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Achieving globally competitive electricity rates

Published:Monday | May 7, 2012 | 12:00 AM

The following is a contribution from the Energy Think Tank of the University of the West Indies, Mona.

In A previous article, a light bulb was used as a tangible illustration of the chronic challenges that confront the Jamaican electricity sector. It bears repeating that under the current arrangements, more than 70 per cent of the energy content of a barrel of oil is wasted during the production and delivery of electricity.

If Jamaica is to grow, develop and expand employment, it is important that electricity rates to our industrial and commercial enterprises are regionally and internationally competitive. Even under the assumption of a 30 per cent reduction in rates, the introduction of the new JPS 360MW LNG plant, at best, would leave electricity rates above US$0.20 per kilowatt-hour - decidedly uncompetitive.

What are the options? Essentially, generating electricity from fossil fuels such as oil, coal or LNG is a process in which thermal energy or heat is converted into mechanical energy, which is further converted into electrical energy. Much of the inefficiency comes from the loss of thermal energy. A critical part of the answer lies in the capacity to extract more usable energy from the fuels.

Combined Heat and Power Systems

To combat the inefficient rate of conversion of fuel into electricity in conventional power plants, combined heat and power (CHP) systems, sometimes referred to as cogeneration systems, present a compelling option. CHP technologies are being implemented in countries across the world. These technologies are integrated energy systems in which the waste heat from the conventional electrical power generation processes is captured and converted into useful thermal energy such as steam for manufacturing processes, or air condition for commercial applications.

The advantage of CHP over conventional electricity-generation systems lies in the efficiency with which fuel is converted into useful energy. JPS's power plants convert fuel into electricity at a rate of about 34 per cent. By contrast, CHP systems have fuel-efficiency ratios of 75-90 per cent. The implication for firms employing these systems is a substantial reduction in their energy costs.

Another advantage associated with CHP is derived from the fact that these plants are typically located in proximity to where the steam and electricity are consumed. As such, transmission and distribution losses, which now stand at 23 per cent in Jamaica, would be virtually non-existent.

Industries in which CHP systems have been used to substantially reduce energy costs include processing industries such as bauxite and alumina production, oil refineries, bottling, and food processing. They are also widely utilised in commercial operations such as hospitals, hotels, universities, airports, etc, which require large amounts of conditioned air.

More than eight per cent of the world's electricity-generating capacity is produced by CHP systems. This technology is applicable at the level of the individual business, but for maximum effect it is best applied within an industrial zone. As a country, Denmark leads globally in respect of the percentage of its total electricity requirements that is produced in CHP systems - more than 60 per cent. The US leads in respect of total installed capacity measured in megawatts (MW). China, Japan, Korea and India are among the countries demonstrating most dramatic growth, with the largest projected increases in the next 15 years.

Governance and Regulatory Considerations

For industrial and commercial businesses to take advantage of these systems, more businesses would have to get off the JPS grid and go into self-generation. Interestingly, this presents an opportunity for the emergence of energy-service companies and greater collaboration within business clusters. In addition, there are five key areas which require the careful attention of the Government and the regulators. These are:

1. Net billing: Recent policy modifications have seen the introduction of net billing into the regulatory framework. This allows a self-generator to buy and sell power with the utility operator. Typically, the self-generator sells excess power to the grid at a lower rate per kWh than is purchased from the grid when it is required.

However, if the objective of growth and development is to be achieved, serious attention has to be given to the establishment of the actual rates of buying and selling, to ensure that there is an incentive to investors in these systems. In fact, consideration should be given to the establishment of net-metering policy which would set the buying and selling price equal for CHP and renewable technologies.

2. Feed-in rate: For scale efficiency, CHP systems often produce more power than is actually required for the operation of the self-generator. This excess power can be sold to the grid. The feed-in tariff allows for the establishment of long-term price agreements based on the cost of production. This can serve as an important signalling device to potential investors and provide a basis for greater diversification of fuel sources.

3. Utility-supply obligations: This measure places a requirement on the utility to source a certain percentage of the electricity required for the grid from CHP operators. It should be noted that the utility can achieve this requirement by owning and operating CHP facilities or else buying electricity from independent CHP operators.

4. Interconnect measures: The terms and conditions (primarily technical) which determine the basis for interconnection of the CHP plants to the grid should be clearly established and easily accessible. It is not unusual for monopoly electricity companies to use interconnection issues to stall and defeat the development of competitive energy sources. Policies of this sort will ensure the stability of the power system.

5. Wheeling rates: Recent changes to JPS licences now allow self-generators to transport their own power on electricity grid to different locations islandwide, provided it is for their own use. The price of wheeling is particularly important where a CHP operator has more than one location of operation and may wish to supply electricity at the other facilities from a CHP facility located at one.

Potential Concerns

There is one major concern that would need to be addressed in respect of policies designed to encourage greater investment in CHP facilities. It is likely that some of the large industrial and commercial customers of JPS will be among the first to take advantage of CHP systems. Their departure from the grid could potentially lead to stranded investments on the part of JPS, resulting in an increase in the overall rate of electricity to those remaining on the grid, given the current tariff structure. Mitigating this concern will require JPS to be an active partner in a national initiative to encourage the development of CHP systems.

The following two considerations are suggested. First, in the privatisation process, JPS's terms of sale called for the 80 per cent investor in the company, Mirant, to use its best efforts to bring $600m of new investments in industrial and commercial activity to the island. In effect, the acquirers undertook to contribute to the growth in demand for electricity.

Now might be a good time for the new owners, Marubeni and East-West Power, to see this as an obligation to act on. Japan and Korea, from which the current operators hail, are among the most aggressive in implementation of small and medium-size CHP systems as a way of ensuring internationally competitive electricity sectors, which evidence suggests will provide incentives for new industrial and commercial investments. The realisation of such a strategy would mitigate the likelihood of stranded investments, and could instead lead to increased economic activity and business productivity. This, no doubt, would boost sagging sales growth for JPS.

Second, JPS can and ought to be encouraged to convert their three main operating facilities into CHP facilities. Hunts Bay is located close to the port, the refinery and downtown Kingston, which will have large demand for district air conditioning as it is redeveloped.

The new Old Harbour facility is to be redeveloped on 500 acres of land which is an ideal location for an industrial park, with the power plant at its centre. Bogue is located in the heart of Montego Bay, which is slated for large expansions in a number of commercial entities in proximity to the facility. JPS could spearhead the process, which would lead to reduced electricity cost to those in its industrial zones, as well as the residential customers.

Economic growth and development are never accidental. They emerge from the deliberate planning and engineering of appropriate incentive structures. For Jamaica, a significantly lower electricity rate is crucial, and CHP systems provide one core component to a lower price trajectory for the commercial and industrial sector. CHP systems could ultimately become the basis for:

Competitive industrial and commercial rates of electricity and energy.

An industry structure involving multiple entities engaged in generation, with expanded local participation in the sector.

More sustained competition in the sector on an ongoing basis rather than only at the time of competitive bidding for new generating capacity as currently obtains.

Improved fuel diversity.

Indeed, the development of CHP systems warrants due and deliberate consideration by individual businesses, as well as those responsible for policy and the efficient governance and expansion of the sector.

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