Below is a submission from The Energy Think Tank of the University of the West Indies, Mona.

The Jamaica Public Service Company (JPS) has indicated that it is about to invest US$616 million in a 360MW power plant at Old Harbour Bay that will use liquefied natural gas (LNG) as its fuel source. Dan Theoc, the company's chief financial officer, estimates that if all goes well, the price of electricity could be reduced by 30 to 40 per cent within the next three years.

Interestingly, he pointed out that "this project will not go forward unless we are certain that natural gas is coming to Jamaica, and I mean certain." Evidently, the reduction in electricity price is not inevitable. Thus, for the average Jamaican who now pays in excess of 40 US cents for every kilowatt-hour of electricity he or she consumes, the question is, 'What are the things that could go wrong with this project?'

The Proposed 360MW Plant

Perhaps a good point to start at is to look at the proposed plant and the potential benefits. The 360MW power plant to be installed in 2014 is intended to replace the ancient and inefficient Old Harbour power station (approximately 212MW), in addition to meeting some growth in demand.

The main advantages of the combined-cycle plant that will be installed are its flexibility and efficiency. It will be capable of burning light fuel oil (LFO), also known as diesel oil, should the gas be unavailable. In addition, it converts a higher proportion of a barrel of oil equivalent than other fossil-fuel generation plants.

The plant is expected to meet baseload demand. This means that the cost of running the plant is projected to be lower than other plants in JPS's fleet. As such, apart from downtime required for maintenance, it would be used on a continuous basis. Based on this level of usage, the plant would be generating some 2,800GWh per annum, representing two-thirds of JPS's annual energy requirement.

The anticipated reduction in electricity prices is to be derived primarily from two factors: (a) a reduction in the cost of the fuel, and; (b) improvement in the efficiency of converting fuel to energy.

A comparative estimate of the fuel costs provided in Table A demonstrates an improvement in the unit cost of fuel (measured by energy content in fuel) of approximately 28 per cent.

Note: The assumption is that the cost of the natural gas delivered to the power plant will be in the US$8-US$12/MMBTU range.

In combining the efficiency and price gains, from a fuel-cost perspective, the think tank estimates that the country would realise a savings in its fuel bill of US$185 million per annum. This estimate is based on the notion that this new unit will be installed and running on natural gas with the efficiency and cost anticipated. But this is if all goes well. The three major challenges associated with this project are discussed below.

1. The Challenge of Coordination

Natural gas exists in enormous quantities around the world. However, the fact that there is no known source of natural gas in Jamaica means that it has to be imported. Transporting natural gas efficiently over vast distances requires that the gas be converted to LNG. Liquefaction, as it is called, involves the cooling of natural gas to -162C (-260F), which results in the gas becoming a liquid at 1/600th of its original volume. By virtue of the huge volume compression achieved in the liquefaction process, LNG can be efficiently shipped from one country to another in specialised vessels.

On reaching its destination (Jamaica in our case), LNG must be reconverted to gas (regasification) and piped to power plants for the generation of electricity. In order for the project to be successful, there are three major components that must be addressed:

1. The purchase of LNG by entering into a contract with a supplier.

2. The contracting of floating storage and regasification services from a provider.

3. The construction of pipelines from the regasification facility to the power plant.

All of these three components are the responsibility of the Government. This is no ordinary task. It involves the coordination of, and commitment from, multiple stakeholders (fuel supplier, JPS, floating storage and regasification unit provider, etc.); each pursuing its own interest.

Table B shows the increase in fuel cost associated with higher LNG prices. Consequently, unless the project is tightly and shrewdly managed, the expected price of the gas when it gets to the power plant might be so high that the benefits promised might not materialise.

2. The Challenge of Collapse

As Mr Theoc suggests, JPS intends to embark on the power plant project, but this will depend on the Government's ability to ensure the availability of gas. This challenge of a collapse in the power deal is not imaginary; it is a real threat.

If things go wrong, the country would be left at a critical point without a long-term solution for meeting baseload demand and would have to resort to measures geared towards extending the life of the old units and implementing short-term, suboptimal generating solutions. No doubt, this would be accompanied by widespread power outages and further increases in electricity costs in the short term.

3. The Challenge of Timing

There is also the possibility of partial failure associated with the delivery of LNG. In this scenario, the power plant would be built, but the gas component of the project would not be secured in time to ensure that LNG is available. In such an event, the power plant would, therefore, have to use diesel oil instead of LNG.

This would result in the tripling of the fuel cost associated with the plant. Rather than savings of US$185 million in the country's fuel bill, all else being equal, there would be an increase of US$302 million. Electricity prices would increase by about 33 per cent, soaring above 50 US cents/kWh. It is difficult to imagine the economic and social repercussions resulting from this level of increase in the electricity bill. This situation would persist until gas became available.

Conclusion

The high price of electricity is sapping the economy of its vitality. Never before has the hope of an entire generation of Jamaicans been so tied to the outcome of a single energy project. If the project is a success, a nation strangled by high fuel prices will breathe again. If the project fails, the consequences are unthinkable. The challenges of coordination, collapse and timing must be confronted. The team appointed by the Government to implement the project will need tough negotiating skills, extraordinary alertness and plenty business savvy to ensure that the objective of a significantly lower electricity price is met.

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Table A: Typical Costs

Table B: Typical Costs