Thu | Aug 16, 2018

Payback critical to gas conversion - JEP

Published:Wednesday | October 1, 2014 | 12:00 AM
Contributed - The two 124MW diesel-powered barges operated by Jamaica Energy Partners are seen on the coastline in Kingston.

Avia Collinder, Business Reporter

Jamaica Energy Partners has decided to convert its diesel-fired generators to gas, but is yet to pick the fuel type.

JEP chief executive Wayne McKenzie said the company is now trying to determine what it will cost to convert its 124 Megwatt plants, but that once decided, it should take 9-18 months to do the retrofittings.

The conversion can be done "on a modular basis" ensuring "minimal dislocation of service", he said. The Electricity Sector Enterprise Team expects JEP's conversion to be complete by 2018.

Other energy providers are also weighing gas-fired plants, with various proposals including propane, ethane and natural gas. McKenzie said that while a decision on the type of gas was pending, the more critical issue for JEP now was financing and how the capital expenditure would be recovered.

"We would need to secure financing and negotiate recovery of capital. As soon as that is in place, the conversion will begin", he told Wednesday Business.

JEP is open to loans from "multilaterals with a blend of local participation," he adds. Earlier this year, the owners of JEP, through CACAO JEP Limited, raised US$60 million from a private placement to pay down debt and provide working capital for the Jamaican operation, but its unclear whether any of those funds are destined for the conversion project.

The decision to convert its 124MW of capacity resulted from the assessed economies of scale.

"With both JEP and West Kingston Power Partners' (WKPP's) readiness for conversion, the economies of scale to bring gas at a cheaper price to the island make it the best solution on an aggregated basis, that is, conversion of Bogue, WKPP, JEP; and the new capacity makes the aggregate demand just right for the transportation of gas," McKenzie commented.

"Cheaper gas would mean further reduction in price for the rate payers," he said.

Jamaica Energy Partners and its sister company, West Kingston Power Partners, both owned by Conduit Capital, have a combined capacity of 190 megawatts of power, with primary income earned from the Jamaica Public Service Company (JPS).

Conduit Capital directly owns 99 per cent of JEP, while the other one per cent is owned by affiliate Barge Energy II LLC, a Cayman Islands-registered company. Conduit also owns 99 per cent of WKPP, with the other one per cent held by affiliate Big Bird Limited, which is also registered in Cayman Islands.

McKenzie declined to say what gas source JEP currently favours, but noted that the method of transporting the gas to its plant and demand volume would be critical considerations in finalising the fuel type.

The JEP boss said while WKPP is configured for liquefied natural gas, both entities together would only consume 200 metric tonnes of natural gas, but in order to be viable, demand has to hit 500 metric tonnes. It means other players in the market would also have to convert for natural gas to be economical for JEP and WKPP, he said.

"The issue is to get the gas here and to ensure that the solution chosen is secured, meaning there is plenty of the gas, more than one supplier; and transportation and storage should not create any eventualities," said McKenzie.

But "at the end of the day, natural gas is what is required and what will be received ... . Now we do have the demand generation, so gas option is no longer a pipe dream. The method of transportation and whether it is compressed or liquefied are issues for the infrastructure facilities."

Open to loans

Until those issues are resolved, JEP, like other providers, is weighing ethane and propane as alternatives, he said.

In relation to financing the changeover, McKenzie said that the "normal debt and equity lines available to the company will be used" noting that the company was also open to loans from "multilaterals with a blend of local participation."

McKenzie expressed optimism that the conversion "will not in any way alter the contractual obligations with JPS, but rather, in my opinion, make JPS a more viable entity, as any reduction in electricity cost ought to result in less non-technical losses on the system as more people should want to pay their bills.

" We are only changing the fuel type, not altering our commitment in dispensation of electricity to the grid, which is really the bane of our contract," he stated.

He said there is expected to be no change in the earnings "as the efficiencies derived from the conversion are likely to be passed on to the consumer through an improved tariff. If anything, the cost of fuel should decrease, and thus operating costs would decrease."

In 2013, revenues for JEP and WKPP increased by 20 per cent to US$242.7 million from US$202.9 million in 2012. Net income increased by 22 per cent to US$14.3 million from US$11.8 million, mainly due to WKPP's partial year of operation in 2012 when it was commissioned, and a reduction in finance charges from US$5.5 million in 2012 to US$5.3 million in 2013.

The conversion to gas, which is a cheaper fuel source, is expected to lead to negotiations on rates paid to the independent power provider.

The final savings to consumers "is dependent on the tariff structure arrived at after the negotiations", said McKenzie.

"Remember, fuel is a pass-through, and as such, our anxiety to convert is simply our intention to make use of that most important fact - a lower cost for the rate payer. Any decision to reduce that cost must be seriously and vigorously applied since fuel represents up to 80 per cent of the cost to generate," he said.