Mon | Sep 25, 2017

Evan Duggan & Din Duggan | Regulation: The Electricity Sector - the future has arrived

Published:Wednesday | October 26, 2016 | 10:00 AM

In recent times, an old military term - VUCA - has made its way into the business world's vernacular. Its applicability to the electricity industry is particularly relevant, considering the volatility, uncertainty, complexity and ambiguity associated with the sector.

Regulators often juxtapose the stunning pace of development in the telecoms sector against the sluggish technological progress in the electricity sector. If Alexander Graham Bell - the inventor of the telephone - were revived and transported through time to the present, he would likely not recognise the technology he created. The 'phone' is no longer a chunky, two-piece, wired device used solely for voice communication. The smartphone, which represents the pinnacle of development in telecoms, is now a small, wireless, handheld gadget, which, in addition to voice communication, enables the user to take pictures, watch movies, send text messages, catch a ride, order cheap Chinese food, and craft spectacularly written newspaper articles. Contrarily, Thomas Edison and George Westinghouse - the pioneers of the electricity industry - would be quite comfortable with what they see today, since the basic model they fashioned at the end of the 19th century remains mostly intact. Since what seems like the Fred Flinstone era, fossil fuel has been converted into energy at power stations, transmitted at high voltages over long distances to substations, then broken down to lower voltages for the ultimate enjoyment of consumers. Despite the dominance of this archaic model, the rumble of change is unmistakable. Indeed, the transformation has already begun and a new electricity industry is poised to emerge.

Electricity prices in small island developing states

With visionary policies and proactive regulation much of the emergent technologies impacting the electricity sector could yield considerable benefits to small island developing states in the Caribbean. Small island developing states that are net fuel importers inevitably face high electricity rates. This challenge is predominantly a result of geography and demography. Caribbean islands cannot capture the benefit of economies of scale in electricity generation and distribution as a result of their relatively diminutive sizes and populations. Being islands, by nature, they are unable to interconnect with the electricity networks in adjacent countries to take advantage of reduced prices. This inability to interconnect to neighbouring electricity grids necessitates expensive investments in generation plants to ensure (or at least attempt) service reliability.

Remoteness and diminutiveness also negatively impact the transportation costs of key energy inputs. For instance, in pursuit of fuel diversity and lower input costs, the Jamaica Public Service, with the backing of its primary regulator, embarked on a project to substitute natural gas for diesel fuel on its 120MW combined cycle plant in Montego Bay. Interestingly and unavoidably, the infrastructural and transportation costs involved will constitute roughly 70 per cent of overall fuel costs at the plant. Amazingly, getting gas to the plant is much more expensive than the actual gas used by the plant.

The region's vulnerability to natural disasters is another major factor keeping Caribbean electricity prices elevated. Most, if not all, electric utilities operate without conventional insurance coverage on their transmission and distribution lines. Because of the risks associated with potential hurricane damage to lines in the region, insurers - some of whom have been known to insure assets as vulnerable as Don King's hair - are scared away. Consequently, the cost of occasionally rebuilding significant portions of the electricity network drives up electricity prices.

Smallness, insularity, remoteness and vulnerability to natural catastrophes lead to incredibly high electricity prices in the region. Even larger English-speaking Caribbean islands, like Jamaica, whose rates are comparatively lower than smaller islands, aren't immune to this phenomenon. At 24.7 US c/kWh the average electricity price in Jamaica in 2015 was more than twice as expensive as Florida's 10.11 USc/kWh (see Figure).

Renewable energy sources

A slew of emerging technologies offer hope to Caribbean islands burdened by high electricity prices. Three in particular stand out as most promising - (1) advances in renewable energy sources; (2) developments in the smart grid; and (3) innovations in energy storage.

The global drive to reduce carbon emissions has sparked the search for power generation solutions harnessed from renewable resources. In recent times, solar photovoltaic technologies and wind have offered great promise as sustainable renewable energy options. This is particularly interesting to Caribbean nations given our abundance of sunshine and breeze.

In 1980, solar energy cost US$30 per Watt. Today, that cost is about US$0.50 per Watt. In 1980, wind energy cost US$0.55 per kWh. Now, depending on turbine site conditions, it may be as low as US$0.05 per kWh. Perhaps nothing more clearly underscores the increasing competitiveness of renewables than the example of Jamaica's last fossil fuel plant - built in 2012 - winning the bid to sell power to the grid at 18 US c/kWh. In comparison, a contemporaneously planned renewable energy plant was selected to supply 33MW of power to the grid at 8.5 US c/kWh.

Reduced cost and price stability have made wind and solar sources very attractive in the Caribbean electricity equation. These resources are also conducive to household-level generation. As a result, a revolution in the business model is under way. Customers are no longer forced to be passive consumers of utility-supplied electricity. They are proudly acquiring the status of 'prosumers' - consumers who 'produce' their own electricity, sell the excess to the grid, and leverage the grid to fill any shortfall as needed.

Smart grid

One of the main drawbacks of wind and solar power is their unpredictability - it's impossible to know precisely when the wind will blow or the sun will shine. These renewable energy sources generate energy intermittently. This is problematic since without perfectly aligned energy supply and demand, power disruptions are bound to occur. Consequently, sophisticated and interactive information, communication and control technologies must be placed on the grid. These controls are collectively referred to as smart grid. While renewable sources tend to drive power generation costs down, they similarly increase network costs. Implementation expenses notwithstanding, smart grid and renewable deployment holds tremendous potential to improve energy reliability, efficiency and sustainability in a way that should result in substantial reduction in Caribbean electricity prices.

Electrical energy storage

Smart grids will certainly make electricity networks more efficient, responsive and stable but they are by no means a panacea. As things stand today, an electricity grid that meets minimum reliability standards cannot be 100 per cent (or even 60 per cent) powered by renewables. Efficient and affordable storage of electrical energy represents the most critical ingredient to a genuine low-carbon industry. Recognising this, the industry is pouring considerable resources and efforts into advancing mechanical, electromechanical, thermochemical and other advanced storage methods.

The World Energy Council, in its World Energy Resources Report of 2016, demonstrated tremendous optimism about the prospects for these storage technologies. The organisation - a UN-accredited global energy body with over 3,000 member-organisations in more than 90 countries, representing the entire energy spectrum - predicts that competing storage technologies will lead to storage costs plummeting as much as 70 per cent over the next 15 years.

In addition to renewable energy, smart grid, and electrical energy storage, several other exciting and noteworthy technologies are being developed that could change the face of the industry forever. These include the rise of electric cars led by Tesla Motors and others, as well as endeavours such as AT&T Labs' multi-gigabit project aimed at leveraging electrical power lines to deliver Internet service. These developments promise to blur the line between auto industry and electric utility as well as spark unprecedented convergence among the telecom and electricity industries.

The future

Grid volatility, planning uncertainties, industry complexity and regulatory ambiguities sparked at least in part by the aforementioned technologies have disrupted demand for electricity across the globe. Some utilities have embraced and responded admirably to innovation's call. They are preparing to power electric cars and bidding on renewable energy projects far away from their home shores. Others - particularly right here in the Caribbean - have become introverted, doubling down on their ancient, Flinstonian philosophies - embedding revenue guarantees, establishing profit bands and retreating from a full commitment to system lossreduction. But whether these utilities embrace change or remain recalcitrant, the market is evolving and a new orientation based on alertness and agility will ultimately prevail. Admittedly, with such rapid change comes tremendous uncertainty for regulators and policymakers alike. Complexities notwithstanding, let it not be said, tomorrow, that the Caribbean electricity industry failed to seize the moment and were left fearfully clutching the past. It is now clear that a bold new future has already arrived.

• Evan Duggan, PhD, is visiting professor, University of Alabama at Birmingham and former professor of MIS and dean, Faculty of Social Sciences, UWI Mona; and

• Din Duggan, Esq, is managing director of a global legal services firm, publisher of Who's Who in Jamaica Business and former Gleaner columnist.