Oman: Future Power and Water Needs
By Sohail Barkatali and Derek Kirton
Sustained growth and development is the key phrase. That is the future outlook for Oman’s power and water sector according to a new seven-year outlook for the period 2013 to 2019 released in late May by the Oman Power and Water Procurement Company or OPWP.
While Oman’s neighbors in the Persian Gulf have widely publicized their lofty ambitions in the power and water sectors, particularly in the renewables space, Oman continues to mature, presenting opportunities not only for development of new generation and desalination capacity but also in the secondary market through the sale of performing assets.
Every year OPWP, the single buyer in Oman and the procurer of new capacity, publishes a seven-year statement setting out its projections for the demand for electricity and desalinated water production capacity and output, as well as any new capacity required over this period.
According to its latest projections, peak power demand for Oman’s central system (including the electricity production facilities at Ghubrah, Rusail, Manah, Wadi Al-Jizzi, Barka Phase I, Al Kamil, Sohar and Barka Phase II), known as the “main interconnected system,” is expected to double from 4,293 megawatts in 2012 to 8,106 megawatts in 2019. This exceeds OPWP’s previous forecasts.
Peak demand for the Salalah power system in southern Oman is expected to double from 389 megawatts in 2012 to 848 megawatts in 2019.
Peak water demand in Oman’s northern region (the interconnected Sur and Ad Duqm zones) is expected to grow from 218 million m³ in 2012 to 316 million m³ in 2019.
Within the main interconnected system, OPWP expects to add 200 megawatts of solar power, subject to government approval.
Certain existing agreements providing 1,517 megawatts of purchased power (and related water) capacity are due to expire by the end of 2018.
For the main interconnected system, the forecast of 8,106 megawatts for 2019 represents nearly 10% year-on-year growth in electricity production with the demand outlook for Salalah increasing at around 12% annually. With this forecasted demand anticipated to exceed contracted supply, a number of options are open to Oman to meet this capacity.
It could develop new power generation and water desalination plants. It could agree to contract extensions for generating units that are due to fall out of contract during 2013 and 2014. It could agree to contract extensions for independent power and water producer plants that have power and water purchase agreements that are due to expire in 2017 and 2018. It could add temporary generating capacity or request existing plants to increase their output. Finally, it could purchase capacity from interconnected power systems such as Abu Dhabi and the Gulf Cooperation Council Interconnection Agency.
The availability of gas may constrain Oman’s procurement activities
Oman’s fuel requirements remain a challenge. Within the main interconnected system, natural gas requirements are anticipated to grow at a rate of 6% per year with a projected increase from 6.7 billion Sm³ in 2012 to 9.8 billion Sm³ in 2019. In Salalah, natural gas requirements are anticipated to grow at a rate of 7% per year to reach 1.1 billion Sm³ in 2019. These growth rates are a substantial increase compared to past forecasts.
The seven-year statement also considers a high case scenario that forecasts a peak demand of 9,133 megawatts in 2019 for the main interconnected system and 936 megawatts for the Salalah system. If realized, Oman could face a gas allocation shortfall from 2014, and it may have to look to other fuel types or consider other options.
Historically though, Oman has been focused on gas-fired plants with fuel oil as back-up fuel. Fuel allocation issues are usually resolved operationally through a protocol among the Ministry of Gas, the Oman Electricity Transmission Company and OPWP to prioritize gas allocation to plants high up in the merit order. This provides the ability to prioritize natural gas for more efficient plants with the further option of reallocating gas from plants that are undergoing maintenance or force majeure shutdowns to those that are in operation.
A few years ago, OPWP considered developing a 1,000-megawatt plant at Duqm that would have been the first plant in the Persian Gulf to burn coal (a blend of imported and locally sourced coal). The project was not tendered but with a potential shortfall, if gas supplies are insufficient, Oman may be forced to consider alternative feedstock.
Solar power and other forms of renewable energy also continue to be options. The development of a 200-megawatt solar photovoltaic and concentrating solar power project is planned; however, the project remains subject to government approval.
The Year Ahead
A request for proposals is expected in the summer 2013 for the Salalah II IPP and Dhofar Power Company acquisition with eight developers having submitted statements of intention to qualify.
Later in the year, an RFP is expected for the Qurayyat IWP with expected new water desalination capacity of 40 MIGD.
In 2014, an RFP is expected for the Suwaiq IWP with expected new water desalination capacity of up to 50 MIGD.
In 2014, an RFP is expected for the Suwaiq IPP with a power capacity in the range of 2,500 to 3,000 megawatts. It is probable that the IPP and IWP projects might be combined.
Oman’s power and water purchase agreements are reaching maturity
In the Gulf, Oman is arguably the most mature market for IPP projects having kickstarted its program with the Al Manah project in 1998, which was the first IPP project to be developed in the Gulf region using the public-private partnership model. In 2000, Oman awarded the Al Kamil IPP and Barka Phase I IWPP projects, and it awarded the Sohar Phase I IWPP in 2004. In each case, the projects were tendered under the build-own-operate framework with no mechanism in the contracts for OPWP to repurchase the plant upon expiration of the contract.
Other than at Al Manah, which has a 20-year power purchase agreement, Oman’s model PPA has a term of 15 years. The consequence of this is that the PPAs for Al Kamil and Barka Phase I will expire within the next seven years. With the build-own-operate framework, that potentially leaves open a number of options for OPWP and plant generators: they can agree on short- or long-term extensions of the PPAs or allow the PPAs to expire and further deregulate the sector and permit the creation of a competitive power generation market.
With the forecasted power demand and the fact that these plants will have considerable remaining useful lives, all three options remain viable. For Al Kamil, with the PPA expiring prior to the summer 2017, if not renewed, this will result in a reduction in capacity of 282 megawatts in 2017. For Barka Phase I, with the PPA expiring prior to the summer 2018, if not renewed, this will result in a reduction in capacity of 427 megawatts in 2018.
A strategic study is being undertaken within Oman to assess the options available to OPWP on the most economical approach to dealing with expiration of the contracts, whether renewal or the development of new capacity.
With the maturing of Oman’s power and water market, opportunities exist for new entrants. Eight plants are currently in operation with a further three under construction. With OPWP as a financially strong counterparty and stable payment history (currently rated as A- by Standard & Poor’s) and the quality of the plants in operation, these factors, as well as Oman’s market share restrictions, could also create opportunities for new entrants. The market will continue to be attractive to developers as well as to infrastructure funds looking for strong returns from a stable asset class.
Significant transactions to date include the divestment of the Barka Phase I plant from The AES Corporation to ACWA Power International, who subsequently divested a minority stake to the Bunyah Investment Fund managed by Instrata Capital. Since then, the Barka Phase I plant has seen an expansion and subsequent refinancing. More recently, the MENA Infrastructure Fund acquired a 20% stake in the Sohar Power Company (Sohar Phase I IWPP), adding to its current portfolio, which includes a stake in the United Power Company (Al Manah IPP). This trend is expected to continue.
Already, there are developers who are close to reaching the regulatory threshold of 25% of installed capacity or a majority of the generating licences. Oman could see certain developers who meet this criterion either refraining from bidding for future projects or, perhaps more likely, divesting part of their existing portfolios. However, any divestment would remain subject to satisfying the sector’s regulatory requirements, such as the appropriate persons criteria prescribed by the regulator, The Authority for Electricity Regulation, Oman.
Oman is also focusing on the town of Ad Duqm and its surrounding areas, which are being promoted by the government for the development of a major industrial and economic city around the new seaport. The current electricity supply is provided by a 67-megawatt diesel-fired power plant operated by the Rural Areas Electricity Company; however, electricity demand is forecast to grow rapidly with current projections forecasting demand of around 100 to 150 megawatts by 2019. Among the options being considered by OPWP to meet this demand is the development of a power generation plant or an interconnection to the main interconnected system.
As with the Gulf region as a whole, Oman’s forecast demand for power and water capacity is robust with an accelerated program to add significant new capacity over the next seven years. It remains a mature investment-grade jurisdiction with a strong offtaker, a long history of a sustainable IWPP and IWP programs and a solid regulatory track record that has differentiated itself from other markets in the region.