Oman power subsidy to fall to RO 456m in 2017

EARNINGS SURGE: Cost Reflective Tariffs for large customers contribute to revenue growth –

Conrad Prabhu –

Reversing a longstanding trend in rising government grants to the sector, electricity subsidy is projected to ease to RO 456.3 million in 2017 versus an amount of RO 510.5 million disbursed last year, entailing a 10.6 per cent decline, according to details published by the sector regulator.
The fall is primarily attributed to an uptick in customer revenues following the introduction of Cost Reflective Tariffs (CRT) for large industrial, commercial and government consumers effective from January 1 this year. The new tariff scheme effectively does away with subsidy for this bracket of customers.
The projected subsidy is an aggregate of subsidy payable by the Ministry of Finance under Article 18 of the Sector Law to electricity suppliers in the three principal systems serving the Sultanate: The Main Interconnected System (MIS), covering much of the northern half of the Sultanate; Dhofar Power System (DPS), encompassing wide swathes of Dhofar Governorate; and the Rural Areas Electricity Company (RAECO), serving areas primarily in Musandam and Wusta governorates that fall outside of the coverage of the MIS and DPS.
According to the Authority for Electricity Regulation Oman (AER), subsidy payable to suppliers within the MIS (comprising Muscat Electricity Distribution Company, Majan Electricity and Mazoon Electricity) is estimated at RO 329.3 million in 2017, down from RO 389.9 million last year.
Commenting on the decline, the Authority said: “On January 1, 2017, new cost-reflective electricity tariffs (CRTs) for large Industrial, Commercial and Government customers came into effect. This represents the most substantial change in electricity tariffs in Oman for over two decades. The new tariff is expected to moderate the growth in peak demand (and therefore reduce future electricity sector investment and fuel requirements), increase the level of total customer revenues and provide for a net reduction in total electricity sector Subsidy in 2017.”
In 2016, MIS subsidy accounted for 48 per cent of the total economic cost (RO 805.4 million) of supplying electricity to customers served via the three main suppliers. The balance 52 per cent of costs was recovered through customer revenue. Muscat Electricity, Majan and Mazoon accounted for 33 per cent, 26 per cent and 41 per cent, respectively, of total MIS subsidy in 2016.
Likewise, the subsidy needs of the Dhofar Power System (DPS) are estimated at RO 37.5 million in 2017, down from RO 42.6 million a year earlier. The 12.1 per cent decline reflects an estimated 17.8 per cent growth in average customer revenue as a result of the introduction of Cost Reflective Tariffs, the regulator stated in its newly published 2016 Annual Report.
Last year, subsidy accounted for 51 per cent of the total economic cost (RO 84.1 million) of supplying electricity to customers across the Dhofar Power System, with customer revenues contributing the balance 49 per cent of costs.
However, subsidy for RAECO is expected to jump to RO 89.5 million this year, up from RO 78 million in 2016. The 14.8 per cent spike is primarily attributed to the increase in RAECO’s fuel purchase rate following the government’s decision to re-align diesel prices to international market prices. As fuel accounts for around 50 per cent of RAECO’s total economic costs, this has a direct and significant impact on the company’s costs, the Authority added.