The truth about net metering
Dan Theoc, Contributor
IN RECENT months, there has been much public discussion about net metering. Many have argued that net metering is the key to lowering electricity costs in Jamaica. I'd like to clear up a few misconceptions in this regard.
Lowering base-load generation costs
The only way to significantly lower the cost of energy in Jamaica is to focus on large-scale projects that replace (or upgrade) existing generation units. Jamaica has approximately 820MW of generation capacity with a base-load demand of 400 to 500MW and an evening peak-load of up to 640MW. Accordingly, we must focus on installing about 400 to 500MW of new generation capacity that is more efficient than the existing fleet of units.
Bearing in mind that fuel currently represents 60 per cent of the total cost of electricity, Jamaica must focus on a fuel-diversification strategy that gets us away from oil. In this regard, the most economic options are really newer generation plants burning coal, petcoke, or natural gas. It is estimated that the 'all-in' operating cost of these units could be as much as 40 per cent lower than the existing fleet of units. The 'all-in' cost refers to the fuel cost, the operating cost, and the annualised cost of capital associated with acquiring the new units.
The Government has indicated that it is making good progress in putting in place the LNG infrastructure and gas supply agreements that are a prerequisite to the building of LNG-fired power plants. This is a critical step for the replacement of existing base load generating units.
Existing Independent Power Producers (IPPs)
It is important to note that the market for generation expansion is competitive and regulated by the Office of Utilities Regulation (OUR). The Jamaica Public Service Company Ltd (JPS) does not have monopoly rights in this regard. Today, the JPS purchases more than 200MW of power from IPPs, which includes 20MW of renewables (wind), with a new 65MW project to be completed in the near future.
One of the OUR's main objectives in relation to generation expansion is to ensure that future projects are done on a 'least cost' basis. This will be achieved by acquiring new power under IPP contracts where the third party must supply the energy at an agreed delivery price. The JPS must then pass on this generation cost to customers without any mark-up. In this regard, a 65MW contract was recently awarded to an IPP by the OUR that will see the introduction of new efficient medium-speed diesel units that are about 15 per cent more efficient in their use of fuel than the fleet of units used in providing electricity today.
Use of renewables
Jamaica should definitely seek to maximise the opportunities for renewables, but this must be done in a cost-effective manner. In 2008, the OUR indicated its desire to obtain 60MW of renewables in a request for proposal. The uptake for this was quite low, as only 10MW of IPP contracts were awarded and the JPS was the only successful candidate.
The question must, therefore, be asked: If renewables were not deemed commercially feasible by large-scale investors, why would it be feasible for small-scale investors, as is currently being proposed by the advocates of net metering?
The JPS fully supports the use of renewables, but this should be done in large-scale projects (of at least 2-5MWs) where appropriate economies of scale can be achieved, with the objective of lowering the overall cost of energy in Jamaica. In this regard, the JPS currently purchases 20MW of renewable power from one IPP, utilises 21MW of hydros in the supply of electricity and recently commissioned its 3MW Wind Farm in St Elizabeth. The company is in an advanced stage of adding another 6MW of renewable capacity to the grid. Additionally, a new IPP project for an additional 20MWs of wind is currently being explored and a feasibility study for another 8MW of hydro is also being conducted.
It must be said that Jamaica - an island power system without interconnection to other power sources - has relatively limited resources to support a large amount of renewables, relative to the system size. Accordingly, renewables are likely to play a meaningful but limited role in energy diversification over the medium term. The biggest bang for rate payers will come from the replacement of at least 400MW of base-load capacity burning less costly and price-volatile fuel.
The cost of transporting electricity
The cost of transporting electricity across the electricity network (or grid) is significant. The JPS has in excess of 250,000 poles, 30,000 transformers, and 16,000 kilometres of electrical lines throughout Jamaica. The total cost of its transmission and distribution assets is over $20 billion, and the annual cost of maintaining this network is in excess of $3 billion. The concept of net metering being put forward seeks to completely ignore the cost of delivering electricity, which would be very incorrect.
By contrast, net billing, which exists today, acknowledges that there is a cost to delivering electricity, which is why IPPs buy electricity from the JPS at one rate (the fully embedded cost), but sell electricity to the JPS at another rate (the agreed contract rate, which is based on avoided cost).
The proponents of net metering are asking that they be paid a higher tariff for energy from their intermittent supply than that paid under existing IPP contracts for approximately 260MWs of firm reliable capacity. This does not in any way help to reduce the cost of electricity for Jamaica or encourage future large-scale investors to come to Jamaica. In fact, by not sharing in the cost of delivering electricity, these persons would be receiving a
subsidy. And, given that a significant amount of the delivery costs are fixed (i.e. the cost of poles, lines, and transformers), this would necessarily result in a higher cost of electricity for other rate payers.
Managing peak demand
In relation to peak demand, solar and wind projects are not ideal as their availability to generate power cannot be guaranteed during the peak demand period for Jamaica, which is generally between 6-9 p.m. It is important to note that the electrical network must be built to serve peak demand since power is not generally stored, which is the problem renewables try to overcome by using the grid as a backup.
As a consequence, there must be enough firm capacity plus a reasonable reserve margin to meet peak demand for electricity, or else there will be a shortage of supply that results in some persons being without power (i.e. load shedding).
Managing the quality of supply of electricity
It is important to appreciate that supplying electricity requires a very high safety standard that necessitates a significant amount of coordination between the managers of the electrical grid and the generators supplying electricity. The supply of electricity has to be coordinated to match the instantaneous demand for electricity to ensure the delivery of the proper voltage (and frequency). Failure to do so will result in damage to electrical equipment or possible loss of life.
The demand for electricity is constantly changing, and the grid operator must be able to add and remove generation units as needed and do so in a safe and cost-effective manner. This includes the ability to isolate aspects of the grid to respond to the need for emergency outages. This entire operation could become unwieldy if dozens of small-generation suppliers were added to the grid, and could compromise the quality and safety with which power is delivered.
Let me emphasise the fact that persons are free to generate their own electricity and use the JPS as a backup supply if they wish. However, they cannot expect to sell electricity to the JPS at the same rate they purchase electricity from the JPS, due primarily to the transmission and distribution costs.
Additionally, they cannot expect to get a rate significantly higher than that paid to existing IPPs, since that would also not make sense, nor would it aid the effort to lower the cost of electricity for the country.
The real focus for lowering the cost of electricity in Jamaica has to be on large-scale projects which, through economies of scale and fuel diversification, can help lower the price of electricity and reduce the volatility in the fuel rates.
Dan Theoc is chief financial officer, Jamaica Public Service Company Ltd.