Friday, March 19, 2010

JAMAICA'S ENERGY OPPORTUNITY (PART 2)

AS a result of the numerous responses to last week's article, I thought it would be good to do a part 2. This is also based on my very firm belief that a focus on the efficient use of energy could be the single most beneficial economic activity for Jamaica. As I indicated, a mere 30 per cent reduction in our energy bill could eliminate our trade deficit within four to five years, and so a focus on a comprehensive energy policy would be most beneficial to the country.

In response to a comment from Omari last week:

(1) I agree that it would be more beneficial to focus on an overall energy project but one could argue also that as long as the cost of even a small project is less than the operations it makes sense. Prudence would dictate, however, that the most effective approach is used, as the rest of the world is exploring energy options and if their projects are more cost-effective then although our own may cost less than what currently exists, relative costs will be higher; and

(2) The payback period is typically six to eight years, but the way I implemented the system will cut my payback in almost half. Remember it is not just access to capital that is important but how it is used, which is why professional financial assistance is always prudent.

One other person indicated to me that he used grid-tie technology where the system runs on solar entirely from panels, but the excess produced by the panels not used is pushed back to the grid by turning the JPS metre back. He therefore indicated that he just used JPS at nights and does not invest in batteries. Apart from being illegal, if the numbers are worked out then there is no real benefit as what you push back in the day you use (and more) at nights. A battery backup would allow less JPS use and increase in the payback period, while having the convenience of electricity at night if the JPS supply goes. I guess the emotional thought of beating JPS has trumped the financial logic.

There are two other issues I wanted to address. These are to do with the way in which GCT is computed on the JPS bills and look at what may be an overly optimistic oil cost projection in the IMF projections. The latter is very important because oil is such a substantial cost to the country.

JPS GCT
The first thing is that the JPS is known to estimate many of its monthly bills. Therefore if they are going to charge GCT on consumption above 200KWH per month, then effectively what they are doing is levying estimated tax assessments on the public. This leads to another concern with the computation of the GCT component, and the JPS (and OUR) may want to tell the public how they will deal with what could be an overestimation of tax.

The table above shows two scenarios, based on an actual consumption over three months of 650KWH. In the first case there are two estimated bills of 150KWH each, based on prior consumption patterns, and in the second case three actual readings. The assumption of a $30 per KWH is used, and shows in case 1 where GCT comes out at $450, while the actual readings show GCT of $150, which is what the customer is actually liable for. So because the JPS does not provide an accurate reading per month the consumer is overtaxed by 200 per cent.

The question therefore is how the consumer is going to be protected against this possible overcharge of tax on their bill, which effectively is an overestimation of tax. The truth is that unless the JPS does actual readings each month then it cannot guarantee against this happening. The other policy that needs to be understood is how they will adjust GCT charges on bills that are erroneously sent to customers, as it is very easy to misread the analog metre.

There needs to be some policy direction from the OUR and JPS on this. I would hope that the OUR gave some thought to this. It doesn't affect me, though, as my consumption is less than 200KWH per month.

IMF oil projections
The other concern is the oil price projections in the IMF document, which projects oil price to average (barrel) - US$77.30 (2010/11); US$79.90 (2011/12); US$81.50 (2012/13); and US$83.40 (2013/14). These prices seem to be optimistic given the global energy realities as outlined by the International Energy Agency (IEA) and that oil is currently close to $80 per barrel ahead of 2010/11 and with the world still facing economic challenges.

The IEA states the following:
* Oil demand and price will peak in 2025, and until then oil prices will be on the increase. China and India will account for the steepest increases;
* The greatest demand increases will come from coal, followed by oil and then natural gas;

* Oil supply into 2030 will be mainly from "Fields yet to be developed and found". It goes on to state that the cost of finding oil continues to rise (a higher break-even price) and that there is a declining investment in new oil fields (declined by 19 per cent in 2009); and

* Demand is increasing at a faster pace than supply. Output from existing fields will drop by almost two-thirds by 2030. IEA states "Additional capacity of around ...four times current Russian capacity, is needed by 2030 -- half to offset decline at existing fields and half to meet increased demand".

These arguments also do not include any geopolitical concerns that may arise. It seems very likely therefore that next fiscal year oil could average between US$80 and US$90 per barrel and increasing until 2025, or until new sources of energy are found. The problem is that trends show a steady reliance on fossil fuels.

The question then is how we address our own energy policy going forward. The Green Paper on Jamaica's Energy Policy states that energy use is approximately 98 per cent from fossil fuels and the main users are bauxite/alumina processing (36.6 per cent); Electricity generation (24.7 per cent); and Road transportation (23.5 per cent). These three account for 85 per cent of Jamaica's energy use.

What is needed is an energy policy that targets these areas in specific ways, so that if we can secure policy-based loans to reduce usage by 30 per cent to 40 per cent by 2014, we could save up to US$791 million in 2014 alone. But this needs a multi-policy approach. For example, the bauxite/alumina sector should be looking at coal, wind and hydro; businesses and residences should be looking at solar and wind; and road transportation should be looking at investing in bio-fuels as well as providing more investment to develop the infrastructure and discipline in the public transportation system.

Although many think that natural gas is the way to go I am not a big fan of that approach. My own belief is that based on the demand-supply equation, coal will continue to be a cheaper option, and that coal technology will get better and provide cleaner coal. But that is just my own view based on the cost versus the financial benefit.

What is clear, though, is that the price of fossil fuels will continue to increase over the next 10 to 15 years, and as a poor country we will be negatively impacted. The IEA is very clear on its projections and we should make every effort to ensure that we use some of that sunshine we sell to tourists.

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