Gulf states plan to phase out electricity at lower cost to their citizens

Oman’s residential electricity costs have not increased between 1987 and 2020, despite inflation of around 80% over the same period. But the era of Qaboos bin Said Al Said is over and the new leader, Sultan Haitham, is committed to cleaning up public finances.

Fiscal austerity may affect electricity prices, but not yet. The sharp rise in oil prices has bought Oman valuable time. The previous decision to phase out residential electricity subsidies by 2025 has been postponed and they are now expected to last for ten years.

Although unsubsidized electricity is a matter of the future, the new tariffs give a clear indication of Oman’s long-term strategy. Citizens no longer benefit from lower prices than migrant workers; the two segments were unified with a starting price of 14 baisa per kilowatt-hour ($0.036). Also, the Public Services Regulatory Authority reserves the right to increase prices up to 2 baisa per year, i.e. a maximum increase of 14% in 2023.

“We will not see zero subsidies; that would be unreasonable,” said economist Adham Al Said, assistant professor at the College of Economics at Sultan Qaboos University. He told Al-Monitor that the era of blind subsidies had given way to targeted support to households in dire need. The national subsidy system, launched in 2018, provides additional energy subsidies to 83,000 eligible Omani families based on their income. In an interview with Al-Monitor Chairman Andrew Parasiliti last month, Oman’s Foreign Minister Sayyid Badr Albusaidi reaffirmed the country’s goal of providing an “adequate social safety net “.

Inexpensive replacement benefits

However, rising energy prices touch on the “social contract” in a region where hereditary rulers derive some of their political legitimacy from the redistribution of oil and gas revenues in the form of subsidies and jobs in the sector. public.

“Residential electricity tariffs for citizens are the hardest subsidy to pull off because you’re playing with people’s rights, or what they perceive to be their rights in their homes,” said policy expert Jim Krane. Energy at Rice University’s Baker Institute. He told Al-Monitor that citizens of the Gulf states “reluctantly accept” the idea that below-cost electricity is “harmful to the national interest” because it cannibalizes exports.

As in Oman, the gradual reform of energy subsidies is, for most Gulf states, part of a broader drive to end the subsidized way of life for all. In 2011, Dubai, one of the seven emirates of the United Arab Emirates, became the biggest mover, raising residential electricity prices by 15%. Seven years later, Saudi Arabia raised electricity tariffs for the lowest band by 260% following the introduction of the Citizen Account Scheme, which provides social protection for Saudis.

To make the pill easier to swallow, Saudi citizens also got “low-cost replacement benefits”, Krane said. “Great increases in social freedom have come alongside those benefits that have been taken away.”

Demographics set the long-term agenda

But demographics set the agenda in Saudi Arabia, the most populous country in the Gulf Cooperation Council. Saudi women give birth to 2.33 children on average, above the global replacement fertility rate.

A growing population would help Gulf States become less dependent on foreign labor, thereby limiting economic leakage. However, this also limits the subsidies available per capita, as government revenues, strongly correlated to oil revenues, stagnate. Saudi Arabia forecasts its revenue for 2022 at SAR 1.045 billion, down from SAR 1.239 billion ten years earlier.

In this context, subsidizing energy could become a heavy burden on public finances. In 2021, Oman spent OMR 550 million ($1.4 billion) on electricity subsidies, equivalent to 45% of that year’s budget deficit.

Soaring electricity consumption per capita – 59% between 1990 and 2019 in the United Arab Emirates – amplifies the challenge of population growth. The growing adoption of electric vehicles and the digitization of economies herald a further push. The International Energy Agency estimates that electricity will account for 50% of global energy consumption by 2050, up from 20% in 2020.

At the network level, utilities are looking to improve their efficiency. The Dubai Electricity & Water Authority claims to have “reduced losses in the electricity transmission and distribution networks to 3.3%, compared to 6 to 7% in Europe and the United States”. However, the opportunity to rationalize investment expenditure and reduce production costs by pooling capacities at the regional level remains ignored.

The environmental impact of electricity at a lower cost

For families who depend on air conditioning during extreme summer temperatures, the prospect of gradually increasing rates is concerning. However, the populations of the Gulf, which have some of the highest per capita energy consumption in the world, can act.

For example, rooftop solar systems, currently almost non-existent, could offer some protection against price increases. Additionally, many homes lack insulation, high-quality windows, and efficient appliances. “Energy was so cheap that it didn’t make sense to install a high-efficiency fridge, dishwasher or air conditioning,” Krane said.

The subsidies have also removed much of the incentive for the Gulf population to save for ecological reasons. To date, none of the six GCC states takes into account the negative externality of electricity generation, unlike the European Union, where big polluters, such as energy producers, have to buy credits to cover their CO2 emissions, which ultimately passes on to customers the climate cost of one kilowatt. Saudi Arabia plans to launch the Middle East’s first carbon trading platform.

The Gulf region has clung to fossil fuel power plants to provide electricity despite abundant cheap solar resources. In 2019, oil-fired power plants produced 43% of Saudi Arabia’s electricity, and electricity and heat producers accounted for around half of the kingdom’s CO2 emissions.

Renewables are very expensive right now.

However, time is running out for electricity generation from fossil fuels. Saudi Arabia has announced plans to increase the share of renewables in power generation to meet its net zero goal. The same goes for the United Arab Emirates, where natural gas overwhelmingly dominates the energy mix despite hosting some of the largest solar farms in the world.

According to Krane, the energy expert, net zero targets provide “more political cover for more subsidy reforms”. However, citizens can expect affordable electricity in the long run as sun-rich Gulf states deploy grid-scale solar farms. In fact, Saudi Arabia and the United Arab Emirates have set successive records for the world’s lowest price for solar electricity.

It may take patience, however, Adham Al Said warned. The Economist said: “People don’t understand that even renewables currently cost a lot of money to invest in.” On January 24, Oman connected its largest large-scale renewable energy project to the grid. The 500-megawatt Ibri 2 solar park cost $417 million, and the country would need five times as much solar and wind capacity to meet its goal of 20% renewables in its energy mix by 2030.

Al Said added: “Renewable energy could prove powerful enough to reduce costs in the long term, but the significant change for individuals will not be felt immediately.”