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Oman is working on a multi-pronged approach to address the anticipated jump in electricity demand
BusinessToday reports

According to the World Factbook, per capita consumption of electricity of the world stood at 2,215 kilowatts per hour (kWh) in 2003. The corresponding figure for the US was 12,187 kWh. During the same years the European Union consumed 5,906 kWh, Japan 7,424 kWh, Germany 6,189kWh and the UK 5784kWh. China, the third largest electricity guzzler of the world, consumed a staggering 2170bn kWh in 2004 (its per capita consumption standing at 1662 kWh). African countries like Somalia, Western Sahara, Rwanda, Burundi and Tonga dominate the bottom of the list. To put things in perspective, the US, with less than a third of India’s population, generates and consumes 7.5 times the electricity used by the latter.

Oman’s gross domestic product (GDP) grew by 24 per cent in 2005 to reach RO11.817bn compared to RO9.52bn in the preceding year. This comes in the wake of a similar performance in 2004. And with the sultanate’s economy expected to grow at a fast clip over the next few years, the demand for electricity is set to spiral. Says Mohammed al Mahrouqi, CEO, Oman Power and Water Procurement Company (OPWP), “We are working on a seven-year sta-tement which will spell out the additional demand for electricity and identify the additional capacity requirements to address this demand.�/p>

Take off stage
According to an estimate submitted by the OPWP to the Electricity Regulatory Authority the peak electricity demand in 2012 is expected to be 3,889 MW (excluding transmission losses) �a 62 per cent increase over 2005. The three electricity distribution companies �Muscat, Majan Electricity and Mazoon Electricity �have drawn up their own future projections. Based on prospective industrial and tourism projects that are expected to take off they estimate that the peak demands for electricity in 2012 will be 4,739 MW (including 70 MW of transmission losses).

While the estimates may vary, there is a general unanimity about an escalation of demand in future. Past record only underlines this trend. The demand for electricity in the sultanate grew from 1,718MW in 1999 to 2,495MW in 2005, a 51 per cent increase at an annual average rate growth of seven per cent.

The Electricity Holding Company (EHC) and the various subsidiary companies are chalking out a roadmap to meet this increase in demand. Says Bob Whitelaw, CEO, EHC, “The new transparent planning obligations for companies operating in the sector will help ensure that the system is developed in a manner and on a timeline that meets the requirements of all consumers in Oman.�

Taking on the challenge
A multi-pronged approach has been drawn up to meet this increase in demand. These include setting up of new power plants, identifying units from which supplementary power can be drawn, involving Rural Areas Electricity Company (RAEC) and interconnecting with other countries in the GCC region. The bulk of the increased demand is to be met by new power plants that are in various stages of development. OPWP has solicited bids for developing an Independent Water and Power Project (IWPP) close to the AES Barka plant. The new IWPP called Barka II will have 100 per cent private ownership. Says Mahrouqi, “We are currently working on Barka II which will have a capacity to generate 700MW of electri-city and 120,000 cubic meters of desalinated water by 2009.�EHC expects the project to start generating electricity commercially as early as April 2008.

Another big Independent Power Project (IPP) underway is the one at Sohar. This will generate 360MW electricity once its first phase gets commissioned next year. A further expansion of the power plant during its second phase will add 580MW of electricity generation capacity to the grid. The second phase is to be completed by the middle of 2007.

Barka II is the first IPP project in Oman to be undertaken fully under the new regulatory regime. The EHC is also working on divesting 100 per cent of the government’s interest in Al Rusayl Power Company along with Barka II. The plant at Al Rusayl has generation capacity of 668MW.

Building blocks
The power sector in Oman has taken one step at a time. It all started in 1996 when the sultanate’s first IPP was set up in Manah. The Ministry of Housing Electricity and Water (MHEW) awarded the United Power Company (UPC) a contract to construct a 90MW gas-fired power station at Manah, in the south west of Muscat. Pleased with its progress the MHEW upgraded its licensed generation capacity to 270MW in 1999 on the condition that it also took over the management of 180km of downstream lines. Apart from being the first privately developed and owned power plant in the sultanate, Manah is also the only IPP, which is operated on a build, own, operate, transfer (BOOT) concept. The IPPs that followed were granted a licence to build, own and operate (BOO).

Manah Phase II was followed by Al Kamil IPP and Barka IWPP projects in 2000, the Salalah Concession Agreement (with Dhofar Power Company) in 2001 and the Sohar IWPP in 2004. Manah also showed the level of international interest in the electricity sector in Oman. Tractabel, a Belgian company and International Finance Corporation (part of the World Bank Group) are UPC’s founder shareholders.

Emboldened, the government solicited more foreign investment in electricity generation. The UK based International Power took a 65 per cent stake in Al Kamil. While AES Oasis from the US took a controlling stake in AES Barka. These foreign firms brought in huge foreign investments. The 285MW Al Kamil project was set up at an initial project cost of over US$200mn. For AES Barka the figure was in excess of US$400mn. Says Salman Pervez, procurement manager, AES, “The 427MW station was commercially operational on June 9, 2003. Since that time the project has performed admirably with reliability, operating environmental and safety results at top rank levels.�

Private investors will initially take a 100 per cent stake in Barka II Rusayl project. As with earlier IPPs like Al Kamil, AES Barka, Dhofar Power and Sohar Power, private investors will be required to offer 35 per cent of their shares to the public within a specified time period. Says Whitelaw, “More than 50 per cent of the electricity generating capacity in Oman has been built, owned and operated by private companies. In addition to this, new generating capacity is required to be built, owned and operated by private companies and the government of Oman has set a policy of selling 100 per cent of its shares in the remaining gov-ernment-owned generating companies.�/p>

The germ
The idea of privatising generating capacity started taking wings in the corridors of power sometime in the early 1990s. The policy was driven by pure economics. “As Oman had limited resources, it was not very prudent for it to put up sizeable investments upfront for a period of 20 years,�says an executive of UPC. As the realisation dawned that providing for the future needs of electricity would require substantial investment, the MHEW saw it as prudent move to bring in private partnerships.

Explains Navneet Kasbekar, CEO Al Kamil Power, “In a welfare state, economic returns are not everything as social returns are also important. Moreover, in a capitalist economy the government should not be in a business where private initiative can be brought in.�

As a rule of thumb, most IPPs make a 12 per cent return on investment, breaking even in seven to eight years. Their contracts also give them a lot of comfort and flexibility. Says Pervez, “The BOO concept enables AESB to operate as a going concern through and possibly beyond the contracted period of 15 years by either negotiating to extend its supply agreements PWPA with OPWP or selling into an alternate structure that may involve a merchant pool type structure is that is the market condition at that time.�/p>

The model proved to be a win-win situation for all the stakeholders. The government got in huge investments upfront, private investors generated power and sold power to the OPWP getting a pre-determined income for the electricity produced. And consumers got enhanced power supply.

The fallback
Going back to the issue of meeting increased demand, the OPWP has identified 615MW of potential capacity which can be contracted out from different companies. Of this, 85MW is owned by authorised entities like Oman Mining Company, Oman Cement Company, Al Kamil and Barka. Sohar Aluminium Company, which is setting up a power plant for its smelter, can lease a further 180MW. The 150MW Ghubra Power Plant (whose contract expires in 2010) can be given a new contract for generation. Thus in addition to the new power plants, OPWP can count upon a number of other entities to address any shortfall.

The idea of a common GCC grid with all countries within the region drawing and supplying power to each other has been in the air. But while a common grid may still be some years away, Oman and the UAE have taken definite strides in this direction. Says Mahrouqi, “The infrastructure connecting the UAE with the Oman is in its final stage and we are looking at the possible utilisation of power drawn from the UAE.�The interconnection with the UAE is expected to provide up to 200MW of electricity to Oman.

Says Hamoud al Busaidi, general manager, RAEC, “We are ready (in the Musandam area) to take power from the UAE when as and when they are ready and the agreement is in place.�Interconnection with the UAE will help RAEC bring down its cost of electricity generation. Unlike other IPPs, which run on gas, RAEC has diesel-based plants. Thus sourcing electricity from the UAE will help it save on diesel costs.

RAEC is authorised to generate electricity and desalinated water, transmit, distribute and supply electricity to customers. Its authorised area extends throughout the sultanate and includes the Musandam, Al Sharqiyah, Al Wusta and Dhofar regions excluding the Salalah Concession Area. Says Busaidi, “RAEC is responsible for any area that is not connected to the main grid system. We provide power to remote villages which may have only six houses or 20-25 people.�In certain areas it purchases electricity from PDO or otherwise sets up its own diesel based plants. Electricity demand in rural areas is also growing at five-eight per cent.

RAEC remains another cushion for the EHC to which more responsibilities for additional supplies can be given. For example RAEC has been entrusted with the responsibility of supplying electricity to development projects like the upcoming port and dry dock in the Duqum area and the Masirah Island.

Seasonal skew
Apart from harnessing new sources of power, there is also an effort to bring in newer efficiencies into the system. The electricity demand in Oman has a distinct seasonal skew with the demand in summer months being significantly higher than in winter.

The peak demand in June 2005 was 2,495MW, a five per cent increase over 2,317MW drawn in June 2004. This is the direct fallout of a higher demand from residential customers in the form of higher air-conditio-ning loads. The demand for electricity during the summer months is the maximum in the afternoon (between 3 pm and 5 pm) and then in the late evening early morning (between 11 pm and 4 am).

Analysts hope that this skew will be addressed once the industrial demand increa-ses. “An increase in the industrial demand for electricity will stabilise the system as the gap between high load for a few hours during the summer season and the base load will reduce,�says Mahrouqi.

Cost reflective tariffs are expected to further stabilise the load factor. Residential customers accounted for 57 per cent of the total electri-city supply in 2005, government customers 19 per cent and industrial and tourism customers 5.5 per cent and 0.6 per cent respectively. Hopefully the share of industrial and tourism customers would be higher in the future, bridging the yawning gap.

While the demand for electricity is bound to grow, Oman has evolved a definite roadmap to address this need. On the one hand it is putting up additional generation capacity and has identified secondary sources of electricity. On the other, it is trying to bring in new found efficiencies into the system. With such measures in place the sultanate's skyline is sure to shine brightly in the coming years.