The Tribune

By NEIL HARTNELL

TRIBUNE Business Editor

nhartnell@tribunemedia.net

FOCOL Holdings chairman yesterday asserted it is “crazy” to suggest the Davis administration’s energy reforms may not lower energy bills for Bahamian households and businesses, as he pledged: “This will save a ton of money.”

Sir Franklyn Wilson, the BISX-listed petroleum and energy provider’s largest shareholder, told Tribune Business that the changes initiated under the first Philip Davis-led administration will be “transformative for the country” as he pushed back against suggestions from a top adviser to ex-prime minister Perry Christie that savings to electricity consumers are unclear.

Deepak Bhatnagar, founder of DKB Associates and also a former Bahamas Power & Light (BPL) executive director, told the Bahamas Institute of Chartered Accountants (BICA) accountants’ week conference earlier this week that a study he conducted raised questions over whether electricity bills will rise, rather than be slashed, given that many of the costs associated with the Government’s reforms have yet to be disclosed.

Sir Franklyn, though, reiterated his belief to this newspaper that the energy industry initiatives launched by the Davis administration will be among “the more consequential decisions” ever taken by a government in the post-Independence Bahamas as the impact will “touch everyone”.

FOCOL Holdings is playing a critical role in the reforms by providing both baseload generation for New Providence via its planned 177 mega watt (MW) generation plant at Blue Hills and $500m liquefied natural gas (LNG) joint venture with Shell that involves construction of a storage and regasification terminal at Clifton Pier to supply the Bahamian capital with cheaper, cleaner fuel.

Sir Franklyn acknowledged that execution and implementation of the Government’s energy reform strategy is taking longer than planned, and conceded he did not have estimates of the projected energy cost savings to hand, but said any research or study that suggests electricity prices may increase - rather than decrease - needs to be “treated with a high degree of scepticism”.

“Any sense that this will not save money is crazy,” Sir Franklyn told Tribune Business. “I can say that categorically. To say that this will not save money is just not true. Without reading it [reports on Mr Bhatnagar’s presentation], I can tell you - to say that this will not save money when it is fully executed cannot be true.

“I don’t care what analysis he did. This will save a ton of money. I don’t care what the hell he says, I don’t care how he rationalised it, once this thing is finalised it will generate significant savings. I have not read what he had to say, but if you are properly interpreting what he said, the fact of the matter is once this programme is properly executed and finalised it will be transformative for the country and save money.”

Sir Franklyn, reiterating his belief in the positive benefits projected from the energy reform drive, added: “I said it when we had a meeting in the Prime Minister’s Office. This energy project in an independent Bahamas, there are few - very, very few, if any, but few - more consequential decisions made by any government since The Bahamas became independent.

“I said that then and I believe it now. This is consequential. This will touch everybody. Once this is executed - it’s taking time, and will take a little more time - but, at the end of the day, this will be transformative for the country.”

Mr Bhatnagar, in the presentation to BICA, cited his findings that a household consuming around 1,400 kilowatt hours (KWh) of electricity per month could see its bill rise from $470 to about $507 once the new generation projects and Bahamas Grid Company's transmission and distribution charges are fully operational.

He added that the increase projected by his study reflects the combined impact of new generation costs, grid charges and the existing expenses that Bahamas Power & Light (BPL) must continue to recover to sustain its remaining generation assets and Family Island transmission and distribution (T&D) infrastructure.

Explaining that LNG generation, long-term purchase obligations and grid charges could outweigh anticipated fuel savings from the Davis administration’s reforms, Mr Bhatnagar said: “The central question is whether The Bahamas is positioning the electricity system to deliver reliable power at the lowest sustainable cost.

““Electricity cost must be examined as a full stack; a low headline generation price can still produce a high system cost if minimum purchases, fuel pass through, debt, or stranded capacity are managed.” He added that the price attached to a generation, or power purchase agreement (PPA), does not represent the final cost to consumers, as transmission and distribution, financing, administrative expenses and taxes must also be accounted for.

Mr Bhatnagar also said FOCOL's publicly identified 4.625 cents per KWh price for New Providence baseload generation represents a generation equipment component rather than the full cost of the LNG project.

He estimated that the project's all-in generation cost could reach approximately 14 cents per KWh after accounting for LNG commodity costs, storage, transportation and infrastructure amortisation. “The real question is what LNG price, capacity payment, indexation and minimum purchase assumptions are embedded in the FOCOL PPA,” said Mr Bhatnagar.

Other energy industry sources, speaking on condition of anonymity, yesterday backed Mr Bhatnagar’s analysis and warning that electricity bills could rise rather than fall under the Government’s energy reforms - especially if the anticipated reduction in fuel costs from switching to LNG and solar energy generation fail to offset the anticipated increase in BPL’s base tariff to ensure it remains commercially viable.

They suggested that 2027 will be a key year as this is when BPL is mandated by the Electricity Act to submit a tariff review application to URCA. Several energy sources have suggested the state-owned utility will have to increase its base rate while potentially ending the free first 200 KWh (kilowatt hours) that consumers presently enjoy.

One contact suggested that BPL’s base tariff, which is a separate component from the fuel charge, may have to rise from the present 11.95 cents per KWh between 200-800 KWh, and 14.95 cents per KWh above the latter figure, to closer to 20 cents per KWh to allow the state-owned utility to maintain its near-1,200 staff, legacy generation assets and hundreds of miles of Family Island transmission and distribution networks.

“All those rates are going to have to go up. They are just not sustainable,” the source said, adding that they believed some of the PPA deals that BPL has signed with renewable energy providers are up to two to three times’ more expensive than they should be. They pointed out that BPL and its customers are locked into these ‘take or pay’ energy contracts for up to 25 year terms.

“There are a lot of questions in my mind as to how this thing is going to work and bring savings to the Bahamian people,” they said. “The only thing that is going to make this thing work is to raise base rate prices. The cost of electricity is going to go up. The figures don’t lie. Bahamians may be in for a rude awakening when it comes to the base price of electricity.

“The Government is likely thinking of the best time to do it and what the messaging is going to be. They have to figure out how to make it work. Hopefully, when they introduce LNG it will bring [the fuel price] down by 5-6 cents per KWh and then they will bump up the base tariff. The cost is not going to gho anywhere. There’s a number of things for them to consider and work their way through.”

Bahamas Grid Company is contractually due to earn a minimum rate of 5.5 cents per KWh for the first six years of its initial 25-year deal through to around April 2031, while documents released by the Government revealed FOCOL Holdings will need to charge 4.625 cents per KWH during the first stage of its baseload generation project.

Adding these two figures, the 5.5 cents and 4.625 cents charges together, totals 10.125 cents per KWh. This combined compensation to Bahamas Grid Company and FOCOL’s Bahamas Utility Company will have to come out of BPL’s base tariff to pay for both electricity purchased and grid management and upgrades.

This 10.125 cents accounts for between 81 percent to 88.8 percent of BPL’s existing base tariff depending on which measure is used. Tribune Business sources recently suggested BPL’s average base tariff was around 12.5 cents per KWh prior to the Government’s introduction of the Equity Rate Adjustment tariff structure, which dropped this to 11.4 cents after the first 200 KWh hours were made free for all consumers.

As a result, with such a large chunk of BPL’s base tariff going towards paying Bahamas Grid Company and Bahamas Utility Company, multiple observers have questioned how BPL will be able to both cover its existing operating expenses unless it enjoys a base tariff rate increase. The base tariff typically accounts for between 40-50 percent of a customer’s light bill, with the balance featuring the fuel charge.