Muscat: The electricity and water subsidy reform program forms part of the set of initiatives under the Sultanate’s Medium-Term Fiscal Plan (2020-2024). The subsidy reform initiative seeks to enhance the efficiency and sustainability of the utility sector, improve the efficiency of government spending and its financial sustainability whilst also enhancing the social safety net ecosystem by rechanneling government subsidies to the segments of society most in need.
A gradual approach to subsidy reform has been adopted that aims to gradually reduce the reliance on government subsidies to the different customer categories over the coming years, whilst taking into account the maintenance of government subsidies to certain Omani households. As part of the subsidy reform program, new electricity and water tariff structures will be implemented across all customer categories beginning from January 1, 2021.
To ensure that the subsidies are delivered to the targeted segments, the government has developed the National Subsidy System, a platform which includes fuel, electricity, and water subsidy to provide protection for the citizens deemed most vulnerable as a result of the fiscal measures taken in the aftermath of falling oil prices and the Covid-19 pandemic.
Electricity and Water Subsidies: Current Status
Demand for electricity and water in the Sultanate has increased markedly over the last 10-15 years. This has required a significant amount of investment, of over RO 8 billion, to enhance and extend the electricity and water infrastructure to serve customers across the Sultanate.
The chart below draws a comparison of the growing demand for electricity and water during the period from 2005 to 2019. Electricity accounts increased by 141% while electricity supply increased by 253%. On the other hand, Water accounts (for Diam) increased by over 187% and the total distributed water reached a staggering rate of more than 180% during the period from 2010 to 2019.
Besides investment in the infrastructure, the government sustained subsidies to all consumers during the last decades by subsidizing customers' tariffs substantially. As a result, the average consumption per account increased significantly for the entire range of subscriber categories as shown in the table below:
Chart (2) Power Consumption between 2005 and 2018
According to the current approach, electricity and water subsidies are extended to almost all electricity and water consumers in Oman, regardless of the living standards and category of customer. The subsidies also cover non-residential categories such as industrial, government and commercial categories. Furthermore, the electricity tariff for residential categories in the Sultanate has remained the same since 1987 and has never been affected by the changing economic events such as inflation, fluctuating oil prices, and the growth in demand over the years. This led to an increase in government subsidies over the years which reached almost OMR 750 million in 2020 constituting 5% of the State’s general budget and around 20% of the projected deficit during the current year. Should the government refrain from taking any action in connection with the subsidies, they are expected to reach up to RO900 million by 2025.
Re-directing Electricity and Water Subsidies:
The reform of electricity and water subsidies will take a gradual implementation approach starting in January 2021 until 2025 as shown in the chart below:
In line with the program for reforming electricity and water subsidies, new tariffs will be implemented for electricity and water services effective 1 January 2021, which includes the gradual removal of subsidies during the upcoming years with citizens (no more than two accounts) continuing to avail from government subsidies until 2025.
The New Electricity Tariff Structure will cover the following Segments:
- Large Customers (electricity): Comprises consumers in all segments (except the residential segment) who consume 100 MWh or more per year. Cost Reflective Tariffs (CRT) will be applied to all electricity consumers that fall in this category.
- Non-residential Consumers: Non-residential customers who consume less than 100 MWh per year (including industrial, commercial, government, tourism) were consolidated under a single uniform tariff, whilst providing for a separate tariff for agricultural and fisheries activities as shown in the following table:
- Residential Consumers: The Residential segment has been divided into two main categories: (i) Citizen Account Tariff and (ii) Resident and Additional Accounts Tariff. The Citizen Account Tariff will be applied to accounts registered in the names of citizens not exceeding two accounts per citizen. Resident and additional accounts tariff will be applied to accounts registered in the names of residents and additional accounts for citizens beyond the allowable two accounts under the Citizen Account Tariff. The tariffs applicable to the two residential segments are shown below:
For Water, the New Tariff Structure will cover the following Categories:
- Non-Residential Consumers: Includes all non-residential uses
- Residential Consumers: Like electricity, the residential tariff is divided into Citizen Account Tariff, and Resident and Additional Accounts Tariff. Whereas the Citizen Account Tariff will be applied to accounts registered in the names of citizens not exceeding two accounts per citizen, the Resident and Additional Accounts Tariff will be applied to accounts registered in the names of residents and additional accounts for citizens beyond the allowable basic two accounts under the ‘Citizen Account Tariff’. See the table below:
- Additional Accounts Tariff will be applied to accounts registered in the names of residents and additional accounts for citizens beyond the allowable basic two accounts under the ‘Citizen Account Tariff’. See the table below:
Targeted Subsidy Approach
Many countries around the globe have moved towards a more targetted approach to delivering support to those most in need by identifying the most vulnerable households compared to the non-targeted utility subsidies approach that is in place today. The chart below illustrates the difference between these two approaches.
To ensure that the subsidies are delivered to the targeted segments, the government developed the (National Subsidy System) which includes fuel, electricity, and water subsidy to provide protection for the citizens deemed most vulnerable as a result of the sizable burden on the state’s budget due to declining oil prices and the Covid-19 pandemic. The National Subsidy System is a platform designed to enhance the social safety net and mitigate the impact of tariff reforms on low-income households. The National Subsidy System will be overseen by The National Subsidy Committee (formerly known as the Fuel Pricing Committee).
Support for eligible categories under NSS will be reflected in the form of a 33% discount on the total bill value and up to a specific consumption ceiling (4000 kWh/month) for electricity. A similar mechanism will be applied to water during the coming phases.
Eligibility Criteria for Social Protection Net
Eligibility for social protection net is based on the outcomes of the Household Income and Expenditure Survey in 2019. Accordingly, the total household income and the number of household members are identified as the two criteria for eligibility under the NSS. This is to ensure that subsidy is targeted to the most vulnerable households following the implementation of the new fiscal policies.
Households that meet the above criteria may register through the NSS website beginning December 20, 2020, in order to benefit from the additional government subsidy, which can be accessed through the website (www.nss.gov.om).