02/09/2014 01:25 AST
The economic cost of subsidising Oman’s rapidly expanding power generation and related water desalination sector is projected at RO 973.7 million in 2014, according to the findings of the Authority for Electricity Regulation, Oman (AER). This compares with a total economic cost calculated at RO 871.7 million during 2013, representing an increase of nearly 12 per cent, the regulator said in its latest Annual Report.
The figures underscore the hefty economic cost of financially supporting the Sultanate’s electricity and potable water sector, which has been growing at a phenomenal rate of around 10 per cent annually.
Every year, Oman’s Ministry of Finance provides grants to licensed supply and distribution companies in the form of electricity subsidies calculated by the Authority. The subsidy amount is computed on the basis of two calculations: the first estimates the subsidy payable to Muscat Electricity Distribution Company (MEDC), Majan Electricity Company and Mazoon Electricity Company which between themselves account for all of the electricity supplied within the Main Interconnected System (MIS), serving much of the northern half of the Sultanate.
Subsidies payable to the Rural Areas Electricity Company (RAECO), which serves areas not connected to the MIS and the Salalah System, are calculated separately. Likewise, subsidies payable to the Salalah System are calculated on the same basis as that applicable to the MIS distribution companies following the successful restructuring of the Salalah electricity market.
Significantly, subsidy calculations for all three systems — MIS, RAECO and Salalah — are based on two different criteria: Financial Subsidy and Economic Subsidy. According to the regulator, the Financial Subsidy is the ‘direct’ subsidy allocated by the Ministry of Finance and reflects the financial cost of natural gas of $1.5 mmBTu and an average diesel fuel cost of 140 baisa/litre.
The Economic Subsidy, on the other hand, reflects both the ‘direct’ and ‘indirect’ subsidy to the electricity sector. “Consumers benefit from ‘indirect’ subsidy as the cost at which fuel is sold to production facilities is below its economic ‘opportunity’ cost. This calculation therefore adjusts fuel costs to reflect their opportunity costs,” the Regulator said.
“The electricity sector benefited from RO 304.6 million in support from the Ministry of Finance in 2013: RO 226.4 million of MIS subsidy, RO 47.7 million of RAEC subsidy and RO 30.5 million financial support for the Salalah System. These subsidy figures reflect the financial cost of fuel used to generate electricity.
If gas is costed at $9mmBTu and diesel consistent with an oil price of $105.5 per bbl, the 2013 subsidy increases to RO 871.7 million. The analysis suggests that electricity consumers derive significant benefit from indirect fuel subsides in addition to direct subsidy,” commented Dr Amer bin Saif al Hinai, Chairman, Authority for Electricity Regulation, Oman, in the newly released 2013 Annual Report.
For 2014, the Financial Subsidy payable by the government to supply and distribution companies in the Main Interconnected System (MIS) is estimated at RO 224.0 million.
However, the corresponding expenditure is estimated to be as high as RO 581.5 million for the year, of which RO 357.5 million (61.5 per cent) is expected to be recovered through customer revenues. The Economic Costs are even higher when calculated against an opportunity cost of gas of $6 mmBTu and $9mmBTu, according to the Regulator. “At a gas cost of $6 mmBTu, 2014 MIS subsidy increases by 158.0 per cent to RO 577.9 million (25.2 baisa/kWh). At $9 mmBTu, subsidy rises to RO 813.9 million (35.5 baisa/kWh) of which financial subsidy accounts for just 27.5 per cent.”
For the Salalah System, the Authority estimates the financial subsidy of RO 27 million for 2014, based on a total expenditure of RO 66.1 million.
Oman Daily Observer
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