Wigton Windfarm and the viability of wind energy
This is the first instalment of a two-part series. See Part Two next Sunday.
William Saunders, Guest Columnist
Wigton Windfarm was the brainchild of Dr Raymond Wright, then group managing director of Petroleum Corporation of Jamaica (PCJ). The idea germinated from the vision of Dr Anthony Chen who pioneered electric power from wind-energy research in Jamaica. Working with the Division of Energy in the then Ministry of Mining, Dr Chen initiated a wind-mapping programme in 1978, from which was spawned Jamaica's first grid-connected wind-powered generator, installed at Munro College in February 1996.
Interestingly, this 225kW generator was also the first grid-connected wind-energy source in the English-speaking Caribbean. It took Dr Wright more than seven years to convince the board of PCJ and the Government to install a wind-energy plant at Wigton. But is the Government really convinced, even though Wigton has been successfully generating low-cost power and saving the country millions in fuel costs?
Wigton began generating wind energy in April 2004 and was debt-financed by way of a loan from NCB, and by a grant of US$6.7 million from the government of the Netherlands. The money was borrowed by the PCJ and on-lent to the new entity Wigton. Initially, the NCB interest rate was 6.1 per cent but, by 2010, had increased to 11.75 per cent.
PCJ's mandates in the Petroleum Act (1979) restricted its operations to the petroleum sector only, so in order to legally own and operate a wind farm, the functions of the corporation had to be extended. This was done by amendment of the Petroleum Act on January 13, 2006 when its functions were extended "to include the exclusive right to explore and develop in addition to petroleum, all renewable and other energy resources existing in Jamaica". It will be shown later that this extension of PCJ's functions created a major problem for the Office of Utilities Regulation (OUR).
Wigton was an immediate success technically, but a disaster financially because of the electricity rates specified in the power-interchange agreement (PIA) between Wigton and JPS. Under the JPS licence, all commercial power generated by others and not consumed internally must be sold to JPS which, in turn, distributes and sells to its customers. Before Wigton could obtain a licence to generate and sell electricity, it had to obtain a licence from the Ministry of Energy, on recommendation of the OUR. Additionally, the OUR had to approve the PIA as well as the rates for sale of electricity to JPS.
Wigton Windfarm Limited was registered under the Companies Act in March 2000 and shortly thereafter commenced negotiations with JPS for the PIA, which was executed in December 2001. The rate agreed in the PIA and approved by the OUR as 'reasonable' was 5.051 US cents per kilowatt-hour (kWh), as the base fixed energy charge for years one to five, a figure then regarded as the 'avoided cost', reducing to 4.496USc/kWh in years six to 20. Provisions for an operating and maintenance charge of 0.549 USc per kWh increasing to 0.555 USc per kWh in years six to 20 were allowed in addition to the base energy rate. These provisions were woefully inadequate to address escalation in interest rates, increases in the cost of living and escalation of material costs, as is normal for all other independent power producers (IPPs) and as is applicable to rates approved from time to time for JPS by the OUR. In fact, the Wigton rates decreased from 5.6 USc/kWh to 5.051 USc/kWh in 2010, as was applicable under the PIA for years six to 20.
At the time, the PIA was being negotiated, the OUR outlined in a paper Methodology for Evaluating the Avoided Cost of Wind Energy. Avoided cost was defined as comprising: operating, maintenance and fuel charges. It is important to note that the avoided fuel costs were based on 1999 fuel prices which averaged about US$16.50 per barrel that year, some 51/2 times lower than current prices.
OUR also stated that the impact on the atmosphere was not investigated as "the next increment of generation will not violate the country's environmental standard".
Wigton Windfarm was commissioned in 2004, three years after the PIA was negotiated. By the time of commissioning, average crude prices were US$34.70 per barrel, almost twice the cost used in the avoided-cost calculation. The Jamaican dollar had suffered significant devaluation; petroleum prices had increased substantially as well as bank interest rates and cost of living. So, despite the fact that Wigton was saving the country more than 31,000 barrels of oil equivalent per year, and avoiding 44,000 tons of carbon emissions to the atmosphere each year, and despite the fact that JPS, as well as the other IPPs, were making millions in profits, Wigton was not able to cover its expenses and consequently operated at a loss. Wigton's books showed a profit only because of subsidies it received from its parent PCJ, such as discounting the bank interest rate and providing many services free of cost.
The financial situation was so bad that although Wigton was up for divestment in early 2007, the sale was cancelled in November of that year as GOJ did not receive a single offer to purchase the company. None of the interested parties was willing to acquire this liability. Not only was Wigton losing on the rates paid by JPS, but also on penalties imposed by JPS for 'reactive power demand', totalling in excess of $120 million up to the end of 2009. JPS continues to enjoy indirect but significant financial benefits from Wigton's power generation in contributing to the reduction of JPS overall systems heat rate and helping to stabilise line voltage.
After exhaustive analysis, Wigton determined that JPS charges for reactive power charges were inconsistent with the PIA, and in December 2008 asked JPS to rectify the error. JPS disagreed with Wigton's interpretation of the PIA. After much discussion on the matter, both Wigton and JPS agreed in March 2010 to subject interpretation of the contract to arbitration, as provided for in the PIA.
However, before Wigton could proceed to arbitration, the Ministry of Energy and Mining (MEM) instructed that arbitration with JPS would be contrary to GOJ policy and offered to provide an alternative approach to resolution of the points of disagreement. Regretfully, the alternative never materialised, and although Wigton retained the services of international consultants whose reports supported Wigton's position, to date the matter has neither been allowed to go to arbitration nor has it been settled.
The consultant's report was circulated to the OUR, but to date they have not commented on the report's technical and legal interpretations of the PIA, which interpretations support Wigton's claims. Until this matter is settled, investment in future wind turbines, similar to those at Wigton will be severely constrained, unless provided by JPS itself, such as its Munro Wind Farm.
In 2009, with the then minister of energy's intervention, JPS agreed to review the power purchase rates between Wigton and JPS. After months of negotiations, both parties agreed to adjust the rate to 8.0 US cents per kWh to be effective on July 1, 2009. This rate adjustment, however, was subject to approval by the OUR. However, approval was never given, as the OUR argued that such an adjustment could not be made, despite agreement between both parties, as this would set a precedent for all IPPs. The OUR never identified the provisions in the Office of Utilities Regulation Act or other legal instrument on which their position is based.
In a truly competitive environment for provision of electricity services, it must be a fundamental right of any IPP who considers the terms of the purchase contract to be prejudicial to its interests to demand review of that contract, especially in instances in which parties, provider and purchaser, agree to such review.
Wigton was desperate to have the purchase rates adjusted and in October 2009, after sustaining more than $127 million in losses, it applied to the OUR for an increase in rates in accordance with Article 12 (1) of the OUR Act. This clause allows the OUR to adjust the rates of an IPP. No response was ever received other than one from the MEM which asked that Wigton withdraw its application and, instead, request a rate that would accord with the MEM Energy Policy that allows the rates to be adjusted to the currently published avoided costs of US$0.103/kWh. This is to be compared with the 29 US cents per kWh currently being charged by JPS.
This adjustment was made in February 2010, but only after Wigton had lost a total of $150 million in revenues, had the agreed JPS/Wigton rate been approved by the OUR in 2009. Although Wigton now receives the published avoided cost rates, there is still no provision in the PIA for escalation of expenses that are linked to cost of living, exchange-rate fluctuations, material-cost fluctuations or changes in bank rates. But these provisions are standard in all contracts with the IPPs, as well as in the JPS licence. Furthermore, even if the OUR were to publish new avoided costs each year, they would not be applicable to Wigton.
There is no logical reason why Wigton should be denied the opportunities to recuperate its efficient operational expenses on the same basis as that enjoyed by other IPPs. Wigton's energy is generated solely for supply to the national grid and is not provided because it is surplus to its internal requirements. It has no client other than JPS, and its continued economic existence is dependent on its sales revenue being adequate to cover its global costs.