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.
