Oman has been a prime mover in power and water sector privatization in the Middle East. A strong regulatory department has ensured that the swing from public monopoly to a ‘corporatized’ sector has been a harmonious one.

The electricity and related water sector in the Sultanate of Oman has undergone an extensive restructure following the issue of the Law for the Regulation and Privatization of the Electricity and Related Water Sector (the “Sector Law”), promulgated by Royal Decree 78/2004. The Sector Law’s 155 articles create a new market structure, pave the way for further electricity privatization and establish an independent regulator to oversee the public interest regulation of the sector.

Sector ownership structure

The sector is now fully ‘corporatized’, comprising a mix of government-owned and private sector companies (Figure 1).


Figure 1: Electricity and related water sector ownership structure, comprising both government-owned and private companies
Click here to enlarge image

Oman has an established and successful track record of electricity privatization. For example, the Manah Phase 1 privatization in 1996, followed by the Manah Phase 2 in 1999, the Al Kamil IPP and Barka IWPP projects in 2000, the Salalah Concession Agreement in 2001 and the Sohar IWPP in 2004. Furthermore, Suez Energy International has recently been awarded a contract to build, own and operate a new power and desalination plant in Barka, and has purchased the previously government-owned Rusail Power Company, bringing the number of private sector companies in the electricity sector to seven.

Future privatizations will take place through the sale of the government’s interest in some of the government-owned companies that took over the functions of the ministry of Housing, Electricity and Water. The programme will begin with the privatization of the remaining two government-owned power companies (Wadi Al- Jizzi Power Company and Al-Ghubrah Power & Desalination Company), followed by the privatisation of the Oman Electricity Transmission Company and three distribution and supply companies, Muscat, Majan and Mazoon.

The approach to electricity privatization in Oman has been to allow investors 100 per cent private ownership for an initial period, with an obligation to make public offerings of stipulated shareholdings through the Muscat Securities Market. This strategy has been extremely successful and is likely to be adopted for the privatization of subsequent companies.

Market Structure

The electricity and related water sector comprises three separate and distinct market segments: (1) the Main Interconnected System (MIS) in the North of Oman; (2) the rural systems of the Rural Areas Electricity Company SAOC; and (3) the Salalah Power System. Each of these market segments is described in detail below.

Main Interconnected System

The MIS constitutes about 90 per cent of the total electricity supplied in the Sultanate, and its market structure centres around the Oman Power and Water Procurement Company SAOC (PWP) as the single buyer of capacity and output from licensed production facilities and other entities.

The Oman Electricity Transmission Company SAOC (OETC) is a monopoly provider of transmission services to the MIS. OETC owns and operates the 220 kV and 132 kV interconnected transmission system in the north of Oman. As system operator, it is responsible for the central dispatch of generating and desalination facilities connected to the MIS.

The Muscat, Majan and Mazoon distribution and supply companies have a mono-poly right to distribute and supply electricity within authorized areas stipulated in their licenses.

The MIS electricity demand has a distinct seasonal shape, with demand in summer months significantly higher than in winter. The MIS reached a peak of 2495 MW in June, a five per cent increase on the 2004 peak of 2371 MW. Residential customer demand has a significant influence on the MIS load shape. Air conditioning loads in summer rise in response to higher temperatures, resulting in the strong positive correlation of monthly peak demand and maximum monthly ambient temperature.

Rural systems

The Rural Areas Electricity Company SAOC (RAEC) is authorized by licence to generate electricity and desalinate water and transmit, distribute and supply electricity to customers in its authorized area. This authorized area extends throughout the Sultanate, principally in areas where the transmission network of the MIS network does not currently extend, and includes the Musandam, Al Wusta and Dhofar regions.

RAEC is also responsible for the electrification of rural areas, and secures electrification funding through a mechanism established by Article (87) of the Sector Law. The Sector Law requires the Authority to encourage electricity supply to rural communities though the extension of the MIS and through the disbursement of rural electrification funding to RAEC.

The electricity supplied to most of RAEC’s 60 rural systems is generated at diesel fuelled production facilities, although for some rural systems RAEC does purchase electricity from Petroleum Development Oman. Figure 2 summarizes the 2005 capacity and output of RAEC production facilities.


Figure 2: Rural Systems – capacity & output in 2005
Click here to enlarge image

null

Salalah Power System

In March 2001 the government signed a 20-year concession agreement with the Dhofar Power Company SAOG (DPC) to facilitate the privatization of the Salalah Power System. The privatization allowed the government to transfer the obligation to fund a new 195 MW gas fired power plant and the operation of the Salalah Power System to the private sector. Prior to the privatization, electricity supply in Salalah was sourced from small diesel fired generating units. The development of the gas fired power plant in the Salalah region resulted in significant cost savings.

DPC is responsible for the generation, transmission, distribution and supply of electricity in the Salalah Concession Area. Figure 3 presents summary statistics for the Salalah Power System in 2005.


Figure 3: Salalah Power System – capacity & output, 2005
Click here to enlarge image

The vertically integrated nature of the Salalah Concession Agreement is in contrast to the vertical and horizontal unbundling of the electricity and related water sector elsewhere in Oman. This reflects the government’s decision to respect the property rights of the concession agreement, which was signed before the enactment of the Sector Law, rather than end the agreement early to align Salalah to the market structure introduced by the Sector Law.

The PWP has appointed advisors to manage the tenders for a new IWPP in Salalah, which has an estimated electricity and de-salinated water capacity of around 150 MW and 68 000 m3/per day, respectively. The Sector Law requires the PWP to ensure that new capacity is funded from private sector sources.

Electricity tariffs

An important customer safeguard provided by the Sector Law is a requirement that all electricity supply tariffs (Permitted Tariffs) to final consumers are approved by the Council of Ministers. The restructuring therefore had no effect on electricity tariffs.

The Sector Law anticipates the introduction of Cost Reflective Tariffs, which, as their name implies, do not include any element of subsidy, but reflect the actual cost of electricity supply. The Authority has recommended the implementation of Cost Reflective Tariffs for industrial customers from 1 January 2007.

Electricity subsidies

The present level and structure of Permitted Tariffs, however, does not provide sufficient revenue to remunerate the full economic cost of electricity supply, so subsidies are therefore required to sustain the electricity sector’s operations.

Article (18) of the Sector Law implements a mechanism through which the Ministry of Finance provides an electricity subsidy, as calculated by the Authority, to licensed suppliers on an annual basis. There are four licensed suppliers: the Muscat, Majan and Mazoon Discos and RAEC. A subsidy is provided to a single point of injection, i.e. only to licensed suppliers. All other sector transactions reflect full economic costs.

Regulation

The Authority was established as an administrative and financially independent body subject to State Audit Law by Article (19) of the Sector Law. The Authority regulates the electricity and related water sector pursuant to Article (2) of the Sector Law, and has the power to grant licenses and license exemption orders, and to set the terms and conditions on which these authorizations are issued. The Authority also has license modification powers (when the public interest so requires) and powers to investigative and issue regulations and decisions authorized by the Sector Law.

Most successor companies are statutory monopolies with significant potential market power. The Authority constrains the exercise of market power through economic regulation, such as the enforcement of economic purchase conditions, direct intervention to approve the pricing structures of electricity and water bulk supply tariffs and charges for connection and use of licensed systems. The principal instrument of economic regulation is RPI-X type price controls.

The Customer Affairs Directorate is res-ponsible for ensuring customer interests are afforded appropriate priority and attention within the Authority. The Directorate approves and monitors measures to be implemented by licensees that safeguard customer interests. These measures include guaranteed and overall standards of performance, a customer late payment code of practice, a register of customers with special needs and advice to customers on the efficient use of electricity.

The electricity market in Oman is now subject to a framework of technical regulation that includes Industry Codes, planning and operating standards, and Oman Electrical Standards. The Technical Directorate of the Authority is responsible for approving technical standards and for monitoring compliance with them.

The Licensing and Legal Affairs Directorate is responsible for ensuring the Authority complies with its statutory obligations and acts as an in house counsel to members. The Directorate is also responsible for the monitoring and enforcement of license conditions, which is the principal means by which the Authority influences the conduct and performance of licensees.