23.04.15

Navigating the JPS Monopoly - Renewable Energy Projects - (Part 1)

Navigating the JPS Monopoly - Renewable Energy Projects - (Part 1)

Jamaica has been facing an energy crisis for several decades now. Numerous studies and consultations have been held over the years in an attempt to find the solution. In October 2009, the Ministry of Energy & Mining (as it was called at the time) published Jamaica's National Energy Policy 2009 – 2030. The objects of this policy are to: (i) to secure Jamaica's energy future; (ii) advance competitiveness, and (iii) promote sustainable prosperity. The development of renewable energy sources and the establishment of a well-defined legal and regulatory framework are included in two of the seven goals set by the policy.

The generation of electricity from solar, wind and co-generation sources is reasonably well-known in Jamaica and these sources have been in use for more than a decade. However, there is currently no regulatory framework that addresses renewable energy issues. Investors interested in this sector require knowledge of the current laws and practice, as well as, skilful guidance from a commercial attorney to ensure that they have a bankable transaction structure. This is part 1 of 2 articles that look at three important issues that affect renewable energy projects, namely: the JPS monopoly, net billing and wheeling.

The Jamaica Public Service Company Limited's ("JPS") monopoly on transmission, distribution and supply of electricity is one of the primary pillars on which the electricity supply sector rests. As we move towards the target of doubling our electricity usage by 2027 (according to the recommendation of the Caribbean Sustainable Energy Roadmap, Phase 1), while at the same time lowering the cost of electricity on the island, investors in renewable energy have to navigate the JPS monopoly. It has been done in several cases, and once done right it can lead to a successful partnership in the best interest of all concerned, including the national interest.

The All-Island Electric Licence issued to JPS ("the JPS Licence") currently provides that JPS has "the exclusive right to transmit, distribute and supply electricity throughout Jamaica..." This licence will remain in effect until July, 2027. The exclusive nature of the JPS Licence was challenged in the case of JPS v Dennis Meadows, et al. The Court of Appeal ruled in January of this year that the Minister had the authority to issue an exclusive licence on the terms on which the JPS Licence was issued. Note that JPS does not have the exclusive right to generate electricity.

This state of play means that JPS has a monopoly on the business of transmission, distribution and supply of electricity. This is a real barrier to entry (which may or may not be justifiable) by potential developers.
As a result of this state of play, all persons who wish to supply electricity to third parties (including households and businesses) are required to enter into contractual arrangements with JPS to facilitate the transmission, distribution and supply of electricity.

This would usually be of concern to companies who are able to generate electricity either from co-generation or from renewable sources and wish to supply excess electricity to a subsidiary company or a neighbouring business, thus earning additional revenue from the neighbor or cutting cost on the operations of the subsidiary. Given the current regulatory environment and industry practice, this cannot be accommodated.

There are also developers of electricity generation facilities who are willing to develop, finance and build renewable energy supply for a single or stand-alone client or cluster of clients, for example, a hotel, manufacturing plant, airport, cargo port, logistics hub, etc. The commercial arrangements that would be required to facilitate a lawful transaction in this scenario are not at all straight-forward. The parties in this scenario will need counsel and assistance from a commercial attorney in order to ensure that the transaction structure meets all regulatory requirements.

Local and international investors and project developers do not want to find themselves in a position where the fundamental structure of their project is flawed because they missed critical pieces of the puzzle that is the current regulatory framework for renewable energy projects. Compliance with local regulatory requirements (even where they are not so clear, as in Jamaica) is a material condition precedent for banks, hedge or private investment funds and multi-lateral agencies who are providing loans or other financial support for these projects; some of these lenders have funds dedicated to climate change projects, which includes renewable energy.