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Jamaica's energy crisis demands paradigm shift

Published:Sunday | September 18, 2011 | 12:00 AM

Dennis Morrison, Contributor

Jamaican consumers have every right to insist that they be provided with a full report on the Office of Utilities Regulation's (OUR) investigation into complaints against the Jamaica Public Service Company's (JPS) billing system, and that this be done promptly.

Equally important is that the company be directed to correct any flaws in the system and make good on any overcharging as a matter of utmost priority. For its part, the regulator must spell out what steps it will be taking to be more effective as watchdog of the rights of the consumer and of the company.

However, what started as public agitation against JPS's billing system which was blamed for excessive light bills has now turned into a heated debate about competition issues. A main argument is that the high cost of electricity in Jamaica is mostly due to the monopoly power of JPS, hence the court challenge to the company's licence. Considering the implications of this move, it is urgent that the public be given the facts about the competition issues and how they relate to the cost of generating and supplying electricity locally.

Information on international best practice and policymaking in the sector is easily accessible. The sooner we get to the bottom of these matters, the quicker attention can be turned to what I believe are the most critical factors responsible for the high cost of electricity - the cost of fuel and old and inefficient generating plants.

Oil issue

Jamaica has stubbornly remained one of the few countries in the world that is almost totally dependent on oil for electricity generation, despite the escalation in oil prices over more than three decades and particularly in the last 10 years. Not only is oil an expensive fuel, but the burning of oil is one of the most inefficient means of producing electricity. It is more expensive than coal and less efficient than natural gas - two of the main fuels used for generating electricity worldwide. As oil prices jumped by more than 25 per cent in the past year, our electricity bills were, therefore, bound to have shot up, and this can be verified by looking at actual light bills.

Rising oil prices have not only put pressure on electricity bills but also on the production costs of our industries that rely on oil as their source of energy. This has implications for their ability to compete in export markets and to match the prices of goods coming into Jamaica as well. The effect of higher oil prices has also showed up in the increasing trade and current account deficits of our balance of payments in the first four months of this year. In short, the dependence on oil is a fundamental weakness in our economic structure. The first imperative, therefore, is that we must diversify our source of fuel away from oil, as nearly all other countries have done.

A valid question that arises is: Has the JPS's monopoly power been used to block the way to fuel diversification in Jamaica? The fact is that Government has taken on the role of prescribing the fuel source and, in any case, the electricity pricing system does not incentivise the company to seek out cheaper fuel sources. While there has been mounting evidence since 2001 that fuel diversification is an imperative, there has been indecision about the choice of alternatives.

The key question still remains as to what should be our choice of fuel. Realistically, Jamaica should be looking at two sources - natural gas and coal - as the main fuels for the future, while developing to the greatest extent that is viable, our hydropower, wind and solar resources. Based on our experience over the last 40 years of being dependent on one source, we ought not to be moving to replace oil with a single source. Our energy plans should, therefore, have allowed for JPS and major industrial entities to replace oil with both fuels

But natural gas has been declared the preferred source, thereby discouraging investors who had signalled their own preference for coal. The choice of natural gas has been based on its high efficiency, lower capital costs, shorter implementation period, and environmental considerations. The fact, though, is that high price volatility and other market conditions, as well as setbacks with supply arrangements in the mid-2000s have derailed the development of the project.

Coal, on the other hand, has advantages of lower price, less market uncertainty and volatility; and there is also the vital factor of abundant supply in proximity to the island. The issue of the environmental impact of burning coal is a disadvantage and control measures would have cost implications. But overall, the advantages still make it an attractive fuel choice for Jamaica.

Globally, there are factors (new demand from China, India and other emerging economies) that are bringing about a shift towards greater use of natural gas as a fuel source for electricity generation. While supply has also been expanded by the advances in the recovery of unconventional gas resources, the shift in demand will have price implications. The choice of fuel source for Jamaica cannot ignore this coming change.

Dennis Morrison is an economist. Email feedback to