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Price floor or fixed credit – which is better?


Price floor or fixed credit – which is better?

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THE INTERESTS of sustainable energy in Barbados, consumers, installers and those of the monopoly power provider will come into focus next month with the conclusion of a not-so-public hearing on whether a price floor or a fixed credit mechanism will be used for renewable energy pricing.

It is a mouthful grounded basically in economics and social equity. 

In one corner is the Barbados Renewable Energy Association (BREA), whose members include installers, and in the other corner is the Barbados Light & Power Co. Ltd, (BL&P) whose interests include ensuring any future shape of renewable energy price regulation will serve its shareholders.

The energy industry association is arguing for a price floor or minimum credit of 40 cents kWH (per kilowatt hour), regardless of whether oil prices continue to decline, as some experts have suggested will occur.

BL&P, our friendly monopoly, believes a fixed credit is in the best interest of all parties.

The steady reduction in oil prices prior to mid last year has been both a blessing for consumers and a nightmare for the fledgling renewable energy industry. On one hand, prices at the pump as well as monthly electricity bills have come down, while, despite consumer question marks, the prices of some goods and services, have also declined.

But what’s good for the goose has not been good for the gander, as the reduced oil prices have literally brought renewable energy installations to a halt, consumers are challenged to invest in photovoltaic systems to reduce charges that have already come down and installers are facing closure of their businesses.

No work means no money – which translates into no need for jobs.

At issue then, in the short term, is what price regulation approach should be taken to crank up the small energy sector, given the tsunami on the horizon of foreign exchange outflows rising substantially, and all the feed-in complications for an economy in which consumers continue to struggle at maintaining a basic lifestyle, while Government presumably is pulling its hair on how to reduce debt and increase foreign exchange earnings.

So at the intervention of Government, the Fair Trading Commission (FTC) convened a written consultation that began on April 22 and is due to end on May 13 – a mere 12 days remaining from publication of this newspaper.

Just about anybody or organisation may read a copy of the consultation document and provide their views and information, with emphasis on the latter, on what is a highly-complex matter.

It is clear to me that while the outcome of this consultation will have a huge impact on all parties involved, either positively or negatively, perhaps less than one per cent of the population understands what is at stake.

To its credit, while the FTC has two issues to decide on, a price floor of 40 cents as proposed by the energy association and a fixed credit as proffered by the regulated company, it has opened the door for views and information on alternative thinking, even alternative to that of the commission, which is profoundly democratic.

In my humble view, however, the mechanism needs transformational change because it is unfair to the consumer and does not encourage investment.

A business or homeowner assumes all the cost, risk and debt to invest in a renewable energy system, whereby they generate energy from the sun, to which there is no investment from the energy monopoly. They are then forced to sell all this generated energy at a rate that is considerably lower than what they pay the utility for power from the grid.

This energy generated from the sun is then sold to another consumer, business or householder, at the higher rate as if it was generated from the use of fossil fuel.

Consumers consequently have no incentive to generate renewable energy for sale to the grid.

The FTC has accepted an argument from the BL&P that generation of renewable energy under the Renewable Energy Rider should not be regarded as an opportunity for an investor to make a substantial return on investment. Essentially, that return should be minimal.

The consumer, therefore, faces little incentive under a regulatory system with ingrained disincentives. Add that to new licence fees, accounts of long delays in installations from the regulated company despite approval from the Government Electrical Department, removal of land tax incentives, challenges with public liability insurance requirements that are questionable and the consumer encounters an environment of inequity that does not support an economic policy to eventually shift from fossil fuel generation to a 100 renewable energy economy.

As the president of the Caribbean Development Bank, Dr Warren Smith, said at a recent FTC lecture: Progress has been modest and we need to learn from history and provide (the consumer with) incentives – a reference to the success story of solar water heating.

At the root of a viable thrust in renewable energy is regulatory and pricing transformation, not a consultation about a short-term plaster for a burst artery.

Hallam Hope is a student of energy regulation and policy. Email: [email protected]