Rationalising Energy Production and Pricing is a Must

CEB, CT Power and the IPPs

By M.K

Mauritius is an economy extensively dependent on outside markets. This makes its road and communication infrastructure absolutely essential to support its development. Another key factor on a par with roads and communications is assuring a steady supply of energy. The whole of our economic production, both of goods or services, revolves around the sustained supply of energy.

Our principal roads are under the control of the public sector and we can draw comfort from this fact. If lateral roads are to be built up by private enterprise, they will not stand in the way and clutter up the flow of people and goods across the country since the strategic roads will still remain in the hands of the public sector. The same is not true of the communications sector which is practically dominated by a couple of private service providers. Given this, we can rely on the strength and effectiveness of the sector regulator to ensure that communications are not only delivered price efficiently but that they are also maintained free of any sort of disruptions all the time and kept up to date with the best that technology has to offer at any point in time.

There was a time, not many years ago, when energy production for public consumption was fully in the hands of the public sector. The Central Electricity Board (CEB) was both the producer and distributor of electrical energy to the whole country. Then, we had wizards coming from the World Bank and the IMF in the mid-1990s advocating that the CEB should give up its role as producer of electricity, restricting itself to being solely its distributor on the national grid as well as the collector of electricity bills. The private sector was to be the producer of electricity with the CEB acting as its distribution and marketing agency. It was a recommendation made at a time the big traditional sugar producers were thinking of diversifying away from sugar into real estate and energy production.

After the government adopted this recommendation, the CEB lost its key role in the production of our electricity needs.  Today, up to 60% of the electricity it supplies to the public comes from the electrical production of independent power producers (IPPs) of the private sector. From 1997, when the first authorisation was given to an IPP, three other private sector IPPs having formed part of the previous sugar conglomerates, have been added on to the major private power producers of the country. According to contracts signed between the IPPs and the CEB, the latter has to buy up all the electricity produced by the IPPs in the first place and only then make good any residual shortage in the demand through its own production.

This arrangement relegates the CEB to a subsidiary position. The latter has to install spare capacity (thermal and hydro-electric) and keep it aside so as activate it to make good any shortfalls in supply from the IPPs. But if IPPs are increasing their supply, the CEB should cut down its own production to take up the IPP supply, no matter if its own installed capacity has to remain idle. Moreover, the contract between the two parties provides that any fluctuations in cost due to higher cost of inputs (including coal) by the IPPs, any external or internal price inflation, changes in freight rates, any adverse effect of exchange rate changes on the cost of production of the IPPs, any taxes – all of these will be factored into the price of electricity charged by the IPPs to the CEB. In simple words, the IPPs are passing on all risks to the CEB and, through the latter, to the public while guaranteeing to themselves a riskless high rate of return.

The domestic price of electricity influences our export competitiveness. It impacts directly on the price our producers will charge to domestic and external consumers for their products. Under existing arrangements, the public sector has no say in the price at which electricity is delivered by the IPPs to the CEB. IPP contracts speak for themselves in this regard. As we know, the manufacturing sector is prompt to jump up against any currency devaluation it is not getting to make itself more competitive on external markets. But it never makes mention of the efficiency with which our electrical production is being delivered by IPPs, i.e., the price being charged per unit of electricity consumed. Why? Are there inherent conflicts of interest on the two sides? Why is there no competitor to whose cost of production reference can be made to gauge whether existing IPPs are charging a fair price per unit of electricity?

Since all IPP contracts are standard, this set of producers operates as a quasi-collective monopoly. The only way to see through the monopoly practices of local IPPs was to bring up new players who would be in competition with them. We are all seeing how restrictive market practices are being kept up by opposing the only other high-scale independent electricity producer trying to set up, notably CT Power at Albion, on the grounds that it will be polluting or compounding traffic congestion problems.

What about pollution and traffic congestion by the existing coal-fired IPPs? Is the pollution control technology of CT Power inferior to that of the IPPs? No one is coming up with comparative facts at this level – and that makes you suspect that existing IPPs could be worse off on this score — but obstructions all and sundry have been placed to prevent CT Power from coming into operation on the presumption it will be more polluting than the rest. To convince yourself about this classic obstructionist attitude, you need to ask yourself why has it taken from 2004 – when it first expressed its interest to produce electricity in Mauritius — to the present day to authorize Suzlon, a wind-energy producer independent of the local IPPs, to start putting in place its equipment in Mauritius only now even for a relatively small production of less than 30 MW?

That CEB has to keep aside extra idle capacity has cost implications. If this cost is not passed on into the electricity bill, it is the government, i.e., taxpayers, who have to foot the bill. The CEB is contractually bound to buy up any amount the IPPs produce and bridge any gap between supply and demand. It will be noted that, in contrast to the treatment given to IPPs, small household units producing their own electricity are being authorised by the CEB to sell to it any surplus electricity they produce subject to a specified limit.

We ought to have rationalized all this by having an overall plan that will go beyond ensuring high rates of annual returns to IPPs. Instead of saying that we cannot but reflect high international cost of inputs in the on-going price of electricity, we ought to be considering what we can do with our own resources to the extent we can so as not to subject ourselves increasingly to dictates of international market fluctuations. The country’s energy efficiency and security of supply should instead have primed above private interests. We should thereby have gone for a national electricity production project in a structure yielding a price which will compare favourably with prices competing enterprises have to pay up in other countries. One wonders which authority in the country is coordinating these considerations rationally along with ensuring foreseen surges in demand keep being met with installed production capacity.

* Published in print edition on 31 January 2013