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LNG complicates light bill savings

Published:Sunday | May 17, 2020 | 8:16 AMSteven Jackson/Senior Business Reporter

THE SWITCH towards liquefied natural gas, LNG, as fuel to produce power supplies for Jamaica has a downside for electricity customers, who are largely missing out on the big oil savings.

The near two-thirds plunge in oil prices will have limited effect on overall light bills, as the price of LNG, which has been added incrementally to the fuel mix since 2016, remains relatively stable.

Power utility Jamaica Public Service Company, JPS, operator of the national electricity grid, said that while its newer power plants can operate on dual fuel, they cannot easily switch back to oil as it might damage the new plants over time.

In the past year, the power that JPS generates using oil fell from two-thirds to less than one-third of output, the utility indicated.

“It should be noted that over the past six months, there has been a significant change in the proportion of oil used in the generation of electricity as compared to the use of LNG,” JPS said in written comment to the Financial Gleaner.

LNG Pricing More Stable

“Of the total electricity generated by oil and gas, approximately 69 per cent was due to oil in October 2019, compared to 28 per cent in March 2020. Overall, the pricing of LNG tends to be much more stable than the price of oil. As a result, due to the changes in the mix, the overall fuel cost will be less impacted by the volatility in the movement of oil prices,” the power utility said.

In the past few weeks, oil prices have dropped to historic lows, including landing in negative territory on April 20.

The gas conversion resulted in Jamaican electricity consumers largely missing out on the collapse in oil prices, which fell an average of US$64.28 in 2019 to some US$25 a barrel at current levels. Natural gas prices in the meantime have fallen from US$2.56 per 1,000 cubic feet in 2019 to around US$2.10.

JPS says any movement in fuel is passed directly to customers, in keeping with its electricity licence, and that the energy price reductions over the past few weeks, or year, have been factored into the fuel rates used to bill customers.

In relation to oil, the savings that consumers would see are constrained by the fact that it is now a smaller component of the energy mix in the production of electricity.

“Any further reductions which are noted in the future will also be passed on to customers once they are received. In relation to oil, JPS and the independent power producers make all their purchases directly from Petrojam and once these prices have been adjusted in the billing received from them, they are passed on to the customers,” the utility said.

The conversion to gas followed on decades of planning by various political administrations and came against the background of rapidly rising oil prices beyond US$140 a barrel at certain stages. Some of the delays stemmed from identifying a sustainable market for natural gas supplies.

American company New Fortress Energy, NFE, eventually stepped into that breach and contracted with JPS in 2016 to start supplying natural gas to the utility.

Both JPS’s 120MW Bogue plant in Montego Bay and its 190MW plant in Old Harbour, St Catherine, now operate on LNG. The conversion of other plants are in the works.

Earlier this year, New Fortress commissioned its own LNG-fired power plant in Clarendon to supply alumina refinery Jamalco with electricity. The excess power is sold to the JPS grid.

“Any reduction in the cost of oil and gas is considered beneficial for the country, especially during this time, given that it represents a significant portion of the overall cost of electricity to customers,” said JPS. “It should also be noted that the newer plants are primarily designed to operate using LNG, and even though they facilitate the use of oil when necessary, this is on a temporary basis and would potentially be more costly in relation to maintenance and capital costs in the long run,” the power company said.

JPS added that it takes a variety of factors into consideration when determining how best to deploy the generation fleet, including the efficiency of the respective plants, the safety and effectiveness of the units, the overall cost of production, and its legal and contractual obligations.

The utility – which is co-parented by Marubeni Corporation of Japan and Korea East-West Power of South Korea, with the Government of Jamaica as minority partner – is the sole distributor of electricity, serving about 600,000 customers.

The grid encompasses 940MW of power, of which JPS owns 400MW. The remainder is supplied under contract by independent producers, including JPS affiliate South Jamaica Power Company.