Business

Jamaica's continuing energy crisis

by DENNIS CHUNG

Friday, July 29, 2011    

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In July 2006, I wrote an article titled "Oil - Jamaica's main external threat". At the time our use of fossil fuels (oil) was 96 per cent of our energy needs, and the oil price was US$78 per barrel. In February 2008, I wrote another article titled "Oil - still Jamaica's main external threat". At that time oil was trading at US$100 per barrel, and fossil fuels were still just about 96 per cent of our energy usage. Today oil is trading at just under US$100 per barrel and our energy usage is just about 96 per cent per barrel.

Does anyone see anything wrong with this picture? This energy crisis started from the 1970s, and as a country we have been talking since then about the need to rationalise our energy usage, and move towards cheaper forms of energy. After almost 40 years of talk, I think we can safely say that this is the longest-running talk show in the history of the country. Recently, even the City of New York announced an initiative to introduce significant numbers of solar panels, as a solution to high energy costs and future supply.

I find it very difficult to understand why it has taken so long for us to address this issue, as today energy is the biggest threat to production and industry in this country. Running close behind is the scrap metal industry and for the record I support the move to indefinitely ban the industry until a solution can be found. Hopefully a solution can come before next year, but any announcement of a temporary ban will only cause the hoodlums to continue to stockpile.

For the past two years approximately, we have seen the Balance of Payments (BOP) perform better than prior year comparative periods, as a result of the weak global demand, and hence the fall-off in oil prices. Still oil imports were approximately 25 to 30 percent of imports during that period. I had indicated at the time that this was just a respite and sooner or later oil prices would start to climb again, especially as global demand starts to pick up. Add to that now the crisis in the US, which is causing a quicker than expected depreciation of the US dollar, and a run to commodities, particularly gold.

The effect on Jamaica's BOP has been that the current account deficit has started to worsen again, and businesses and individuals will continue to be under immense pressure from rising energy prices. So we once again have not taken advantage of the lull in oil prices. But as I had indicated when oil prices were on the way down, we would forget about the urgency needed to address this, added to the bureaucracy involved, and it would only come to the fore again when prices started to go back up.

So here we are once more, fighting with the JPS and a worsening current account, which will no doubt affect our future demand of US dollars if not addressed expeditiously.

What is happening currently? I saw an ad on television this week where the NHT seems to have expanded its offering of solar panel loans. And this is a good move and one I have been pushing for a while. I hope that the level of bureaucracy that existed a few months ago has been improved, as it was way too onerous for someone to access a loan. No doubt this bureaucracy existed because of the need to protect government funds, but we should have found a way to protect the funds and at the same time disburse the loans, as the cost of high energy bills for Jamaica far outweighs any loss that could occur from increased risk in the lending practices for this purpose. In fact I still maintain that the GCT on the electricity bills should be used to credit compliant taxpayers who introduce renewable energy solutions at their homes and businesses.

I also see that the argument surrounding the JPS distribution monopoly has shifted to being impractical to break up because of the size of the country and cost of doing so. I think what is needed here is some out-of-the-box thinking. I totally agree with the position of the Energy Minister, when he says that the control of the distribution would have to remain with the JPS. The fact is that it would be much too costly and difficult to monitor otherwise, as JPS has the infrastructure to do so.

This, however, does not prevent competition in the market. And vibrant competition at that. This can be done in the following ways.

1. Competition will occur by persons generating their own energy needs, as this will reduce the demand for the electricity produced by JPS. I have been using solar panels at home for over one and a half years, and it is still going strong. My average cost of energy has been significantly reduced, and I expect a four-to- five year payback timeline. I also am not impacted in a significant way by JPS rate hikes, and power cuts don't affect me. In addition, at this payback period this amounts to a 15 to 20 per cent return on investment (if one considers depreciation), with no withholding tax.

2. We need to move immediately to net metering, as net billing is still not cost-effective for greater investments to take place.

3. We should allow independent electricity generators to establish themselves, and be charged by JPS a regulated distribution fee. These independents would then sell the power they generate directly to the customer, and not have to sell it to JPS for them to on-sell. This is where the OUR would be valuable in regulating the cost of the distribution (to ensure a standard and reasonable charge) and also to assist in monitoring how many credits each distributor puts on the system and can sell. The more cost-effective one would obviously sell their supply first. This way JPS also collects for the distribution, but competition will be introduced.

The other solution to significantly reduce demand is to invest in a much more efficient and safe public transportation system. Right here we have to commend the efforts of Mike Henry in getting the limited train service going. This will not only reduce the demand for energy but also ensure that competition forces the other operators into greater discipline and efficiency.

Note that none of these initiatives involve any significant project like the LNG, which is required for industrial production, but these alone could save 30 to 40 per cent in energy cost. If this happens it means greater disposable income and revenues for businesses.

Jamaicanisation of the US

The debt crisis debacle happening in the US is pointing towards the Jamaicanisation of that country. I never thought the day would come when I would see US politicians behaving like Jamaican politicians, where politics and party come before country. It is a sad day for the world when the world's leading economy starts to behave in that way, and we are seeing how destructive politics can be. In Jamaica we have long known about the destructive nature of politics as evidenced by our low growth rates, relatively worsening productivity and human development index, and increasing poverty.

I think after the irresponsible behaviour of US companies that led to the 2008 financial crisis, and the current debt impasse, the US is showing the whole world why it no longer deserves to be the world's reserve currency or benchmark for financial transactions. It is still the greatest country in the world for me right now, but is fast self-destructing.

Dennis Chung is a chartered accountant and the author of "Charting Jamaica's Economic and Social Development - A much needed paradigm shift". His blog is dcjottings.blogspot.com

Email: dra_chung@hotmail.com

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