Understanding the cost of energy in Jamaica (Part 2) - ‘Electricity cost poised to come down’

In looking at the overall cost of electricity (COE), one must consider how all different costs interact, and how supply and demand are satisfied.

The utility business has a significant amount of fixed capacity costs associated with the transmission and distribution (T&D) network as well as the generation assets - whether owned by Jamaica Public Service Company (JPS) or the independent power producers.

These costs do not vary with actual electricity usage, as these assets are in place to meet the highest (peak) demand on the system at any point in time. This includes the annualised costs of poles, lines, transformers, sub-stations and the generation equipment which are in place to meet the peak demand.

So, while we discuss the cost of electricity in terms of US cents per kilowatt-hour (kWh), it is important to appreciate that the fuel cost is completely variable but the non-fuel costs (or capacity costs) are not.

Based on a recent cost of service study, we identified that 88 per cent of the non-fuel costs are fixed (related to capacity) and only 12 per cent vary with changes in energy consumption.

So, when we talk about serving a customer today for an average cost of US25c, it's important to appreciate that the fuel component is completely variable (now about US13c) but most of the non-fuel costs are fixed (circa US10.5c per kWh).

This is an important consideration, as persons look at options to reduce their energy consumption or look to go partially off the grid. In order for all persons to pay for their fair use of capacity, energy consumption will not be the real criterion but their capacity (or demand) requirement.

 

The cost of capacity to meet peak demand

 

It is important to note that energy is produced (or supplied) to instantly meet the total demand on the system. So, we must have enough generation running to instantly match supply with the demand. If the supply is not sufficient, then some customers will experience power outages.

This brings the resource (generation supply) issue into consideration. Jamaica has a peak power demand that occurs between 6 and 9 p.m., amounting to approximately 620 megawatts (MW). This can only be reliably supplied from baseload (or firm) capacity and cannot be reliably served from intermittent resources such as solar or wind.

It's for this reason that we must focus on low-cost base-load generation for the next round of generation. That's why it is equally important to appreciate that US13c wind or solar power will not be comparable to US13c baseload generation, as those resources will not be available for serving the peak demand, due to their intermittent nature and, therefore, have to be backed up by baseload capacity to guarantee the reliability of supply.

While distributed solar generation certainly has its place, we must ensure that we are comparing apples with apples and counting all of the costs when looking at the real cost of electricity.

As long as the distributed generation has to connect to the grid, then we have to count all of the capacity costs previously discussed.

There is also a limit to how much intermittent generation resources can be integrated into the grid before causing system stability concerns - resulting in additional resources (and costs) to stabilise the grid. This can be a complex exercise and requires an integrated resource plan (IRP) to fully analyse.

 

The cost of theft

 

On the T&D side of the business, the main challenge is commercial losses, or the theft of electricity. While JPS has 600,000 legitimate customers, we also have approximately 180,000 illegal users and total commercial losses of approximately 18 per cent.

As a country, we must find a solution to the problem of electricity theft. This crime is costing Jamaica in the region of US$115 million in wasted fuel per annum, based on the total fuel purchased in 2014.

We must understand and address the root causes of this socio-economic problem if we are truly to resolve electricity theft. This requires a targeted social intervention programme with the appropriate safety net and subsidies for those who truly cannot afford the product, coupled with customer education and training to learn to use the produce wisely (i.e., energy conservation). It also requires stiffer penalties and increased law enforcement to limit the extent of the theft of service.

 

Growing to reduce the cost of electricity

 

Lastly, I do wish to emphasise the importance of growth for the economy and for lowering the COE further. As we grow the customer base (i.e., add or regularise more customers) and add new low-cost generation, we expect to be able to supply large industrial customers with a COE of US18c (the COE for large industrial customers today is approximately US21c).

Additionally, if we can eliminate commercial losses over the next decade, we can further reduce the COE by US2c per kWh for all customers.

The importance of centralised planning and execution cannot be overemphasised, to ensure that we are implementing solutions that help to lower the cost of electricity for all customers on the grid. Based on the planned projects for the next three years which have been approved by Electricity Sector Enterprise Team, I am confident that Jamaica will have the third lowest cost of energy in the Caribbean, something we should all look forward too.

- Dan Theoc is JPS's chief financial officer