Nov 24 2012
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Electricity subsidy set to jump 56pc to RO 164.5m in 2012
Article 18 of the Sector Law implements a mechanism through which the Ministry of Finance provides electricity subsidy calculated by the Authority to four licensed suppliers (Muscat, Majan and Mazoon and RAEC) on an annual basis.
According to the regulator, subsidy on electricity supplied within the Main Interconnected System (which covers all of Oman with the exception of the Salalah System and areas served by the Rural Areas Electricity Company -- RAEC) accounted for 29 per cent of the total economic cost of supply, amounting to RO 365.3 million in 2011. The remaining 71 per cent was recovered through customer billings.
Of the three supply and distribution companies serving the MIS, Mazoon earned RO 54.3 million (52 per cent) of the total subsidy of RO 105.4 million provided last year. Muscat Electricity Distribution Company accounted for RO 18.6 million (13 per cent) of the total subsidy, while Majan Electricity Company received RO 32.5 million (31 per cent).
For 2012, the subsidy is projected at RO 164.5 million within the MIS, representing a 56 per cent (RO 59.1 million) increase over 2011. This increase is driven by a projected 20 per cent increase (RO 75 million) in underlying economic costs and a 13 per cent rise (RO 32.7 million) in customer revenues.
Subsidy made available to areas covered by the Rural Areas Electricity Company (RAEC) totalled RO 30.5 million in 2011, reflecting the cost of diesel used as the dominant fuel for electricity generation within its licence.
But an insightful study by the Authority now shows that the subsidy amount would be dramatically higher if fuel costs are to reflect their economic 'opportunity' cost. Consumers, the regulator says, benefit from 'indirect' subsidy as the cost at which fuel is sold to production facilities is below its economic 'opportunity' cost.
"Foregoing opportunities to use domestically produced gas and diesel fuel for purposes such as export or increasing allocations to industrial projects, imposes real costs on the government. Failing to include these 'opportunity costs' in Article (18) subsidy understates the true level of subsidy provided to consumers," the regulator has noted.
According to the Authority's findings, power plants operating within the MIS and the Salalah System use natural gas as fuel purchased a cost of $1.5 per million standard BTU (MMBTU). But in actual terms, when calculated against international market trends, the value of gas is as much as $9 per MMBTU. This value broadly represents the 'opportunity' cost of gas.
Likewise, in RAEC's license, electricity generation is primarily based on diesel fuel procured at an average cost of 140 baiza per litre. But when calculated to reflect international market prices, diesel costs rise to as much as 244 baiza per liter.
Citing these findings, the Authority has concluded that electricity consumers derive considerable benefit from indirect fuel subsidies that are in addition to direct subsidy provided through Article (18) of the Sector Law.
"At a gas cost of $4.5 MMBTU and diesel costs of 215 baiza/litre total electricity subsidy in 2011 increases to RO 389 million, 120 per cent higher than financial subsidy. At costs of $9 MMBTU for gas and 244 baiza/litre for diesel, total subsidy increases to RO 694 million, which is 292 per cent higher than financial subsidy," the Authority said.
It warned that failure to account for the opportunity cost of fuel used to generate electricity underestimates the economic cost of electricity supply, potentially resulting in inefficient consumption, and particularly when electricity tariffs are already subsidised. Further, this "distortion" can result in the "oversupply and inefficient use of valuable natural and financial resources", the regulator stressed.
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