Fri | Dec 9, 2016

Understanding the cost of energy in Jamaica – Part 1: ‘The time to act is now’

Published:Sunday | April 26, 2015 | 12:00 AMDan Theoc
A JPS substation at Duhaney Park, St Andrew.

The electricity sector in Jamaica is at a critical juncture. When we consider the fact that the average cost of electricity now stands at US25c per kilowatt hour (kWh) for residential customers, what you are paying now is 35 per cent less than what you were paying one year ago.

This is primarily the result of average oil prices of US$55 per barrel in March 2015. The fuel tariff now makes up approximately 50 per cent of the total bill, compared to a year ago when it made up 65 per cent of the total cost.

In essence, this means that for every $100 paid to the Jamaica Public Service Company (JPS) as a customer, $50 is paid directly over by the JPS to its fuel supplier.

Lowering the cost of electricity is one of the key strategic imperatives of JPS. We strongly believe that as a country, we need to focus on: lower energy prices for everyone; looking holistically at the entire system; and having the right resources in the right place.

In this regard, we should appreciate some general challenges, which include:

1. Dealing with the high cost of energy (fuel);

2. Finding the lowest cost of energy for the next round of generation; and

3. Dealing with our transmission and distribution (T&D) challenges.

The cost of electricity (COE) is made up primarily of the annualised generation, transmission and distribution (T&D) costs on one hand; and, the cost of the fuel used in the generation plant.

To help keep the COE down, we generally amortise the capital costs associated with the generation and T&D assets over very long periods, typically 20 years. This is very important, given that the electricity sector is highly capital intensive.


Capital intensive sector


To appreciate how capital intensive the utility sector is, consider that the replacement cost for the existing T&D network is approximately US$1 billion, and it takes approximately US$50 million in routine capital expenditure annually to maintain this network.

In terms of operating costs, fuel represents the largest single cost, as evidenced by a fuel rate of US12.75c per kWh (of the total COE of US25c in April).

In general terms, the generation cost accounts for an additional US6c, and the T&D cost the remaining US6c. In this way, one can appreciate that the generation cost (including fuel) accounts for 75 per cent of the COE, while the T&D accounts for the remaining 25 per cent.

Also, consider that while there is approximately 800 megawatts (MWs) of base-load generation plant available in Jamaica, replacing the next round of generation (190 MWs), and bringing natural gas will require approximately US$500 million in investment. This is a significant investment considering the annual amount of foreign direct investment which Jamaica typically attracts.


Fuel diversity key to lower generation costs


We are now confident that the next round of generation will result in generation costs (including fuel) in the range of US13c, which will be a remarkable improvement from where we are today.

This is aided primarily by the expected 40 per cent improvement in fuel efficiency of the new generation plant, compared to the plant to be retired. It's also important to appreciate that this will be firm (or base-load) capacity, which the country desperately needs to ensure the stability of the national electricity grid and to accommodate the approximately 150 MWs of renewable intermittent generation resources that will be on the grid by 2016.

So, our first goal in attacking high energy prices starts with fuel diversity since we don't expect oil prices to remain at US$55 per barrel over the long-run. It's never been a desired position to have 95 per cent of our generation plants fired by oil, although this is a typical challenge for most of the Caribbean region.

The fuel of choice for the next round of generation will be natural gas. This is one of the best options for the country considering the relatively small size of the generation plants required for Jamaica.

If we can find other sources of fuel for future generation projects, which achieve a lower generation cost while also helping to diversify our fuel sources, then those will certainly be embraced at that time. However, the time to act is now - Jamaica has been pursuing natural gas and new efficient generation for the past seven years.

(Part 2 of this article will be published next Sunday, May 3, 2015)

- Dan Theoc is the chief financial officer at the JPS.