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Economic growth is placing new demands on the electricity sector. But the sector is proving to be more than a match. BusinessToday reports

Jayesh Kumar, a resident of CBD area in Muscat, had a tough time getting water for his family’s needs for almost a week after Cyclone Gonu in June 2007. As supply lines got damaged the taps went dry. What followed was an anxious wait for water tankers, jostling in long queues and carrying multiple buckets to his sixth floor flat everyday. In contrast, another utility held up pretty well – electricity supply remained uninterrupted throughout the cyclone and in its aftermath.


The contrast threw up the underlying strengths and weaknesses of the two utilities. The electricity sector has seen a number of efficiencies coming into it in the last two and a half years. The process got going on May 1, 2005 when the Ministry of National Economy transferred electricity and related water assets, liabilities and staff of the Ministry of Housing Electricity and Water (MHEW) to ten successor companies.

Says John Cunneen, executive director and member, Authority for Electricity Regulation (AER), "The sector is incomparable to what it was two years back." Whispers in the corridors of power suggest that the disruption in water supply during Cyclone Gonu served as a wake-up call for the government.

In September 2007, Royal Decree No. 92/2007 established a Public Authority for Electricity and Water (PAEW). The decree transfers the works, allocations and assets related to electricity and water from MHEW to PAEW.

Taking a leaf out
The move is a significant development for the electricity sector as it takes forward the privatisation process of the sector in the sultanate. The process began when it was decided to have a complete restructuring and privatisation of the electricity sector. Says Navneet Kasbekar, CEO, Al Kamil Power Company, "The move is unique as it makes Oman the first country in the Middle East to take electricity and water outside the purview of a ministry and put it under a public authority."

As one looks forward to PAEW bringing in requisite changes in the water sector, the improvements brought about in the electricity sector since May 2005 is a case study for other utilities. The privatisation of Al-Rusayl Power Company and commissioning of the greenfield power and desalination project in Barka (II) saw a few firsts for the electricity sector in the sultanate.


"This was the first time that privatisation of an existing power company was done by buying shares rather than transfer of assets," says Mario Savastano, CEO, SMN Power Holding Company. The process of acquiring shares is a more complex transaction than acquiring physical assets of a company as it requires more financial due diligence.

The model was an experiment as it combined privatisation of an existing power plant with a greenfield project. Its success has given the government confidence to follow a similar approach for the privatisation of other power and water desalination companies like Al Ghubra and Wadi Jizzi. "It worked well and will provide the basis for further privatisations," says Cunneen.


When Suez Tractabel, Mubadla Develop-ment and the National Trading Company consortium won the bid for Al Rusayl, Barka II in December 2006, there were concerns about the deal. A number of questions were raised about the financial viability of Al Rusayl – a plant that dated back to 1984 and for which the consortium had coughed up a princely sum of RO50mn. Says Savastano, "The cash flow from Rusayl is actually helping us to finance Barka II. We had to fix a few things at Rusayl and so 2007 was a year of transition but we expect 2008 to be a smoother year."


SMN is working on bringing about a number of changes at the plant. The gas turbines at the plant were refurbished, extending their lifespan till 2022. New technologies like DLN (Denox) burners and grid codes are being put in place to make the plant comply with new environmental standards and emission norms. Finally, the company is transferring over 60 people from Al Rusayl to Barka II to improve human resources management.

Galloping demand
Increasing population, industrialisation and growing tourism sector is placing more demands on the electricity sector in the country. According to Oman Power and Water Procurement Company's (OPWP) seven-year statement, the power demand in the sultanate is expected to grow from 2544MW in 2006 to 4634MW in 2013 – an annual average increase of around nine per cent or 300MW per year.


To meet this demand the government is commissioning new power plants. OPWP has initiated work on an IWPP at Salalah. The project will be built on a BOO (build, own, operate) basis. The plant will produce 430MW of power and 15mgpd (million gallons per day) of desalinated water. "This will be the first IWPP in the Salalah region and it will not be connected to the northern grid," says Saleh al Rashdi, CEO (acting), OPWP.

The tender board has shortlisted eight companies for the project as potential bidders. A new power plant in Duqm is also in the works. The sultanate is also working out other arrangements to beef up its power supply. The government was an early supporter of the GCC grid, a multinational project that will link the electricity networks of Oman with those of Saudi Arabia, Qatar, Bahrain, Kuwait and the UAE by 2010.

Says Hassan Abdwani, deputy CEO, Electricity Holding Company, "We are self-sufficient but we are going to interlink with the UAE as this will help us during emergencies and outages." The aim of the US$7bn project is to reduce the need for reserve capacities and to boost the security of supply against outages.

Apart from ramping up production, efforts are also being made to close the demand-supply gap by reducing wastage. AER's annual report for 2006 states: “Technical and non-technical losses added up to 22 per cent of power losses on MIS (main interconnected system) in 2006. Though this was less than the 23.9 per cent of the losses in 2005 and translated into a saving of RO2.7mn, the authority is targeting further reductions and is working on reducing the total losses to around half their present levels by 2012.” Says Cunneen, “We are looking at bringing down losses by RO15-20mn by 2008. This is important to keep per unit costs down.”
Errors in meter reading and tampering result in huge non-technical losses. Seized with the problem, AER has installed digital metering on the Oman Electricity Transmi-ssion Company's transmission system. This has taken care of inaccurate metering on MIS system. It has also taken an in-principle decision to install digital meters at customer premises. This will make tampering difficult and ensure accuracy.

Cost control
The electricity sector has traditionally thrived on subsidies. Subsidy is defined as the difference between the economic cost of supply (including finance costs) and permitted tariff and other revenue. The sector has been working on improving the transparency of the subsidy system in the last two years. Though still far from being ideal, some progress has been made on this count. The subsidy forecast for the sector in 2007 is RO73.5mn, a shade lower than the 2006 subsidy of RO88mn. “Improvements in fuel efficiency, reductions in system losses and improved revenue collection mean that future MIS subsidy requirements will be lower than previously expected,” states the AER annual report.

Plans are also afoot to introduce cost-reflective tariffs this year. The measure is expected to improve revenue realisations for the sector. Cost reflective tariffs will see consumers paying more for power consumed during peak hours and less during non-peak hours. The measure will also reduce the power burden on MIS.

Efforts are also being made to bring about an attitudinal change amongst employees in the sector. Says Cunneen, "When customers make demands, it is essential to respond in a proper manner. This marks a big shift for employees who have worked in a monopolistic environment. "AER is introducing a register for people with special needs. This will ensure that the electricity supply to these households remain uninterrupted except in exceptional cases.

Acclaim for these efforts have been quick to follow. The internationally recognised financial rating agency, Moody’s Investor Service, has assigned a long-term local and foreign currency issuer ratings of A2 to OPWP. The rating provides an independently verified assurance to companies about the soundness of OPWP’s business and its ability to meet its financial obligations. Says Rashdi, "It is a big achievement as it shows that in future we may not require a government guarantee in a power purchase agreement. It also brings in a new credibility to the sector." The government presently stands as a guarantor for power projects in the country, taking on the credit risk.

If power projects like Barka II are able to get two such ratings then the government will withdraw its guarantee and the credit risk will transfer to the IPP (independent power project). This would reflect the fact that the sector is in a financially robust.

Impediments on the way
Almost all power plants in the sultanate are gas-based plants. In 2006, power and desalination plants absorbed 64 per cent of Oman Gas Company's supplies. With demands being made on the sultanate's gas supplies from manufacturing industries in Sohar and LNG commitments, the government needs to rationalise gas usage by power plants.

Globally, developed countries use a mix of hydrocarbon sources like gas, oil, coal and water to run their power plants. This restricts the overuse of a single energy source and reduces dependence on one fuel. The sultanate is mulling the idea of adopting a similar fuel-mix policy. The planned power plant in Duqm is reportedly going to be a coal-based one. Says Rashdi, "We are going to do feasibility studies on using a variety of fuels for power plants and will look at coal and other heavy fuels as alternatives."

The electricity sector in the country has surely come of age in the last few years. Though there is still some way to go before the privatisation ideas are fulfilled, it has been a strong beginning. If the water sector can do the same, people like Kumar may not have to face the predicament of dry taps next time a contingency strikes.