Monopoly hurting energy sector - Excerpts from a PSOJ forum on energy presented by Nigel Davy

Does the monopoly within the electricity industry keep energy costs high? The answer is a resounding yes!

To spur robust and real growth in the economy and to reduce energy cost for all Jamaicans, as a matter of urgency, the Government of Jamaica (GOJ) must enact legislation to separate transmission and distribution (T&D) from generation.

In a modern economy that hungers for vibrancy and transparency, no single entity, like JPS, should own both!

The question a policymaker should ask, is: if generation can be competed, and T&D can be separated from generation, why not do this?

Opponents to this position will argue the following five points:

1. The Jamaican grid is too small and finite for this to make economic sense.

My response: We currently have partial deregulation in generation and you will note that the independent power producers (IPPs) are the most efficient and lowest cost producer of energy on the national grid today!

The size of the grid has not limited the efficiency of the IPPs nor their low cost of energy.

This would be true today - and only today - if we were trying to split T&D, but separation of T&D from generation makes absolute sense!

2. There is no precedence with such a small and finite grid to justify separation of T&D from generation.

My response: Jamaica is a trail-blazer in demonstrating what others fear to undertake. Jamaica has done it successfully in the telecom sector and other nations have followed her lead. We have done it in parallel areas, such as sports and music!

We must again lead the charge and blaze trails in making this shift in policy in the electricity sector.

3. It will be too costly to do.

My response: Not true. It is even more costly not to do. Our economy is not enjoying robust growth due to the high cost of energy! Which is more expensive?

Deregulation in the United States and Europe was not inexpensive in the short term, but in the long term, electricity got cheaper and a vast amount of energy services companies (ESCOs) were born and are still thriving!

4. You will be creating yet another monopoly in trans-mission and distribution.

My response: Unlike generation, transmission is a natural monopoly by virtue of its structure.

The precedence has been set globally wherein monopoly on transmission has very little impact on the price of energy, and as a regulated monopoly its T&D prices for its services will be regulated in a direct and transparent manner.

This is true in South, Central and Latin America, the US, and in Europe.

5. Fuel diversification in generation and a shift to nuclear and coal technologies are the answers.

My response: Why settle with a 10 to 20 per cent reduction in energy price in the short term, when you can attain a sustainable reduction over the long-term north of 40 per cent with robust and true competition? Robust competition helps to keep all honest over the long-term.

We will not get to rates Trinidad enjoys, but every penny we save per kilowatt-hour for electricity is a four per cent reduction in the price of energy (using today's unit price as reference).

Here are the realities with nuclear, coal technologies and LNG as fuel:

a. Nuclear technology has its place in Jamaica's energy mix and should be further pursued, but the development of technology for the size suitable for Jamaica is up to 10 years or more away. We simply cannot wait.

As you all know, despite its positives, nuclear technology has its fair share of problems, and I am not sure all can be adequately mitigated. The perception is a huge burden.

The Japan tsunami and the recent floods in the Mid-Western US are fresh events in our minds!

b. A coal plant also has its place in our energy mix, but it takes 4 to 5 years to construct, with high capital cost. In addition to its difficulty to finance, coal has other long-term problems.

The recent dam rupture at the TVA coal plant located in Kingston, Tennessee, that spilled millions of gallons of contaminated slurry from its coal plant into the community around the plant, is also fresh in our minds.

c. LNG is a two-year project and is the quickest, cleanest and most appropriate first step in reducing the price of energy.

This can be appropriately dove-tailed with deregulation to attain sustainable low energy price.

What currently exists

At the moment, JPS is both a bidder for new generating capacity and a buyer of electrical energy from these bidders - IPP. All IPP must ultimately negotiate a power purchase agreement (PPA) with JPS, ultimately to be approved by the Office Of Utilities Regulation (OUR).

This issue was among the deterrents why we never had more robust competition from the recent 480MW RFP.

You simply cannot have robust competition with this construct!

During the sale of the Mirant portfolio to Marubeni in 2006, JPS implied that they were happy with no competition.

One has to therefore ask, is this why the requirements of the recent RFP for 480MW of capacity was so onerous?

The current monopoly also places the OUR in a very awkward position that leads to the perception that they

are not objective with respect to JPS.

Let's put Jamaica's current monopolistic situation in context for all to appreciate the consequence of this monopoly! Let's look at three areas.

The existing monopoly

You will recall that when Mirant bought JPS in 2001, the GOJ gave them the exclusive right for 3 years - a hard monopoly - to provide new generating capacity!

What happened during this period of exclusivity?

a. JPS installed a gas turbine plant at Bogue that produces the most expensive power in Jamaica today, despite it being JPSCo's most efficient plant! In excess of 30 per cent more expensive than from an independent power producer. This is primarily due to the fact that they use automotive diesel as fuel! This will change with LNG!

b. JPS did very little to improve the efficiency of their other existing generating plants to drive down the price of energy. Jamaica expected modern and efficient generating capacity during that time.

Relative to the private power producers, JPS' other generating plants produce the most expensive power on the grid today! This averages 50 more expensive, because of their inefficiency!

In terms of fuel cost, the largest component cost on a consumer's energy bill today, the consumers are paying for the inefficiency of JPS generating plants!

c. JPS, by their own publication (2006 Sale Prospectus) was recovering an average of two over and above their fuel cost. Based on their projections, they would be recovering approximately J$800M this year (2011) and J$1.2B in 2012.

Nigel Davy is an energy consultant and power plant developer.