BPL to re-enter hedging via 15% fuel cost lock-in

respond to Tribune Business messages seeking answers on when the proposed hedge will be sealed, its likely terms or the timeline/duration it will cover.

However, the utility described as “far more prudent” its decision to pursue a new hedging arrangement now given that global oil prices have eased. Electricity suppliers typically initiate fuel hedging strategies when per barrel oil costs are low, exploiting market softness to lock-in prices they believe will offer consumers tariff predictability and stability, shielding all parties from future volatility and price spikes.

While global oil prices have dropped somewhat since the Ukraine invasion’s start, standing at $77.19 per barrel on the West Texas Intermediate index, and at $83.66 on Brent crude, they remain significantly higher than the $40-$50 per barrel cost that the Minnis administration was able to exploit in mid-2020 when world energy demand plummeted due to the lockdowns associated with the COVID-19 pandemic.

Still, BPL said: “Not only have fuel prices declined to a point where hedging gains are far more favourable, but the organisation’s finances have stabilised due to the successful completion of [two] loan agreements and the implementation of the glide path fuel cost recovery scheme.” The latter refers to the phased-in fuel charge hikes that will this summer peak at 163 percent above October 2022 levels for consumers using over 800 kilowatt (KW) hours per month.

“It looks like BPL is bringing hedging back into the mix for price stability,” one energy industry source said of its statement.

“Once they see oil prices come down, they can raise the percentage of fuel they hedge. They’ve now come back and realised hedging is the best strategy for price stability, which contrasts with the statement that hedging is a gamble.

They’re getting back into hedging, and contrasting what the Prime Minister is saying that it’s a bet.”

Mr Davis, during Monday’s House of Assembly hostilities with Opposition leader, Michael Pintard, sought to justify his administration’s decision not to authorise trades that would have supported BPL’s hedging strategy by acquiring more cut-price oil at a “strike price” of $50 per barrel. He argued that it was “a reasonable decision” to focus scarce financial resources into paying down BPL’s multi-million arrears owed to vendors and $246m loan that was coming due.

“Let’s remember what a hedge is. It’s a bet, a gamble,” the Prime Minister asserted. While it was designed to lock-in fuel prices in advance, so that electricity consumers enjoy price stability and predictability, he cited the example of a Florida utility that lost billions over a ten-year period after spot market oil prices declined below the price at which it had hedged.

Mr Davis also implied that executing the September 2021 trades would have been of little use in protecting Bahamian businesses and households from the oil price spike produced by Russia’s invasion of Ukraine in February 2022. This was because the hedge they were tied to “only covered a period beginning in July 2022”.

However, the energy industry source said of yesterday’s BPL statement: “What they’re saying to The Bahamas is they’re going to continue hedging because it gives us price stability. They’re saying hedging makes sense, so we’re going to do it again.” They agreed with BPL’s analysis that to seek a new hedge in early 2022 would have been “bad timing” due to the global oil price spike, as it would have been unable to lock-in a favourable price.

BPL said global oil prices were projected to ease further, helping to increase hedging’s potential benefits. It added that entering a new hedge in early 2022 may also have “derailed” or delayed negotiations over two new loan arrangements, which have now been completed.

Bahamian businesses and households will face an average fuel charge of 20 cents per kilowatt hour (KWh) in their electricity bills during 2023, BPL confirmed, as it seeks to recover fuel costs that were not 100 percent passed on to consumers as required by law between December 2021 and October 2022.

It admitted that this was almost double, or 100 percent higher, than the 10.5 cents per KWh attained when the fuel hedge was initially put in place, but argued that this was “still lower compared to utilities of similar size and characteristics in our region”.

Meanwhile, the Opposition yesterday showed no sign of letting up on the fuel hedging controversy. Mr Pintard, in a statement, reiterated that “the lion’s share” of the $150m in unpaid BPL bills disclosed in the Fiscal Strategy Report was tied directly to the Davis administration’s decision not to execute the hedge-supporting trades for more cheaper fuel in September 2021 and December 2021.

“The public has sufficient reason to believe that is related to the decision around the hedge or failure to act,” the FNM leader told Tribune Business of the $150m arrears. “There was sufficient reason to believe ballooning of this exposure to Shell had to do with the decision they made and failed to make. We gave