Pothole-filled road to cheaper energy

Zia Mian, GUEST COLUMNIST

The state of the power sector in Jamaica is precarious. Electricity generation is overly dependent on imported petroleum, particularly expensive diesel oil. The generation plants are old, inefficient and in dire need of replacement. The combination of overreliance on expensive petroleum fuels and old plants makes electricity expensive, which is a deterrent to investment and growth.

The sector challenges are to ensure secure and reliable electricity at an affordable price. Considering the Jamaican habitat and it being a prime tourism destination, this must be done without compromising the environment.

To improve the electricity supply, security and affordability, Jamaica must attract large investments to replace the old and inefficient generation plants and add new generation capacity that will reduce reliance on petroleum and generate electricity using more efficient and modern technology (such as combined-cycle gas turbines). Investors will gravitate to predictable and hospitable investment environments. The rules of the game must be transparent and not change overnight.

This synopsis is not new and has been recognised by successive administrations. The problem has been that decision making and implementation have always been protracted. The Electricity Licence 2001 provided that post April 2004, the new generation capacity would have been acquired by the Jamaica Public Service Company (JPS) through a competitive process. Having granted the licence, the Government later felt that this modus operandi favoured JPS and feared that true competition might not prevail.

In 2007, the Government sought to renegotiate this clause of the licence and took away the responsibility of acquiring new capacity from JPS. The Office of Utilities Regulation (OUR) was designated to spearhead the competitive acquisition of new generation capacity.

When I assumed leadership of the Office in 2009, my priority was putting the electricity sector on sound foundation by introducing timely acquisition of new capacity rather than relying on emergency additions (a general practice in the past). The OUR commissioned the long-run generation expansion study and determined that 480MW of new capacity would be needed in two tranches to replace old plants and add new capacity.

However, the issuance of the request for proposal (RFP) for this capacity was subject to the Government's policy decision regarding the choice of fuel. The debate that should it be coal, or liquefied natural gas (LNG), or a combination of both, continued for too long.

Finally, at the end of 2010, a go ahead was given to proceed with LNG, which the Government intended to deliver to the new independent power producer.

Potential Winning Bid

The OUR believed that the RFP should remain fuel and technology neutral and should allow the potential winning bid to decide on those two factors. The policy decision proviso was that the Government would deliver natural gas at the plant gate. To achieve this, a separate RFP for the LNG project was issued by the Petroleum Corporation of Jamaica.

The OUR was directed to synchronise its RFP with the LNG RFP in such a way that the bidders of LNG project would be able to obtain offtaker agreements from the bidders of the power project. This did not allow sufficient time for a successful power project proposal, and it was unlikely that the bidders, without knowing whether they would win the bids, would provide LNG offtake commitments. But this is a story for another time.

In December 2010, the OUR invited interested entities to submit proposals for the construction of one or more plants of varying configurations up to 480MW of new baseload generating capacity with individual generating sets of no greater than 120MW.

The new plants were to supply energy to the national grid under a power purchase agreement. Where the proposed technology dictated, plant design ratings were to be based on the chosen site's ambient conditions. The OUR had determined that the indicative all-in avoided cost of electricity for Jamaica at US¢10.05/kWh.

PROPOSALS FROM JPS ONLY

Proposals were received only from JPS, which provided a base proposal and three alternative proposals. While the date for the electricity RFP had to be extended, owing to the Fukushima accident, the LNG project fell apart. The one proposal from the incumbent company (JPS) which was considered acceptable was only for 360MW, and no acceptable bid for the second tranche of 120MW was received.

The proposal, however, did not fully meet the RFP requirements. In view of the timing for new capacity, the OUR was permitted by the National Contracts Commission to negotiate with JPS and arrive at an acceptable response within 45 days, which it did. Following the award, JPS was required to meet certain preconditions for which many extensions had to be granted.

When JPS failed to meet these conditions, the OUR terminated the process. That happened just before I demitted the Office in February.

The termination of the process put the the Government in the driving seat where it could negotiate a deal it considered preferable without the involvement of the OUR. However, it seems that the OUR was coaxed into entertaining unsolicited proposals and then tried to formalise the process, in which many short cuts were used. In international procurement, one cannot keep changing timing and requirements without compromising its credibility. There are no excuses for not completing evaluation of bids in the stipulated time.

MAKE POLICY DECISIONS

The role of the Government is to make policy decisions and to address commitment issues. Governments create regulatory agencies to protect investors and consumers from "politically driven decisions that would sacrifice long-run efficiency for short-term political expediency" (quote from 'Readings on Infrastructure Regulation' by University of Florida). The regulators must be allowed to implement the policy without someone continuously watching over its shoulders and prompting actions.

It is interesting that JPS, which was the original winner of the bid, after having done so much preparatory work, did not submit a bid during the last round. This reflects on the lack of predictability that has been created by the protracted procurement process.

The four bids that were received were all deficient in meeting the financial requirement criteria. Jamaica is at a suboptimal solution and, considering the recent Office of the Contractor General report, one is not sure where the current round of bidding is heading.

If the country is to move forward, we must be decisive and create a predictable environment for potential investors. The policy formulation and regulation must be kept separate and apart. Former Prime Minister P.J. Patterson was a visionary in removing the administrative oversight of the OUR from a ministerial level to the Cabinet/Office of the Prime Minister. He wished to see the OUR operating as an independent body, without political interference.

Zia Mian, a retired senior World Bank official, is an international consultant on information technology and energy. Email feedback to columns@gleanerjm.com and mian_zia@hotmail.com.