Energy Production and IPPs

Editorial

By M.K.

According to press reports this week, Independent Power Producers, namely sugar millers, are seriously considering to shift from the utilisation of coal (which, together with bagasse, is presently the case) to other less polluting materials like wood chips (roseaux de bois) and solar energy. This is in view of the impact of coal on climate change and the country’s commitment to the Kyoto Protocol. That’s all very good and is a welcome initiative. However, until such time that these new projects are realised, the current contracts binding the CEB with the Independent Power Producers (IPPs) will apparently be renewed for a shorter periods than the earlier longer term contracts (typically for 20 years), on terms that have not been disclosed to the public at this stage.

One argument that has been brought up regarding the “new projects” – these are new projects, according to the Central Electricity Board (CEB), since that’s a shift from the earlier coal-bagasse to bagasse-wood chips/solar energy power plants, and which will call for fresh bids – is whether the consumer would be willing to pay a higher price for electricity produced therefrom. The Government is apparently working on the elaboration of a Sustainable Biomass Framework, and one could presume that State incentives for renewables and efficiency for the benefit of IPPs will come into the picture sooner or later.

Common sense dictates that if new sectors of economic activity or projects are going to contribute an ever-larger share in terms of national production and employment generation, it is those sectors that deserve to be given a fillip. Or, if new offshoots are to be generated from a sector that no longer plays the key role it has played for centuries, those offshoots should receive financial resources, subsidies, etc., provided they become the springboard for greater economic mobility of the various members of the population than has been the case with so many years of protection of the sugar sector alone.

Accordingly, if energy production is to be privileged at guaranteed prices and benefit from State incentives, all stakeholders should participate in the project in a better-balanced model of economic development. This unfortunately has not been the case. What has happened instead is the heavy price paid by the consumer due to the IPPs and their cast iron contracts with the CEB. That’s a pain that has been coming back since the CEB-IPPs contracts had been signed by previous governments.

It bears repeating that it was in the mid-1990s that experts of the World Bank and the IMF recommended that the CEB, which had for most of its existence been both the producer and distributor of electrical energy in the country, 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 then 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. Up to 60% of the electricity the CEB distributes to the public comes today from the IPPs of the sugar producers.

According to contracts then signed between the IPPs and the CEB, the latter had 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 provide 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 contracts between the CEB and the IPPs, which thus operate as a quasi-collective monopoly, speak for themselves. Under existing arrangements, the public sector has no say in the price at which electricity is delivered by the IPPs to the CEB. Earlier 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. Lobbies might have been at work with the objective of preventing “intruders” from occupying an area of production which seemed to be reserved to some exclusive group of IPP promoters. So strong has this lobby been that the promoters of CT Power had to go to court to get the necessary clearance, even after they had already been issued the Environmental Impact Assessment (EIA) certificate, implying that the environmental risks posed by the project had been assessed and found to be compatible with laid-down standards.

The government is surely aware of all the issues flagged above, including that of the powerful vested interests and their lobbies. If it is going to support the move to conform to the Kyoto Protocol through incentives or stimulus packages – a form of bail-out really – then it must see to it that once more the costs are not passed on to the consumers who will then see their electricity bills increase. It’s already quite onerous as at present, and it would be really unfair to penailse the consumers further. We therefore look forward to the government acting as the true custodians of the common weal, and spare consumers from having to sustain a heavier burden.


* Published in print edition on 14 February 2020

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