The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Regulators have confirmed a new net billing-based compensation mechanism for renewable energy providers providing power to Bahamas Power & Light’s (BPL) grid with rates based on the latter’s “non-hedged avoided fuel cost”.

The Utilities Regulation and Competition Authority (URCA), unveiling its statement of results and final decision on “cost effective tariffs” for the fledgling renewable energy industry, has decided on a price structure that applies to both small-scale residential and larger business/government solar systems.

Both will be subject to a ‘net billing’ structure, URCA said, with “compensation at a rate per kWh (kilowatt hour) equivalent to the non-hedged avoided fuel cost of the public electricity supplier”. That supplier is BPL, with the regulator clarifying that the fuel cost compensation will be calculated by stripping out the impact of its current hedging policy.

The move effectively fulfills URCA’s pledge to move away from the ‘buy all/sell all’ method of compensating renewable energy suppliers, the regulator having admitted last year that its policies are “not attractive” for companies and investors seeking to enter the sector, hence the pricing structure switch.

The regulator, in a much-criticised compensation proposal for larger grid-tied renewable energy systems, in 2020 mandated that those capable of producing more than 500 kW (kilowatts) were to compensated by BPL for selling energy to the grid via a “buy all, sell” method.

This required participants with such systems, mainly larger businesses and government facilities, to not consume any electricity generated by their renewable systems. They instead had to export all energy they generated to BPL, and consume all the electricity they need from the state-owned monopoly at the standard retail tariff levied on all its customers.

Those who “sell all” under this arrangement have been compensated by the equivalent of BPL’s appropriate monthly fuel charge, which normally accounts for just 50-60 percent of customer bills. Such a mechanism was vehemently opposed by private sector renewable energy players on the basis that producers will not be fully compensated for what they produce.

They argued at the time that reducing the rate of return on utility investments in such a fashion will discourage Bahamians from investing in renewable systems, and URCA agreed based on the results of a study it commissioned from independent consultants, The Cadmus Group and Energynautics.

“The current RESG (Renewable Energy Self-Generation) policy design is likely not attractive for larger projects that are compensated at fuel rates under a buy-all/sell-All arrangement,” URCA concluded.

“While the current RESG policy design is cost effective for smaller projects that can offset significant electric purchases with self-generated energy, the current design is likely insufficient to attract participation for larger projects that are not able to offset electric purchases and are compensated at a fuel rate which is insufficient to cover project development expenses and provide system owners with the required rate of return.”

Net billing enables persons with grid-tied systems to “net off” the difference between what they supply to, and consume from, BPL. However, many in the renewable energy industry have advocated for net metering, which credits grid-tied solar system users for the energy they sell to the grid.”

BPL, in its reply to URCA’s consultation, argued that “the value-based approach pegged to the avoided cost of fuel is BPL’s preferred approach”. And the regulator added: “BPL also put forward the view that investors in the renewable energy projects should be required to compete against the prevailing cost of energy to the public electricity supplier.

“BPL premised this view on URCA’s position that by setting payment rates equal to the levelised cost of energy (LCOE), policymakers can ensure that payments to project investors throughout the contract will allow them to recover their costs, including the return on their investment. BPL argues that rates charge based on LCOE will necessitate subsidies from ratepayers.”

URCA, in reply, said: “URCA notes BPL’s preference for the value-based approach pegged to the avoided cost of fuel. However, URCA reiterates that while the administrative, value-based approach is an accepted methodology for setting the compensation rate for renewable energy generators, it pegs the value of the kWh produced by the renewable energy generator to the utility’s cost of fuel.

“There are a few drawbacks associated with this approach, including that it does not provide long-term investment certainty because the compensation rate is variable and fluctuates based on the cost of fuel; it only incentivises investment in renewable energy when the cost of fuel is high and not when the cost of fuel is low; it does not reflect the actual costs of investing and operating a renewable energy system; and it does not reflect the full value a kWh of renewable energy may deliver to the grid. Notwithstanding, URCA believes that un-hedged avoided fuel costs over the past five years are sufficiently cost effective to incentivise renewable energy investment.”