Oman is a pioneer of private power in the GCC, having seen the first IPP in the Sultanate begin generating electricity in 1996. Demand for power has been growing at 6–7 per cent per annum in recent years, fuelled by private industrial activity. However, Oman is facing a need to change its generation mix away from natural gas.

Penny Hitchin

The Sultanate of Oman has been a pioneer in electricity markets reform in the Middle East. The ‘whole system’ approach it has adopted for the reorganization and privatization of its electricity and water sectors makes it one of the most highly developed privatization programmes in the Gulf region. Oman has used a four-step model to unbundle the country’s generation, distribution and transmission assets, establish a regulatory regime and introduce commercialization and privatization.

A watchtower in the form of a giant incense burner at Al Riyam Park in Oman’s capital Muscat.
Source: L. Plougmann

Privatization of the electricity sector actually started in 1996 when the Manah power project was developed on a build, operate, own, transfer (BOOT) basis by the United Power Company. In 2002, private sector companies were invited to invest in the Salalah Power System.

Until 2004, Oman’s Ministry of Housing, Electricity and Water was responsible for generation, transmission and distribution of electricity. Privatization of its state-owned electricity and water industry was driven by a rising demand for power and water, a requirement for investment to modernize facilities and the need for structural reform and reduction of subsidies. In 2005, the Sector Law came into force providing a new framework for the electricity and seawater desalination infrastructure sectors.

In 2006, the Al-Rusail Power Company was privatized through a 100 per cent share sale – the first such sale of an operational generation asset in the Middle East. It paved the way for the privatization of more of Oman’s power companies, a process that is still underway.

The government’s approach to privatization has been to allow 100 per cent private ownership for an initial period, with an obligation to make public offerings of stipulated shareholdings through the Muscat Securities Market. However, there currently are no plans to privatize the Electricity Holding Company, Oman Power and Water Procurement Company or Rural Areas Electricity Company.

Electricity market structure

The electricity sector is made up of three separate and distinct markets: the Main Interconnected System, the Rural Systems and the Salalah Power System. As part of the Gulf Cooperation Council (GCC) scheme to interconnect the electricity systems of six Gulf States, progress is underway to link the three Oman systems into a Gulf Peninsula network, which in due course will extend further afield.

All of Oman’s domestic energy consumption is supplied by natural gas and oil, reflecting the country’s abundant reserves. Electricity generation is mainly gas powered, although diesel generation is used in rural areas and to provide reserve (non-contracted) generating capacity.

The Authority for Electricity Regulation, Oman has had full responsibility for the regulation of the electricity and related water sector since May 2005.

Regulated activities include generation, transmission, distribution, export, import or supply of electricity; generation of electricity combined with water desalination; generation of electricity co-located with water desalination; central dispatching; development and/or operation of international interconnections; and the activities of the Oman Power and Water Procurement Company.

Main Interconnected System

The Main Interconnected System (MIS) serves around half a million customers. It covers the Governorate of Muscat, the Governorate of Buraimi and most of the Batinah, Shariqiya and Dhahirah regions.

The MIS consists of a single 220 kV/132 kV transmission grid owned and operated by Oman Electricity Transmission Company (OETC) and three generation and distribution networks owned and operated by Muscat Electricity Distribution Company (MEDC), Mazoon Electricity Company (MZEC) and Majan Electricity Company (MJEC). Each of these three distributors supplies customers in its own area.

In its Seven Year Statement, covering the period 2010–2016, the Oman Power and Water Procurement Company (OPWPC) predicts the maximum power demand for the MIS will grow from 3424 MW in 2009 to 6043 MW by 2016, an average annual increase of around 8.5 per cent.

The Oman Electricity Transmission Company (OETC) is a monopoly provider of transmission services to the MIS. OETC owns and operates the 220 kV/132 kV interconnected transmission system in the north of the country, and is responsible for the central dispatch of generating and desalination facilities connected to the MIS. The OETC system operator functions are managed from a load dispatch centre in Al Mawalleh.

Rural Power Systems

The Rural Areas Electricity Company (RAECO) is responsible for generating, transmitting and distributing power in the areas where the MIS transmission system has not operated, although the MIS is now linked to RAECO through the Petroleum Development Oman’s system.

RAECO is also responsible for the electrification of rural areas, funded through a special mechanism in the Sector Law. Most of the electricity supplied to RAECO’s 60 rural systems is generated by diesel fuelled plant. For some rural systems RAECO purchases electricity from Petroleum Development Oman.

The total capacity is 447 MW. The forecast for the RAECO area is approximately 350 GWh in 2012. Demand for electricity in RAECO areas could increase considerably when the development projects in the Duqum area and Masirah Island take off.

Salalah Power System

The Salalah Power System serves 64 000 customers in the city of Salalah and the Governorate of Dhofar. It comprises an integrated generation, transmission and distribution system owned by the Dhofar Power Company.

The system was isolated from the rest of the country’s networks until 2010 when it was connected with the power system of the Petroleum Development Oman, which is connected by a 132 kV single circuit to the MIS. Demand on the Salalah Power System is expected to grow from 297 MW in 2009 to 615 MW by 2016, an average annual increase of around 11 per cent. Significant development of the system will be taking place as the new 445 MW Salalah power and water plant is phased in.

A Five Year Business Plan submitted to OPWPC for the years 2011–2015 sets out RO297 million ($770 million) in investments in the development of the Salalah Power System as demand escalates over that period.

First Middle Eastern transco to be privatized?

The Omani government has plans to privatize the OETC – a first for a Middle Eastern transmission company.

In 2008, it appointed KPMG to oversee the privatization. At that time the request for proposals (inviting potential international bidders to submit expressions of interest) was expected to be floated the following year.

But the global financial crisis appears to have delayed the plans, which are currently on hold. OETC’s existing transmission system extends across the whole of northern Oman comprising about 600 circuit km of 220 kV and in the region of 2700 circuit km of 132 kV transmission lines.

Interconnection links Oman to other Gulf States

Oman is a member of the GCC, which is working to achieve an interconnection system linking all six members. Linking the electrical power networks in the GCC member states will enable a reduction of the electrical generation reserve of each of the member states and improve power supply security and economic efficiency in the region.

The system consists of an AC interconnection of the 50 Hz systems of Kuwait, Bahrain, Qatar, UAE and Oman with a back-to-back HVDC interconnection to the 60 Hz Saudi Arabian system. The North Grid, the first phase of the Interconnection Project, connecting Kuwait, Saudi Arabia, Bahrain and Qatar, was completed in 2009. The second phase, the South Grid, involves interconnection of the independent systems in the United Arab Emirates (UAE) and Oman.

The third phase, interconnection of the GCC South Grid with the GCC North Grid, started in 2010 and is expected to finish in the middle of 2011. The original plan was to connect Oman to the GCC Grid via the UAE’s internal grid but a new proposal to connect it directly to the GCC grid is now under technical and commercial feasibility study.

Oman’s first step in the proposed interconnection system was a 220 kV interconnection between MIS and Abu Dhabi in the UAE completed in early 2007. A link to the Petroleum Development Oman system in the Dhofar area became operational in 2010. As well as improving economic efficiency, streamlining operations and strengthening reliability, the GCC interconnection will promote a common GCC electricity market to pave the way for additional developments.

The interconnection could serve as a gateway to a regional and pan-Arab power pool and bring in new investment. This could allow private investors to develop larger projects with access to a bigger market, including the GCC and other pools such as the EJILST (Egypt, Jordan, Iraq, Lebanon, Syria and Turkey) and ENTSO-E (Europe).

Ensuring water supplies in an arid area

The OPWPC, established in 2002, is a wholly-owned subsidiary of the Electricity Holding Company (EHC) and is 100 per cent owned by the government. It has a monopoly on the sale of desalinated water.

OPWPC estimates that the demand for desalinated water will rise from 22.5 billion gallons a year in 2008 to 53.5 billion gallons a year in 2015, necessitating additional desalination capacity of 31 billion gallons per year.

Oman’s renewable energy pilot projects in the RAECO area

OPWPC has been working towards the development of new independent water and power projects (IWPPs), but the global financial downturn led to revisions in its ambitions. In August 2010, OPWPC dropped the plans to build an IWPP at Al Ghubhrah and decided to re-tender it as a desalination plant only.

A proposed facility at Duqum Port was originally planned to be a 1000 MW coal fired plant (the first in the GCC region); however in February 2010, OPWPC announced that it was changing the fuel source from coal to gas. In April 2010, however, the plan was put on hold and in the second quarter of 2010 it was delayed indefinitely.

OPWPC is seeking proposals for an independent power project (IPP) at Sur. It wants in the region of 400 MW of electricity to be available ahead of the summer peak demand in 2013, and full commissioning of 1500 MW in time for summer 2014. In October 2010, nine companies tendered to build and operate the plant.

At the start of 2011 the contract to build and operate the $1 billion Salalah IWPP was signed with Sembcorp Salalah Power & Water Company (SSPWC). The 445 MW gas fired power plant and reverse osmosis desalination plant will be owned by a join venture formed between Sembcorp Utilities and the Oman Investment Corporation. Commercial operation is projected to begin in 2012.

The electricity and water output from the facility will be sold to OPWPC under a 15-year power and water purchase agreement. SSPWC is 60 per cent owned by Sembcorp Utilities and 40 per cent owned by the Oman Investment Corporation.

The facility will be operated and maintained by a joint venture company, Sembcorp Salalah O&M Company, which is 70 per cent owned by Sembcorp Utilities, and 30 per cent by the Oman Investment Corporation. Chinese company SEPCO III Electric Power Construction Corporation is the engineering, procurement and construction contractor under a fixed price, turnkey contract.

Development of renewable energy

In 2008 Oman published a renewable energy study that explored the availability of solar and wind energy resources in the Sultanate.

This made a number of recommendations for harnessing renewable resources including that the Authority for Electricity Regulation, Oman supports the implementation of pilot projects in conjunction with RAEC diesel generation in rural areas. Tenders were invited and in April 2010 the electricity regulator announced six renewable energy pilot projects offering 6.6 MW of renewable capacity at an investment cost of $21 million.

The six projects will allow RAECO to replace 11 GWh of annual diesel generation with renewably sourced electricity, reducing diesel fuel consumption by 3.1 million litres per year and avoiding 8298 tonnes of carbon dioxide per year.

RAECO currently spends $2.5 million annually on operating its five reverse osmosis desalination plants, which produce around 660 000 gallons per day of water. In December 2010, RAEC appointed Dutch consultancy KEMA to develop a plan for capital spending over the next ten years. KEMA will evaluate all of RAEC’s plants and report on the investment needed, as well as ways to cut operating costs.

While Oman is moving forward with ambitious plans to attract investment in developing and modernizing its power and water infrastructure, the planned rate of progress has been impacted by the global financial downturn. It seems likely that the speed at which planned new projects are agreed will be determined by the rate of recovery of the global economy in general, and the Gulf in particular.

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