RenewableEnergyResources in Oman In practical terms the natural gas provision price for the power plants is determined in long term contracts. However through indexation of the price it is possible to transfer to the international LNG price to the natural gas contracts. The economic price is somewhere between the production costs in Oman and the spot LNG price. As mentioned earlier a gas price 3 USD/MMBtu with 3% annual escalation, would make wind power competitive provided carbon emission reductions can be sold at 25 USD/ton. Using a price of natural gas, reflecting the cost of economic use of the gas, would increase the room for renewable energy in the planning of new power production. It might also provide current producer with incentives to consider renewable energy as a supplement in the production operations with a cost reducing impact. The changes in cost of energy production are in a well functioning market, transferred to the end-users thus impacting their behaviour in terms of energy use. However, in Oman this mechanism is not operating because the Permitted Tariff currently is settled below cost. Price at End-user level End-user electricity tariffs are settled in a political process and are below the economic cost of power as an average, due to the subsidy provided to the distribution companies. From economic theory it is well known that the consequences are: consumption of energy is not efficient, over investments in production capacity/depletion of the natural gas resources quicker than optimal for the society. In the longer term this will lead to the requirement import of natural gas / oil, at market costs and a lower security of supply. It is also directly a barrier to the introduction of renewable energy applications at the end user level. Introduction of renewable energy applications in an industry or in a household are costly and require investments. The return of investing in e.g. a solar application will be lower and the payback time will be longer if electricity is priced below its real cost. This will therefore have an adverse impact on investment in production and installation of renewable energy in the country. Cost reflective end-user prices are necessary to encourage the end-users to make the decision regarding energy use and invest in renewable energy applications. The Authority is presently recommending an introduction of Cost Reflective enduser tariffs. Steps in this direction, would also assist in removing an important barrier for renewable energy and other improvements in the use of energy. Possible increases of the power tariff should must take place gradually in order to mitigate the impacts on the poorest household. 8.1.2 Scale Conventional power plants can be very large - thousand of MW in size. Renewable generators are much smaller in size. The smaller size of renewable energy technologies has advantages and disadvantages. The principal disadvantage is that the cost of participating in the market (transaction costs) are high per unit produced. This accounts for the whole project cycle. Page 122 of 134 .
RenewableEnergyResources in Oman A number of cost items in the project cycle are to some extent independent of the size of the project: investigations, pre-feasibility studies, feasibility studies, siting considerations, land purchase, detailed design, creating access to the site plant, establishing connection to the grid, insurances, negotiating of power sales agreements, obtaining licenses and permits and the tendering process. This cost can't be avoided and in some countries special programmes with support measures are established to assist investors overcoming this barrier. Further during operation, unless a developer of renewable energy project has a diversified portfolio of generators, renewable energy operators are unable to net off imbalances with the company. For instance when operating a wind farm supplying the grid, the transmission company - or organisation responsible for balancing the system - can obtain difficulties in ensuring the balance because of the volatility of the wind farm production. For the system operator, this might result in additional purchase or cancellation of already purchased power, which means additional costs that in principle are transferrable to the wind energy producer. These situations are less costly to handle if you operate a diversified portfolio of facilities. There needs to be a set of market regulations that the markets access for renewable energy producers, before investors will consider investing. In more mature renewable energy set-up special services and facilities have been developed to deal with these issues. In Oman, where renewable energy is emerging these programmes and rules have to be defined before a development on a commercial scale can be expected. 8.1.3 Power Sector Set-up and Legal Framework The present legal framework for the power sector is formulated in the Law for the Regulation and Privatisation of the Electricity and Related Water Sector and described in Section 4.3 of this report. The legislation lack formal arrangements and statuary mechanisms to accommodate renewable energy or facilitate its introduction, some examples are discussed below. These examples do not mean that isolated renewable energy project cannot be undertaken, but should be seen as barriers for the broader market to take off. In the energy legislation in most countries, you will find specific regulations regarding inclusion of renewable in the power supply in order to have a basis for the practical arrangements and in order to support the process. The lack of a strong interconnection, between MIS, RAECO and Salalah makes introduction of renewable energy less economic than in an interconnected system. The intermittency of say wind energy adds system imbalances easier to cope with in a system with strong interconnections and of some size. Wind resources are located mainly in the Southern part of Oman, but the Northern part of the country cannot benefit from wind energy production from the South in situation of overproduction. This goes of course for all production resources, but is especially important with a volatile resource such as wind. The current legislation stipulates that the DC's in MIS must purchase all their power from OPWP. They are not allowed to establish their own 'embedded' production facilities - local power generation inside their own distribution areas - based onfor instance small scale renewable resources, if found to be cost effective compared to purchase from OPWP. Page 123 of 134 .