The effects of rising electricity prices on manufacturers
Some manufacturers have adjusted operating hours to reduce electricity costs.

Some member companies of the Jamaica Manufacturers and Exporters Association (JMEA) have shared what they have been doing to mitigate the impacts of increasing electricity costs which have arisen since the start of 2022 and the war in the Ukraine.

The companies have asked not to be named; however, details shared indicate where power generation has been implemented significant savings have been achieved.

For others, operating hours have been adjusted as one measure to cut electricity costs. Some companies are now concerned, however, about rising LNG costs.

A large manufacturer involved in foods said that between November 2021 to March 30, 2022 electricity costs have seen a 13 per cent cumulative increase. Currently, electricity is 12 per cent of overhead cost.

The rise in electricity costs impact the company’s cost-competitiveness in two ways: One is the increased price of products resulting in reduced sales volumes due to cost unattractiveness. The other is a reduced ability to compete in the export space given that the export market is much more price sensitive as products are much cheaper.

Management shared, “The challenge with electricity is that while there are cost initiatives that we have implemented, there is a limitation to the extent we can reduce the cost and given that it is vital to our operations, to remain viable we have limited options which is why several subsidiaries have chosen to either increase price to the consumer or reduce employees.”

Management further shared, “If this trend continues, we estimate the impact to the bottomline – revenue and profits will be $12-$15 million for the financial year approximately.”

In order to cope with and mitigate the impacts of increasing electricity costs the food manufacturer has been pursuing energy conservation. For example, it says when the lines are not in use machines and other electrical assets including air conditioning units, lights, and fans, etc, are turned off.

Change in operating hours help

The company has also started replacing some of their motor assets with high-energy efficient motors.

To ensure that the production process is more efficient, it is implementing “first time right,” production practices and converting boilers from expensive heavy fuel oil (HFO) to cheaper liquified natural gas (LNG). Already the large manufacturer is seeing savings from this initiative. Meanwhile, the company is also continuing to invest in LED lighting which replaces metal halide fixtures.

Another food manufacturer and distributor, classified as a large shared that as of April 6, 2022, electricity costs decreased by three per cent due to the generation of its own power. Electricity is now two per cent of the company’s overhead costs.

Management commented, “The rise in electricity costs is minimal due to own-generation and electricity is a very small per cent of overall cost. If this trend continues, we believe the impact to the bottomline – revenue and profits would be minimal.”

Management said that to cope with and mitigate the impacts of increasing electricity costs, the installation of the company’s own power generation plant was a suitable solution. The company has also streamlined operating hours to improve energy efficiency.

Baker’s costs rise

As of May 10, 2022, a medium-sized baking entity which produces for both local market and exports saw electricity costs increase by 15 per cent. Electricity is now eight per cent of product cost and four per cent of overall production cost.

Management commented, “The rise in electricity costs impact the company’s cost competitiveness,” as goods produced are not staple products.

They added that any increase in product cost will affect competitiveness as their product will become unaffordable. “If this trend continues we believe that there will be an ongoing erosion of profit margin.”

Management noted that to cope with and mitigate the impacts of increasing electricity costs they have implemented cost-cutting measures such as reduced operating hours and energy efficiency investments.

Another Jamaican manufacturing company, which falls in the small category, indicated that its increased use of renewable energy has resulted in unchanged electricity costs primarily.

The company, in the JMEA report said, “Our electricity costs have not increased significantly over the past three months as the company utilises renewable energy. An actual increase in electricity costs of about 15 per cent, year over year, in March 2022, was mainly due to the company bringing in additional machinery resulting in greater energy consumption.”

Management explained, “The cost of electricity is only a small percentage of the total cost of production. Furthermore, the rise in electricity costs has not had an impact on the company’s cost competitiveness, production, operations, product quality, pricing, revenue, or profits.”

The company said that it heavily utilises alternative energy such as LNG (natural gas) and plans to invest in additional renewable energy sources such as solar equipment.

Packaging challenge

Management noted however that their packaging suppliers are being adversely affected by the increase in electricity costs which contributes to higher prices for packaging material.

They stated, “The increase in energy prices is also causing a rise in the cost of transporting material (packaging material and raw material) and equipment to the factory, as well as a rise in overall shipping costs. The main concern of the company currently is the rise in liquified natural gas prices.”

Some manufactuers are indirectly affected by electricity costs due to its impact on companies that package their products.
Solar power is one of the sources of renewable energy being tapped by Jamaican manufacturers seeking to reduce electricty costs.
LNG solutions are rated highly by local manufacturers but some are anxiously watching price increases for liquid natural gas.
Avia Collinder

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