither combined with nor co-located with power generation capacity. Declaring an IWP as a project of special nature thus brings it under the ambit of the Sector Law and the regulation of the AER, and within the competitive procurement procedures for OPWP outlined in that law.
Alongside Al Ghubrah, a further three desalination facilities are anticipated to enter into service in the coming two years. Expansion to the Barka I project will see an additional 12.5 MIGD of capacity added between July 2015 and January 2016. Expansion to the Sharqiyah IWP at Sur currently under construction will result in the addition of a further 10.6 MIGD at that facility also, due to enter service in April 2016.
Finally, the largest addition to capacity will be the Qurayyat IWP, which will add 44 MIGD to the sultanate’s water supply. Construction work on this facility was scheduled to begin in 2015 and is expected to run until May 2017.
Altogether, these three facilities should add a total of 67.1 MIGD of production capacity per year, more than covering the predicted supply gap of 102m cu metres predicted to last through 2021.
Desalination
Looking ahead, OPWP is planning on opening a further six desalination facilities throughout the sultanate, including moderate plants in Duqm and Musandam, and more significant projects at Barka, Sohar, Sharqiyah and Dhofar. The Duqm facility, which is subject to approval by the PAEW, will provide 13.2 MIGD, depending on the scale of need arising from the special economic zone currently under construction there (which may result in a resident population of 100,000). The Musandam facility, which is expected to have a production capacity of 3.5 MIGD, will serve the city of Khasab, and OPWP has been asked by PAEW to undertake procurement on behalf of RAEC.
The larger facilities planned for Barka and Sohar are expected to have, respectively, production capacity of 62 MIGD and 55 MIGD. OPWP invited RFPs in May 2015 for both projects, with operations hoped to begin by May 2018. The Sharqiyah and Dhofar IWPs (Salalah IWP), meanwhile, will add 17.6 MIGD and 22 MIGD of production capacity, respectively. OPWP is set to invite proposals for these projects in Q1 2016, with production anticipated to begin in Q1 2019. Should all these planned projects be fulfilled, they will add in the region of 270m cu metres per year of additional desalinated water capacity to the sultanate.
Moreover, alongside these projects, Oman Environmental Services Holding Co – also known as Be’ah – is investigating the possibility of building the sultanate’s first waste-to-energy plants for desalination. In line with the national strategy to reduce solid waste, Be’ah is exploring the feasibility of two facilities: a larger plant in South Al Batinah and a smaller plant in Sharqiyah.
At the administrative level, PAEW is also implementing an automation system to bring the sultanate’s decentralised water networks under central control. In collaboration with French firm Veolia Water, PAEW is surveying the more than 340 sites and 25 separate control rooms that currently make up the water supply infrastructure, with the intention of creating a supervisory control and data acquisition (SCADA) system that will help manage potential leaks and breakdowns. The SCADA system should help to limit future water shortages in the sultanate, as well as increase security within the network: the system will be able to remotely detect unauthorised access to water facilities throughout the country.
Waste Water Management
Following on from its prior mandate to serve the Muscat area, Haya Water in July 2015 signed a five-year agreement with the Ministry of Regional Municipalities and Water Resources to expand nationally. Under the agreement, Haya will be responsible for the management, operation and maintenance of all wastewater facilities in the sultanate, with the exception of Dhofar and Sohar.
The agreement will see Haya take responsibility for the ministry’s 57 sewage treatment plants (with a total capacity of 56,130 cu metres per day), 900 km of network, 21 contracts relating to ongoing construction projects, and 11 operation and management contracts.
The new deal will enable Haya to develop a national master plan for the management of the sultanate’s wastewater and is in addition to the 30-year concession signed by the company in 2002 to operate the Omani capital’s sewage network. Under that scheme, the company is currently investing a total of OR2.415bn ($6.25bn) at a rate of around OR100m ($258.9m) per year, and aims to connect 80% of Muscat’s residents by 2020 (up from around 30% currently).
As part of its plans to extend an efficient water reuse system throughout the Omani capital in June 2015 Haya signed two contracts totalling $67.5m. The first contract, worth $20.7m, covered the Madinat Sultan Qaboos district in the wilayat of Bawshar and was awarded to Oman Consolidated Contractors, while the second, worth $46.7m, will cover 7500 properties in the wilayat of Seeb, and was awarded to a consortium of M/S Arab Contractors Company and National United Engineering and Construction Companies. As well as these two projects, several international firms are in the running for the $100m contract to construct a tanker STP in Misfah.
The overall goal of Haya’s Muscat strategy is to connect the city’s residents to six major treatment plants at Seeb, Bawshar, Muscat, Muttrah, Amerat and Quriyat. These plants will then in turn be linked to the world’s largest submerged membrane bio-reactor treatment plant at Al Ansab. The Al Ansab plant began initial operations in 2011, with a daily processing capacity of 54,000 cu metres of effluent per day. This figure is expected to eventually reach 110,000 cu metres, with the treated water going on to be used to irrigate public parks and green spaces. As well as limiting the amount of desalinated water previously required for such purposes, the canalisation project also has the benefit of severely curtailing the need for septic tanks within the capital – helping to reduce the pollution of groundwater aquifers and the erosion of foundations through seepage.
Outlook
With market reforms now firmly embedded, and plans in place to extend competition further, Oman’s utilities sector is well positioned to attract the investment necessary to meet rising demand in both the power and water sectors. Brian Hull, country manager at ABB, told OBG, “We can already see that the diversification and privatisation efforts in the utilities sector are not only making utilities more reliable but also creating investment and job opportunities.”
Furthermore, recent reforms to the pricing of natural gas may well create a more fertile environment for investment in renewables such as solar and wind, and encourage private sector activity in an area which is currently under-utilised.
The chief short-term risk to the sector, however, lies on the demand side and in the interaction between oil prices and subsidies. With the 2015 gas price increases by and large being absorbed by the government budget (rather than residential consumers), the result has been a sudden jump in direct subsidies at a time when public spending is already under pressure from falling oil prices.
Given that such gas is locally produced (and publicly owned), the subsidy represents an opportunity cost rather than a real loss. Yet with power demand rising at 7% per year, the issue of subsidies is likely to return to the government agenda at some point. Whatever the ultimate decision, however, restructuring undertaken over the past decade means that the tools are already at hand to implement reform in the most effective manner.
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