When I discuss diversification with many people in Trinidad, “cheap natural gas” is often mentioned as a key strength that we should leverage to attract new export-oriented industries. The Trinidad and Tobago investment promotion agency, InvesTT, lists the very low cost of electricity as one of the central reasons why international investors should consider Trinidad and Tobago as an investment destination.
Meanwhile, during the current low commodity price crisis, we have seen a significant chunk of the country’s petrochemical producers idling their Trinidad production, citing the comparatively high cost of natural gas as a key reason for temporarily closing operations here and not elsewhere.
There is clearly a policy disconnect that has arisen in how we are dealing with natural gas pricing and the electricity sector versus the petrochemical sector. Policy measures have kept natural gas prices for electricity low at the same time as prices for the petrochemical sector have been rising significantly.
The longstanding policy decision, followed by successive governments, has been that the energy sector should effectively subsidise the rest of the economy by providing natural gas at below market rates to the electricity sector. While it is the National Gas Company (NGC) who has to directly bear this “opportunity cost” subsidy, it is indirectly shared by the entire gas industry, as it impacts the pricing for both the upstream suppliers to NGC and their downstream customers.
Approximately 15% of NGC’s gas sales are to the electricity sector and T&TEC is NGC’s single biggest customer. The subsidy to the electricity sector is therefore significant for a gas industry that is currently struggling to remain competitive. The bottom line is that the country cannot delay the long-overdue increase in electricity prices for much longer. We need to stop thinking that we have cheap gas that can drive diversification into new industries. Electricity prices must increase.
When I raised this point in the past, I was accused by some commentators of being “anti-poor people”. This statement is based on a fundamental misunderstanding of how the electricity subsidy operates. It is the households who use more of the subsidised electricity (typically the better-off households) who get most of the value of electricity, while the poorest households get significantly less value.
Based on data from the RIC in 2016, the top 15% of residential users of electricity (comprising households who have electricity bills over TT$750) accounted for the usage of 43% of total residential electricity. If your bill is over this amount, you are in the top 15% of households who get the biggest benefit from the electricity subsidy. By contrast, the bottom 20% of households use a tiny amount of residential electricity – just 3% (households with an electricity bill of under TT$100).
In Trinidad and Tobago, there are slightly higher electricity rates if you are using over 1,000 kWh – which is the case of roughly half of the total households – but those rates are still extremely low by international and particularly, regional standards. In other words, the electricity subsidy is a direct transfer of the nation’s wealth in the form of natural gas for power generation, primarily to the better-off households in the country.
There is a very good argument of subsidised electricity for the poorest households in the country. There is a clear social policy objective to make sure that every single household has access to electricity to power basic appliances – lights and a laptop computer so that children can do homework; fans to keep people cool and keep off mosquitoes that spread disease; a fridge so people can buy and store more affordable food. The bottom 20% of households use only 1% of the total gas that NGC sells for electricity. The subsidy for the poorest households should be left untouched.
But should a country subsidise a wealthy household’s central air-conditioning, flatscreen TVs in every room and their swimming pool pump? These are the households that are each using over 2,000 kWh of electricity. Just for comparison, the gas that these householders effectively consume is enough to feed an average-sized petrochemical plant. This needs to be put right.
The final point that should be made is that increasing the prices per unit of electricity does not necessarily mean a household’s or a business’ bill will increase. We are incredibly energy inefficient in Trinidad and Tobago and there is huge scope for decreasing the volumes of electricity used through the simplest energy management techniques (as simple as turning off lights when not in use). Higher prices can easily be offset by being more energy efficient and introducing renewables; and this has the added benefit of increased business activity and the scope for innovation.
Energy efficiency and renewables, rather than cheap gas, need to be at the core of our diversification policies.