Bad policy decisions in the Jamaican electricity market

 

When it comes to the regulation of the electricity sector, we really know today what works and what does not.

What does not work, for example, is simply privatising a public utility monopoly without enforcing competition. Many examples around the world have shown how the private profit maximising principle has led to increased prices and reduced expenditures - eventually leading to a dramatically lower quality of services.

Perverse incentives for investment and other spending are established. This is true for infrastructure in general: one of the worst examples is the public transportation disaster in the United Kingdom compared to almost perfectly functioning public systems in Switzerland and elsewhere. Private electricity transmission and railway transportation monopolies in New Zealand were so much worse than public monopolies that the government eventually renationalised both.

Likewise, just selling Jamaica Public Service Company, JPS, to a private owner had no benefit here in Jamaica. The company is not carrying out sufficient useful investments. It takes advantage of its power over the distribution network, which serves to block the faster adoption of renewables. Incentives induced by policy are not properly supported and implemented. Power outages are a regular phenomenon. And electric power lines are attached to poles made of wood, in a region with tropical rainfall, heat and hurricanes.

The restructuring of the electricity industry has not worked out. It must be fundamentally revamped as soon as possible.

Detaching ownership

What has proved to work extremely well is detaching ownership and operation of the grid, that is, the system of electricity lines that transmits energy from the plants that generate electricity. The grid can either be publicly owned or managed for predefined periods by a private operator. Licences can be issued to multiple operators if one splits different geographic sections of the grid or detaches local distribution from regional transportation lines.

Detaching the grid from the generation capacity could see a dramatic reduction in regulatory complexity, costs, and effort. The examples of many countries and regions have shown that it significantly reduces costs and eases the adoption of new generation capacity, investments, and renewables. There is virtually no downside to this policy measure.

Irrespective of the exact detail, power plants cannot be run by the company that manages the distribution. Plants must be owned by other public or private companies. Ideally, none of them should be in a position to dominate the market like JPS dominates the industry today.

However, this may not be fully possible, given the small size of the island. JPS owns the majority of generating capacity, but there is no reason that many small hydroelectric plants should not be owned by other companies. Many of these plants are out of service or in a terrible state. Why is Reggae Falls out of service? Don't we have prettier waterfalls?

Photovoltaic installations can be small-scale if they are rooftop fittings on private houses, factories, warehouses and office buildings. In Europe, wind farms are increasingly owned by local energy cooperatives, which are often in communities in direct proximity to the facilities, improving acceptance.

In last week's column, I argued that renewable energy is the only sensible future for Jamaica. A benefit not mentioned yet is that this new source can be decentralised with many competing electricity generators. There can easily be two or three huge photovoltaic plants of similar size. And smaller solar plants and wind farms can be owned by cooperatives in the different parishes.

A better electricity system needs to be much more competitive than it is now. It becomes more competitive when electricity generation is decentralised, which happens automatically when renewable sources are utilised. But renewables only grow if the electricity grid is not owned by the dominant player in the electricity generation sector.

The full separation of ownership and control of the national grid from any generating capacity is the single best and most obvious economic policy measure I can imagine for the island of Jamaica. Benefits for private households and industry will be visible almost immediately. This is an economic no-brainer.

- Jan Keil is lecturer/assistant professor in the Department of Economics, University of the West Indies, Mona.

jan.keil@uwimona.edu.jm

 

EDITOR'S NOTE:

This is the final column in a series of six contributed by Mr Keil.