Erik Lavoie
The Regulated Industries Commission (RIC) approved expenditure for the Trinidad and Tobago Electricity Commission (T&TEC) that is around $6 billion higher than historically justified between 2024 and 2028. If the Cabinet approves the final determination as it stands, this $6 billion in additional expenditure could be passed directly to electricity consumers over the next five years.
The $6 billion in questionable expenditure is attributed to the RIC’s decision to approve a 71 per cent increase in T&TEC’s total generation costs between 2021 and 2024.
The two components of total generation costs, fuel costs and conversion costs are set to increase by 63 per cent and 80 per cent, respectively.
In 2021, the cost of fuel to T&TEC was $1.08 billion. The RIC approved fuel cost for T&TEC in 2024 of $1.75 billion, which is an increase of 63 per cent.
T&TEC’s cost of conversion in 2021 was $983 million. The RIC approved conversion cost for T&TEC in 2024 of $1.77 billion. That is an increase of 80 per cent.
Historical trends in generation costs and the rigid nature of these costs raise questions about the justification of such an increase.
For comparison, the actual increase in total generation costs between 2012 and 2019, according to T&TEC, was 5.3 per cent, an annualised increase of less than 1 per cent over the eight-year period. T&TEC’s total generation costs in 2012 was $1.94 billion and in 2019, it was $2.05 billion.
This revelation follows an April 4, 2024 Business Guardian investigation, which estimated a 124 per cent increase in electricity bills for the median household (470 kWh/month) by 2028, if the Government implements the final determination as written.
Using the RIC’s projections for demand, future generation costs should only rise by less than 15 per cent. In this case, electricity bills for the median household would still go up, but only by 78 per cent by 2028, compared to a 124 per cent increase under a 71 per cent increase in generation costs by 2024. This would save the median household approximately $864 annually by 2028.
63% increase in fuel costs?
T&TEC is responsible for the purchase of fuel, in the form of natural gas, to be used by the three independent power producers (IPPs): Trinidad Generation Unlimited, which is 100 per cent state owned, PowerGen, 51 per cent state owned and Trinity Power, a privately owned company.
The National Gas Company (NGC) sells the fuel to T&TEC at a subsidised rate that increases by 3 per cent annually. The RIC has approved fuel costs for 2023-2024 that are 63 per cent higher than T&TEC’s reported fuel costs in 2021.
Despite the RIC’s approval for increased costs, T&TEC has actually reported declining fuel expenses since 2012, according to the RIC’s final determination. This trend is attributed to two main factors: increased generation from power plants with fuel-efficient combined cycle gas turbines (CCGT) and stagnant electricity demand since 2012. These elements combined have softened the effect of the annual 3 per cent escalation in natural gas prices supplied by the NGC to T&TEC.
Consequently, it is unclear what justifies the significant surge in T&TEC’s fuel costs.
80% increase in conversion costs?
T&TEC also pays IPPs for the conversion of the fuel it purchases into electricity. The RIC has approved conversion costs for 2023-2024 that are 80 per cent greater than T&TEC’s conversion costs in 2021.
Over the 2012 to 2021 period, the average growth rate in conversion costs was 2.3 per cent annually.
Approximately 95 per cent of T&TEC’s conversion costs originate from capacity costs, where T&TEC pays for the availability of generation potential instead of the actual quantity of electricity produced.
Each IPP has a formula used in calculating capacity costs. The three main variables in these equations influencing the capacity cost paid by T&TEC are the United States’ (US) Consumer Price Index (CPI) inflation rate, amount of contracted capacity, and the per kW capacity rate.
US CPI inflation, according to the US Federal Reserve, will range between 2.0 per cent and 2.6 per cent up to 2026.
The amount of contracted capacity is unlikely to change significantly, as the projected total increase in electricity consumption between 2021 and 2024 is expected to be between 1.5 and 3 per cent annually, according to the RIC.
This leaves the capacity rate charged as the only variable that could largely be responsible for the 80 per cent increase. T&TEC has not notified the public of any changes to existing power purchase agreements (PPA) between itself and the IPPs. The earliest that a PPA is expected to conclude is in 2029, according to a joint select committee hearing into T&TEC’s management practices on May 5, 2021.
RIC’s justification of 71% increase to T&TEC
Guardian Media contacted the RIC for the justifications behind the 71 per cent increase in generation costs for 2024:
The RIC was asked: “What are the justifications for the 63 per cent increase in fuel costs and 80 per cent increase in conversion costs?”
Here was the RIC’s response:
“Over the period 2017 to 2021, the fluctuations in the actual fuel cost and the declining trend in the conversion cost were due to falling demand, this being especially negatively affected during the period of the Covid-19 pandemic. This makes the comparison and thus differential of the cost projections in 2023 to the actual costs in 2021 very large.”
At first glance, this may seem like a proper justification, given the disruptive impacts of the COVID-19 pandemic.
However, a deeper investigation into aggregate electricity consumption between 2021 and the RIC’s 2024 forecast reveals a crucial problem in the RIC’s argument:
In 2021, total electricity consumption in T&T was 8,268 gigawatt-hours (GWh). The RIC’s own forecast for electricity consumption in 2024 is 8,805 GWh. This means that between 2021 and 2024, according to the RIC’s own projection, electricity consumption will increase 6.5 per cent.
A 6.5 per cent increase in demand, once considering increases in fuel costs and capacity costs, would correspond to an increase in total generation costs of between 13 to 19 per cent, a range that is nowhere near the 71 per cent approved by the RIC.
The RIC’s justification raises questions on whether T&TEC submitted inflated generation costs that were not properly scrutinised by the RIC.
The cost to consumers
With a 71 per cent increase in generation costs, the average tariff to be charged by T&TEC will need to increase by 106 per cent by 2028.
Assuming annual increases of 3 per cent in fuel costs, 2.5 per cent in US CPI inflation, and 2.5 per cent in electricity demand, alongside a conservative 0.5 per cent annual efficiency improvement rate, T&TEC would only need to raise its average tariff by around 64 per cent. This is an average tariff increase that is 40 per cent lower than the RIC’s approved average tariff increase.
Lack of transparency is concerning
Typically, when proposing a substantial increase in costs from recent trends, regulatory bodies extensively detail the reasons behind their decisions. However, the RIC’s 2023-2028 final determination lacks justification from the RIC for the substantial rise in generation costs.
The final determination for 2023-2028 marks a departure from previous practices like those observed in the 2006-2011 Final Determination, where the RIC provided comprehensive breakdowns and justifications for cost adjustments.
