Pricing electricity from renewable resources

Winston Hay, Guest Columnist

The fact that renewable energy resources such as solar radiation and wind are available free of cost leads many to believe that electricity can be generated from these resources at lower cost than that being experienced utilising fossil fuels. In reality, however, economies of scale typically result in electricity from small-scale renewable resources being more expensive for supply to distribution networks.

Nevertheless, in the interests of environmental protection; reduction of the adverse effects of the price volatility of fossil fuels, oil in particular; the realisation that fossil fuel resources are finite; and the objective of increasing utilisation of local resources, many governments, including Jamaica's, are seeking to increase the extent to which renewable resources are exploited in the provision of national electricity supplies.

The fact that the cost of electricity from renewable resources is frequently higher than that from conventional alternatives means that increased production of electricity from these resources may have the effect of increasing the cost of service to the end consumer. A decision must, therefore, be made as to how 'renewable' electricity can be optimally priced and the extent to which increased electricity prices can be accommodated without distress to the average consumer.

Internationally, the most contentious issue in deciding on appropriate incentives for increased generation of electricity from renewables has probably been determination of the optimum pricing mechanism. Three approaches have found wide application internationally. They are:

Net billing: With net billing, the energy exported to the grid is measured by a meter separate and distinct from the utility's meter. The energy exported does not pass through the utility's meter. The generator is compensated for energy supplied to the grid at a price stipulated by the appropriate regulatory authority as being the utility's avoided cost, that is, the cost which the utility has avoided by importing energy from the generator instead of having to generate the same quantum itself. The amount received by the generator is then obviously less per kilowatt-hour than that which would apply with net metering as described below.

Net metering: This is applied by injecting the 'renewable energy' into the utility's network at some point downstream of the utility's meter. The renewable energy then flows from the generator to the grid through the meter, turning it in the opposite direction to that in which it turns when the energy is being supplied by the utility. The consumption recorded by the meter is thereby reduced by the kilowatt-hours exported, and will be reflected in lower aggregate consumption being recorded for the premises in any billing period. If the amount exported exceeds that imported, the meter will register negative consumption.

How negative consumption is dealt with varies from jurisdiction to jurisdiction, but generally results in the utility paying the generator for the aggregate energy supplied to the grid. The generator is thereby effectively paid the same price per unit of energy supplied to the grid as the utility charges for supply to its consumers.

Feed-in tariffs: FIT is a relatively new but fast-growing approach to encouraging increased utilisation of renewable energy resources. With FIT, all energy produced by the generating facility is metered and bought by the utility. In turn, the premises in which the generator is located imports all its electricity needs from the grid, for which it is billed at the utility's standard rates. The utility purchases the electricity imported at a kilowatt rate determined by the appropriate regulatory authority but which is higher than the utility's standard rates. With that approach, the renewable generator has the economic advantage of being able to purchase its electricity requirements from the utility at lower prices than that at which it sells energy to the utility.

The Office of Utilities Regulation (OUR), in consultation with Jamaica Public Service Company (JPS), has developed a standard-offer contract for the purchase of energy from renewable energy facilities and is currently inviting comments on the draft from the public. The price proposal is based on the net-billing principle, in which the energy will be purchased at the estimated value of the cost avoided by the utility in not having to generate that quantum of energy itself. As calculated by the OUR, on this basis the value of each kilowatt-hour would currently be about 10 US cents. The initial price would remain applicable over the five-year duration of the contract.

Proposed energy purchase

The majority of the responses received by the OUR to its invitation for comments on the draft consider the proposed energy purchase price and the contract period to be inadequate for amortisation of the investment costs. The net-metering principle is more strongly supported. However, the major problem with net metering is that the utility would, in effect, be purchasing the energy at the same price as that at which it sells, and this would obviously be unsustainable in the long run. The utility is unwilling to be dependent on the regulator's periodic reviews for rate adjustments in order for it to be compensated for the income shortfalls which would result from application of the net-metering principle.

FIT was first introduced in Germany in the 1990s and was significantly instrumental in increasing the percentage of electricity generated annually from renewable resources in that country from 6.3 per cent in 2000 to more than 15 per cent in 2008. FIT is currently being applied in more than 75 jurisdictions (countries, states and provinces) around the world. In the Caribbean, Guadeloupe has been applying the principle for more than five years, Barbados since 2010.

Grand Cayman has decided to follow suit and is currently inviting proposals for supply of electricity from renewable resources. The Cayman utility is offering to purchase such energy under 20-year contracts at 37 Cayman cents (approximately 44 US cents) per kilowatt-hour. Average consumer prices in Grand Cayman are currently about 31 Cayman cents (37 US cents) per kilowatt-hour. The utility will buy all the renewable power produced, while the generating facility will be required to purchase all its electricity requirements from the grid. The independent generator will, therefore, purchase energy at a lower price than that received for energy sold. The cost of renewable energy purchased will be included in the fuel charge to consumers supplied from the grid.

When first introduced, FIT prices are higher than the base and will have the effect of increasing the overall cost to the consumer. The impact on consumer bills must, therefore, be regularly monitored and the prices and/or quantum of energy purchased adjusted as appropriate. For this reason, the maximum power to be supplied by any single generator is normally restricted and the period during which proposals for new supplies will be accepted subjected to periodic review by the regulators.

A significant advantage of FIT is that it becomes relatively easy to vary the price paid for power purchased according to the source, for instance to pay more for power from solar than from wind. The purchase price can also be varied in response to varying circumstances As the quantum of electricity produced from renewables increases, the impact of the higher costs may begin to significantly affect consumer prices.

In addition, the cost of renewable generating equipment will probably fall with time, both considerations tending to reduce the appropriate unit price to be paid to independent generators. The prices paid for renewable purchases in Germany, Spain, England and some other countries have been drastically reduced over the last two years.

Jamaica's National Renewable Energy Policy 2010 lists "feed-in tariffs at fixed levels set by the authorities" as one of its objectives in Goal 2. In Goal 3, the key strategy includes establishing "net-metering strategies that value renewable energy production at the point of end-use". Interestingly, what is now being offered to those interested in selling electricity to JPS is neither feed-in tariffs nor net metering. As an incentive for greater exploitation of renewable energy, Jamaica's current net-billing proposal of a five-year contract at 10 US cents per kilowatt-hour for five years appears tame in comparison with Grand Cayman's 44 US cents for 20 years.

Winston Hay is a power sector planning and regulation consultant. He has formerly worked as director general of OUR, principal power engineer with the World Bank, and managing director of JPS. Email feedback to columns@gleanerjm.com and winhay@cwjamaica.com.