Jamaica's energy inertia

Claude Clarke, Contributor

Among the clearest manifestations of Government's failure to create an environment of economic opportunity and prosperity for our people is the continuing uneconomic pricing of energy. At up to US$0.39 per kilowatt-hour, Jamaica has perhaps the highest electricity rates among our trading partners.

The newly appointed energy minister now has the opportunity to take effective leadership of what should be a national priority and reshape the country's energy arrangements to provide the economy with reliable and competitively priced energy. However, his recently announced plans for electricity production and distribution fall far short of what is needed.

Our current inefficient production and delivery of electricity have not been an overnight phenomenon. It is the result of ongoing inertia and perennial dithering by governments in managing this vital area of national life.

Government's vacillation and inaction began almost four decades ago when the international energy crisis of 1973 shook the world into recognising that oil could no longer be treated as an ordinary commodity, but would, thenceforth, be priced to reflect its strategic value to the world economy.

Oil prices soared and led both producers and consumers to radically change their approach to economic management. Some producing countries used the resultant revenue windfall to build up the non-oil areas of their economies and reduce their long-term dependence on oil revenue. The evidence of this is now impressively displayed in countries like Qatar, Kuwait and, more recently, Trinidad and Tobago. Others, like Venezuela and Nigeria, mainly squandered their new-found wealth on global political adventurism or outright corruption.

Double blow for Third world

Consuming countries, reeling from the exorbitant cost of oil, sought cheaper, more productive energy sources and more efficient ways of using energy. But high energy prices were not an equal-opportunity punisher.

Because of their pre-existing global economic power, wealthy consuming countries were able to pass on their higher energy costs in the price of the industrial goods they sold to the rest of the world. Developing countries, on the other hand, exporting mainly commodities, had no such power. They suffered a double blow as they were forced not only to bear the higher direct cost of oil, but also to accept the higher cost of manufactured products imported from the industrialised world. The result was spiralling balance of payments deficits among developing countries, which plunged them into deepening debt.

Some developing countries were fortunate to have commodities that were sufficiently scarce or strategic to allow them to increase prices to compensate for the higher price of oil. Jamaica was one such country. We used that good fortune to impose a levy on bauxite production, yielding approximately US$160 million in the year 1973-74, enough to offset the oil bill which had trebled that year.

Notwithstanding studies and committees to seek a solution, this was the Government's only tangible response to the threat of escalating energy costs to our economy. But by 1980, oil prices had increased tenfold and the revenues from the levy were dwarfed by the skyrocketing oil bill.

The Jamaica Labour Party administration of the 1980s did no more to relieve our oil dependence. It merely took short-term steps to increase electricity-generating capacity using oil, even while all but oil-producing countries were seeking to escape oil's costly grip. The country avoided paying a higher economic price for that negligence only because the decade of the 1980s saw average oil prices fall by almost 70 per cent from their 1980 peak, when adjustments are made for inflation.

As a result, when the People's National Party returned to office in 1989, inflation-adjusted oil prices were at their lowest level since the crisis began in 1973. The extraordinary volatility in the oil market had ended and was replaced by the more normal upward meander of prices characteristic of other hard commodities. Between the 1990 Gulf War and the shock of the 9/11 attacks, oil traded within a very narrow band, ending at a price 15 per cent below the inflation-adjusted pre-Gulf War cost. The oil market had become more stable and predictable than in the previous two decades, making economic planning easier, and the task of changing energy policy less vulnerable to economic dislocations.

But oil had settled at a high price plateau, making it an uncompetitive fuel for generating electricity. Yet the government of the day did nothing to free our economy from its grip.

The personal generosity of one obviously impermanent Venezuelan leader to ease our cash-flow problems by deferring our oil payments is not a sustainable energy policy, and does nothing to reduce the price we pay for oil.

The 2001 decision to privatise the Jamaica Public Service Company provided an opportunity not only to free the economy from the suffocating grip of oil but also to modernise our archaic electricity generation, transmission and distribution systems; and ease the burden of the outrageously high electricity costs that have rendered nearly all production in the country internationally uncompetitive.

Done properly, divestment could have been a positive development for our electricity competitiveness, as it could have opened the way to cheaper energy sources, more efficient generation, transmission and distribution, and lower electricity prices. But electricity rates have never been higher than they are today.

Moving Jamaica out of its economic slump and putting the country on course to economic development rests on our ability to expand production of high-value goods and services within the Jamaican economy. This will not be possible without competitively priced electricity, which is below US$0.10 per kilowatt-hour among some of our trading partners.

Today, energy drives everything. No economy can thrive without mastering the competitive production and use of this economic asset. From the rudimentary task of tilling the soil to the most sophisticated application of artificial intelligence, economic activity depends on the efficient use of energy. The availability of competitively priced energy is, therefore, central to creating a competitive and prosperous economy.

New course needed

Government, having failed to effectively address this most fundamental aspect of its mandate, now needs to wake up to its responsibility and chart a new course toward competitive energy before we are left permanently in the backwater of the world economy.

There is universal agreement that there should be competition in electricity generation. And the new minister's position that the distribution and transmission of electricity is a natural monopoly is sound. But for a monopoly to be beneficial and not exploitative, there must be strong and enforceable regulation by Government. Government must ensure that the costing of transmission and distribution is fair and competitive. Fairness in this area will ensure that independent electricity suppliers will not be at a disadvantage to the transmission and distribution monopoly. The real cost of transmission and distribution should be determined by independent audit. At the same time, the Government should pressure the monopoly company to bring its costs in line with those of our trading partners.

But the most important factor on which the reduction of electricity costs depends is the energy source that is used. This critical decision should not be made by a bureaucratic process but by competitive bids from competing energy sources. The Government's involvement should be limited to ensuring that environmental standards are met and that there is protection from wild price swings in the future.

In the immediate future, renewable energy sources such as wind and solar power are unlikely to be economic on the large scale needed to meet our electricity requirements. Nuclear power would, doubtless, be politically unsaleable in the aftermath of the Japanese post-tsunami disaster. That leaves us with liquefied natural gas (LNG) and coal or petcoke.

While it is accepted that either coal or natural gas will yield lower electricity costs than oil, it is not a settled matter that natural gas supplied as LNG is more beneficial than coal. The Government should, therefore, not select one over the other, without the benefit of competitive bidding between both sources.

Explore coal option

LNG prices and supplies have been relatively volatile. Since the Japanese nuclear disaster, its price has doubled, and is now even less economical than coal. Coal prices, on the other hand, have remained reliable and predictable over many decades. In addition, the fact that a dollar of coal has consistently generated over four times more energy than a dollar of oil would explain why more than 40 per cent of the world's electricity is produced with coal.

It follows that for Jamaica to be sure of achieving competitively priced electricity on a sustainable basis, coal, with its proven record of supply and price stability, would be the most prudent choice. Even with anthracite, the highest-priced but most environmentally friendly type of coal, our electricity-generating costs could be lowered by 75 per cent.

Coal poses environmental threats, as does LNG. Nevertheless, we need to employ it in order to advance the country's development, just as most economically successful countries have. It is interesting that Germany, even with its high levels of environmental awareness, has, for environmental and economic reasons, commissioned the construction of 19 coal-fired plants to replace its nuclear plants, following the Japanese nuclear disaster.

Conversion to coal, and upgrading our electricity generation, transmission and distribution systems, could take as long as four years. However, with a financing arrangement that allows for the expected electricity rate reduction to be front-ended, power rates could be brought down to competitive levels without significant delay.

Thirty-nine years is too long a time to wait, only to make more bad decisions about our energy future. The new minister now has a short time to properly assess the facts, make the right decisions, and put our energy sector on a sound and competitive footing.

Claude Clarke is a businessman and former minister of trade. Email feedback to columns@gleanerjm.com.