Understanding the electricity subsidy. A series created by Christopher Narine Thomas, Chairman of the Energy Efficiency and Alternative Energy Committee
The islands of the Caribbean have been identified in many studies as having exceptional solar resource potential and Trinidad & Tobago is no exception. Despite this, there are only a few islands that have achieved significant penetration from solar based renewables. This is mainly due to the high upfront cost of solar and the lack of scalability due to the small demand of many Caribbean nations. This coupled with a dearth of hydrocarbon resources requires these nations to import diesel and fuel oil to generate electricity. As a consequence the cost of electricity in much of the Caribbean typically lies between USD $0.30 - $0.40 per kWh and fluctuates with prevailing oil prices. In comparison the cost of electricity in Trinidad & Tobago is steady at around $0.05 per kWh. Many attribute this large discrepancy to T&T having cheap and abundant gas resources, and to an extent this is true. However, the bulk of the benefit comes in the form of a subsidy on electricity. While not as popular in the public domain as the fuel subsidy, the electricity subsidy is one of the major barriers to the uptake of renewable energy penetration in T&T.
The history of the electricity subsidy
In T&T all electricity is produced using natural gas making our twin island state the second nation in the world to achieve this feat (the first being Qatar). Despite only meeting this accomplishment relatively recently it must be noted that as a nation we began examining how to utilize our abundant natural gas reserves over 35 years ago. It was during this time in the 1970s that several reports were submitted to the government on the value and usefulness of natural gas. One of these reports, the Adams Report on Natural Gas Pricing (1978), clearly outlined that if natural gas was to be used for power generation, it must be at a rate that is cheap and affordable to all citizens of Trinidad and Tobago. This policy position still stands today and is the basis upon which our electricity is subsidized.
The mechanics of the electricity subsidy
The electricity subsidy is at its core an opportunity cost subsidy. T&Tec purchases gas from the NGC at a rate that is significantly below the prevailing market rate. T&Tec then pays the independent power producers (Powergen, Trinity Power or TGU) to convert the chemical energy inherent in the natural gas to electrical energy at a negotiated rate outlined in the respective power purchase agreements (PPAs). Therefore the cost price of electrical generation is equal to the following formula:
Cost of natural gas + Cost of conversion = Cost Price of Electricity Generation
Adding in the cost of distribution, O&M and capital depreciation brings you to the fully loaded cost of electricity in T&T. From the formula it is therefore clear that the main driver for the low price of electricity is the subsidized natural gas price. As a result, the NGC is foregoing an opportunity to sell this gas at a higher price. In Trinidad and Tobago natural gas demand for power is protected from competing with natural gas demand for petrochemicals and LNG thereby allowing citizens to benefit from low cost electricity. If power were forced to compete with petrochemicals and LNG for natural gas the price paid for electricity by the end consumer would increase as well. This means therefore that while the citizens of the country benefit from low cost electricity, they are also foregoing an opportunity to generate additional revenues from increased gas sales from higher valued natural gas based derivatives. While low cost electricity is a benefit to any population, the extremely low cost of electricity in Trinidad and Tobago results in wasteful practices and a nonchalant attitude to energy efficiency which puts an undue strain on our natural resource base.
Renewable Energy & Energy Efficiency
Trinidad and Tobago’s population growth rate is around 4% annually. Using this growth rate it has been projected that we will need another power plant sometime in the early 2020’s. If we choose to meet this growth with a utility scale solar or wind project with combined cycle power being used as back up during the night or low prevailing winds and a national drive toward energy efficiency we can considerably reduce the drain on our natural gas resources. Therefore it seems that contrary to popular belief, renewables and T&T are in perfect alignment as renewables are a method of reducing gas demand for power generation which in turn can be used to create higher value products. The result being job creation in a newly formed renewable energy sector, increased levels of gas based revenue and an easing of the industry wide gas shortage.
In the upcoming installment of this series we will determine the magnitude of the opportunity cost mentioned earlier and do a deep dive on the economics of renewables on our subsidized energy landscape.