'Utility death spiral'
Energy sector facing pressure as consumers defect from traditional power grid

Jamaicans can expect the cost of energy to continue trending upwards, according to research and projections in the sector, as more customers — particularly those who can afford higher cost — choose to defect from the grid, leaving those least capable of paying increased costs, and those stuck on fixed incomes, to pay more.

According to chief technical director for energy in the Ministry of Science, Energy and Technology (MSET) Brian Richardson, the country is already on the road to experiencing a "utility death spiral".

He was speaking on Wednesday at the parliamentary joint select committee reviewing the Electricity Act.

The committee last met in July 2022.

Outlining Jamaica's current energy situation, Richardson explained that, with a large number of customers now opting to get their utility "in a box", there is mounting pressure on the grid from factors such as constant 'entrepreneurial attack'. This involves increasing use of solar and other forms of renewables, alternative business models, and customers seeking alternative non-commoditised solutions.

Richardson said this has put the traditional utility model "under siege" to deliver reliable and cost-effective energy.

"What you then have is that because you're having these issues, and the concerns aren't being addressed, you have technology catching up and then you get defection; and so that fixed cost gets redistributed across those remaining on the grid.

"What that does is cause upward price pressures, and you get to a point where you get to an ageing grid because there isn't enough funds to deal with repairs, [and] the need for smart grid investments. So that pushes further upwards price pressure," Richardson told the committee.

"Jamaica, it seems, is on that path [to utility death spiral] right now, because we are in a position where several of our large demand consumers have taken themselves off the grid, they have their own utility in a box. So the fixed costs for those remaining on the grid constantly creeps up," he added.

Further, he noted, for example, that the Jamaica Public Service Company's (JPSCo) most recent annual report shows a five-year increase in the per kilowatt unit cost for electricity — a trend which indicates this spiral.

"We are seeing where customers with the most capability to pay for their electricity [are] looking at that utility in a box solution, and they're taking demand off the grid. If 50 per cent take that demand off the grid, that cost gets shifted to that [remaining] 50 per cent — the only way the price can go is up," Richardson said, pointing out that the vast majority of those who would remain are customers who do not have the capability to pay more and those on fixed incomes such as pensioners.

He said the additional concern is that those who defect from the grid remain connected to the network.

"So you have a problem, which is growing for Jamaica. Our huge demand [customers] is taking their demand off the grid, we have a structure which incentivises it [defection]. We're not looking at what then happens to the remaining customers who are unable to provide a utility in a box for themselves. So Jamaica may very well be a little bit down the road in that utility death spiral," he asserted.

Richardson noted that there is strong stakeholder angst over the sector, prices, and fixed capital costs, which continue to increase with new capacity. He also noted that, with the expiration of the JPSCo's current licence just four years away, all these factors are starting to converge faster than policy can keep apace.

In the meantime, Richardson pointed to World Bank studies on unbundled (deregulated) and bundled (regulated) electricity markets across several jurisdictions, which found that before any country begins to think about unbundling it should have a peak demand of 1,000 megawatts, and a peak demand of above 3,000 megawatts before definitively deregulating. Richardson also noted that Jamaica has 632 megawatts as of 2021, and its projected demand by 2030 is under 800 megawatts. Furthermore, a minimum of five separate generation companies is recommended for that type of market.

Unbundling in the sector refers to the separation of energy supply and generation activities. The concept usually constrains providers, opening up competition, and consequently prevents or hampers monopoly in the activities which are subject to competition.

The chief technical director said unbundling entails significant costs which should not be underestimated, and that it may be more expensive to have multiple providers than a single provider. He stressed that the right of first refusal (ROFR) — a source of major concern for smaller energy providers — is an embedded contractual right granted to the JPS which, if removed, could have unknown implications for the Government or customers.

Richardson said the current grid [needs] to be redesigned considering that the country will face a much different future when climate change is taken into consideration.

"Jamaica is likely to have much drier periods in the future, so our hydro is going to change a little bit. We are going to have hotter temperatures during the summer, so AC demand is going to increase, and we have to ensure that we have laid out the appropriate grid that can provide the electricity demands for the long term — looking at the future where we're seeing distributed energy coming on the grid, et cetera."

He maintained that MSET must find a way to curtail the utility death spiral, or ensure that the future grid is resilient and available to every customer, not only those who can afford it.

BY ALPHEA SUMNER Senior staff reporter saundersa@jamaicaobserver.com

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