Ten companies submitted bids to build and operate renewable energy plants that run on solar, wind, water or waste, but two are in danger of being disqualified for non-payment of the bid security.
The Office of Utilities Regulation (OUR) received the bids for supply of up to 37 megawatt of renewable power to the grid on Wednesday and will determine the preferred bidders by April.
The bids included a 24.7MW waste-to-energy plant at US$110 million, by Green Waste Energy Inc; a 37MW wind plant at US$61 million by Wigton WindFarm Limited; a 20MW solar plant, at US$33.15 million, by WRB Enterprise Inc and a separate bid to build a 37MW solar plant at US$72.15 million, which contains three options.
Great Valley bid US$50 million to develop a 26.4MW wind farm; Tamarind Energy proposed a 36.3MW at US$76.96 million; and BMR Jamaica bid US$18.27 million for a 9.9MW wind farm to expand the existing wind farm that it is developing in central Jamaica.
The other four bids were a 37MW solar project at US$48.7 million with an alternative option by Eight Rivers Energy Company Limited; a 2MW hydropower project, at US$8.9 million, by Petroleum Corporation of Jamaica; a 37MW solar plant at US$77.14 million by Jamaica Energy Partners; and a 30MW biothermal energy plant, at US$93.8 million by Bio Energy Resources Limited.
“We are happy with the process. It was done in an orderly and professional manner,” said Angella Rainford of Eight Rivers Energy Company following the bid openings held at the OUR.
“The returns are attractive, but it’s also the right fit for the country as it mitigates against the reliance on oil,” said Rainford.
Eight Rivers took no chances and submitted a US$700,000 bid security.
Two of the 10 bidders – Green Waste Energy and Bio Energy Resources – did not put up the required security, OUR legal Chenee Rily disclosed at the bid opening.
The OUR required each bidder to submit security equivalent to one per cent of the project cost.
“The only two bids with firm capacity failed to offer a bid security it’s unfortunate,” said Cecil Gordon, the director of generation at Jamaica Energy Partners, in discussion with the Financial Gleaner at the OUR event. “Waste-to-energy gives a constant output so it’s firm capacity.”
Gordon explained that wind solar and hydro can fluctuate depending on external factors, including weather. He also indicated that waste-to-energy projects are more expensive to operate – “which means a lower return,” he added.
OUR said on Thursday that the decision on whether to disqualify the two waste-to-energy bids would be considered by the bid review committee when it convenes.
Last July, the OUR issued a Request for Proposals (RFP) from local and international interests to supply up to 37MW of electricity generation from renewable energy resources on a build, own and operate basis. Wednesday was the deadline for the receipt of bid documents.
This latest project is to complete an RFP process started in 2012 to identify interested entities to submit proposals for the supply of one or more plants of varying configurations greater than 100kW and up to 115MW of renewable energy. At that time, 78MW was identified from three successful bidders.
Jamaica is to reduce greenhouse gas emissions by the equivalent of 1.1 million metric tonnes of carbon dioxide per year by 2030, as part of its global commitment to take climate-change mitigation action.
To bring this about, the island – as reflected in its nine-page Intended Nationally Determined Contributions (INDCs) document to the United Nations Framework Convention on Climate Change – has undertaken to implement energy policies that ensure the island:
– uses energy wisely and aggressively to pursue opportunities for conservation and efficiency;
– has a modernised and expanded energy infrastructure that enhances energy generation capacity and ensures that energy supplies are safely, reliably and affordably transported to homes, communities and the productive sectors on a sustainable basis; and
– achieves its energy resource potential through the development of renewable energy sources by increasing their share in its primary energy mix of 20 per cent by 2030.
Such policies are also to ensure that government agencies and ministries are a model/leader in energy conservation and environmental stewardship, and that the island has a well-defined and established governance, institutional, legal, and regulatory framework.
Fully implemented energy polices need, too, to ensure that private industry embraces “efficiency and ecological stewardship to advance international competitiveness and to move towards a green economy”, the document said.
With the ink now dry on Jamaica’s Climate Change Policy Framework and Action Plan, the island’s Climate Change Division (CCD) is to drive the realisation of its goals.
“We never did have a launch of the policy framework per se, but Minister (of Water, Land, Environment and Climate Change Robert Pickersgill) did speak to [its completion]. The Climate Change Division will now drive the implementation,” Colonel Oral Khan, the ministry’s chief technical director, told The Gleaner.
Khan added that the publication of the policy was expedited last September, following the inclusion of comments from public consultations done, final approval from Cabinet and some three years of work.
“Some of the priorities highlighted include the mainstreaming of climate change in policy and development planning frameworks, and we have started that process,” noted CCD head Albert Daley.
According to Daley, “There is a 2015 to 2018 framework which highlights the priority actions to be done and who is to do them, timelines, and so on.
“We have been working closely with the Planning Institute of Jamaica to ensure climate-change concerns are reflected in the actions for the various sectors,” he noted.
As things stand, there are a number of adaptation and mitigation sector plans on which work has been ongoing.
The policy was made possible through the Government of Jamaica/European Union/United Nations Development Programme Climate Change Adaptation and Disaster Risk Reduction project, funded by the EU under the Global Climate Change Alliance.
In addition to facilitating and coordinating the national response to the impacts of climate change and promoting low-carbon development, the 36-page policy is to:
– mobilise climate financing for adaptation and mitigation initiatives; and
– improve communication at all levels on climate-change impacts and also adaptation- and mitigation-related opportunities so that decision makers and the general public will be better informed.
This is while mainstreaming climate-change considerations and supporting those institutions, including research entities that would enable that process.
While Jamaica has spent US$20 million (about J$2.3 billion) to hedge against the risk of a sharp increase in oil prices, the World Bank has lowered its forecast for crude oil to US$37 a barrel from US$51 a barrel in its October 2015 predictions.
The bank, in its latest commodity markets outlook, said that oil prices fell by 47 per cent in 2015 and are predicted to decline, on an annual average, by another 27 per cent this year.
If the World Bank’s prediction prevails, it would mean that Jamaica would take a hit, given that its hedging contract, with a strike price averaging US$66.74 per barrel, started in June 2015 and is set to expire in about September this year.
Lower oil prices, as well as the ongoing economic adjustment under Jamaica’s economic support programme with the International Monetary Fund (IMF), have been attributed to the macroeconomic stability which the fund’s executive board reported last month has continued to strengthen.
Those factors have also been credited for the inflation and the current account deficit falling to historical low levels.
In the report released yesterday, the World Bank said the lower forecast for crude oil reflects a number of supply-and-demand factors.
These include sooner-than-anticipated resumption of exports by the Islamic Republic of Iran, greater resilience in United States production due to cost cuts and efficiency gains, a mild winter in the Northern Hemisphere, and weak growth prospects in major emerging market economies, according to the World Bank’s latest quarterly report.
However, from their current lows, a gradual recovery in oil prices is expected over the course of the year, for several reasons.
“First, the sharp oil price drop in early 2016 does not appear fully warranted by fundamental drivers of oil demand and supply, and is likely to partly reverse,” the report said.
“Second, high-cost oil producers are expected to sustain persistent losses and increasingly make production cuts that are likely to outweigh any additional capacity coming to the market. Third, demand is expected to strengthen somewhat with a modest pick-up in global growth,” it added.
The anticipated oil price recovery is forecast to be smaller than the rebounds that followed sharp drops in 2008, 1998, and 1986.
“Low prices for oil and commodities are likely to be with us for some time,” said John Baffes, senior economist and lead author of the commodities markets outlook. “While we see some prospect for commodity prices to rise slightly over the next two years, significant downside risks remain.”
In the IMF report submitted to the board for the 10th review in December, the Jamaican authorities also observed that despite increased surrendering requirements since the beginning of last year and reduced foreign exchange demand from public enterprises, given lower oil prices, there has not been any trend increase in the central bank’s net foreign exchange purchases. “Indeed, net purchases were negative in September and October 2015,” it added.
When Jamaica purchased hedging contracts from Citibank NA, covering six million barrels of oil imports over a 15-month period, expectations last year were that crude prices may climb back to US$75-US$80 per barrel on the world market.
However, prices have since fallen to just over US$30 a barrel.
The transaction was the Jamaican Government’s first oil-hedging arrangement, resulting from a policy decision to manage the country’s exposure to a predicted spike in oil prices from lows of about US$40 per barrel reached earlier in 2015.
The fall in world prices since 2014 has boosted Jamaica’s balance-of-payments position due to a lowering of the oil import bill – crude imports total nine million barrels per year – even as it threw tax revenue collections off-target due to lower special consumption tax receipts from the state refinery Petrojam.
Jamaica imports about nine million barrels of crude oil per year.
A new Energy Stabilisation and Energy Efficiency Enhancement Fund (ESEF) has been introduced to, among other things, finance the purchase of the hedging instruments.
Legislation and regulations governing the use of the ESEF are expected to be adopted by February this year, ahead of the parliamentary debate for the fiscal year 2016/17 Budget.
The announcement of an agreement between Jamaica Public Service Company (JPS) and a Chinese firm is expected this week for the construction of the new energy plant at Old Harbour.
JPS and American company New Fortress Energy are executing separate projects at Old Harbour – the Jamaican utility company is building a new 190 MW plant, while Fortress is financing and developing the gas infrastructure to supply the plant with LNG.
Together, the projects are estimated at around US$500 million.
JPS said it will have no ownership in the gas infrastructure project nor contribute to the cost of developing it, but will solely be a client of New Fortress, which will build its pipeline to connect to the JPS plant. The same arrangement applies to the gas infrastructure under development by New Fortress in Montego Bay, which will feed gas to JPS’ Bogue plant.
The utility company said previously that the 190 MW combined cycle plant at Old Harbour is expect to cost close to US$300 million.
The name of the Chinese contractor will be disclosed only after the deal to develop the plant is finalised, JPS said. The utilitycompany had previously chosen Abengoa to develop the plant only to be embarrassed when the Spanish firm filed for bankruptcy protection in its home country just days later.
JPS is also in final negotiations with General Electric (GE) as the primary equipment supplier for the Old Harbour plant.
“JPS is currently finalising the agreements with both GE and the ‘EPC’ contractor and coordinating the start of this new generation facility with the completion of an associated LNG facility that will be built to provide gas. These two projects will total over US$500 million and begin operation in early 2018 with full commercial operation by the middle of 2018,” said JPS via email.
EPC is a categorisation, which stands for ‘engineering, procurement and construction’ contractor.
The plant’s advance GE turbines will utilise cleaner burning natural gas, replacing the heavy fuel oil currently used at Old Harbour, and will be able to integrate increased solar, wind and hydro resources as Jamaica moves towards producing more electricity from renewable resources.
“GE will provide four turbines – three gas turbines and one steam turbine the three heat recovery steam generators, the four electrical generators and the major controls,” said JPS.
Once the new Old Harbour plant is built, the current structure will be dismantled, and the property will resort to brownfield status, according to JPS spokeswoman Winsome Callum.
New Fortress is negotiating separately with the Electricity Sector Enterprise Team regarding its gas project, Callum said.
JPS has spent some US$4 million so far in preparing for the upgrade over the past 24 months.
The Bank of Jamaica (BOJ) indicated on Wednesday that to date, the Government of Jamaica (GOJ) has spent US$27.87 million or J$3.2 billion on oil hedge contracts. In total, five contracts have been signed with Citibank covering periods up to December 2016.
For the current period, the contract runs from January 2016 to December 2016 with a strike price of US$65.90.
The strike price means that Jamaica will begin to receive payouts if the price per barrel of crude hits that mark or exceeds it.
Some analysts to whom the Jamaica Observer have spoken say that it is clear a better deal could have been struck had the Government waited a while before spending money for the hedge in 2015, but they also note that it could not have been predicted that oil prices would continue to slip downwards to the extent to which they have.
Earlier this week, benchmark crude prices fell to their lowest since September 2003 on worries about a global glut.
A new drop came Tuesday after the International Energy Agency, which advises industrialised countries on energy policy, used the alarming term “drown in oversupply” in relation to the oil markets of 2016. The market has begun to react to plans by Iran to ramp up supplies to regain market share.
The West Texas Intermediate index slid 2.3 per cent to US$27.80 per barrel of crude on Tuesday, while Brent slipped 2.3 per cent to US$28.09 per barrel.
On Wednesday the downward spiral continued with Brent Crude down 5.2 per cent at US$27.28 a barrel, while WTI sunk 6.6 per cent to US$26.59.
Analysts note that oil price has plummeted 75 per cent since mid-2014 as oversupply, mainly due to US shale oil flooding the market, has driven down the cost, even while a slowdown in economic growth in China and Europe has cut demand.
Locally, technocrats had suggested a return to US$70 per barrel by year end 2016, a prediction informing the decisions by the GOJ technical committee set up to manage the hedges. The technical committee is chaired by Michael Hewitt of Petrojam and has representatives from the BOJ, the Ministry of Finance, and Development Bank of Jamaica.
One analyst in Kingston, who spoke on condition of anonymity, commented, “To be honest, hindsight is 20/20. We could not have anticipated the current prices. It is easy to say the obvious, which is that if we had waited we could have got a better deal, in the form of a lower premium. In fact, it is obvious, based on where things are, the hedge (for contract periods already covered) was not needed.”
The BOJ informed the Caribbean Business Report that the GOJ is prepared to write new contracts for the period beyond 2016, before year end.
Funds already spent on hedging, provided for in the FY2015/16 budget, were paid out of the Consolidated Fund to facilitate the upfront purchase of the hedge contracts, the central bank stated.
It said that the advance is now being repaid from the proceeds of the new special consumption tax introduced in March 2015 to pay for the hedge.
The amount paid out so far is only about half of what the Government plans to raise from the SCT of $7 per litre on petrol — about six US cents per litre — which is expected to fall in the ball park of $6.4 billion by year-end.
The five existing contracts for hedging are all with Citibank which was the successful bidder for that round of contracting.
Periods covered by the contracts range from June 2015 to May 2016 (two contracts) with a weighted average strike price of US$66.55; and September 2015 to August 2016 (two contracts) with a weighted average strike price of US$66.80. The last is the contract for January 2016 to December 2016 with a strike price of US$65.90.
Regional governments have been eyeing hedging as a new strategy to protect against changes in the price of crude. Mexico, which hedged against a fall in prices, collected US$6 billion under hedge contracts in 2015.
Gov’t oil hedge underwater
In June 2015, the Government of Jamaica booked a hedge transaction to buy six million barrels of oil for delivery 15 months later at a strike price of US$66.74.
The mechanism used in this kind of transaction is called a ‘call option’, which gives the purchaser of the option the right, but not the obligation, to purchase the asset at a specified price the ‘strike price’ within a specified time. A month later, it bought another 15-month futures contract for two million barrels of oil and the average strike price of the two contacts is US$66.53.
We paid about $30 million to Citibank for the privilege of placing this bet on oil prices going higher than our strike price in 15 months.
When these contracts to buy crude oil were booked, prices on the world market was trading at about US$63 a barrel and had rebounded from about US$45 in January 2015. The government placed a bet based on its belief that crude oil prices would continue to rise well above the $66.53 strike price. If that were to happen and oil prices were to increase to, say, US$80-US$90 per barrel, the Government would be in the delightful position of having to pay only about US$66.53 per barrel for oil that would be trading at the much higher spot price on the international commodity market. The Government of Jamaica, senior executives at the Bank of Jamaica, and members of the oversight and technical committees created by the Government to manage the hedges, all seem to have bought into the belief that oil prices would climb higher than US$67 before the expiry date of the options.
The oversight committee is comprised of the financial secretary, Devon Rowe; the governor of the Bank of Jamaica, Brian Wynter; the managing director of the Development Bank of Jamaica, Milverton Reynolds; the managing director the Petroleum Corporation of Jamaica, Winston Watson; and Dr Vincent Lawrence. Mr Watson is known to have experience in oil trading and markets. Only Michael Hewett, an executive at Petrojam, was named as a member of the technical committee.
One has to believe that the intention of the members of the government-appointed committees and all of those involved in the hedge transaction was a good one to try and protect Jamaica against that time in the 15-month period when oil prices might spike above US$67. While there is still considerable time to the maturity of the call options, right now the bet is not looking good and the best projections are for oil prices to fall even lower than the below-US$30 they traded at this week.
This week, three important financial institutions released projections indicating that oil prices could fall to US$10-US$20 per barrel and stay there for sometime. Goldman Sachs’ projection was at US$20, Morgan Stanley’s was US$20 and Standard Chartered, a bank with strong roots and connections in the Middle East and Asia, projected US$10 a barrel oil.
In the futures trading business, which is where these call options reside, when an option is bought with the expectation that the price of the commodity will increase but the opposite occurs, the option is said to be ‘underwater’. Given that these options were booked with the expectation for oil price to rise above US$66, and they are now heading in the direction of US$20, Jamaica’s call options on oil are seriously underwater.
A better alternative
In November 2014, a public official asked me about hedging because someone had written him an email to encourage Jamaica to hedge oil transactions on the upside, based on a scenario the email writer concocted about the state of affairs in the international oil industry. The public official was aware that I had traded oil futures for many years and had lived in the Middle East for more than two decades. I share below an excerpt from my reply:
“The recommendation needs study because taking a position means the Government and Jamaica will be guessing the direction of the movement of the price of this commodity. The writer makes it sound like making money on these bets (options) is a sure thing. It is not.
“There is always a risk. Suppose we bet on a certain price increase in a specific time frame, which we would have to if we are going to hedge, and prices instead of rising to, say, US$70/bbl from US$50 falls to US$35/bbl during our hedge horizon, we would suffer an important loss depending on the size of the contract. This is what apparently happened to that forward position Jamaica took on that futures contract on aluminium with the Russians and/or Glencore, the debilitating result of which you are very familiar.
“When oil went to US$9/bbl in the 1990s, if you had dared to tell anyone about the US$147 per barrel price which occurred in July 2008 they would have declared you mad. It’s a commodity; any card can play. On review, if the writer sees the prices as going one way, down, and OPEC is ‘dead’, why hedge? Do nothing, stay addicted to imported oil and go for the lovely ride to low-oil-price nirvana.
“The better alternative is to wean ourselves off the 98 per cent dependence on petroleum-based fossil fuels for our energy supplies. We really need to develop and use renewable energy from many sources, including bagasse, garbage, wind, water and solar.”