Mon | Nov 30, 2020

Fuel the power that drives economy

Published:Friday | December 21, 2012 | 12:00 AM

Maurice McNaughton, Contributor

THE ECONOMIC significance of electricity to Jamaica's, and indeed any country's development, is well documented and supported by international research. There is strong evidence that electricity consumption is strongly correlated to gross domestic product, making it the single best physical indicator of the overall economic activity, whether formal or informal, within a country. Some may debate whether electricity is the cause or consequence of economic growth. Nevertheless, a large part of the productivity growth in most industries, or sectors, is attributable to technical advances that are facilitated by electricity consumption, and in general, productivity growth is found to be the greater, the lower the real price of electricity.

It is worthwhile, within the context of the Jamaica-50 reflections, to contemplate the role of the electricity sector in the economic growth and development of independent Jamaica.

History of electricity in Jamaica

Jamaica became one of the first countries in the world to receive electricity in 1892, only 13 years after Thomas Edison invented the electric lamp.

This service was supplied by the Jamaica Electric Light Company from a plant at Gold Street in Kingston. It was quickly followed in 1897 by the West India Electric Company, which built the hydroelectric plant on the Rio Cobre in Bog Walk. Electricity became a catalyst for the introduction of electric tramcars, which provided public transport in Jamaica until 1948. The Jamaica Public Service Company Limited (JPS) emerged in 1923 through a process of consolidation of several smaller electric companies, and was granted an all-island franchise in 1966.

The period 1958 to 1970 represents the most - and perhaps only - sustained period of economic growth in Jamaica's modern history, coinciding with the emergence of the bauxite/alumina industry. Electricity consumption over the period reflects this sustained industrial and consumer vibrancy, growing by double digits from an annual consumption of 100GWh in 1954 to just over 1,000GWh in 1972.

The Government of Jamaica (GOJ) acquired controlling interest of the JPS in 1970. This period also saw the establishment of the Rural Electrification Programme, which was incorporated in 1975 with the specific mandate to expand the reach of electricity supply to underserved rural areas.

The 1973 oil crisis, which saw oil prices tripling in one year, also signalled a hazardous future for Jamaica's largely oil-based stock of generation plants. Over the 40-year period between 1970 and 2010, electricity consumption grew at a more moderate rate to just over 4,000GWh in 2010. By then, Jamaica reported 92 per cent of the population with access to electricity, considerably higher than the world average of 74 per cent.

The '90s - A Troubled Period

In the past two decades, many countries have sought to pursue the restructuring and introduction of competition into the electricity sector prompted by the view that state ownership of utilities, as well as the absence of competition, invariably results in excessive costs, low service quality, poor investment decisions, and lack of innovation in delivering service to customers.

By the early 1990s, the conditions were ripe for privatisation and competition in Jamaica. Strong evidence of this was exhibited in the frequency of power blackouts, poor power quality, Government's inability to fund the much-needed expansion in capacity, and the existence of artificial subsidies owing to repeated deferred tariff adjustments.

Prompted by the International Monetary Fund and the World Bank, the GOJ and the JPS briefly flirted with the idea of vertical separation - unbundling the generation component of the company from transmission and distribution - as a precondition for privatisation.

This initiative was started, but then abandoned in deference to the view that the company should be privatised as an integrated whole. Even before the privatisation process got off the ground, a massive explosion at the Old Harbour Power Station in June 1994 - that took out 68.5MW of baseload generating capacity, close to 10 per cent of total generating capacity - resulted in blackouts being the order of the day. The crisis it precipitated then forced the cash-strapped Government to accelerate the negotiations with independent power producers (IPPs) to build, own, and operate generation plants, selling the energy to the JPS, the sole supplier of electricity. Over the period 1992-1996, Jamaica saw the introduction of three IPPs on the grid for a total of 175MW, just over 20 per cent of total generating capacity.

In anticipation of further reform in the electricity sector, the Office of Utilities Regulation was established in 1997 to preside over the orderly development of the industry. In 2001, ownership of the JPS was returned to private hands with the sale of 80 per cent of the integrated utility to Mirant of Atlanta, with the Government retaining almost 20 per cent. Since then, the company's ownership structure has changed again, with Korea's East-West Power and the Japanese Marubeni Corporation jointly owning the 80 per cent of the shares initially acquired by Mirant. Today, the JPS accounts for 75 per cent of the island's generating capacity, with the IPPs making up the rest.

moving back to 85 per cent

With the JPS winning the recent bid - in which it was the only bidder - for additional generation, the installation of another 360MW of capacity by 2014-15 will see the ratio of monopoly ownership of generation move back to 85 per cent.

Reform of the electricity sector over the past two decades, geared at greater efficiency and innovation in service delivery, clearly has not yielded the desired outcomes. Since 2001, the average price of electricity has moved from 14.9 US c/kWh to 40 US c/kWh. Admittedly, there have been substantial increases in oil prices, but the near tripling of electricity rates is staggering. System losses have grown to about 22 per cent. The 2011 study by the Jamaica Productivity Centre ranks the JPS distribution operations among the least efficient in the region for total distribution losses, non-technical losses and reliability, and places the JPS in the group with the highest electricity prices.

Because of the capital-intensive and idiosyncratic nature of electricity investments, decisions made in the sector have long-lasting consequences. Long-term contracts signed with IPPs in the 1990s were negotiated with the threats of blackouts looming in the background, resulting in price and technological outcomes that have not been favourable to the Government or the consumer in the long run.

The Government's continued involvement in determining the choice of fuel sources has led to protracted delays in fuel-supply decisions that have perpetuated the use of expensive fuel and the purchase of suboptimal generation plants.

We stand now at the brink of a series of critical decisions, the effects of which will reach well into the next 50 years. Most prominent of these is the decision on the 360MW LNG plant and the supporting natural gas storage and delivery infrastructure.

Recent analyses suggest that the anticipated 30-40 per cent reduction in electricity price associated with the 360MW LNG plant is not a foregone conclusion. Further, the project is confronted by challenges of coordination, timing, risks in securing favourable long-term LNG supply prices, and tough negotiations. There are encouraging signs that the critical stakeholders in the electricity sector, including the JPS and the Government of Jamaica, the regulator, the private sector, the media, and academia recognise that the current state of the sector is near crisis proportions. We are guardedly optimistic that there is visibly greater urgency in the dialogue that is inclined towards reconciliation and collaboration.

Looking to the future of the sector

The recent Justice Sykes ruling that rejects the exclusivity of the JPS licence may very well prove to be the tipping point that provides the transformational platform for the next 50 years of electricity service in Jamaica. Prudent dialogue and negotiations will be needed in order to address the appropriate adjustments at the policy, regulatory, and operational levels. An integrated portfolio of initiatives will be required, including:

A more aggressive posture towards renewables and greater incentives and facilitation for conservation by residential, commercial, and industrial consumers. This should be enabled through the establishment of energy service companies and the development of an energy-savings industry that would not only raise the level of awareness and understanding of conservation, but also undertake the effective implementation of energy efficiency and renewable initiatives.

A controlled, managed transition towards a more liberal restructuring of the electricity sector that allows for controlled access to the electricity grid. This should create competitive forces and private-sector incentives that can lead to the wider-scale deployment of combined heat and power (co-generation) systems that provide significantly greater fuel-conversation efficiency compared with the conventional generation technologies currently in use, which would lower the cost.

Seriously examine the prospects for the establishment of one or more industrial zones that could take advantage of such large-scale combined heat- and power-generation technologies to provide low-cost electricity, heat, and air-conditioning to a cluster of commercial and industrial businesses co-located within the zone. The prospect of such an industrial ecosystem in designated areas such as the Kingston Wharf beckons as Jamaica prepares to capitalise on increased trade flows from the expansion of the Panama Canal together with its strategic geographic location.

The image of an electricity sector that transforms from being an economic liability to becoming an industrial catalyst where low-priced energy can attract investments, generate new industries, and create new, sustainable jobs is a compelling one. It is not a far-fetched pipe dream, but is one that requires vision, a sense of urgency, political will, and regulatory diligence to make it happen.

Maurice McNaughton, PhD, is director of The Centre of Excellence, Mona School of Business and Management, University of the West Indies, Mona. Send feedback to editor@gleanerjm.com.