Trading Stability For Growth
The MENA Infrastructure Fund acquired GDF Suez Group’s 32.81 per cent stake in United Power Company in May this year. Zoher M Karachiwala, the recently appointed CEO speaks to Mayank Singh about the company


United Power Company (UPC) has a number of firsts to its credit? How did the project come into existence?
United Power Company was the first Independent Power Project (IPP) in the Middle East. The project started on a small scale in 1994, when Tractebel SA (now GDF Suez) and prominent local business groups, National Trading, WJ Towell, The Zubair Corporation and Tawoos (subsequently sold to Ministry of Defence Pension Fund) signed an agreement with the government. The project was conceived by the Ministry of Electricity and Water under the guidance and leadership of His Majesty Sultan Qaboos bin Said. It is said that the people of Nizwa raised the power shortage issue during one of His Majesty’s visit leading to this project being set-up at Manah (near Nizwa).

Since there was no precedent of a standard long term power purchase agreement (PPA), it took three years for the PPA to be put into a legal framework. UPC started as a small project with a 90MW capacity. There were three machines of 30MW each. The debt-equity ratio was 67:33 per cent. Apart from production, UPC was also responsible for transmission network from Manah/Nizwa to the main grid and some other areas near Nizwa. The biggest challenge in the initial stages was getting international funding as international lenders had not done any significant project finance transactions in Oman. But once IFC (International Finance Corporation), a member of the World Bank Group got involved both as a lender and shareholder it opened the doors for international banks and export credit agencies (ECAs) from France and England. The phase 1 project cost was $230mn. In 2000, the government asked us to increase our capacity from 90MW to 270MW. Our project is based on BOOT (Build, Own, Operate and Transfer) for the plant and BOT (Build, Own and Transfer) for the transmission network. All other power projects that followed us were on BOO (Build, Own, Operate). If the phase II had not happened, we would have given back the project to the government in 2016, but now the life of the project has been extended by four years till 2020, after which the plant will be handed over to the government. Since the promulgation of the sector law and the strong commitment for privatisation, we would expect that the ‘T’ will no longer remain for power plant. As the machines have a lifespan beyond the PPA term, it would be logical to assume that the company will continue to produce power beyond 2020. Transmission lines, however, would be handed over to the government in 2016 as it would complete its 20 years PPA life.

How have the recent changes in the electricity sector impacted your business?
From a consumer point of view the sector is still under the relevant ministry. Through the unbundling process, the government’s control has been transferred to a number of private companies. This has brought in more independence and a private sector ethos to the sector. Earlier, our customer was the Ministry of Electricity and Water (now MHEW), but after the privatisation of the sector, Oman Power and Water Procurement Company (OPWP) is our customer and all our contracts have been transferred to OPWP.

The sector has become more organised. UPC is both a transmission and generation company, but because of the legal and other issues we were allowed to keep the transmission network and still not be in contravention of the power generation license. Pursuant to the sector law, the intention of the government is to take back the transmission lines network earlier. We will continue to find acceptable solutions for transfer of transmission network and the removal of ‘T’ to enhance shareholders value.

Power companies in the Sultanate operate on a fixed price model? What are the strengths and weaknesses of this business model?
Looking at the weather pattern in the Middle East, this is the only workable model, because there is a peak demand during summers and a reduced demand in winters. If it was a completely commercial model based on demand and supply, it would be difficult to justify running a plant at full load only during summers. As per the model, we have to demonstrate that the plant has the capability (and availability)and we get paid accordingly. If this was not the case then it would be difficult to get power companies to come to Oman. In the West, the concept of merchant plant exists. For example, in the US, anyone can set up a captive power plant and start selling to any buyer which could be an individual, government or industry. There are also transmission companies whose sole focus is to connect the captive power plant with customers and they can fix their price based on market forces, then there are individual companies who just provide fuel to the individual power producers. Right now, I cannot visualise this happening in this part of the world. For IPP’s there are no upside /rewards but at the same time there are no significant risks as well. From the ministry’s point of view the government is also not exposed to unforeseen risks as through the PPA it knows what it has to pay over the term of the PPA. Had it been a merchant type of IPP here, both IPPs and the ministry would be exposed to risks and if subsidy did not exist, then the individual consumer would be directly affected.

Are there any plans to put up mega power plants to negotiate the power issue?
The next big projects that are in the market are Sohar II and Barka III. The government has a well defined plan to take care of the future demand and they have been up to speed on that. On a broader level there are plans to integrate Oman and GCC grids. This will help in the exchange of surplus power between the GCC countries.

The Authority for Electricity Regulation (AER) has come out with an exhaustive report on renewable energy and there has been a lot of interest in alternative energy. How viable are such prospects?
Solar energy seems to be quite promising, wind energy is limited to certain specific areas. The Sultanate’s focus will be on solar but making it commercially viable is a struggle not just here but internationally. Nuclear power is a cheaper and efficient option. For example UAE is actively considering setting up a nuclear plant. The initial cost of setting up such a plant is quite high, but it is safer and more environment friendly. Coal is another option and there are talks about setting up a coal fired power plant in Duqm. Coal is not environment friendly, but it is a cheaper option. If there is a shortage of gas, then power plants may have to run on diesel oil. Diesel generated plants are neither cost effective nor environment friendly. So overall, coal and solar are the likely frontiers
in Oman.


 

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