Ja energy financing off the grid

C. Courtney Jackson, Guest Columnist

In a previous letter, I sought to highlight the fact that the bidding process for the 360MW plant had not attracted companies with strong financial resources, with the implication that perhaps we should take a closer look at the investment planning aspect of this process.

Since that time, the preferred bidder has failed to post the bid bond, while the next in line has, in fact, posted the bond, signed a power purchase agreement with the Jamaica Public Service Company (JPS), and announced that the plant will be partly financed from equity participation by the JPS.

The country now waits anxiously to know if Energy World International (EWI) will successfully raise the remaining amount of nearly US$700m in time to complete the building of the plant, according to the agreed schedule. There has also been an announcement that the Government has established an Energy Monitoring Committee (EMC) to ensure that the company honour its commitment to deliver energy to the electric grid at US$0.1288.

It has not been clear from the discussions in the media that Jamaica's economic difficulties and their impact on the viability of the project were adequately considered in the planning for this investment. It seems that the parties were more concerned with the technical questions of fuel choice, availability and cost; and the final price of electricity to the consumer.

The controversies in the bidding procedures involving the National Contracts Commission (NCC) and the contractor general also consumed a lot of time and personnel resources. So we are not sure if the basic question of whether Jamaica's social, political and economic profiles could attract financially well-qualified investors in a US$740m one-off investment that generated Jamaican revenues.

The range of answers to the question of how this project could be financed would require comprehensive investment planning (rather than just hoping and praying), which would require substantial involvement by the Ministry of Finance and Planning, especially the Planning Institute of Jamaica. The result would be a macro-financing framework developed from financial markets research for the detailed project feasibility analyses and bid management of the Office of Utilities Regulation (OUR).

deliver future pay-off

I believe this comprehensive investment planning approach would consider the design of appropriate financial instrument by which local financial institutions, and even individuals, could participate in the project financing. The foreign-exchange demand for the repatriation of profits would be correspondingly reduced. And Mr Richard Byles, president of Sagicor, made reference to this in a recent public presentation on the subject.

The 360MW project is a relatively huge, lumpy investment that will be financed mostly with hard currency and will deliver future pay-off in local currency. Therefore, the project is exposed to currency devaluation and to the volatility of interest rates.

Strengthening the capacity of local financial markets so they can extend debt and equity financing instruments denominated in local currency, in competitive terms, is therefore crucial to stimulating local private-sector involvement in partnership with international investors. Researchers at the World Bank also found that among a group of 37 countries, the existence of an autonomous energy-sector regulator, such as the OUR, significantly stimulated private investment in power projects.

Current debt-servicing and foreign-exchange flows in Jamaica are giving rise to low levels of net international reserves at the Bank of Jamaica and do not present an attractive economic profile for investors who need to be assured that they can repatriate their profits without difficulties.

Potential investors will consider, among other factors, the demand on available hard currency for the repayment of the more than US$750m Jamaica Development Infrastructure Programme and Major Infrastructure Development Project Chinese loans, US$650m for CHEC north-south link, US$65m Palisadoes shoreline, NROCC Highway 2000 and the US$2b-plus of multilateral loans up to 2017. In addition, the annual cost for imported petroleum is about US$2.5b, equivalent to 16 per cent of the country's output, and the PetroCaribe stock of debt has topped US$2b, with an annual repayment rate above US$100m.

On the hard currency inflow side, remittances are still below their pre-2008 fiscal crisis levels, and the price and volume of bauxite/alumina exports are about half of what they were five years ago - and prospects are not good for the next five years.

We know that significant savings in fuel-import costs are expected from gains in fuel-conversion efficiency of the power plants, and that a unit of energy from natural gas currently costs about one-third of the cost of fuel oil, but it is not certain whether, over the long term, the market price of a unit of energy from natural gas will be significantly lower compared to fuel oil.

The national expectation for positive effects on foreign-currency flows and the exchange rate is indicated by Mr Byles' comment at the same event noted above:

fuel bill

"The latest data suggests electricity costs Jamaicans US$0.38-US$0.42 per kilowatt-hour. Electricity accounts for 30 per cent of the total fuel bill of US$2.6 billion, or approximately US$780 million. If we assume the savings from the new 360MW plant will be at a minimum 20 per cent, that translates to US$0.30 per kWh and removes a 'tax' on business, freeing up money for investment."

That amount of savings would reduce US-dollar consumption by more than US$156 million and increase consumer purchasing power; and, were JPS to press ahead with plans to fuel its Bogue plant with LNG, there could be further savings of US$40 million, he adds. Neither project is expected to be finalised before 2016.

But when they are commissioned, "both these projects should have a massive positive impact on our balance of payments", Byles had said.

He noted, as well, that the responsible authorities should be planning a coal plant predicated on a revival of the bauxite sector. "Coal can produce power at about US$0.12 per kWh. We should be making decisions on this now," he stated.

However, if we then consider the demands on the international reserves for the repatriation of profits based on the regulated target return on investment of about 11.6 per cent, it is apparent that there could still be hard currency challenges that find their way into the exchange-rate dynamics.

In this regard, the World Bank study referred to above also concluded that "financial-sector development positively and significantly affects private investment, and also emphasises that among all institutional and risk measures considered in this study, exchange rate risk is a key determinant to private investment in the power sector. Our findings, therefore, suggest that when assessing the financial sector's development of a country, private investors also take the country's level of exchange rate risk into account. Hence, the latter appears to be the most important risk factor that can hinder the private sector's participation in power projects' funding".

C. Courtney Jackson is a former deputy director general of the OUR; adjunct senior lecturer, UWI. Email feedback to columns@gleanerjm.com and c.courtneyj@gmail.com.