As discussed in a previous post (Hot Topic: Solar Energy), solar power is poised to play a key role in meeting the Sultanate’s future energy needs. With the Omani Authority for Electricity Regulation having published a comprehensive report on renewable energy in 2008, and the Omani Public Authority for Electricity and Water anticipated to soon release a feasibility study for the Sultanate’s first large-scale solar plant, there are clear indications of growing support at the policy level for solar energy projects in Oman. Once policymakers decide to undertake specific solar energy projects, the implementation framework for these projects will come to fore.
As the Sultanate crafts its implementation framework for solar energy projects, it is likely that economic and strategic issues will lead, and the legal issues will follow their cue. However, it is important to choose the legal structure that will best express and accomplish the chosen policy goals. This article explores the economic and strategic context for solar energy in Oman, and outlines some possible legal structures that may meet the Sultanate’s needs.
Economic and Strategic Context
Solar energy has clear advantages over other energy sources, namely that it is renewable, plentiful and non-polluting. Over the long term, investing in solar energy makes solid economic and strategic sense. Solar power provides a secure, stable and sustainable energy source. Solar production costs will likely fall as technology improves, whereas fossil fuel costs have shown a propensity to rise with global supply constraints and demand increases. Further, replacing fossil fuel-based power with solar power also reduces pollution, which lowers health and environmental costs to society as a whole.
However, solar projects do face a short-term disadvantage: at current technology and market prices, the per-unit cost of producing electricity using solar energy is significantly higher than using natural gas or other fossil fuels.
In order to overcome the obstacle of short-term cost and launch solar projects that will yield long-term benefits, governments usually will absorb, over the short and medium term, the production cost difference between solar-based energy and fossil fuel-based energy. In other words, the key step to getting solar energy projects off the ground is for the government to subsidize the project to make it economically viable. Although such a subsidy can be politically difficult to carry out in some countries, it likely could be done in the ordinary course in Oman, where government subsidies to provide affordable electricity to the population have long been a top priority of government policy.
There are a number of possible ways that the Sultanate could structure such subsidies, and these various legal structures contain subtle but important differences.
Possible Legal Structures for Solar Subsidies
The first, most obvious way that Oman could subsidize solar energy production would be for the government to absorb the higher per-unit cost by directly financing and carrying ownership of the solar plant. In this case, the government would typically recruit a third-party operator with the requisite technical expertise, and would build and operate the solar power facility as a public-private partnership (see the June 2010 Client Alert for an overview of the public-private partnership model).
Alternatively, the government could subsidize the purchase of output from a privately owned and operated plant. Under this approach, the government would solicit a private party to build and operate a solar energy plant and cause the Oman Power & Water Procurement Company (“OPWP”), the government-owned, sole wholesaler buyer of electricity in Oman, to enter into a subsidized long-term purchase agreement that would allow the operator to earn a reasonable profit above its cost of producing the solar energy. This power purchase agreement would typically have a term of between 15 and 25 years. It is important to note that private operators seek a long-term power purchase agreement not only for assurances that they will earn a reasonable operating profit, but also to help secure financing to build the plant in the first place, as banks are more likely to lend money for projects that have revenue streams which are guaranteed (and are backstopped by the government).
Finally, as Oman’s solar power sector evolves in future years, OPWP eventually may decide that it would like to tap private-sector capacity even further. One way to do this would be by adopting a “feed-in-tariff” model along the lines of what is used today in Germany and other European countries. Under this model, private businesses and households install solar panels on their property and sell the excess energy that they produce to the relevant electricity authority (in Oman’s case, this would be OPWP). Rather than negotiate power purchase agreements with each business and household that contributes to the electricity grid, the electricity authority establishes a standard rate, commonly called a “feed-in-tariff”, that it pays to all contributors. The government purchases excess solar-produced electricity from businesses and households at feed-in-tariff rates that are high enough to allow the businesses and households to recoup the cost of purchasing and installing their solar panel systems. The feed-in-tariff model both encourages more widespread adoption of solar energy and helps to instill eco-friendly values across society.
Monday, September 13, 2010
Solar Energy – Legal Structure Issues
Monday, August 16, 2010
Hot Topic: Solar Energy
Oman, like its GCC neighbors, is well known for its abundant oil and natural gas resources. What is perhaps less well known is that the Sultanate is also poised to become a leading player in the next great natural resource boom: solar energy.
This article provides background on Oman’s plans and potential for harnessing solar energy. In a future post, we will discuss some of the important legal issues that may come to the fore as Oman moves ahead in its solar development initiatives.
History
Solar energy has been on the agenda in Oman for quite some time. The use of solar systems for special industrial purposes – such as powering telecommunications and monitoring equipment in the Sultanate’s remote desert and mountain areas – dates back to the early 1990s. More recently, the Government has begun to focus on the potential for large, commercial-scale solar projects, both to help diversify the national economy and to meet growing domestic energy needs. A comprehensive report on renewable energy issued by Oman’s Authority for Electricity Regulation in 2008 (the “AER Report”) identified solar power as one of the Sultanate’s top prospective energy sources for the coming decades.
Over the past few weeks, we have witnessed the clearest signs yet that Oman’s potential as a solar energy producer soon will be realized. Oman’s Public Authority for Electricity and Water (the “PAEW”), which is overseeing the formulation of a national strategy for solar energy development, has been working with a consortium of international consultants to determine the size, location, and type of solar technology to be used in Oman’s first large-scale solar power plant. According to recent press reports, the feasibility study is near completion, and the PAEW soon will announce the details of the project and launch a competitive process for bidders to design, develop, finance, and operate the plant.
Looking toward the Future
As we await further details of Oman’s solar plans, it is easy to be optimistic about the Sultanate’s potential to be a major producer – and perhaps someday an exporter – of solar energy. As noted in the AER Report, which analyzed solar radiation data collected over a five-year period, Oman’s solar energy density ranks among the highest in the world. The AER Report estimated that, theoretically, it would be possible to produce sufficient electricity to satisfy all of Oman’s electricity consumption at present levels by utilizing 280 square kilometers of desert (0.1% of the Sultanate’s total land area) for solar collectors.
Building solar power generation capabilities could yield a variety of benefits for the Sultanate. First, the bolstering of Oman’s overall energy resources clearly would help to meet growing domestic electricity needs. Second, the partial fulfillment of domestic energy needs through solar power may allow Oman to export more of its oil and natural gas, which would generate additional revenue. Third, advancing the development of renewable, environmentally friendly energy sources would allow the Sultanate to take a leadership role in the global community. And finally, acquiring expertise in “green” technology may be something that the Omani tourism industry could tap into – hotels featuring eco-friendly technology would nicely complement the stunning natural beauty of their surroundings, and could enhance Oman’s appeal as an upscale, eco-friendly travel destination.
Potential Technologies
According to the recent news reports, it is likely that Oman’s initial large-scale solar projects will utilize some form of concentrated solar power (“CSP”) technology. CSP systems use a group of mirrors to focus a large area of sunlight onto a smaller collecting surface. The collecting surface is usually mounted on a tower surrounded by an array of mirrors, or inside a parabolic trough composed of mirrors. The collected heat is used to turn a heating medium (such as water or molten salt) into steam, which powers a turbine to produce electricity. An alternative technology is to use photovoltaic cells, which absorb solar radiation and directly turn it into electricity via the excitement of electron particles.
Tuesday, March 2, 2010
Nuclear Energy Development
When a nation such as Oman decides to develop a peaceful nuclear energy program, the first step in essence will decide the political and economic consequences of the entire process. This first step is to become a party to the Treaty on the Non-Proliferation of Nuclear Weapons (NPT). That step is important because nations that lack the domestic capacity to develop nuclear energy will require technological support from other nations. In order to obtain this technological support, the country seeking to develop nuclear energy will need to join the NPT and fulfill a number of political obligations and related criteria.
Joining the Non-Proliferation Treaty
The NPT came into force on 5 March 1970 and includes 189 signatory nations, including Oman. Oman ratified the NPT in 1997 and therefore already fulfills this basic fundamental criteria. The NPT includes three basic "pillars": non-proliferation, disarmament, and the right to peacefully use nuclear technology. The provisions on peaceful use of nuclear technology are most important for Oman’s current plans, and are addressed in Article 4 of the NPT.
Article 4 of the NPT gives a county seeking to embark on a nuclear energy program the inalienable right to use nuclear energy for peaceful purposes within the parameters laid down by the obligations in the treaty.
A country such as Oman, which lacks the domestic technical resources and capacity for nuclear energy development, may seek to avail itself of Article 4(2) of the treaty. Article 4(2) deals with the exchange of equipment, materials and scientific technical information for the peaceful use of nuclear energy between member states. Article 4(2) also sets out the non-binding moral obligations of member states to support the responsible spread of the use of peaceful nuclear technology.
In practice, Article 4(2) is monitored by a group of forty six nuclear supplier states, including China, Russia and the U.S., that have voluntarily agreed to coordinate their export controls governing transfers of civilian nuclear material and technology to non-nuclear weapon states. This group is known as the Nuclear Suppliers Group (NSG), and was created in 1975 after an incident involving India’s explosion of a nuclear device. This incident demonstrated that nuclear technology transferred for peaceful purposes can be misused. The objective of the NSG is to prevent nuclear exports for commercial and peaceful purposes from being used to make nuclear weapons. Under the NSG structure, members are obligated to refrain from nuclear trade with governments that do not subject themselves to international inspections of their nuclear imports. The inspections are designed to provide confidence that their nuclear imports are not being used to develop a nuclear arsenal.
As Oman will require technical support from the international community in developing a nuclear program, it is important to instill confidence in the International Atomic Energy Agency (IAEA) and the NSG to ensure that the international community understands that Oman’s intentions are NPT compliant. Specifically, a nation in this situation should show its adherence to international instruments and inspections.
Developing Effective Legislation
A country seeking to develop a nuclear program will require legislation to move the process forward. Specifically, nuclear legislation should:
Monday, November 9, 2009
GCC Interconnection Grid
The vision of an interconnected power system for the states of the Gulf Cooperation Council (GCC) is nearly as old as the 27-year old organization itself. The introduction of the concept in 1982 has, in recent years, proven extraordinarily prescient. Today, the GCC Interconnection project is nearing completion just as electricity demand projections appear set to take off.
The countries of the GCC have experienced increases in demand driven by population growth, urbanization and industrialization. According to some sources, demand for electricity in Oman has been growing at 6-7% per year. Demand growth is forecasted at 15% annually until 2020
The GCC Interconnection Grid is a crucial element of the GCC’s plans to meet the growth in demand. The linking up of electricity systems between Gulf states will reduce long term investment costs for generation by reducing required levels of reserves, adding efficiencies and creating opportunities in energy trading.
Phase I of the interconnection was completed in July 2009, linking Bahrain, Saudi Arabia, Qatar and Kuwait in what is referred to as the GCC North Grid. Phase II of the plan, also complete, involves the internal connection of the electricity grids in the UAE and Oman, known as the GCC South Grid. Phase III will bring the project to completion with the linking of the North and South grids. The final of the three phases of the USD 1.407 billion interconnection project is scheduled for completion in 2011.
According to GCC Interconnection Authority (GCCIA), the body responsible for constructing, operating and maintaining the interconnection, each GCCIA member state will be capable of importing up to the value of its interconnection size. In Oman’s case, potential imports amount to 400MW. As a result, operational reserves in the region are expected to fall.
Additionally, lower operating and management costs to consumers will be achieved by using energy from the most economic generation unit available for dispatch in the interconnected system.
Further, available spinning reserves will be shared to cover emergency conditions and provide emergency support to any system experiencing a blackout.
The benefits of interconnection, however, could stretch far beyond cost savings. If all goes according to plan, the Interconnection Grid will enable the export of power to the Mediterranean basin and to Europe.
Legal Framework for Interconnection
Just as crucial as the technology behind the GCC Interconnection Grid are the legal arrangements making interconnection possible. In the words of GCCIA spokesman Hassan Al-Asaad, “legal agreements are the basis for the entire project – without them there we have no interconnection.”
The members of the GCC Water & Ministerial Committee have undertaken to sign the General Agreement of Power Interconnection Grid with the GCCIA. The General Agreement lays out the fundamental agreement between member states with regard to use of the interconnection. The General Agreement includes provisions relating to connection fees, rights of interconnection, performance, defaults, termination, and governing law, as well as the regulatory principles committed to by the parties.
Regulation of use of the interconnection will initially be carried out by the GCCIA Board. At a later stage, authority will be transferred to a Regulatory & Advisory Committee that will ensure compliance with regulatory principles and performance standards. Finally, when member states take the step of forming a regional energy regulator, permanent authority will vest in that body.
In addition to the General Agreement, state utilities must enter into a Power Exchange and Trading Agreement (PETA) which sets out the terms on which the parties may connect and have access to the grid and the terms by which parties may schedule transfers of power. The PETA is made up of three separate components:
Monday, August 10, 2009
Renewable Energy Update: Carbon Credits
Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air, and are openly traded in many countries. Currently, Oman is taking steps to enable the Sultanate to be a potential player in the international market and to promote renewable energy investment in Oman through the establishment of a new governmental authority.
The Oman Ministry of Environment and Climate Affairs announced that it is in the process of setting up a new authority for administering “clean development mechanisms” (“CDMs”) in Oman. CDMs are part of the Kyoto Protocol, which is an international agreement linked to the United Nations Framework Convention on Climate Change. The Kyoto Protocol sets binding targets for the reduction of greenhouse gas emissions. Oman became a member of the Kyoto Protocol in January of 2005.
CDMs are one of the Kyoto Protocol’s three flexibility mechanisms designed to assist countries to meet their greenhouse gas emission reduction targets. CDMs allow an industrialized country with an emission-limitation commitment to implement an emission-reduction project in a developing country. The implementation of a CDM project, e.g., a rural electrification project using solar energy, can earn saleable certified emission reduction credits or carbon credits which can be counted towards meeting Kyoto targets.
A developing country like Oman could host CDM projects that would attract investments from foreign companies seeking to earn carbon credits. These carbon credits can then be sold and traded on the open market.
In Oman, these CDM projects will be regulated by the Designated National Authority (“DNA”). The DNA will determine what CDM projects that it wishes to propose to the CDM Executive Board for accreditation. The process of establishing the DNA also coincides with the overwhelming response generated for the government’s recent solar energy initiatives in the power sector.
In accordance with the substantial national interest in renewable energy, it is hoped that the DNA will develop rules for audit and certification of CDMs so that Omani companies, as well as foreign companies, can fully participate in the creation of CDMs and the chance to sell carbon credits in the open market. Omani companies should be aware that CDMs present a potential revenue source, as carbon credits are traded internationally. The constitution of the DNA is the first step towards the establishment of clear mechanisms for companies to participate in such programs.
Thursday, July 9, 2009
Hot Topic: Nuclear Energy in the GCC
Earlier this month, Oman’s Ministry of Foreign Affairs signed a Memorandum of Understanding (MoU) with the Russian Federal Atomic Energy Agency (Rosatom) that deals with cooperation in the peaceful use of nuclear power. The MoU could lead to Russia and Oman engaging in joint research projects and even building nuclear reactors together.
The MoU details Russia and Oman’s plan to establish a working group to promote Oman’s plans to develop nuclear power. The countries also plan to draft an intergovernmental agreement for cooperation in peaceful nuclear energy. Both countries have stated that they plan to cooperate in the following areas:
Oman has long had plans to diversify its economy and encourage sustainable economic development policies, and the peaceful use of nuclear power fits in with those plans. Cooperation between Oman and Russia on nuclear power can help the Sultanate develop infrastructure, provide employment opportunities and training, and benefit from Russian expertise and technology.
Oman is not the first country in the Middle East to seek nuclear energy development. Bahrain, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates (UAE) and Yemen have all expressed their intention to develop nuclear energy. The UAE has already signed a bilateral agreement with the United States on nuclear cooperation and is also talking with France to cooperate on nuclear energy. In addition, the North African countries of Algeria, Egypt, Libya, Morocco and Tunisia have also expressed interest in nuclear energy.
MENA states have a number of motivations for this interest in nuclear energy, such as powering water desalination plants and air conditioning, diversifying beyond oil, and furthering scientific and economic development. Some countries have even stated that they prefer to sell their oil rather than use it to meet domestic demand, and constructing nuclear reactors would enable them to do that.
Energy demand is growing rapidly in Oman and the GCC, with electricity and desalination demands estimated to increase by about 10 per cent annually by 2015. Recently, a GCC-wide electricity grid was introduced which allows GCC states to share power during peak periods. The GCC electricity grid is designed to address what has been labeled a “power crisis” in the region.
GCC states are looking to nuclear and other alternative energy sources as providing potential solutions to the power crisis. Solar energy is another potential resource, with new projects underway. Earlier this month, Abu Dhabi opened the largest solar power grid in the Middle East and North Africa. Oman is also in the process of developing solar energy projects in response to the growing electricity demand.
Tuesday, May 26, 2009
Hot Topic: Red Tide Legal Issues
In recent weeks, the Omani coastline has been significantly affected by red tide, a biological phenomenon that occurs when the rapid growth of algae overtakes a water column.
Red tides, also known as algal blooms, are common along the coastlines of the Arabian Gulf between the months of March and September. Red tides are generally considered to be a natural phenomenon, though many scientists contend that human activity such as pollution or global warming can increase their likelihood or exacerbate their severity.
The red tides result in red or green colored seawater, unpleasant odors, and low underwater visibility, making the water an unpleasant place for beach goers. Severe red tides, however, are more than just a nuisance. The proliferation of algae blocks out sunlight and results in a lack of dissolved oxygen in the water, causing the death of marine organisms and the destruction of ecosystems.
As has been seen in Oman, the environmental disruption caused by red tides can have a serious impact on businesses relying on the waters for economic activities.
Perhaps the most direct consequence felt by businesses has been the killing of massive amounts of fish. In 2001 and 2002, 27 tons of dead marine life came ashore along Sur, Batinah and the south of Oman. The recent red tides have also resulted in large amounts of dead fish washing ashore in Muscat. Such destruction has a detrimental impact on fisherman and fisheries in Oman.
Additionally, the red tides significantly affect tourism. The red tides are toxic and cause skin irritation rendering the water un-swimmable. Resorts in the area routinely warn their guests to stay out of the water during red tides. Further, the blooms have resulted in the destruction of coral reefs and the killing of whales and dolphins.
Algal blooms also have a serious impact on industries relying on the use of sea water, and are known to have caused temporary industrial shutdown. In Oman, the red tide has caused a temporary halt at the Qalhat LNG plant as well as the Sohar Aluminum plant. Similarly, other Omani plants in Sohar must remove foam from the sea water before it comes into contact with their systems and equipment. Removing the foam, which is caused by algal blooms, increases costs materially.
Red tides also raise complex legal issues, most of which hinge on the question of causation. Of particular concern to businesses is whether legal rights exist for those parties facing adverse economic effects. The answer to this question relies on whether red tides are caused by the activities of any particular person or legal entity. If so, it must be determined whether such entity has breached a duty to refrain from such activity or applicable environmental laws.
While red tides are widely considered to be natural phenomenon, many scientists believe the frequency and severity of red tides are influenced by human activities, including pollution and the dumping of raw sewage, that raise nutrient levels in the waters. If direct causation, for example by the unlawful dumping of raw sewage, can be determined, liability for damage caused by red tides could possibly be found against the violator.
Assuming the red tide is caused by pollution, Oman has environmental laws in place that would hold the polluter liable. Specifically, the Environmental Law, provided in Royal Decree 114 of 2001, provides criminal penalties for introducing harmful pollutants into the natural environment of Oman. If the pollution involves the discharge of a pollutant into wadis, sewage systems, catchments feeding the underground water or rain water disposal networks, or falajs and their channels, the penalties are more severe.
In addition to fines and imprisonment, polluters are also required, at their own expense, to repair the damage to the environment by restoring it to the previous state. If the red tide in Oman is caused by a polluter, the clean up and compensatory costs could be enormous.
Currently, however, it is not clear what causes the red tide and there is no hard evidence that it is caused by polluters in Oman. Therefore, perhaps more important than liability is the matter of mitigation and prevention. In Oman, this responsibility is imposed on the Ministry of Environment and Climate Affairs (MECA). MECA has set up a warning system involving the placement of buoys outfitted with sensors for continuous measuring of over 13 determinants of water quality.
Wednesday, April 29, 2009
Doing business in Oman: Alternative Energy
A study on renewable energy sources commissioned by the Authority for Electricity Regulation (AER) has found that the level of solar energy density spread throughout Oman is among the highest in the world, capable of generating more than enough electricity to meet domestic requirements and allowing for the export of any surplus. It also identified wind energy potential in coastal and mountainous areas of Salalah comparable to inland Europe where large numbers of wind turbines are operational.
The study has recommended the creation of a national authority to administer clean development mechanisms to assist renewable energy investment and policies. The international consultant conducting the study also assessed the potential of biogas, geothermal and wave energy.
Many private sector entities have shown interest in supporting solar and wind energy initiatives. Rural Areas Electricity Company SAOC, responsible for power generation and distribution in remote parts of Oman and the largest consumer of diesel in Oman, will identify locations for solar/wind energy pilot projects possibly as hybrid systems. Solar power, because it is an intermittent energy source, requires a backup supply, which can partially be complemented with wind power. Oman Power and Water Procurement Company SAOC will also conduct competitions for large-scale renewable energy projects.
The price of electricity generated using domestically produced gas is highly subsidized. Despite technological advancement and increased efficiency, renewable energy generation continues to be highly capital-intensive. Consequently, private sector initiatives will also need government support in terms of subsidizing the electricity price for domestic consumption; land concessions for installation and operation of generation plants; and tax and customs exemptions. Given the long-term benefits of using renewable energy and the dire need to reduce the reliance on depleting hydrocarbon resources, going solar may prove to be the most cost effective solution for averting an energy crisis and for reducing Oman’s carbon footprint.
