Part 2 of the Understanding the Electricity Subsidy Series by Christopher Narine Thomas, Chairman of the Energy Efficiency and Alternative Energy Committe at the Energy Chamber.
In the previous installment of this series we outlined the mechanics of the electricity subsidy. Let’s take a moment to recap the key points.
1. The electricity subsidy is at its core an opportunity cost subsidy where the demand for natural gas for power generation is protected from competing with natural gas demand for petrochemicals and LNG.
2. This allows T&Tec to purchase gas from the NGC at a price that is significantly below the prevailing market rate for alternative uses of gas i.e. petrochemicals/LNG.
3. The Cost Price of Electricity Generation in T&T = Cost of natural gas + Cost of conversion
The Cost of Conversion is essentially a service fee charged by the independent power producers to convert the gas purchased by T&Tec into electricity. While the cost of natural gas (i.e. the price of natural gas paid by T&Tec), is subsidized as compared to the price paid by other gas consuming industries.
This therefore begs the question; if gas for power generation were put on a level playing field with alternative uses for gas, how much revenue has the nation forgone by maintaining the electricity subsidy? More importantly, what exactly is the True Cost Price of Electricity Generation in Trinidad and Tobago? The importance of these questions prompted us, the members of the Energy Chamber’s Energy Efficiency and Alternative Energy Committee, to conduct an evaluation to determine the answers (Special thanks to Alexei Viarruel for assistance with the calculations).
Valuing the Electricity Subsidy
The electricity subsidy, like the fuel subsidy fluctuates both due to price and consumption levels. The higher or lower each of these variables, the greater or smaller the subsidy will be by way of opportunity cost. In Trinidad and Tobago gas for petrochemicals is sold via the commodity tied gas pricing model. In effect this means that the gas sold to the petrochemical industry rises and falls with the price of the petrochemical itself. Prior to the collapse in commodity prices in 2014, petrochemical gas prices were on the order of USD $4.00-5.00/mmbtu. By 2016 they had fallen by approximately 50%. Over the same time period consumption of gas by the power sector also fell. This is due mainly to the more efficient TGU power plant taking on more of country demand and replacing the older and less efficient Powergen Port of Spain power plant (See Chart 1). Over the period 2012 to 2015 the opportunity cost of maintaining the subsidy has been approximately 1.5billion USD. While smaller than the fuel subsidy, the electricity subsidy is still quite large (See Chart 2).
True Cost Price of Electricity in Trinidad
This brings us to determining the true cost price of electricity in Trinidad. As I mentioned in the previous installment the fully loaded cost of electricity would include the cost of distribution as well as operation and maintenance costs and capital expenditure. To keep things simple here, we will focus on determining only the Cost Price of Electricity i.e. Cost of Gas + Cost of Conversion. According to the IDB report entitled “A unique approach for sustainable energy in T&T” the current cost of conversion is about USD $0.045/kwh. By converting the price of unsubsidized gas over the period 2012 to 2015 and accounting for conversion efficiency we see that the total cost price of electricity in Trinidad and Tobago is on average USD $0.10/kwh. Going further and utilizing the projections in T&Tec’s 5 year plan (available on the RIC website) to determine the remaining costs gives approximately USD $0.02/kwh by our estimates. Therefore, the fully loaded cost of electricity in T&T is a little more than double current price or ~USD $0.12/kwh. When compared to other islands in the Caribbean our unsubsidized electricity costs are still low (See Table 1). This is mainly due to two factors:
1. The primary energy source of our electricity is gas which is less expensive than the fuel oil or diesel used in many of the neighbouring islands.
2. We do not incur any major shipping/transportation costs to import the energy required to meet our electricity needs
Reducing the subsidy
With the above in mind, there are essentially two main ways to reduce the level of the electricity subsidy. Naturally the first is to raise the cost of electricity, but as we all know this presents many social and political challenges. The second is to increase the level of energy efficiency at our existing power plants and/or reduce the amount of gas that is used for power generation in general through the implementation of renewable energy technologies.
In the next installment we will estimate the percentage that the subsidy was reduced due to increased gas consumption from the highly efficient TGU power plant as well as take a look at the potential decrease and level of savings to be had by meeting the goal of 10% RE generation by 2021.