Could Paulwell's plan light the path to recovery?

Claude Clarke, Contributor

While I disagree with Phillip Paulwell's assertion that the distribution of electricity should be opened up to competition, I am convinced that his newly announced policy - to open the choice of the energy sources used to produce electricity to competition - is potentially the key to bringing electricity costs to levels that would give the Jamaican economy a chance to compete and make this essential service affordable for the consumer.

Present and known technology allows electric power to be most efficiently delivered through transmission lines. This type of delivery involves an extensive and expensive infrastructure, and seeking to replicate it would be highly wasteful of capital. New entrants to the business would be required to use valuable capital to construct very costly infrastructure, and Jamaicans would, ultimately, have to pick up the tab. This, combined with the fact that distribution represents no more than 20 per cent of the price of delivered electricity, supports the view that electricity distribution is a natural monopoly.

Monopolies are not always bad, and in many situations they are necessary for the most efficient delivery of an economic product. However, in these circumstances, it is Government's duty to use regulations to stand in the place of the market to ensure best prices, quality, and service.

A fairly well-developed electricity distribution infrastructure already exists in Jamaica, and Government is in a position to apply the necessary regulatory and oversight authority to force the monopoly distributor to meet specific cost targets and set connectivity charges that are fair to its generation competitors.

essential national objectives

In contrast, electricity generation can only benefit from competition. As I said in July last year in my Gleaner article, 'Jamaica's energy inertia', once participants are able to compete fairly on price, and choose their energy source, such competition would allow Jamaica to achieve competitively priced electricity.

Four essential national objectives would be met.

First, it would improve the balance of trade by minimising the cost of importing the fuel used to generate electricity. At a cost of almost US$2.5 billion, energy is 38 per cent of our total imports and consumes more than 17 per cent of our GDP. The more than six billion kilowatt-hours of electricity estimated to be generated annually is responsible for more than US$900 million of that import bill. The good news is that if we were to convert all our electricity generation to coal or liquefied natural gas, more than US$600 million of that expenditure could be saved. This saving alone could benefit our GDP by more than four per cent.

Second, it would provide an incentive for companies competing to sell power to employ the most efficient technology and equipment for converting fuel to electricity. Between the Jamaica Public Service Company's (JPS) ancient generation equipment and transmission losses, more than 22 per cent of the fuel used to generate its electricity is currently being lost.

Third, it would provide financial motivation for power-generating companies to sharpen their pencils in pricing the electricity they produce to stay competitive.

Fourth, renewable-energy solutions would be encouraged as their competitiveness would be their only obstacle.

UC Rusal's recent decision to construct a 30-megawatt coal-fired plant to serve its Ewarton alumina plant, with the implied benefit to the company's international competitiveness, is clear evidence of the economic value of allowing the generators of electricity to choose their energy source.

However, I wonder if more could not be made of this new strategy. From as early as 2006, the previous owners of the Ewarton and Kirkvine plants were prepared to convert to coal-fired plants in such a way that each plant would be able to sell a 60-megawatt surplus to the national grid. Is there a reason why this could not be done today? The cost benefits to the country would be enormous.

These economic benefits would be made possible by Government's decision to liberalise the selection of energy sources for Jamaica. The not-so-obvious benefit is that by removing itself from the business of choosing energy sources, Government would now be free to properly discharge its core responsibility in the energy sector: that of providing an effective regulatory framework to which the industry would be required to conform in order to protect the environmental, social and economic interests of the Jamaican people.

The key to the success of liberalisation at the generation stage is fair, properly regulated, and evenly applied pricing at the distribution stage. And it is the Government that must ensure that distribution is fair, regardless of who the producer is. The cost of distribution must also be internationally competitive, and the prices from the monopoly distributor must be realistically benchmarked to international best standards.

Mr Paulwell must emancipate his mind from the futile and impractical idea of breaking up the transmission and distribution of electricity in our relatively small market in an activity that is so highly capital intensive and where economies of scale provide an important cost benefit.

The minister's time, energy, and demonstrated penchant for bucking the status quo would be far more productively employed in addressing legacy issues, which might frustrate his desire to reduce Jamaica's electricity costs to levels that would allow Jamaican production to be internationally competitive and relieve the burden of JPS bills on our people.

JPS is partially owned by the Government. This is both a real and potential conflict of interest which, if not removed, could undermine the success of liberalisation. It would be reasonable for a prospective generator of electricity to regard competing with the JPS as competing with the Government. The Government must divest itself of this handicap if it is to be viewed as an honest broker in a truly liberalised regime.

The JPS has recently been given the right to construct a 360-megawatt, natural gas-fired electricity plant. The company is only promising a 30-40 per cent reduction in electricity rates as a result. Was this award based on any guarantees or assurances which would directly, or indirectly, protect the company from other producers using more efficient energy sources, or who may be capable of better prices using the same fuel?

Ja needs to double fuel efficiency

The Jamaican economy consumes more energy per unit of GDP than any of our non-oil-producing trading partners and almost twice the world average. To be within the realm of global competitiveness, Jamaica will have to, at least, double the efficiency with which we use energy. Government must lead a concerted and comprehensive effort to better utilise energy in all areas of our economic and social life. But we will be starting on the wrong foot if the target the Government accepts for the reduction of electricity rates from the JPS is inadequate.

An energy policy that limits its electricity pricing objective to 25 to 30 cents per kilowatt-hour will leave Jamaica continuing to languish in a state of economic uncompetitiveness. Our economic survival depends on electricity rates being reduced to no more than 15 US cents per kilowatt-hour to ensure that we can compete regionally and internationally. After waiting four decades for relief, it would be the ultimate defeat if the Jamaican people were to be sold a solution that is inadequate. A mere step in the right direction would leave us far short of the desired destination.

Because of the disjointed manner in which governments over the last 40 years have approached energy policy, incoherence has been its most consistent quality. Phillip Paulwell must not hold back on bringing focus and coherence to this centrally important area of national policy. He should move with all deliberate haste to set Jamaica on course for a better economic future with competitively priced energy.

If this can be done, and it is accompanied by an agreement with the International Monetary Fund that can reconstruct the major pillars of our economy for macroeconomic competitiveness, we will, at last, after decades of decay, be set on a course that could lead us to economic recovery.

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