Since November 2014, Oman Power & Water Procurement Company (OPWP) has signed two power purchase agreements (PPAs) to extend existing independent water and power plants (IWPPs) at Barka and Sur. It has also selected a developer for the Qurayyat independent water plant (IWP), invited prequalification for two major new IWPs, and is now preparing documents to tender two independent power projects (IPPs).

Key fact

Power demand in Oman is forecast to grow at 10 per cent a year to 2020, one of the highest rates in the GCC

Source: MEED

OPWP is preparing for its busiest year yet in 2015, and expects high activity levels to continue into 2016. This will pose a challenge for the firm, but its IWPP model is now tried and tested. The majority of power and water capacity in Oman is owned and operated by the private sector. Only older facilities, used to ramp up for peak demand, are still operated by the state.

Utility networks in Oman are split into several sections: the Main Interconnected System (MIS), which covers Muscat and northern Oman; the Salalah zone; and smaller networks in Dhofar, Duqm and the Musandam exclave.

Multiple projects

Meanwhile, the Public Authority for Electricity & Water (PAEW) is tendering multiple projects to connect more of Oman’s population to water networks. With each completed scheme, water demand jumps, requiring more desalination capacity, as the sultanate’s natural water resources are overexploited.

“We have been successful in attracting the right number of serious developers, so on the competition and bankability sides it has been working very well,” says Ahmed al-Jahdhami, CEO of OPWP. “The challenges we have been facing are to do with project timelines, in terms of delivering projects on time. We will be enhancing the scrutiny and supervision of both developers and their EPC [engineering, procurement and construction] contractors.”

Catching up

While electricity connection rates are at 97 per cent, according to the Paris-based International Energy Agency, Oman is at a different development stage to the rest of the Gulf with regards to water supply and treatment. Many areas receive drinking water from tankers. PAEW is spending an average of RO150m ($390m) a year to connect 90 per cent of the sultanate’s population to the water supply network by 2035.

The key driver is to obtain efficiencies from the private sector and have more private sector involvement

Ahmed al-Jahdhami, OPWP

“A lot of demand is driven by the fast-track projects PAEW is carrying out, getting networks into the region, and we have to catch up with water supply,” says Al-Jahdhami.

The jumps in demand following connections combine with steadily growing water usage as living standards rise and industrialisation continues. This is leading to a greater focus on demand-side management, efficiency programmes and investment in the reuse of treated sewage effluent, which is the responsibility of Muscat’s sewerage authority, Haya Water.

Desalination capacity

In 2014, OPWP projected average water demand growth of 6 per cent a year in the MIS and Salalah grids, and higher in other regions. Peak demand is forecast to grow from 768,000 cubic metres a day (cm/d) in 2014 to 1.1 million cm/d in 2020, so OPWP will need to increase desalination capacity from 876,000 cm/d to 1.2 million cm/d over the next five years. However, the utility provider is expected to revise its projections upwards for the 2015-21 period.

Electricity demand is expected to increase at an even higher rate of 10 per cent a year, depending on economic growth rates, meaning new power generation capacity will be required. The extra demand is due to population growth of about 8 per cent, rising living standards and industrial development efforts. While the supply/demand balance has improved since 2011, when blackouts were narrowly averted, OPWP will have to move fast to procure an extra 3,000MW to reach 10,000MW by 2020.

Private model

A royal decree in 2004 laid out a framework for the power and water sector to move towards privatisation. Although only small steps have been taken in transmission and distribution, in the past decade all of Oman’s new generation and desalination capacity has been tendered on a build, own, transfer (BOT) model.

The long delays and reversals that discouraged developers from investing in Kuwait and Saudi Arabia have not been a problem in the sultanate. Since early 2014, 40 per cent of shares in each holding company has been floated in initial public offerings (IPOs) on the Muscat Securities Market to grant developers overall control of projects as the largest shareholder. Only two ageing generation plants are still owned by the public sector, and they will soon be decommissioned.

“The key driver is to obtain efficiencies from the private sector and have more private sector involvement in the economy, while the IPOs develop the Muscat Securities Market,” says Al-Jahdhami. “It also transfers expertise from the private sector and develops local skills. Local content requirements are gradually increasing based on the capabilities of the market.”

Water purchase

The recently signed water purchase agreements (WPAs) with Acwa Power Barka (controlled by Saudi Arabia’s Acwa Power) and Sharqiyah Desalination Company (controlled by French developer Veolia) to expand their plants suggest both the private sector and OPWP feel they are benefiting from the public-private partnerships (PPPs). WPAs for the supply of an additional 57,000 cm/d at Barka, due for completion in 2016, and 50,000 cm/d at Sur, to come online in late 2015, were negotiated with the existing operators. Financing was promptly secured in January.

Project finance is primarily raised from international banks and export credit agencies, with the participation of one or two local banks or subsidiaries, such as HSBC Bank Oman (which is a joint-stock company). The Omani banking market is too small to have the depth for financing large projects.

New plants

OPWP has been active with the procurement of IWPs in 2014 and so far in 2015. Aside from the plant expansions, the $377m Ghubrah IWP, with a capacity of 190,000 cm/d, is due to come online in March. The 200,000-cm/d Qurayyat IWP, valued at $210m, was awarded to Singapore’s Hyflux in December 2014, with a WPA and financing deals currently under negotiation.

Two new IWPs are planned close to existing installations: a 280,000-cm/d unit at Barka and a 250,000-cm/d facility at Sohar. The projects, currently at the prequalification stage, will be tendered together. However, due to their size, OPWP expects to award them to different project companies and developers.

“Infrastructure from PAEW, such as pipelines and storage, is in place at these sites,” says Al-Jahdhami. “The technology will be reverse osmosis [RO], as they are taking power from the grid.”

An additional two IWPs, in Salalah and Sharqiyah, are under study. OPWP intends to begin prequalification in late 2015 or early 2016, with commissioning projected for 2019.

Reverse osmosis

Oman is moving away from cogeneration, especially as energy-intensive multi-stage flash desalination plants are gradually being phased out in favour of less energy-intensive RO technology.

Outside the MIS, OPWP is studying two smaller desalination plants at Duqm, and Khasab on the Musandam peninsula. The Duqm facility is expected to have a capacity of 30,000 cm/d and come online in 2017, while the commissioning date of the 13,000-cm/d plant in Khasab is likely to be delayed from 2015.

Majis Industrial Services, a public company that provides water services for Sohar Industrial Port Area, is evaluating bids for a RO plant to supply water to the area. A joint venture of Indian/Austrian VA Tech Wabag, the local Bahwan Contracting Company and Norway’s Aqualyng submitted a low bid of about $59m.

Electricity generation

The Sur IPP in Sharqiyah was completed in late 2014 by Phoenix Power Company. It has added 2,000MW to the existing capacity of 5,911MW in the MIS and Salalah grids, and gives a reasonable margin until 2017, when Oman is expected to face shortages again.

OPWP intends to issue a tender for two IPPs with a combined capacity of 3,200MW by the end of March. Prequalification for the Ibri and Sohar plants took place in 2014.

Outside the MIS, three bids have been under evaluation for the Salalah 2 IPP, with a capacity of 400MW, since October 2014.

A contract for the EPC and operation of the Musandam IPP has been awarded to Finland’s Wartsila. The developer on the $160m project is Musandam Power Company, a holding firm formed by Oman Oil Company (OOC) and South Korea’s LG International. It is directly negotiating a PPA with OPWP, which is expected to be signed in March.

To cover potential generation shortfalls, OPWP plans to extend PPAs for existing IPPs, although 1,500MW of older capacity could be decommissioned by 2024.

Energy efficiency

The utility provider is also focusing on energy efficiency, and aims to improve its gas utilisation per megawatt hour (MWh) by 5 per cent in 2015. Total gas consumption by the main power and desalination plants is projected to increase 6 per cent a year from 6.7 billion cubic metres in 2013 to 9.9 billion cubic metres in 2020. So, Oman, which has the capacity to produce more than 10 million tonnes of liquefied natural gas (LNG), is having to import gas from Qatar through the Dolphin Energy gas pipeline.

The sultanate has little recourse to renewables to mitigate feedstock demand growth. While several alternative energy projects have been suggested, only off-grid schemes in remote areas have progressed.

Abu Dhabi Future Energy Company (Masdar) is financing a 50MW wind project in Dhofar, worth $200m, under the auspices of Rural Areas Electricity Company (Raeco). An EPC award is expected soon. No utility-scale solar projects have been confirmed, but a new energy strategy in 2015 could change this. Meanwhile, OOC is reconsidering coal-fired generation as the price of coal continues to fall.

Privatising distribution

The 2004 Royal Decree also restructured the transmission and distribution market, unbundling distribution into smaller local companies. PAEW plays a regulation role, with OPWP acting as sole offtaker and procurer. However, slower progress has been made on privatising electricity distribution firms, partly due to the subsidised electricity rates for consumers.

Distribution companies rely heavily on subsidies (which make up 40 per cent of revenues for Oman Electricity Holding Company (OEHC)) and for political reasons the government is unwilling to make consumers pay the full cost of utilities. OEHC received a subsidy of RO361m in 2013, a rate of RO13.7 a MWh sold and a 30 per cent increase on the 2012 subsidy.

Although the government raised gas prices for industry to market rates in 2014, no hike in electricity prices is expected due to sensitivity around this issue. However, Canadian consultancy CPCS Transcom International are carrying out a study on the possibility of privatising Muscat Electricity Distribution Company (MEDC). MEDC distributes and supplies power to 261,480 customers in the Muscat governorate.

“MEDC is really the start of privatisation in the distribution and supply business,” says Al-Jahdhami. “It could be a pilot that all the other distribution companies follow.”

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