Electricity Sector Reform in Abu Dhabi

348 Pages·2012·3.26 MB·English

THE UNIVERSITY OF HULL

Electricity service utilities in the GCC:
Steps towards a common regulatory reform

Being a thesis submitted for the Degree of Doctor of Philosophy in
Economics in the University of Hull

By

Ali Masoud Ali Al-Sunaidy
B.Sc. Engineering, the University of Miami, USA.
M. B. A, the University of Bristol, UK.

November 2011
Abstract
The member states of the Gulf Cooperation Council (GCC), namely; the Kingdom of
Bahrain, the State of Kuwait, the Sultanate of Oman, the State of Qatar, the Kingdom of
Saudi Arabia and the United Arab Emirates (UAE) have been moving towards more
economic integration while taking practical steps in the direction of market opening and
liberalisation. Over the past ten years, the GCC has evolved into a more integrated economic
zone with agreed common policies that are coordinated through its Secretariat. With respect
to service utilities, the GCC Interconnection Grid – nearing completion in 2011 – is
considered a milestone in the direction of integrating GCC electricity markets.

The objective of this research is to suggest a GCC-wide policy to support reform of GCC
electricity markets. The suggested policy would include new market structure(s) as well as
institutional changes supported - when required - by sector specific laws and regulations.
Further to the study’s academic contributions, the research is primarily intended to advance
the further development of the economies of GCC member states. The study presents a model
that we believe could contribute to expediting the process of developing the GCC zone as a
common market by advising policy makers on the applicable elements of GCC electricity
market structure, governance and performance.

This study provides a comprehensive review of the theoretical aspects of electricity sector
restructuring and examines different options for reform and restructuring based on worldwide
experiences. The study adopts a case study research method to analyse the GCC situation in
order to arrive at the recommended policy or ‘model’. The research specifically emphasises
reforms that have already taken place in the Sultanate of Oman – for which an empirical
social cost benefit analysis is carried out - and the Emirate of Abu Dhabi (UAE). Oman and
Abu Dhabi are believed to be at more advanced stages of electricity market reform compared
to other countries within the region.

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The study concludes that while some GCC member states have already taken the initial steps
to restructure their respective electricity markets, other members are expected to follow. The
study recommends a set of common steps or ‘rules’ that are presented in the form of a
‘model’ for restructuring GCC electricity markets. The proposed model for reform takes into
consideration the nature of member states’ economies as well as the restrictions imposed by
market size limitations and some other considerations that are a feature of prevailing policies
in the region - such as commitments to subsidise consumer electricity tariffs. Since not all
GCC member states are on an equal footing in terms of economy-size and preparation for
structural reform, the suggested model allows for a transition mechanism. The study
recommends that the electricity markets are unbundled before embarking on any further
privatisation programmes. Further measures of wholesale competition may be then
introduced allowing for a mix of both private and state-ownership through the use of a single-
buyer model. Subsequently, activities that have natural monopoly characteristics such as
transmission and distribution are to be separated and subject to incentive based regulation.

The study recommends that the role of the GCC Interconnection Authority be restricted to
transmission and system operations only and that each member state should have its own
independent regulator. The study suggests that the GCC Secretariat play a co-ordination role
between the different regulators while a separate power-exchange instrument be introduced to
facilitate cross-border electricity trading between GCC member states.

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Dedication

To His Majesty Sultan Qaboos bin Said, the Sultan of Oman
A great leader for a deserving nation
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Acknowledgement
I am most grateful to my supervisor Professor Richard Green for his most valuable advice
and guidance throughout the various stages of my study. I can not thank him enough for
being such a wise mentor and true friend.

I would also like to express my gratitude to my second supervisor, Dr. Steve Trotter, whose
contributions and remarks were of great value especially in the last stages of finalising this
thesis.

I should also like to thank Michael Kuczynski and Dr. Geoffrey Edwards of Pembroke
College, the University of Cambridge for their kind assistance. Thanks are also due to John
Cunneen, Executive Director and Member of the Omani Authority for Electricity Regulation
for his most valuable contribution and assistance – especially at times when information was
limited.

I also owe many thanks to the scholars, staff and friends that I have interacted with during my
different stays at the University of Hull, Pembroke College of the University of Cambridge
and the Department of Economics at the University of Birmingham.

I can not thank enough my mother, wife and children – no mater how hard I try - for their
support and encouragement throughout the entire journey.

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Table of Contents
Abstract .......................................................................................................................... i
Dedication .................................................................................................................... iii
Acknowledgement ....................................................................................................... iv
Table of Contents .......................................................................................................... v
List of Figures ............................................................................................................ viii
List of Boxes .............................................................................................................. viii
List of Tables ............................................................................................................. viii
List of Acronyms .......................................................................................................... x
Chapter 1 Introduction .................................................................................................. 1
1.1 Introduction ....................................................................................................1
1.2 Research Problem ..........................................................................................4
1.3 Significance of the Study ...............................................................................6
1.4 Research Objective ........................................................................................7
1.5 Research Methodology ..................................................................................7
1.5.1 Research Approach: Using the Case Study Research Method ..................8
1.5.2 Research Questions ..................................................................................10
1.5.3 Research Instrument.................................................................................11
1.6 Limitations ...................................................................................................12
1.7 Organization of the Thesis ...........................................................................14
Chapter 2 A Review of Conceptual Literature ........................................................... 16
2.1 Introduction ..................................................................................................16
2.2 Economic Considerations ............................................................................16
2.2.1 Perfect Competition and Social Welfare..................................................17
2.2.2 The Use of Marginal Cost Pricing ...........................................................18
2.2.3 Analysing Market Behaviour ...................................................................19
2.3 Electricity Markets: Options for Power Sector Reforms .............................24
2.3.1 Electricity Supply Chain Functions .........................................................27
2.3.2 Electricity Market Structure Options .......................................................29
2.3.3 A “Textbook Model” for Restructuring and Competition .......................33
2.4 Regulating Electricity Functions.................................................................35
2.4.1 Regulation, Deregulation and Liberalisation ...........................................36
2.4.2 Regulating the Wires................................................................................44
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2.4.3 Unbundling the Vertically Integrated Utility ...........................................49
2.4.4 Regulatory Authorities .............................................................................53
2.5 Private Ownership and Reform ....................................................................55
2.6 Conclusions ..................................................................................................60
Chapter 3 A Review of Worldwide Experiences ........................................................ 61
3.1 Introduction ..................................................................................................61
3.2 Reforms of England and Wales ...................................................................62
3.3 Reforms of the Nordic Market (Nord Pool) .................................................70
3.4 The Experience of the European Union (EU) ..............................................76
3.5 The Experience of the United States ............................................................82
3.6 Experiences from Developing Countries .....................................................87
3.7 Conclusions ..................................................................................................98
Chapter 4 A Review of the GCC ................................................................................ 99
4.1 Introduction ..................................................................................................99
4.2 An Overview of the GCC as a Region .........................................................99
4.2.1 Institutional Framework .........................................................................100
4.2.2 Economic Indicators and Comparisons .................................................102
4.3 GCC Electricity Markets............................................................................105
4.4 Framework for GCC Economic Integration ..............................................118
4.5 Conclusions ................................................................................................124
Chapter 5 Case Study I – Electricity Sector Reform in Abu Dhabi.......................... 126
5.1 Introduction ................................................................................................126
5.2 Background and Electricity Market Characteristics ..................................126
5.3 Abu Dhabi Electricity Sector Law (Law No (2) of 1998) .........................129
5.3.1 Unbundling and the New Market Structure ...........................................132
5.3.2 Regulation and Competition in Generation ...........................................139
5.3.3 Post Reform Developments ...................................................................140
5.4 Key Observations .......................................................................................141
5.5 Conclusions ................................................................................................142
Chapter 6 Case Study II: Electricity Sector Reform in Oman .................................. 143
6.1 Introduction ................................................................................................143
6.2 Background and Electricity Market Characteristics ..................................143
6.3 Oman Electricity Sector Law (Royal Decree 78/2004) .............................147
6.3.1 The New Market Structure.....................................................................151
6.3.2 Regulation and Competition in Generation ...........................................160
6.4 Conclusions ................................................................................................163
Chapter 7 Social Cost-Benefit Analysis of Omani Reforms .................................... 164
7.1 Introduction ................................................................................................164
7.2 Methodology ..............................................................................................165
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7.3 Analysis......................................................................................................171
7.3.1 Effects on Consumer Welfare (∆S): ......................................................172
7.3.2 Effects on Private Omani Investors (∆P): ..............................................176
7.3.3 Effects on Government Welfare (∆G): ..................................................179
7.3.4 Effects on Labour (∆L): .........................................................................193
7.3.5 Costs Associated with Regulation and Corporatisation (∆R&C): .........197
7.4 Results ........................................................................................................199
7.5 Sensitivity Analysis ...................................................................................200
7.6 Conclusions ................................................................................................202
Chapter 8 Findings and Implications ........................................................................ 203
8.1 Introduction ................................................................................................203
8.2 Survey Review of GCC Electricity Markets ..............................................203
8.3 Textbook Model - Restated ........................................................................211
8.4 Choices for Reform (GCC Related Implications) ......................................219
8.5 Implications at the GCC-level ...................................................................225
8.6 Conclusions ................................................................................................226
Chapter 9 Conclusions and Recommendations ......................................................... 227
9.1 Introduction ................................................................................................227
9.2 Conclusions ................................................................................................228
9.3 Recommendations ......................................................................................229
9.3.1 Recommendation 1: Single Buyer Market Structure .............................229
9.3.2 Recommendation 2: Regulation .............................................................233
9.3.3 Recommendation 3: Transitional Measures...........................................235
9.3.4 Recommendation 4: Institutional & Administrative Arrangements ......236
9.4 Concluding Remarks ..................................................................................239
Bibliography ............................................................................................................. 240
Appendices ................................................................................................................ 284

Appendix 1 Key findings of meetings & Communications
Appendix 2 Key Provisions of the Omani Law
Appendix 3 Key Provisions of the Abu Dhabi Law
Appendix 4 Oman SCBA Sensitivity Tables
Appendix 5 GCC Questionnaire

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List of Figures
Figure 1 Case Study Approach (Using the Textbook Model) ............................................. 10
Figure 2 Vertically Integrated Monopoly ........................................................................... 29
Figure 3 Single-buyer Model ............................................................................................. 30
Figure 4 Wholesale Competition ........................................................................................ 31
Figure 5 Retail Competition ............................................................................................... 32
Figure 6 Desirable and Feasible Competition .................................................................... 38
Figure 7 Price Regulation ................................................................................................... 47
Figure 8 Map of the GCC ................................................................................................... 99
Figure 9 Energy Consumption by Category (2005) ......................................................... 106
Figure 10 Electricity Generation by Fuel Type (2005) ...................................................... 107
Figure 11 GCC Interconnection Grid ................................................................................. 117
Figure 12 Abu Dhabi Cumulative Generating Capacity & Production (1998-2010) ......... 127
Figure 13 Abu Dhabi Monthly Gross Energy Demand (2006-2010) ................................. 128
Figure 14 Unbundling of the Abu Dhabi Electricity Market ............................................. 133
Figure 15 Abu Dhabi Electricity Capacity Market ............................................................ 134
Figure 16 Oman Electricity Supply by Customer Category (2010) ................................... 144
Figure 17 Monthly MIS Electricity Generation (2009-2010) ............................................ 144
Figure 18 Unbundling of the Omani Electricity Sector ..................................................... 151
Figure 19 Subsidy Comparisons Between Systems (2010)................................................ 159
Figure 20 Example Calculations of Consumer Surplus ..................................................... 173
Figure 21 MIS Procurement Costs: counterfactual and actual ........................................... 186
Figure 22 Differences in Actual & Counterfactual MIS Subsidy ...................................... 191
Figure 23 Recommended GCC Electricity Market Structure ............................................ 230

List of Boxes
Box 1 Basic design questions for regulation ...................................................................... 35

List of Tables
Table 1 Pool Spot-price Calculations.................................................................................... 65
Table 2 Comparison of Economic Indicators Across GCC Countries (2009) .................... 102
Table 3 GCC Crude Oil Production and Reserves (Million Barrels) ................................. 103
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Table 4 GCC Natural Gas Production and Reserves (Million Cubic Meters) .................... 103
Table 5 Specific Characteristics Among GCC Countries ................................................... 104
Table 6 Expected Future Contributors to the Economies of the GCC ................................ 105
Table 7 GCCIA Interconnection Criteria and Share-capital ............................................... 116
Table 8 Phases of Economic Integration and Conditions ................................................... 122
Table 9 Net Electricity Generation (2009 & 2010) ............................................................. 153
Table 10 Dividends to Omani Private Investors ............................................................... 178
Table 11 Change in Tax paid by Government Owned and Private Sector Companies .... 181
Table 12 Change in Dividends to Government from Government Owned Companies ... 183
Table 13 MIS Procurement Cost Efficiency Benefits ....................................................... 188
Table 14 Estimates of Savings in Technical & Non-technical Losses (MIS) ................... 190
Table 15 Calculation of Difference in MIS Subsidy......................................................... 192
Table 16 Change in Labour Welfare Calculations ............................................................ 196
Table 17 Regulation and Corporatisation Costs ............................................................... 198
Table 18 SCBA Results .................................................................................................... 199
Table 19 SCBA Sensitivity Analysis ................................................................................ 200
Table 20 GCC Electricity Market Structures – Functional Separation ............................. 204
Table 21 GCC Electricity Market Structures – Corporatisation ....................................... 205
Table 22 GCC Electricity Market Structures – Public & Private Ownership ................... 206
Table 23 GCC Electricity Market Structures – Regulation .............................................. 208
Table 24 GCC Electricity Market Structures – Member State Interconnections .............. 209
Table 25 Future Policy and Trends ................................................................................... 210
Table 26 Multiple Criteria Decision Analysis for GCC Options ...................................... 224
Table 27 Application of the Textbook Model to the GCC ............................................... 228

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