Muscat revisits private transmission

20 July 2010

Plans to open up Oman’s electricity transmission networks to the private sector look set to be revived as investor appetite returns

Oman power in numbers

11 per cent: Predicted annual electricity demand growth in Oman between 2010 and 2017

6,043MW: Expected Power demand by 2016 across the MIS

615MW: Expected power demand by 2016 across the Salalah network

MIS=Main Interconnected System. Source: MEED

Back in 2008, Oman announced its intention to introduce private-sector participation into its electricity transmission sector.

UK-based accountancy company KPMG was appointed by the government to advise on the programme and the scheme was launched to the market in the first week of September.

While the government wants to build on its native skills base, it also wants to bring in international expertise

Source close to the OETC privatisation scheme

The monopoly provider of transmission services, Oman Electricity Transmission Company (OETC), was to be privatised, along with several distribution companies belonging to the Electricity Holding Company.

Oman electricity sector *(Rom)
Production costs243
Tariff revenue180
Electricity supply63
Note = For the Main Interconnected System
Source: Authority for Electricity Regulation, Oman 

While the programme was initially met with a healthy level of interest, the global financial crisis and the consequent tightening of credit markets prompted the government to shelve the scheme temporarily.

Returning appetite for investment in Oman’s power sector

The plans have been on hold since early 2009. But now that investor appetite is showing signs of returning, the privatisation of the electricity transmission network looks set to return to the agenda.

The sultanate was one of the first in the region to invite private companies into its power-generation sector in the mid-1990s.

The result has been largely positive in terms of improving efficiency, increasing power capacity and keeping costs low.

With an established independent power programme in place, policymakers in Oman began to explore the potential for doing the same with the country’s electricity networks.

“The plan was to improve efficiency and reduce the public stake in a service that would be better run by the private sector,” says a source close to the scheme.

Further benefit was the potential for improvements to the transmission network by adopting practices and technologies used elsewhere in the world. “While the government wants to build on its native skills base, it also wants to bring in international transmission expertise,” the source adds.

The government opted against pursuing an asset-sale policy, indicating that it would prefer to see a private firm take over the whole transmission company so it would be incentivised to make improvements that benefit the whole electricity network. This decision is consistent with the approach followed for other electricity companies in Oman. Of the nine companies to be privatised since restructuring in 2005, only one has been sold off piecemeal.

The government also chose not to retain a stake in the transmission company.

“If [the sale of OETC] goes ahead, it would be likely to follow other similar electricity sector privatisations. This would be in the form of a share sale, with the government selling 100 per cent of its shares in the transmission company,” says to a source close to the government.

From the perspective of a private-sector company, buying into the Omani grid is an attractive proposition.

The country’s power regulator, the Authority for Electricity Regulation, will continue to set the electricity tariffs for five-year periods. This guarantees a certain return to the investor, assuming that demand for power does not fall away. There are few signs that this will happen. Electricity consumption has grown steadily in recent years and the Oman Power and Water Procurement Company (OPWP) expects this to continue.

Growing power demand in Oman

In its latest demand forecast published in June, OPWP predicts that power consumption in Oman is set to grow by as much as 11 per cent a year in some areas of the country in the seven years to 2017.

Total electricity demand in Oman’s Main Interconnected System (MIS) and Salalah networks grew by 13 per cent in 2009, in spite of the economic slowdown.

The power demand in the MIS is expected to grow from 3,424MW in 2009 to 6,043MW by 2016, representing an average increase of about 8.5 per cent a year.

In the Salalah system, the usage is forecast to grow from 297MW 2009 to up to 615MW by 2016, equivalent to an average annual increase of about 11 per cent.

Since prices are set once every five years, a private company would be in a good position to predict returns from the transmission company. Furthermore, if the owner could operate the system more efficiently, profits would increase. 

This is an important benefit to the Omani government. The private company that takes over the transmission company would be incentivised to make improvements to the network to make it operate as efficiently as possible.

The sultanate is in need of network upgrades and also has to connect up major new power projects that are expected to come online over the next five years at Barka, Sohar and Sur.

In addition, the Gulf interconnected grid project will provide benefits in terms of stabilising electricity supply, but will also pose some challenges for the network and changes will need to be made to accommodate it. The link to Abu Dhabi in particular will be particularly advantageous once its nuclear project is online; the Omani power transmission network operator will need to take this factor into consideration when implementing upgrades.

Power tariff changes in Oman

There are also some disincentives to potential investors. Chief among these is the fact that the price of power to consumers in Oman is artificially low.

Oman’s Authority for Electricity Regulation completed a study in October 2009 on electricity tariffs, which led to a decision to raise the prices for commercial and industrial consumers.

Amendments were made to the tariffs and this took effect from 1 April 2010. The changes were intended to move prices closer to a level that more accurately reflects the cost of production. The investment needed to supply an ever-increasing demand for power and the requirement to use more expensive alternatives to local natural gas, all pointed to a need to raise the tariff.

Commercial and industrial users receiving power from the MIS, whose connections were energised on or after 1 April 2010, are now supplied under a cost-reflective tariff. This tariff is based on a formula that includes the cost of power production, transmission, distribution and service charges. For the Salalah power system, the changes will take effect from 1 January 2011. The authority has decided that residential consumers would remain unaffected by the tariff changes.

The study justified the distinction between different users of power, saying “electricity demands of commercial and industrial consumers are growing faster than other consumer categories, it is appropriate to introduce cost-reflective tariffs for these consumers”.

The issue of pricing is important as it is a key determinant of the worth of the transmission assets in the period for which the tariff is set. As prices for consumers are raised over time, this will undoubtedly increase the appeal of the assets as investment opportunities.

In fact, there is an argument for further delaying the privatisation of the networks and increasing consumer tariffs in the meantime. Doing so would likely raise the price investors are willing to pay for the network.

Ultimately, the assets will be valued according to confidence in the commitment of the regulator to continue to raise the prices of electricity.

It is long-term investors that the Omani government hopes to attract. Some industry players have indicated that transmission companies and private equity funds would be keen to take a stake in the networks.

The government hopes to attract operators not only with knowledge and experience of the sector, but which are also able to make the long-term commitment to the sector.

“We would be looking for operators with extensive international experience of transmission system operation in a regulated market environment, such as major utilities and grid operators rather than funds,” says a source close to the project.

When the plans to privatise OETC were launched to the market, the response was very positive. “It looked like a nice little company to buy. The cash flow didn’t look too bad at all and there was good upside potential,” says the source. Now that stability is returning to the market and banks are beginning to lend again, the time may be right to move ahead with the privatisation.

Richard Williamson, director and head of corporate finance at KPMG, the firm advising on the programme, says: “The will is still there with the Omani government to privatise the transmission company.” According to KPMG, some expressions of interest have been made since the beginning of this year.

GCC power trend

While Oman is expected to tread carefully with the privatisation, the OETC could be formally offered to the market very soon. “The reality is that we are looking at 2011 and beyond,” says Williamson.

As the first country in the region to privatise its electricity transmission company, the sale would be a landmark occurrence if it goes ahead.

Oman’s experience has been, and will continue to be, closely watched by other countries in the region. Several have completed initial studies on the potential for privatising their transmission and distribution networks as well. 

Germany’s Fichtner conducted a study in 2003 for Qatar General Electricity & Water Corporation (Kahramaa) on the possibility of privatising its power and water networks, but these plans have yet to move forward.

Saudi Arabia has also played with the idea, but has focused on other plans instead. Meanwhile, Abu Dhabi originally considered selling off minority stakes in its electricity distribution firms, only to bring in international expertise through consultancy contracts instead.

Oman has a good track record of privatisation within the power sector. Doing the same for its transmission companies as for its power generation companies would build on this reputation. And it appears Muscat has the will to do so.

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