The Electric Subsidy Challenge

In an era when oil has seen its status as king increasingly threatened by fluctuations in the global economy, renewable energy once again rises as its top competitor. However, non-fossil fuel-based power faces a tough battle in the region, where oil has long been the unmatched champion, allowing Oman and the GCC to develop their economies and granting them access to markets that have made them wealthy, powerful players in the international arena.

Today, oil-dependent nations are finding themselves in very different territory, pushing respective governments to look for alternative sources of sustainable income and energy. This is a core challenge for Oman. While working to mitigate the effects of the drop in oil prices, the country has seen an increase in demand for electricity. According to Oman’s Electricity Holding Company, Nama Group, domestic consumers increased by 47,815 last year, indicating a 7% rise. This is pushing Oman to reform the state’s spending and revenues system and may ultimately challenge electricity subsidies.

Since 1987, electricity tariffs in Oman have not changed and, according to the Authority for Electricity Regulation (AER), they have not even been adjusted for inflation. In economic terms, this means tariffs have actually decreased over the years. While the price the consumer has paid for electricity has not changed since 1987, the subsidies paid by the government have seen an increase from OMR295 million in 2014 to around OMR450 million in 2015. In order to alleviate this growing problem, Oman plans to execute an electricity tariff strategy that will represent a 7-8% cut in electricity subsidies.

This cost-effective scheme will first be implemented among commercial, industrial, and government users of electricity. This group represents between 9,000—9,500 consumers using over 150 MW hours annually. While a necessary reform to government spending, the move may provoke a troublesome reaction from the private sector. One of the most lucrative aspects of doing business and investing in Oman is the affordability of electricity, as compared to India or Africa, where the supply of electricity is unstable and the costs much higher.
Supporting the government’s aim of reducing subsidies, an effort to offer incentives for consumers to manage their power costs in a sustainable manner is underway. The new scheme will offer lower rates to consumers using energy during non-peak times when the cost of producing power is lower. On a parallel front, the development of renewable sources of energy will also provide the Sultanate with a new means of tackling its electricity requirements, while potentially generating enough electricity to export. This is the case of the OMR216,000 solar project being developed by Sultan Qaboos University (SQU) and funded by Jacobs International. The project, which aims to generate from 170-200 KW per day, enough electricity to light 10 houses each day, is one of the many endeavors that seeks to diversify Oman’s energy sector and take advantage of an area with some of the highest solar radiation levels in the world.

The gap caused by subsidies between the cost of energy production and the return in revenue is unsustainable and signals an eminent need to restructure the subsidies the Omani government has historically granted. It is a positive step that will educate society, jettison the paternalistic approach, and promote a more responsible community that is engaged in the country’s economic development. Nevertheless, reducing subsidies for electricity is a particular case that will need to be addressed independently, as it could affect the manufacturing sector, which is a listed as a priority sector in the ninth Five-Year Plan. In this regard, the implementation of the strategy will need to fit in with the country’s future intentions of continuing to promote investments in manufacturing.