Economic Regulation
Competitive Markets
Competition encourages companies to become more efficient and innovative and ultimately to offer services at lower prices and higher quality. In the electricity sector in Oman, production facilities enter the generation and desalination markets through a competitive tendering process, and thus tariffs are determined by competition. Even in a competitive market, it is important for the regulator to monitor the market to ensure competition is fair and not distorted. The Authority has a statutory obligation to ensure that OPWP undertakes a fair and transparent competition when procuring any new (generation or desalination) capacity. Furthermore, the Authority also applies market share thresholds for applicants of any new capacity or expansion of existing capacity to safeguard against any market power abuse. The Sector Law also allows the Authority to impose restrictions on the economic interest a Person may have in a licensee or licensees. The Authority has discretion to relax the market share thresholds and economic interest restrictions on public interest grounds, provided that any such relaxations are consistent with its statutory obligations.
Statutory Monopolies
In the absence of competition, regulation is necessary in order to prevent the abuse of market power and to protect consumers from potentially higher prices and lower quality of service. In the electricity sector in Oman, network companies such as transmission (OETC), distribution and supply (MEDC, Majan, Mazoon and DPC) as well as RAEC and the single buyer and seller of electricity and related water (OPWP), are all statutory monopolies established by the Sector Law. The Authority constrains the exercise of market power of these companies through economic regulation by:
- Enforcing economic purchase conditions
- Approving the pricing structures of intra-sector transactions such as electricity and water bulk supply tariffs and charges for connection and use of network companies’ systems; and
- Using RPI-X type price controls; a principal instrument of economic regulation through which the Authority ensures improved efficiency and constrains costs assessed against benchmark service quality standards.
The RPI-X type price controls are implemented through Charge Restriction Conditions within each of their respective licenses. Price controls remunerate Licensees for efficient capital and operating expenditure and a reasonable return on capital. RPI-X also provides efficiency incentives where Licensees retain benefits from operating more efficiently than Authority’s forecast but also incurs losses if operating less efficiently.
Oman Electricity Market Liberalization
Spot Market
In January 2022 the Oman Electricity Market (the spot market) commenced live operations. The purpose of the spot market is to provide a mechanism for trading electricity at wholesale level, that in a flexible way, takes into account the variation in electricity generation and consumption. Currently, OPWP purchases electricity from Generators through long term Power Purchase Agreements (PPA), using the following process:
• When new generation is required, developers compete in a tender to supply the new plant; and
• Once the tender is complete, a long term contract is signed, setting the price/tariff and conditions for the duration of the contract.
In contrast, the spot market will have OPWP purchasing some electricity through a short term market, with prices for each half hour trading period based on the demand of electricity and Generators’ offers. The spot market is operated by the Market Operator, a separate function within Oman Power and Water Procurement Company (OPWP). The Market Operator arranges Generators’ offers into a merit order, meaning that the cheapest offers are accepted first. The offers are submitted every day by 10:00 AM for the following day (24 hours = 48 trading periods, starting 00:00). The market price (System Marginal Price, SMP) for each half hour trading period will be set by the last production unit required to meet the demand forecast sent by Oman Electricity Transmission Company (OETC). The spot market will be implemented initially in the Main Interconnected System, though it may expand to cover Dhofar Power System over time.
Oman Spot Market – Market Operator Separation
With the Introduction of the electricity spot market in Oman, OPWP will be undertaking the Market Operator Functions as well as procuring power from the Pool (referred to as Power Procurer in the Market Rules Document). Thus, to ensure that any (real or perceived) conflict of interest between OPWP’s two (2) roles under the Market Rules is avoided, the Authority has issued the attached document to specify Market Operator Separation Requirements.
Pursuant to Condition 14A (3) of the OPWP Licence, this document identifies the details of the administrative, managerial, operational, financial, system and/or other requirements for the proper separation of the Market Operator to ensure compliance with the Licence and the Market Rules Document and ensure that the Market Operator Functions are properly discharged by OPWP (Separation Requirements).
This document must be read in line with OPWP’s licence and the Market Rules, as amended from time to time and reviewed periodically to ensure that they remain consistent.
Expected benefits from the spot market
The spot market is expected to deliver several benefits, including:
• The market provides post contract revenue opportunities and enhance transparency for generators and other market participants.
• The market will provide clear and transparent real time price for electricity based on system supply and demand, which also will provide signals for system capacity needs.
• The market will provide increased dispatch efficiency through transparent electricity trading, showing where generator dispatch diverges from unconstrained optimal dispatch. This increased efficiency will reduce fuel consumption and other variable operations and maintenance costs as well as improving network utilisation.
• The market will allow uncontracted and unconventional capacity, including backup turbines, demand response units, renewable and excess emergency level capacity to contribute to meeting demand and provide flexibility for new entrants to develop the most efficient new plants.
• The market will incentivize generators to operate in response to real time system needs, as opposed to only meeting contractual responsibilities, resulting in more efficient asset utilisation.
The Authority’s role is to monitor the market operations and ensure appropriate market conduct. In addition, the Authority continues to actively oversee further market development work and engaging Stakeholders, in collaboration with the Market Operator.
Regulatory and legal framework for direct selling
Article (22) of the Electricity and Related Water Sector Law stated that the Authority shall review the conditions of the electricity market in order to measure its readiness for further liberalization.
The results of the studies carried out by the Authority during the past period showed that the electricity market in the Sultanate of Oman has become ready for further liberalization. Accordingly, the Authority decided to consider applying the mechanism of direct sales between electricity-producing companies licensed by the Authority and large consumers other than the Oman Energy Procurement Company. Water SAOC
In 2021, the Authority sought to prepare a legal and regulatory framework for the direct sale of electricity and to set all appropriate regulatory and legal frameworks for the direct selling mechanism project. Where a comprehensive study of the current electricity market conditions was conducted and challenges related to direct sales were identified. As the regulatory and legal framework for the direct selling project was completed in the fourth quarter of 2022, and the guidance memorandum for the direct sale mechanism was also shared with the stakeholders, through which the mechanism was clarified, how to apply it, and who are qualified as the first stage of this project.
The implementation of the direct selling mechanism, as a first stage, will be limited to major producers and consumers, as follows:
1- Power plants whose contracts with the Oman Power and Water Procurement Company have already expired
2- Companies or factories that have self-generators and have an exemption license from the Authority.
It is expected that the direct sale mechanism will contribute to enhancing competition between generators and major consumers in the first stage, raising efficiency and attracting investments.