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Challenges to the successful implementation of Power Wheeling for wind powered irrigation in Jamaica ECPA Caribbean Initiative

August, 2013

ECPA Caribbean Initiative

Mechanisms to the successful implementation of Power Wheeling for wind irrigation in Jamaica

Department of Sustainable Development Organization of American States

August, 2013

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Disclaimer Š (2013) General Secretariat of the Organization of American States (GS/OAS). Published by the Department of Sustainable Development of the Executive Secretariat for Integral Development (DSD/SEDI). All rights reserved under International and Pan-American Conventions. Any part of the contents may not be reproduced or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or by any information storage or retrieval system without prior written permission of the publisher and the General Secretariat of the OAS (GS/OAS). Department of Sustainable Development Executive Secretariat for Integral Development The General Secretariat of the Organization of American States Washington, D.C., August 2013

This publication has been prepared by Bryan Rohena RodrĂ­guez, under supervision by Kevin de Cuba, ECPA Caribbean Initiative Manager, OAS Department of Sustainable Development and Dr. Wilfried van Sark, Utrecht University, and is commissioned by the U.S. Department of State under the framework of the Energy and Climate Partnership of the Americas (ECPA). The opinions expressed in this report are solely the views of its author and do not represent the opinions or official positions of any donor, the project partners, the Organization of American States, or its Member States.

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Mechanisms to the successful implementation of Power Wheeling for wind irrigation in Jamaica 1

Abstract Electric Power Wheeling is being promoted because of its potential to: (a) encourage competition in the utility sector, (b) protect the interest of consumers in relation to the supply of a utility service, (c) encourage the development and use of indigenous resources, and (d) promote and encourage the development of modern and efficient utility services. Retail wheeling contemplates that every costumer should have the freedom to seek out and choose the lowest cost of power. There is an assumption that retail wheeling will provide maximum opportunity for competition in the power generation sector. Competition promotes efficiency into the market, creating lower prices for electricity consumers. Nevertheless, caution must be taken when implementing “retail wheeling”. If implemented unwisely, this could lead to higher costs and lower reliability because instruments such as economic dispatch might not work effectively. Success is likely to depend on how power wheeling is implemented, both for the nation as a whole as for individual transactions. This paper presents an analysis of power wheeling mechanisms to facilitate of the increased deployment of wind powered turbines for water irrigation purposes. Particular focus is laid on different “wheeling” methodologies, taking into account important key principles such as: efficiency, cost recovery, transparency, stability, non-discrimination, and ease of application. With detailed explanation on each individual methodology, the best “electric wheeling” methodology for implementation in Jamaica for wind power is discussed.

1 Bryan Rohena Rodríguez, MSc. Energy Systems Analysis, Utrecht University, August 2013. Under supervision by ing Kevin de Cuba, MSc., ECPA Caribbean Initiative Manager, Department of Sustainable Development, Organization of American States and Dr. Wilfried van Sark, Utrecht University.

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List of Content 1. Introduction 2. Background 3. Power Wheeling An Option For Jamaica? 4. Regulatory Framework For Wheeling In Jamaica 5. Results And Discussion 6. Conclusion 7. Strategies For Implementation 8. Acknowledgements 9. References

................................. 2 ................................. 3 ................................. 6 ................................. 12 ................................. 14 ................................. 16 ................................. 17 ................................. 20 ................................. 21

List of Tables Table 1: Table 2: Table 3: Table 4: Table 5: Table 6:

General Characteristics Jamaica Energy Sector (As Per 2012) Comparison Of Wheeling Methodologies With Key Principles Strategies For Implementation Turbine Component Cost (750kw, 1.5mw, 3mw, 5mw) Turbine Component Cost Of Energy Contribution Acknowledgements And Contacts

................................. 3 ................................. 14 ................................. 17 ................................. 18 ................................. 19 ................................. 20

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1. Introduction From an energy efficiency perspective, decentralized power production, demand side management and wheeling are often seen as key options to move towards a more sustainable energy system. Decentralized power production includes production of power, generally using indigenous renewable sources, at small scale (residential or neighborhood scale) on-site and/or dispersed in a particular jurisdiction close to the center or point of consumption, reducing or eliminating the need to distribute power over long distances. Like many small islands in the Caribbean, Jamaica is economically vulnerable to external factors such as energy price fluctuation, a consequence of the significant dependence on increasingly costly imported fuel. Jamaica with its unique variety of natural resources, geographical characteristics, and climatological conditions has a lot of potential for the development of renewable energy technologies that can contribute to the reduction of their dependence on high cost fossil fuels. Renewable energy technologies can create benefits to Jamaica in at least fivefold ways: (1) as a clean, green, dynamic image and marketing tool for the country; (2) the preservation of natural and tourism resources; (3) economic savings and benefits via the reduction of oil imports; (4) diversification of the economy and creating employment; and (5) providing cheaper and more reliable energy for the country. If renewable and decentralized energy production is to contribute efficiently to removing the dependency on oil in

Jamaica, this aspect of market regulation and grid connection and use has to be dealt with adequately. This paper aims at analyzing the potential implementation of “power wheeling” in Jamaica based on a bottom-up system approach. It is important to take into account efficiency, cost recovery, transparency, stability, non-discrimination, and ease of application to analyze each pricing method. The bottom-up approach is developed for assessing each individual pricing methodology to decide which would be the best pricing practice that complies with the main objectives: (1) to explore wheeling charge and the computation of transmission and distribution network access fees in order to guide the development of an appropriate wheeling framework; and (2) to develop a fair and practical framework for the provision of wheeling services on Jamaica’s transmission and distribution network. Based on these considerations, “electric power wheeling” methodologies are discussed.

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2. Background Power Production, Transmission and Distribution in Jamaica

The Jamaica Public Service Company (JPS) grid is composed of about 28 generation stations where 2 4,135,918 MWh (2012) of electricity is generated; with 54 load centers, and transmission and distribution lines that cover about 1,200 km. Today, JPS is the sole public utility provider of electricity, and is the sole owner of the national grid, with exclusive right to transmit, distribute and supply electricity island-wide until 2027 and is overseen by the Office of Utility Regulation. 3 The company has grown into a modern electric utility, with an extensive network reaching more than 95% of Jamaica’s population. The customer base of the JPS is comprised of 89% residential accounts and 11% commercial, industrial and streetlight customer accounts. JPS produces its own electricity using steam (oil-fired), combustion gas turbines, combined cycle, diesel, eight hydro power plants, and wind turbines. There are four main fossil fuel power plants: Rockfort and Hunts Bay in Kingston, Old Harbor Bay in St. Catherine, and Bogue in St. James. In addition there are also five independent power producers (IPP), with different ownership structures, operating in the power generation sector: Jamaica Energy Partners (JEP), Jamaica Private Power Company (JPPC), Jamalco, and Wigton Wind Farm. JPS uses the approach of Least Cost Expansion Plan (LCEP) methodology to determine the extent to which IPPs may provide electricity for sale to the grid. This is based on the provision of a reliable supply of electricity to consumers at the least possible cost and is supervised by the Office of Utility Regulation (OUR). See Table 1 for an overview of the general characteristics of the power sector in Jamaica.

Table 1: General characteristics Jamaica Energy Sector (as per 2012) 4 Category


Population Real GDP Growth CPI Trade Balance Oil Imports Electricity Generation RE Generation (ex. Sugar Sector) RE Generation Total 1,812,896 MWh Total Installed Generation Capacity Installed RE Capacity Peak Demand

2,711,500 -0.3% 8% -J$4,885.1 billion (US$2.2 billion) 20.3 million barrels of oil 4,135,918 MWh 259,215 MWh (160,000 BOE) (730,000 BOE) 896.5 MW 61.4 MW 635.8 MW

2 The Planning Institute of Jamaica, Economic and Social Survey of Jamaica, 2012. See: 3 Jamaica Public Services Company Limited, Amended and Restated All-Island Electric License 2011. See: 4 The Planning Institute of Jamaica, Economic and Social Survey of Jamaica, 2012. See:

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4 Next to the JPS, another key actor in Jamaica’s power sector is the Office of Utilities Regulation (OUR). The OUR, regulates the supply and distribution of electricity in Jamaica. These regulations include: pricing of electricity and petroleum products; old generation plants; tax and pricing structure for road users; system losses; and the development of renewable energy generation capacity. Since the objective of this “Wind Powered Irrigation in Jamaica” project is to promote the increased deployment of wind turbines for wind powered irrigation purposes through the application of power wheeling mechanisms, a key actor is the National Irrigation Commission (NIC). The National Irrigation Commission (NIC) is an agency within the Ministry of Agriculture established with the objective to manage, operate, maintain and expand such existing and future irrigation schemes and systems in Jamaica to provide irrigation water for clients (e.g. farmers) to facilitate the agricultural development in the nation. It also fixes and collects rates or charges to be paid for the use of water.

Electricity sector regulation

Regulatory Policy for Addition of New Generating Capacity to the Electric System, 2006 This policy is outlines to conditions for the addition of new capacity. It is required to provide the long-term expansion of generation at the least economic cost. The Least Cost Expansion Plan (LCEP) is a key point for the addition of new capacity above 15MW. The regulatory policy allows for the addition of small power producers of 100kW capacity or less to be made to the system by way of a Stand office Contract that is issued by JPS. This contract addresses: (a) tariff structure; (b) the right

and responsibilities of the parties; (c) safety; (d) the technical requirements of the facility; and (e) the assignment of interconnection costs. The regulatory policy specifies net billing using two-meter systems. Both involve selling excess electricity to the grid but with a difference in price at which JPS buys this excess energy. In net billing, JPS buys the excess power from its costumer at the “generation avoided cost”, plus a premium if the source is renewable energy 5.

Urgent challenges to the electricity sector of Jamaica The Jamaican energy sector is presently confronted with key challenges, including significant losses in the generation and distribution of power, aging fossil fueled base load installed capacity with an urgent need for replacement, a flattening or reduction in electricity demand/sales (a reflection of a contracting economy), and the need for a regulatory framework that facilitates the increased deployment of renewable energy technologies and help stabilize electricity rates. Among the key challenges, there is social acceptance or agreement that there is a need to improve efficiency in: o Electric generation by the public utility (Jamaica Public Service Company); o Transmission and distribution of electricity by the public utility; and o Energy use for water services provision by the National Water Commission.

5 Energy efficiency potential in Jamaica: challenges, opportunities and strategies for implementation, 2011

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5 Wheeling of dedicated wind power in Jamaica Presently there is about 42 MW of installed wind power capacity in Jamaica for electricity generation, whereby in addition a new wind power production project is being considered with a specific purpose of supplying power to deep well pumps used for pumping ground water for irrigation using modern wind turbines. Most of Jamaica’s water supply originates from ground water resources. The majority of the systems are operated through deep-well pumping, which are currently powered by increasingly expensive fossil fuel generated electricity. The NIC supplies irrigation water to its costumers using both ground and surface water resources. The ground water is abstracted via deep-wells and is conveyed through a network of pipelines and distribution canals. The NIC provides water at a subsidized rate to farmers and sells water to the National Water Commission (NWC) for domestic use. The subsidy on water is presently being eroded by the rising cost of electricity, used to operate pumping facilities. The NIC is currently conducting a wind resource analysis and a feasibility study to incorporate wind energy in its operation of water pumping for water irrigation to alleviate the high cost of electricity for deep-well pumping. The aspect to this project is having a fully publicly owned corporatized agency (NIC) developing and installing decentralized renewable technology, a dedicated wind farm, for own power consumption, and become one of the first parties to use the power wheeling structure to lower the cost of electricity.

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6 3. Power Wheeling an option for Jamaica? “Wheeling” is the term used in the electricity industry to describe the sale and transfer of electricity over a grid of wires. “Power Wheeling” is the term used to describe the sale of electricity from a generator of electricity to a home or business over transmission and distribution lines. Wheeling would allow customers to buy their electricity directly from an independent power producer (IPP), rather than from the distributing utility. Electric power is commonly viewed as a commodity, but the transmission and distribution system of poles and wires is not. Construction of distribution systems is very capital intensive, such that it is considered to be more efficient to have one firm providing distribution services than many. Most expect that electricity transmission and distribution systems will remain as regulated monopolies that will charge a fee to their clients and/or sellers of power for the use of the system. The premise behind wheeling is that if properly implemented, would typically open up the market for electrical generation into the electricity market, providing maximum opportunity for competition in generation, improving efficiency and contribute to lowering electricity prices in the market for consumers. Also because of this competition, it spurs innovation in more efficient technologies. The primary concern about wheeling is its implementation. If implemented unwisely, competition could result in higher cost of electricity and a lower reliability since functions or mechanisms, as economic dispatch would not work effectively. A successful implementation will depend on how the wheeling instruments are implemented.

It is important to make sure that the benefits of competition and the cost of the transition to a competitive market are balanced.

Transmission Pricing

Transmission and distribution services are critical elements or functions that enable the proper implementation of a power wheeling structure that will facilitate a competitive electricity market by impartially providing energy transportation services to all energy buyers and sellers, while recovering the cost of providing these services. To recover the cost, the costumers have to be charged a price, which has to be defined clearly to allow correct engineering and economic decisions if upgrade or expansion of capacity for generation, transmission and distribution is needed. The pricing of transmission should always meet the following requirements: (1) promote efficiency; (2) compensate grid companies fairly for providing transmission services; (3) allocate transmission cost reasonably among all transmission users, both native load and third party; and (4) maintain reliability of the transmission grid. In the following sections specific attention is placed on pricing methods to be considered for future possible application in the Jamaican power sector.

Pricing Methods

In order to implement a wheeling structure to create fairness and competition, compliance to the following key principles is critical: • Efficiency – This can be promoted and achieved by providing the appropriate price signals for

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generation and demand, giving incentives for appropriate investment and promoting competition. It is very important to consider the relation between transmission pricing and the electricity trading arrangements, especially in relation to congestion charging. • Cost recovery – There are different methodologies that can be applied in order to determine the recovery cost. This document discusses two approaches; historic cost vs. forward-looking cost. • Transparency, fairness and predictability – A governance regime is required to achieve this, by providing confidence in the regulatory framework and encourage new market players. It should be stable in the long-term, avoiding “price shocks” or price changes. • Non-Discrimination – This implies equal treatment of all network users who will be impacted all in the same way. Any residual cost should be allocated in a fair and ensuring way.

advantages of transmission charge to its customers. Full cost recovery is ensured allowing investors to recover their project investment. It is a simple and stable transmission charge since each consumer pays the same charge without depending on the location. Bulk power transmission cost does not increase a lot with the distance between producers and consumers. The transmission charge of a costumer is given by the peak demand involved in the costumer transaction multiplied with the postage stamp rate.

Rt=TC *



Rt = transmission price for transaction t TC = total transmission charges Pt = power of transaction PPeak = system peak power

These methodologies tend to ensure the full cost recovery. Cost recovery is essential in planning because it lowers the risk of investment. The total system costs are allocated to various users by determining the extent of use of the facility. These methods are only cost biased, so no incentives are set for the reinforcement of the network.

A disadvantage of this methodology is that all users pay the same transmission tariff, and does not distinguish between “high-cost transmission users” and “low-cost transmission users”. Incentives are not given to the system users; therefore efficiency is not met. Also it does not consider the distance between injection and consumption of energy into account, so there is no price difference across space and time.

• Postage Stamp Methodology Under the “postage stamp” methodology the rate cost of all transmission facilities are allocated according to each customer’s share of load in the region. Being a historic cost method, it offers some

• Contract Path Methodology Within the contract path method the customer and the transmission provider come into an agreement for an individual wheeling transaction of a fictitious path between two points. Separate prices are

Rolled-In Pricing Methods (Historic Cost)

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considered for generation and transmission. This path connects the points of injection and consumption of the two points. Disadvantages of this method are that it does not contemplate the actual system operation and any congestion issues. Transactions of energy will always affect all components in the transmission system, and this method only considers the one in the contract path. This issue may lead to additional investments needs in other areas of the system where the contract path is not included, resulting in low efficiency in the system. • Distanced Based MW-km Methodology Under the distanced based MW-km methodology, the transmission charges are assigned to the costumer between injection and consumption and the magnitude of transmitted power (MW).

PX t Rt=TC * SUM PX i PX t = DT * PM PXt = MW-km Value DT = airline distance PM = power magnitude TC = total transmission changes The conditions of the actual network are neglected, and like the contract path method, the real transaction path is not considered, causing wrong economic signals, which are a disadvantage.

• Power-Flow Based MW-km Methodology The power-flow based MW-km is a method that does consider the real usage of the power system conditions using power flow analysis, forecasted loads, and generation configuration. Cost of transmission is in relation to the use by individual transaction of the transmission system determined by the power-flow studies. The cost allocated to the costumers is determined on the basis of extend of use of each network facility.

R(u) =SUM Ck ( Fk(u) ) Fk R(u) = allocated cost to costumer u Ck = cost of circuit k fk(u) = k-circuit flow caused by costumer u fk = k-circuit capacity This method considers transmission cost through a ratio of power flows caused by the costumer and the line capacity, so the embedded cost can be recovered. The problem of prices is reduced by making customers pay for prices more related to their actual network use. In this methodology, efficiency can be increased. A disadvantage to this method is that it fails to signal the future investment costs caused by each individual user. Also, not all transmission system capital costs can be recovered since the total power flows are less than the circuit capacity.

Incremental Pricing Methodologies (Forward Looking Cost)

Incremental Pricing methodologies do not guarantee cost recovery, therefore investment is

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9 more risky. Only new transmission costs caused by a new transaction are taken into account when calculating the transmission change. Within this methodology, there are two types of cost: incremental cost of transaction and marginal cost of transaction. Marginal cost of transaction can be defined as the change in cost that arises when a quantity produced changes by an additional unit. Incremental cost is calculated by comparing the transmission system cost with and without the entire transmission transaction. • Short-Run Pricing Methodology The short-run pricing methodology includes Short-Run Incremental Cost (SRIC) Pricing and Short-Run Marginal Cost (SRMC) Pricing. The transmission capacity in the short-run method is assumed to be fixed.

Short-Run Marginal Cost Pricing (SRMC)

SRMC can be defined as the additional cost caused by an additional transmission of one unit. To estimate SRMC, the marginal operating cost of an extra MW of power is calculated at all points of delivery and receipt. Then this value is multiplied by the size of the transaction to provide the SRMCs. This method comprehends that electricity is generated, and also delivered to a particular node. Electrical losses and transmission constraints are taken into account. Disadvantages to this method are that it is difficult to evaluate accurate operating costs of a single transaction when there are multiple transactions occurring at the same time; therefore each individual transaction has to be allocated to its investment. If an individual transaction is very large compared to the transmission load, then the SRMC may result not to be an accurate estimation of the actual extra

costs caused by the transaction, as this method fails to capture additional costs imposed. Once an investment is made, prices for future SRMC will fall, therefore the potential for a system owner to recover his costs. Short-Run Incremental Cost Pricing (SRIC) In the SRIC methodology, all new incremental costs are assigned to a transmission transaction. The profits or revenues collected compensate only for short-run costs caused by this specific transmission transaction. SRIC are obtained by reviewing the transmission system costs with and without the entire transmission transaction. The costs are calculated using a model of optimal power flows. Disadvantages to this method are that it requires forecasting of future operating costs, and such forecast becomes less reliable with time. Also, same as SRMC it is difficult to evaluate accurate operating costs of a single transaction when multiple transactions occur at the same time. Then an assessment has to be done to allocate each individual transaction to its investment cost. Overall, under Short-Run Pricing Methodology, the transmission price for a transaction is approximately equal to the actual cost placed upon the system, promoting efficiency in the recovery of the transmission system costs. • Long-Run Pricing Methodology The long-run pricing methodologies include Long-Run Incremental Cost (LRIC) Pricing and Long-Run Marginal Cost (LRMC) Pricing. The transmission capacity is allowed to change in this method, as opposed to the Short-Run Pricing Method. There are no fixed costs by definition of 8 long-run considerations, and all production factors are variable. With these methodologies, users have a full long-term cost of their actions, and also consider the costs on new investments. Prices are

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10 more stable, therefore users can commit easier in long-term contracts.

Long-Run Incremental Cost Pricing (LRIC)

The LRIC methodology is similar to SRIC, with the difference that not only does the LRIC method include operating costs, but also considers investment costs. There is an introduction of long-run view that considers reinforcements in the network. The reinforcement costs are defined as the change in cost between the current transaction cost and the long-term transaction plans. The main optimization problem is finding the right plant size, which is the optimal transmission cost capacity.

Long-Run Marginal Cost Pricing (LRMC)

LRMC are the costs of increasing production by one unit, allowing changes in the overall system capacity, reinforcing or suspension (of parts) of the system. This method is similar to SRMC since it uses marginal investment costs and also marginal operating cost to determine transmission costs. Future transmission expansion projects are valued in order to calculate extra investment costs. The future transmission expansion cost is divided by the new plant transmission transaction in order to obtain the marginal investment cost. This method serves the approach of evaluating the capacity expansion of a transmission system. The disadvantages of both methods are almost identical. It is hard to determine the operating cost of a single transaction when multiple transactions are occurring at the same time; therefore it is also difficult to determine which users should contribute to new investments. Also, transmission prices can be unstable, since there is a sensitivity of future investment. • Nodal Pricing Methodology The nodal pricing method is a way of determining prices in which market clearing prices are

determined for a number of locations in a transmission grid called node. A node can be any point in the network, and the difference in price at each node is set on the basis of the marginal cost of losses and congestion at that node; the cost of injecting one additional unit of energy at that node. The price of each node represents the locational value of energy, which will include the cost of energy and the cost of delivering it, the losses and congestion. For nodes that are located in an area with a surplus generation, the additional generation will require a higher cost. Nodes located in areas with a generation deficit, the cost of adding additional load will also be higher. Advantage of this method is the estimation of returns potential investors can calculate in different parts of the distribution network, making it a reliable method. This method solves also the dispatch issue in a decentralized market by ensuring the marginal cost of all supplying nodes is equal to the marginal benefit at all consuming nodes. In a decentralized market, price takes the role of control and coordination of stakeholder’s actions. With this method, efficiency is maximized since the marginal value of power is equal to the marginal cost of supply. Disadvantages of this methodology are that it allows for changes in supply and demand, therefore individual nodal prices can change instantaneously. Nodal pricing does not allow for the recovery of the existing fixed cost that are fundamental to the transmission networks, which lead to average total cost of exceeding short-run marginal costs. In order to implement this method, advanced information is needed since constant real time information is required on all loads, generators and equipment condition in order to set the price. This makes the method unreliable

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11 le since prices at each node will vary with time and so will supply, demand and transmission constraints. • Congestion Management Congestion management methodology emerges whenever there is a preference in the generation/demand pattern of various market players that require the provision of transmission and distribution services beyond the capability that the system can provide. Congestion on transmission/distribution networks is a big issue, and need careful attention when relating it to “wheelingâ€?. Transmission congestion can have huge impacts on an energy system. It can affect the dispatch generation, which is important in order to prevent bottleneck on the transmission network, and also to avoid system overloads. The system might also require specific procedures for giving access to transmission circuits for a specific transaction. Congestion in a system can also impact the network market operation, causing a separation (market splitting) of the electricity market into different physical zones in order to set market prices. A disadvantage of congestion management methodology requires prices to be published before electricity trading takes place, being an ex-ante process. The calculations are based on predicted base case of the power flows. Congestion management would be dependent on the evolution of the electricity market towards short term contracting arrangements such as a day ahead or spot market.

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4. Regulatory Framework for Wheeling in Jamaica Electric Lighting Act


JPS All Island Electric License

Self Generation License

Standard Terms and Conditions

Line Extension Policy Document

Wheeling Code

Generation Code

Connection Code

Wheeling Contract

Transmission Distribution Code

Figure 1: Hierarchy of Electricity Sector Legislation and Regulatory Instruments

Wheeling Charges

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13 • Standard Terms and Conditions These terms and conditions cover a range of technical and commercial provisions that are associated with connections. This distinguishes between residential, commercial and power consumers. It specifies also for the provision of a single and three phase supplies, definition of delivery points, the requirements for metering, restrictions on the use of motor loads by different consumers and motor starting arrangements, and power considerations. • A Line Extension Policy Document This emphasizes the basis for electricity line extension and supplies. It distinguishes between connection types on the basis of the complexity of link to the network • A Generation Code This part has some technical conditions that relate to the connection and operation of generators connected to the transmission and distribution system. This code defines the performance standard to be achieved by the generators, the voltage and frequency standards that can be expected on the power system, the protection requirements for the generators, the metering systems associated to the meter reading procedures, the scheduling and dispatch that will apply, and the provisions for operating generation in real time, in normal and contingency situations. • Self Generation License This license will relate activities that self-generators are entitled to follow in the electricity sector and relate them to compliance with other codes as a condition to be permitted to generate and wheel power to their own consumption sites. This license will also define generation and demand associated with a specific legal entity, specifying which parties are able to wheel electricity and how to handle situations in which generation and load installa-

tions are owned by different subsidiaries of the same organization. • Wheeling Code A load will be proposed to ensure enabling provisions that will cover technical and commercial issues required to enable wheeling. This code will need to be compatible with provisions of other regulatory documents that are part of the overall legislative and licensing regime • Wheeling Contract A standard wheeling contract with site and plant specific schedules will be needed. This contract will form basis of the commercial undertaking between JPS and the wheeling entity for the provision of wheeling services. The change for wheeling services will be explicitly stated in the Wheeling Contract.

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14 5. Results and Discussion It should be noted that in order to implement electric power wheeling, it is important to take into account energy efficiency, cost recovery, transparency and non-discrimination. These factors were taken into account when analyzing each pricing method. The x-marks indicate that the method does not comply with the key principle, being a negative characteristic. The check mark indicates that the method does take into account the specific key principle, therefore is positive.

Table 2: Comparison of Wheeling Methodologies with Key Principles Method Postage Stamp Contract Path Distance Based MW-km Power Based MW-km SRIC LRIC Nodal pricing

Efficiency Cost recovery x x x

Transparency Stability Non-Discrimination x x x

x x x x x

Rolled-in pricing methods such as postage stamp, contract path, distance based and power-flow based methodologies can be beneficial since they tend to ensure full cost recovery, therefore decreasing the risk for investment. The Postage stamp method is a simple and stable transmission charge. Each customer would pay the same price, independent of location. This method has a positive application when it comes to cost recovery and transparency since it encourages new market players. The downside is that this method is discriminatory. All users pay the same tariff and do not distinguish between high and low transmission users. Efficiency is not met either since the distance between injection and consumption of energy is not taken into account.

x x


The Contract path method also ensures cost recovery. However, separate prices are taken into account for generation and transmission, therefore transparency is not met. This method does not take into account the actual system operation or congestion issues, which is a key issue for wheeling implementation. Also, the transaction of energy in the transmission system only takes into account the contract path, so additional investment might be needed to make the system more efficient in other areas of the network where the contract path is not included. The Distance Based method, being a rolled-in pricing method ensures cost recovery. The transmission charges are assigned to the costumer between injection and consumption and the

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15 magnitude of transmitted power. Downside of this method is that the actual conditions of the network and the real transmission path are not considered, making the method less reliable to efficiency and causing erroneous economic signals. The Power flow/based method considers real usage of the system offering transparency and fairness. The cost allocated to the costumers is determined on the actual use of each network facility, offering a non-discrimination mechanism between users. This method considers the transmission cost through a ratio of power flows caused by the costumer and their capacity, therefore losses can be recovered. This is a very important detail, since in the Jamaican electricity network there are many losses in the system. Costumers pay for their actual network use, therefore increasing efficiency. This method covers most of the objectives for the implementation of wheeling. The only disadvantage is that it fails to signal future investment cost caused by each individual user. Incremental pricing methods such as Short Run Incremental Cost (SRIC), Long Run Incremental Cost (LRIC) and Nodal Pricing do not guarantee cost recovery, increasing the risk of investment. Only new transmission costs caused by a new transaction are taken into account when calculating the transmission charge. This can be an issue when it comes to electrical wheeling since cost recovery is one of the main objectives for electric wheeling implementation. In the Short Run Incremental Cost (SRIC) methodology, all new costs are assigned to a transmission transaction, complying with non-discrimination for network users. The profits only compensate for short-run costs that were caused by the specific transmission transaction. The efficiency objective is promoted since the transmission price for a transaction is equal to the actual cost of the system. Disadvantages for this

for this method is that it requires forecasting of future operating costs, and these forecasts become less reliable with time. Also, it can be difficult to evaluate an accurate operating cost of a simple transaction with multiple transactions occurring at the same time in the network. Long Run Incremental Cost (LRIC) method considers operating and investment costs, therefore being a more accurate method than SRIC but less transparent. This method considers changes or reinforcement costs on the network, defined as the change in cost between the current transaction cost and long-term transaction plans, making the method a non-discriminatory one. Disadvantages of this method are that it is hard to determine the operating cost of a single transaction when multiple transactions occur at the same time, and making it difficult to determine which users should contribute to new investments. This method is also sensitive to future investments, so transmission prices can be unstable. The Nodal pricing methodology determines the price of electricity for a number of locations in a transmission grid called nodes. The price at each node represents the value of energy, which is composed of, the cost of energy, the cost of delivering it, and losses and congestion, which are important since there are major losses in the transmission and distribution system of Jamaica. It is a non-discriminatory method because there is a high cost of generation for nodes located in areas with surplus generation or where there is a deficit of generation. With this method, efficiency is maximized since the marginal cost of power is equal to the marginal cost of supply. Nodal pricing has also some disadvantages. Individual nodal prices can change at any instant since it allows for changes in supply and demand, making the method less stable and less reliable. It also does not allow for recovery of existing fixed

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16 cost. To implement nodal pricing, advanced information is needed since there is a need for constant real time information on al loads, generators and equipment to set a price.

6. Conclusion Jamaica, like most of the islands in the Caribbean, relies on imported fuel and inefficient usage patterns. This energy dependency relates to social stability, agricultural production and national balances of payment. The Jamaica energy sector is dominated by electricity services. JPS owns and operates all distribution and transmission network in the island, and operates under a license, which is valid and exclusive until 2027. This license grants the right for JPS to act a single buyer for electricity delivered by external producers and maintaining the sole ownership on transmission and distribution lines. Most of Jamaica’s water supply comes from ground water resources. Most of the water used for farming irrigation is operated by old systems of deep-water pumping, which are powered by fossil fuel generated electricity. The operation of deep-wells to supply irrigation water keeps increasing due to the high cost of electricity. The National Irrigation Commission (NIC) is currently conducting a wind resource analysis and a feasibility study to install wind turbines for the operation of deep-well pumping. Power wheeling is being considered for the successful implementation and installation of wind turbines to reduce the cost of electricity used for irrigation. Different wheeling methodologies are presented in this report, and each method is assessed based on efficiency, cost recovery, transparency, stability and non-discrimination. Rolled-in pricing methods

seem to be very promising since they ensure full cost recovery. As seen in Table 2, the postage stamp method offers transparency and stability, but fails to ensure efficiency and non-discrimination. The contract path method also offers cost recovery and stability, but efficiency, transparency and non-discrimination is not met. With the Distance Based MW-km method, cost recovery and stability are achieved, but it fails in offering transparency and non-discrimination, and efficiency cannot be measured. Incremental pricing methods such as SRIC, LIRC and Nodal pricing do not guarantee cost recovery, which is one of the main objectives for electric wheeling implementation. The SRIC method offers efficiency and non-discrimination, but fails to guarantee stability and transparency cannot be measured. Nodal pricing method only offers efficiency and non-discrimination, but if fails to ensure cost recovery, transparency and stability. The LIRC and Power Based MW-km both score relatively high in terms of efficiency, cost recovery, both are stable and easier to implement. LRIC does not guarantee full cost recovery, so this method might not be suitable since this is essential. The Power Based MW-km complies with the objectives of recovering the existing value of the network. Based on the Jamaican electricity market, it is important that in the implementation of an electric wheeling framework, there should be a balance between economic efficiency, simplicity and transparency in the rate structure while ensuring cost recovery. As a conclusion to this analysis, since the Power Based MW-km covers most of the objectives described above, it is recommended to take this methodology into further consideration to be applied and implemented for electric wheeling in Jamaica.

ECPA Caribbean Initiative

17 7. Strategies for implementation Table 3: Strategies for implementation ITEM




Existing transmission scenario: JPS is the sole operator for the transmission and distribution of electricity in Jamaica

Develop strategies for net-metering and wheeling to promote small and medium private Distributed Generation facilities

Conduct study to determine the “real cost” for JPS transmission and distribution, with an aim to formulate “wheeling” costs and to facilitate discussions around the same with the utility company

Distributed Generation is attractive because it offers electricity that is more reliable, more efficient and cheaper than purchasing power form a centralized utility. Distributed Generation is dependent on the ability of the investor to move the power produced either into the grid or to another point of consumption at a reasonable cost.


Examine the possibility of self-generation for some energy services provision, specially those which are very energy intensive

Conduct pre-feasibility and feasibility determination on the possibility for running some pumping stations and treatment facilities on Distributed generation.

Distributed Generation systems have been known to improve energy efficiency supply systems

National Energy Relevant import substitution to Policy (2009-2030) replace oil with indigenous energy sources should be pursued with less costly options that switch from imported oil to another source

Energy Security should be the main goal of the policy, the drivers for the energy sector, and incentives for promoting.

The policy recommends Diversification of Energy Types and suggests exploration of fossil based sources towards the future fuel mix as well as defining and development of the country’s renewable energy sources.

Renewable Energy Stimulate new renewable electric Policy generation through transparent power purchase rules, with minimum electricity price assured

To promote renewable energy, providing minimum price for low-carbon electricity form renewable sources.

Privatized nature of electricity reduces the ability of Government to be prescriptive, but the market will not provide all the solutions. Tax incentives might be needed.

Net-Billing Policy: Update the present Met-billing Policy Standard offer to Net-metering Policy Contract issued by JPS

Hold consultation with JPS and interested stakeholders, to determine possible implementation of distributed generation activities.

Net-Metering Policy

Introduce net-metering policy to stimulate small/medium scale distributed generation.

Offer green incentives to JPS for uptake of power provided from a more efficient distributed generation facility.

Policy allows for the addition of small power producers of 100 kW capacities and less and offers rates at avoided generation cost, which may be too low to attract investors.


Provide powers of oversight to OUR, for monitoring JPS’ efficiency target indicators.

Establish efficiency indicators for JPS, with penalties for breach and incentives for conformation

ECPA Caribbean Initiative

18 Table 4: Turbine Component cost (750kW, 1.5MW, 3MW, 5MW) Component/Rating

750 kW

1.5 MW

3.0 MW

5.0 MW

Rotor Blades Hub Pitch Mechanism and bearing

$102,000 16% 10% 3% 3%

$250,000 11% 5% 3%


$730,000 13% 6% 2%


$1,500,000 12% 6% 2%


Drive train, nacelle Low speed shaft Bearings Gearbox Mechanical brake, HS coupling Generator Variable-speed electronics Yaw drive and bearing Main frame Electrical connections Hydraulic systems Nacelle cover

$260,000 39% 1% 1% 10% < 1% 7% 8% 1% 3% 5% < 1% 3%

$600,000 1% 1% 11% < 1% 7% 7% 1% 5% 4% < 1% 3%


$1,300,000 2% 1% 10% < 1% 6% 6% <1% 6% 4% < 1% 2%


$2,500,000 2% 1% 9% < 1% 4% 4% 1% 6% 3% < 1% 2%


Control & Safety System Tower

$10,000 $70,000

2% 11%

$10,200 $200,000

1% 13%

$10,500 $600,000

0.30% 16%

$11,000 $1,200,000

0.10% 15%

Balance Station









Foundations Transportation Road, civil works Assembly and installation Electrical/interface connections Permitting, engineering

5% 4% 7% 4% 11% 2%

Initial Capital Cost (ICC)


Normalized initial capital cost (ICC/Rating), ($/kW)


Annual Energy (AEP) (MWh)


Relative Initial Capital Cost per kWh of energy produced

4% 4% 6% 4% 9% 2% $1,460,201

2% 7% 4% 3% 7% 2% $3,540,501

1% 17% 3% 3% 6% 2% $7,711,001












ECPA Caribbean Initiative



750 kW 1.5 MW 3.0 MW 5 MW 11% 27% 1% 7% 23% 11% 18% 4.367

13% 29% <1% 9% 20% 11% 19% 4.321

16% 28% <1% 12% 19% 9% 17% 4.741

15% 26% <1% 12% 25% 7% 14% 5.642

ECPA Caribbean Initiative

20 8. Acknowledgements Table 6: Acknowledgements and Contacts Last name

First name








Director, Energy Economics and Planning





Head of Government and Regulatory Affairs





Head of Government and Regulatory Affairs


Chin Lenn



Project Manager





Economic & Regulatory Policy Consultant





Engineer/Regulation & Policy





Manager, Regulation & Policy


De Cuba



Senior Sustainable Energy Specialist





Energy and Climate Change Engineer

202-370 4537

ECPA Caribbean Initiative


6. References • Consultation Document (2012). Electric Wheeling Methodologies, Office of Utilities Regulation • Krause (2003). Evaluation of Transmission Pricing Methods for Liberalized Markets, A Literature Survey • Weber & Vogel (2005). Decentralized Energy Supply and Electricity Market Structures • Binger (2011). Energy efficiency potential in Jamaica: challenges, opportunities and strategies for implementation • Cudahy, Energy Law Journal (Vol. 15:351) Retail Wheeling: Is this revolution Necessary? • Office of technology Assessment (1989). Electric Power Wheeling and Dealing: Technological Considerations for Increasing Competition, Congress of the United States • Ministry of Energy and Mining, (2010). Energy Conservation and Efficiency (ECE) Policy, 2010-2030 • Annual Report (2007). Office of Utilities and Regulations,(2009) • Office of Utilities and Regulations, (2006). Regulatory Policy for the Addition of New Generating Capacity to the Public Electricity Supply System • Office of Utilities and Regulations/Jamaica Public Service Company Limited, (2001), All-Island Electricity License • The Planning Institute of Jamaica, Economic and Social Survey of Jamaica, 2012

ECPA Caribbean Initiative Department of Sustainable Development Executive Secretariat for Integral Development The General Secretariat of the Organization of American States Washington, D.C., August 2013

Challenges - OEA  
Challenges - OEA