With the government already having announced its intention to remove the transport fuel subsidy, there is now a new focus on the cost of the electricity subsidy in Trinidad and Tobago. The cost of this subsidy has been largely ignored in the past as it was borne, not by the central government, but by The National Gas Company of Trinidad and Tobago Ltd. (NGC). However, with gas shortages plaguing the petrochemical and LNG sectors, and with NGC seeing its margins being squeezed by low commodity prices in the downstream and higher natural gas sales prices being demanded by the upstream, this issue has come to the fore.
This issue was a major topic of discussion at the recently concluded Clean Energy Conference. Reporting on the work of the Energy Chamber’s Energy Efficiency and Alternative Energy Committee, Chairman Christopher Narine- Thomas explained how the subsidy is not actually on the electricity directly, but rather on the natural gas that is sold to power generation by NGC. Government policy dictates that NGC has to sell the gas at a low fixed price to the electricity sector and has to prioritise delivery to power generation. This policy means that NGC loses the ability to sell gas to higher price customers in the petrochemical sector, at a time when these plants are being consistently undersupplied. Effectively, this policy means that NGC is subsidising all electricity consumers in the country, in what is typically called an ‘opportunity cost’ subsidy, rather than a direct subsidy.
The power generation sector accounts for about 10% of natural gas demand nationally, which amounts to about 20% of NGC’s total sales according to Mark Loquan, President of NGC, who also spoke at the conference.
According to Narine-Thomas, in 2016, the country lost US$122m because of the opportunity cost subsidy. This subsidy could be significantly reduced if energy efficiency was increased in the power generation sector. From a technological point of view, the energy efficiency upgrade needed is relatively simple, but it is made difficult due to the administrative and financial structure of the electricity sector.
More than half of Trinidad and Tobago’s electricity generation capacity uses inefficient single-cycle gas turbines, according to Narine-Thomas. He added that upgrading to combined cycle would result in significant increases in energy efficiency, and hence reduce the amount of gas used to generate the same amount of electricity. He said that using single-cycle technology, 70-75% of energy is wasted through heat loss. In combined-cycle plants, some of the waste heat from the initial combustion is recovered and used to power a second turbine. This increases efficiency by about 25%. Further, efficiency can be obtained if the remaining waste heat is then used as an additional energy source, for example, as steam in the petrochemical sector or to power air conditioning through heat exchange. This process is known as co-generation or co-gen.
The Energy Chamber Energy Efficiency and Alternative Energy Committee has calculated that energy efficiency power plant upgrades and renewable energy deployment would offset more than one third of power sector gas demand by 2030. He also said that offset gas would then be available for processing in the high-value petrochemical sector, earning substantial additional profits for NGC, the government and petrochemical operators.
So why have these upgrades and deployment of renewables not taken place if the returns are so immediate and obvious? The challenge is the structure of the power generation and electricity sectors which mean that the companies who generate electricity – the independent power producers or IPPs – are not the companies who would directly benefit from the investments. The necessary investments involve high upfront costs for the IPPs to upgrade their facilities. Current estimates are US$100 million per combined cycle unit and US$60 million per cogen unit. The problem is that the company who would primarily benefit from the increased efficiency, namely NGC, does not own the IPPs and cannot therefore make the necessary investments.
IPPs do not actually purchase gas from NGC. Rather Trinidad and Tobago Electricity Commission (T&TEC) purchases the gas and provides it to the IPPs, who then receive payment based on their ability to make power available when called upon, similar to an availability contract. He added that contractually, IPPs are not entitled to energy byproducts (heat, steam, etc.) and therefore they are not incentivised to pursue cogen opportunities.
The suggestion by Narine-Thomas, was to operationalise the existing 150% tax allowance for energy efficiency that was approved by Parliament in 2010, but never implemented (see accompanying article). A tax allowance of this type would provide the commercial driver for the IPPs to make the necessary investments. The challenge is that nobody is currently able to access this tax incentive.
Narine-Thomas reported that in 2010, the government received TT$33 million in tax revenue from the power generation sector. Even if this entire tax revenue was forgone through the tax credit, the financial gains from the efficiency upgrade would more than offset the loss of revenue. This increased overall revenue would come from increased NGC sales revenue, increased petrochemical sales, increased tax revenues from petrochemicals, as well as increased money spent on local services and wages. The financial case for energy efficiency in the power generation sector is very clear.