The Energy Conundrum
The continuing public spat between the Minister of Finance and the Governor of the Bank of Mauritius in relation with the composition and the calibre of the members of the Bank’s Monetary Policy Committee and economic policy generally will eventually pass – however unpleasant, and possibly embarrassing, it may be for the government. A comfortable political leeway would be sufficient to bring to check whoever may be going beyond his brief and put an end definitely to this ugly spat that shows Mauritius’ financial sector in a poor light. Meanwhile there are more important issues that have to be addressed, and which calls for strong political resolve. One issue in particular relates to our steady supply of energy upon which the whole of our economic production is dependent.
The Central Electricity Board (CEB) was, for most of its existence, both the producer and distributor of electrical energy to the whole country. In the mid-1990s experts of the World Bank and the IMF stepped in to recommend that the CEB should give up its role as producer of electricity to the big sugar producers (which had then started diversifying into real estate and energy production), and to restrict itself to being its distribution and marketing agency. That recommendation was adopted by the government, possibly because the CEB could not then afford the huge capital outlays necessary to step up its production capacity, but it resulted in the CEB losing its key role in the production of electricity. Upto 60% of the electricity the CEB distributes to the public comes today from the four independent power producers (IPPs) of the sugar producers.
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 means that the CEB 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.
The contracts between the CEB and the IPPs also provides that any fluctuations in cost due to higher cost of inputs (including coal), 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 will be factored into the price of electricity charged by the IPPs. In other words, the IPPs are passing on all risks to the CEB and, by extension, to the public. The Illovo “mari deal” pales in comparison with the riskless rate of return the sugar producers ensured for themselves – and that during the mandates, initially and subsequently, of accommodating governments.
The contracts between the CEB and the IPPs, which thus operate as a quasi-collective monopoly, speak for themselves in this regard. Under existing arrangements, the public sector has no say in the price at which electricity is delivered by the IPPs to the CEB. Attempts by the government to bring the IPPs to review the price charged and other conditionalities in their contracts with the CEB have failed despite the recourse to an independent foreign mediator. Moreover attempts to bring in other competitors in this market have met with all manner of restrictive market practices and misinformation. The case of 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 speaks eloquent about the determination of some vested interests to block entry to new players. What about pollution and traffic congestion by the existing coal-fired IPPs? Another promoter has met with the same obstructionist attitude: Suzlon – a wind-energy producer. It has taken Suzlon almost eight years, when it first expressed its interest to produce electricity in Mauritius, to the present day for it to obtain the necessary authorisation to start putting in place its plant in Mauritius for a production of less than 30 MW.
The government has, last week, through the Deputy Prime Minister and Minister of Public Utilities’ reply to a PNQ of the Leader of the Opposition announced that it has (finally) given the go-ahead to the CT Power project. A few days later, excerpts from the report of the National Energy Commission, which was submitted to Cabinet last October, were published by a few papers. It looks like it was an organised leak for the relevant excerpts published clearly demonstrates the NEC, which is but an administrative commission, taking a stand in opposition to the government’s decision in favour of CT Power coal-fired generators and recommends instead recourse to natural gas and other green energy inputs.
The recommendations of the NEC will no doubt provide fodder to all the interested (and moneyed) lobbies intent upon defeating the CT Power project on the strength of the renewable energy argument. Any transition from an economy based on fossil fuels to one based on renewable green energy is likely to be slow. Further the capital cost of wind and solar power stations is said to be at the moment higher than that of coal-fired generators and will become viable only on the back of technological leapfrogging. Meanwhile Mauritius will need to do whatever is required to prevent any risk of blackouts. To do this the NEC suggests that the CEB be equipped with engines operating at 60 MW heavy oil which will switch to natural gas. But the government will also have to decide whether it will give way to obstructionist initiatives or remain true to its democratisation agenda and open up with the economy to more players with a view to ensuring energy security in the long term – that is conditional upon the new players supplying electricity at competitive prices and that new fossil-fuelled power plants abide by an appropriate Emissions Performance Standard, like the one adopted by the European Investment Bank which requires that such power plants would have emission limit of 550 grams of carbon dioxide per kwh.
* Published in print edition on 29 November 2013