Archive for June 24th, 2008

Cayman renewable energy: Is there hope?

By Dr Donald Hardy – Posted 24 June 2008

8 comments

Over twenty-five years ago I founded a company to do renewable wind
energy. We have operated in the global wind industry ever since. Two
or three decades ago, very few people in the world believed the
widespread use of renewable energy now happening would be possible.

My company was retained by Caribbean Utilities Company (CUC) in 2001
to do a wind power study of Grand Cayman Island. In 2003 we submitted
our report. Much has changed since then. Oil prices have more than
tripled to US$120 per barrel. Cayman electricity prices have greatly
increased.

Commercial wind turbines have continued to improve. The UK has
extended the Kyoto Agreement, for international action to combat
Climate Change, to the Cayman Islands. However, as of May 2008
renewable (e.g. non-oil) energy still was not used significantly in
the Cayman Islands.

Cayman Government negotiations with CUC on the question of extending
the CUC electricity license were very slow and involved little or no
community input concerning alternative policies and laws. In the new
CUC license, fuel (oil) costs will be ‘passed through’ and thus paid
100% by you, the Grand Cayman consumers, according to Reuters. CUC
apparently has no incentive to reduce oil usage.

Faced with record high oil prices, CUC took action. CUC announced (30
April 2008) that it will install a new US$24.3 million diesel oil
burning generator to begin operating in summer 2009. This is a new 16
MW diesel generator. CUC customers will pay for the new US$24.3
million oil burning generator, plus an assured profit to CUC on this
US$24.3 million, plus the cost of all oil used no matter how costly
that oil is. Since 2000, CUC has installed over 60 MW of other fossil
fuel burning generators.

CUC uses perhaps 40,000,000 US gallons of oil annually. This is like
filling 5,000 home swimming pools with oil, and then burning it all
each year. You, the Grand Cayman consumers, get to pay for it all.

The public summary concerning the agreement reached between the
Government and CUC (the Joint Media Release December 2007) does not
describe specific incentives or programs for renewable energy. It does
mention special tariffs “to protect other customers” concerning small
customer-owned renewable systems, without saying why (if at all) other
CUC customers might need ‘protection’.

Several non-oil electricity programs now in use outside the Cayman
Islands are quite successful: Net Metering, Electricity Feed Laws, and
Renewable Portfolio Standards. As far as I know, these programs are
not now approved by the Cayman Islands Government.

Climate Change is driven largely by the continued burning of fossil
fuels. Every barrel of oil CUC burns for electricity contributes to
Climate Change problems. Expensive oil makes very expensive
electricity. Do Cayman businesses, or the Cayman Government, or the
Cayman people have a Climate Change plan? It would seem better to have
a plan than to drift.

Whether or not the Government and CUC are willing to talk about it,
Climate Change is a serious issue for the Cayman Islands people.
Climate Change needs to be countered, now. The Cayman people need
affordable electricity, now. Renewable energy achieves both goals,
now.

What are the problems of doing nothing to reduce the use of oil and
other fossil fuels? Problems caused by Climate Change are several and
significant. Coral reefs are among the first areas to be destroyed.
Hurricanes now are more frequent and more destructive. Sea levels are
rising. The highest Grand Cayman broad land area is approximately 15
feet above the current 2008 sea level. Land will be lost. What will
happen to George Town and to Grand Cayman landowners as the sea level
rises?

Given these CUC decisions to use increasing amounts of oil, and Cayman
laws that do not support renewable or self-generated electricity, what
can the Cayman people do?

Olivaire Watler: As the Chairman of the Government
Negotiating Team (the “Team”) who negotiated the new licences with
CUC, I feel compelled to respond to Dr Hardy’s article. This should be
taken as my personal response and not an official response on behalf
of the Government.

First, let me state publicly that I felt honoured and privileged to
lead a Team of highly competent, committed professionals possessing
such a diverse skill-set, and I am proud of the accomplishments of the
Team in what were always vigorous, and sometimes intense,
negotiations. As Grand Cayman electricity consumers, most of the Team
also had a strong personal motivation to serve the consumers’ best
interests. It is quite simply unfounded for anyone to suggest that
consumers’ interests were not the paramount consideration of the Team
at all times.

Second, I never ceased to be amazed that there are persons who are
willing publicly to disparage the negotiations and the new
licensing arrangements but have simply not made the effort to read and
understand the new licences or the Electricity Regulatory Authority
(Amendment) Law, 2008 (the “Law”), or at least ask questions first.

Third, it is remarkably ironic and pointless that someone who
criticizes the negotiations as “slow” and “involving little or no
community input” would write articles three months after the
new licences were signed to give his view as to how the electricity
industry should be re-structured supposedly prompted by his
concern for Grand Cayman consumers and the effects of climate change.

The article is inaccurate and misleading in a number of respects. I
will not attempt to catalogue all of them but I believe the following
will suffice:

1. Dr Hardy mentions his 2003 Report, but what he fails to disclose,
and which is critical for this discussion, are the results of that
study. Instead, he leaves the reader with the incorrect impression
that wind-power in Grand Cayman is a viable alternative to diesel
generators to supply continuous, reliable power.  The fact of the
matter is that generally wind-power is variable and intermittent, and
Grand Cayman in particular because of its relatively low elevation
does not register the high-sustained wind-speeds needed.  Wind-
power will always need a reliable backup and therefore the consumer
pays both for the wind-power and the backup alternative.

 2. “In the new CUC license, fuel (oil) costs will be ‘passed
through’ and thus paid 100% by you, the Grand Cayman consumers,
according to Reuters. CUC apparently has no incentive to reduce oil
usage…CUC uses perhaps 40,000,000 US gallons of oil annually. This is
like filling 5,000 home swimming pools with oil, and then burning it
all each year. You, the Grand Cayman consumers, getto pay for it
all“.

The diesel burned by CUC directly reflects the electricity consumed by
consumers. It is not about extravagant waste for CUC’s own purposes
from which you derive no benefit that Dr Hardy seeks to depict by
references to swimming pools full of oil. Clearly, whether a utility
treats its fuel costs as a direct ‘pass-through’, or whether they are
included in its rates, these represent major operating costs which
are, and must be, paid for by the consumer. The increases in the price
of diesel could not possibly be absorbed by CUC for any significant
period and it is simply unreasonable to expect that. There is no such
thing as a ‘free lunch’. 

Incidentally, fuel costs as a ‘pass-through’ was also required under
the Heads of Agreement negotiated by the previous Government.

Had Dr Hardy bothered to read the licences before approaching his
keyboard, he would have discovered that CUC will be subject to certain
performance standards going forward and these will include such
matters as fuel efficiency in generation.

3. Unlike the previous licence, there is no guaranteed rate of return
for CUC under the new licences. For example, under the old licence if
CUC earned an 11% return on rate base (“RORB”), it would be entitled
to a 4% increase in rates that would permit it to earn a 15% RORB.
Accordingly, there was an incentive to over-invest in its rate base.
Under the new licence there is no such incentive. Instead, if CUC
earns the same 11% RORB it will not be entitled to any rate increase.
If CUC wishes to increase its RORB over that level it must do so, not
by raising rates, but by lowering costs, creating efficiencies and
increased growth. Indeed, if CUC by these methods increases its RORB
to 13% then it must give the consumer a rate
reduction.        

4. It is preposterous to state that the Law does not support
alternative or renewable sources of energy (“renewables”) or self-
generated electricity. The Team was mindful of these issues throughout
and this is reflected in the Law in the following respects (amongst
others): 

a) for the first time, there is a separate category of generation
licence available for renewables under which power could be supplied
on an energy-only (rather than capacity) basis. If Dr Hardy has a
renewables source he wishes to sell to the Grand Cayman public he can
make application to the ERA and obtain a licence; 

b) if Dr Hardy’s renewables source can provide firm, reliable power
(as he suggests) then it can compete in the next solicitation process
which is about to commence. If, as he intimates, it will supply power
at a fraction of the cost of a diesel generator, then no doubt it will
win the next solicitation;

c) contrary to Dr Hardy’s statement, the Law does provide for net-
metering whereby the consumer may sell back to CUC power generated by
its renewables source; and   

d) the Law provides that anyone can generate power for self-supply
without a licence, and further that CUC is required to provide backup
supply if requested.

Dr Don Hardy: Mr. Olivaire Watler has written as the
Chairman of the Government Negotiating Team (the “Team”) who
negotiated the new licences with CUC. He took exception to the idea
that the Government negotiations were “slow” and involved “little or
no community input”.

Perhaps Mr. Olivaire Watler could direct all of us to the Government
Internet site where the transcripts of the public meetings are posted.
These would be the open community meetings that were held on the
question of extending the CUC electricity license, where alternative
policies and laws were freely discussed.

As to the Government negotiations being “slow” it was reported on
Radio Cayman by Jay Ehrhart in March 2007 (yes, in 2007 not 2008) that
“the licenses negotiations between Caribbean Utilities Company (CUC)
and the Cayman Islands Government will conclude in less than 3 months”
and that “Mr. [Arden] McLean has been very tight lipped on the subject
of the negotiations before today, saying he could not divulge details
as it would be a breach of protocol.”

Prior to that, in June 2004 (yes, 2004), there was a Joint Media
Release by the Government and CUC saying “After extensive and
intensive negotiations, the Cayman Islands Government and Caribbean
Utilities Company, Ltd. (CUC) have reached agreement on a plan that
will allow competition in the electricity industry and grant new
licences to CUC to operate in the Cayman Islands for 20 more years
from 2004.”

Perhaps I am missing something, but these events seem to be slow and
to lack community involvement.

Mr. Olivaire Watler also refers to the “Team” who negotiated the new
licences with CUC. Perhaps he could identify the persons who comprise
the “Team”. It would be courteous and respectful of the Cayman
community if Mr. Olivaire Watler would let us know if any of the
“Team” members are involved with CUC, e.g. as CUC shareholders, CUC
ex-employees, as employees or partners of businesses doing business
with CUC, etc. Such involvement (if any) would not necessarily be of
any concern, but disclosure by the Government is customary.

Clearly, the Grand Cayman people are asking for electricity changes.
People want a new, and better, approach to making and delivering
electricity.

Olivaire Watler: It appears that Dr. Hardy was unable
to address any of the various substantive points that I made in my
letter in response to his inaccurate and misleading article, including
the conclusions of his 2003 Report. Accordingly, he has failed to
establish any deficiencies in the new licensing arrangements.
 Instead, perhaps in order to divert attention from his lack of
credibility on the licensing arrangements, he has decided to impugn
the integrity of the Negotiating Team. This is unfounded, reckless and
irresponsible, and I do not propose to dignify it with a response, nor
do I intend to engage further in an unproductive exchange with Dr.
Hardy.

Alan Roffey: Dr. Hardy is right when he says the negotiations
with CUC were slow. I don’t believe that Dr. Hardy’s opinion was
intended necessarily to be critical of the Government. I read it as a
call for action to reduce our dependence on fossil fuel. However, Mr.
Watler’s urge to defend his role is a more interesting phenomenon to
contemplate.

In June 2004 I was a member of the Team negotiating with CUC. The Team
was appointed by the previous Government, but, apart from its Chairman
and one member, Messrs. Cline Glidden and Rolston Anglin respectively,
it was not politically appointed and didn’t operate as if it was.

I too was honoured and privileged to serve and was not paid to do so.
I did so because it was obvious to me that by 2002 or so CUC was
“overegging the pudding” by gold plating its plant and equipment, in
order to maximize its guaranteed 15% return on its asset base. It is
submitted that it had also become obvious to CUC that as the value of
those assets depreciated then the contribution to revenue of those
assets would become proportionally less each year.

CUC approached Government for a new license several years early,
suggesting to the Government of the day that it would benefit
consumers if it was to cap its rates to stave off inflation whereas
the true effect of the cap would allow CUC to avoid the reduction in
revenue that its depreciating assets was already causing under its
then existing license.

Another way for CUC to avoid the depreciation trap was to retire older
equipment, not because it had become worn out, but because it had
reached the end of its depreciation schedule. Some of those older
engines, whilst smaller, produced more kilowatt hours of electricity
per gallon of diesel than the newer machines. But because they had a
book value of CI$ 0.00 they no longer earned a profit for CUC.

The 2003/2004 team also had an excellent cross section of “highly
competent, committed professionals possessing a diverse skill set”. By
June 2004 it had put in hundreds of hours of work over a period of
months and, with the assistance of an excellent financial report from
the Auditor General, was able to expose many of the inefficiencies of
the old license that put money into the company’s pockets at the
expense of the consumer.

It had also exposed that CUC’s overhead power distribution lines were
not insured by the company and that its Hurricane Reserve fund, then
only CI$ 1/2M, was hopelessly inadequate, especially when compared to
the dividends paid out to its shareholders each year.

CUC’s view was, that it’s power lines were built to very high
standards and that they would prove robust enough to withstand a
strong Hurricane. When they fell down during Ivan, uninsured, the
consumers of the Cayman Islands had to pay a hurricane surcharge to
have them put back up, and then again 15% on the new lines’ un-
depreciated value through the old rate structure for three years.

Whilst it was devastating to its infrastructure, Hurricane Ivan also
saved CUC from having to conclude a negotiation with the 2003/2004
Team that was not turning out as well as it had hoped. The storm
necessarily took the Government’s eye off the ball, but CUC was still
audacious enough to blame the Government for the “breakdown” whereas
in fact, it had been saved by the bell.

In its recently concluded negotiations the independent statutory body
called the Electrical Regulatory Authority (“ERA”) was much mentioned.
However, it was not revealed that the ERA has not met since the change
of Government in May 2005. It’s Chairman was asked to resign, which he
did, and has not been replaced. Neither has any proper funding been
provided by the Ministry so that the Board can operate. The ERA was
therefore prevented from continuing with the line of negotiation set
out by the 2004 Team.

There are no new ideas in the 2008 license that were not already put
forward by the 2004 Team. Wind power and other alternative solutions
were strongly supported. It was always recognized that it isn’t, and
can never be, a prime source of power, but for every 16 or so kilowatt
hours generated by the wind, that is one less gallon of diesel burned
and a significant reduction in Cayman’s carbon foot print. We ought to
develop it.

We also ought to find ways to fund installing our electrical
distribution underground, where it will not be destroyed again by the
next Hurricane that hits us.

The Government has too many important issues to deal with at Cabinet
level. This is one area that can be delegated. The ERA must be
reformed and funded urgently and allowed to do its work. I have
indicated to the Minister that I am still qualified and willing to
serve. I believe that by doing so I will have the opportunity to pay
back some of the good things that these Islands have done for me. The
ERA should not be a politically appointed Board and must be allowed to
do its work without being interfered with.

Olivaire Watler: It is interesting that a member of the Team
appointed by the previous Government (now the political opposition)
would come to Dr Hardy’s defence and seek to favourably
mischaracterise the nature of Dr Hardy’s article and
unfavourably mischaracterise my response. My responses have
nothing to do with an “urge to defend (my)
role”. (Ironically, it is Mr Roffey who apparently has an urge to
defend his role without being attacked). Instead, there
were a number of inaccurate or misleading statements made by Dr
Hardy which were identified and addressed by me. It was entirely
appropriate to do so. It is also entirely proper for me to defend my
reputation when it is unfairly attacked.

Dr Hardy’s overall message was that renewables generation can and
should immediately replace diesel generation as a source of
continuous, reliable power and this would immediately slash
electricity prices, but the new licensing arrangements have failed to
make provision for this or for self-generation. While Mr Roffey
knows that this is inaccurate he has instead chosen to state that Dr
Hardy was merely saying that we need to reduce our dependence on
fossil fuels, and to suggest that I am in disagreement with this
objective and that specific initiatives should be developed to
accomplish this.  My initial response concludes: “In
closing, I believe the escalating costs of fossil fuels will mean that
more research and development is put into renewables so that they
can indeed provide reliable power at a lower cost. We will all
welcome that. However, we may rest assured that the new CUC licences
and the Law already make provision for that, and that the ERA has the
necessary authority to develop incentives further”. The Law is meant
to provide an enabling framework not to spell out in detail
specific initiatives. It provides for an energy policy (including
renewable energy) to be developed by Government and implemented by the
ERA after a public consultation process. I am all for that. 

I have to admit I am flummoxed by the suggestion that a team
appointed by Cabinet which comprised two MLAs of its own
party (with one as chairman) is not political, but one
appointed by another Cabinet that comprises no politicians or (to
my knowledge) party members and includes members who have a
record of voluntary public service under successive governments
somehow is.      

Alan Roffey: I didn’t seek to defend Dr Harvey, or his report.
I merely said that he was right when he said that the Government’s
negotiations with CUC were slow and then went on to provide some of
the reasons why they were slow. I did try to highlight the fact that
the ERA, of which I am still a member, has not been active since May
2005, because it is leaderless and unfunded.

It seems you agree with me that statutory boards ought not to be
politically appointed and ought not to be interfered with. I have no
political affiliations although it appears to me from your comments
that some became attached when I was asked to serve on the ERA by the
previous Government.

And therein lies the rub because, if it is automatically assumed by
the public that when a person is appointed to a statutory board a)
they must be politically connected and b) they must be enjoying some
hidden benefit, then I can see why we have such trouble obtaining
better functioning statutory boards.

Unfortunately, the current Government’s decision not to provide
funding to the ERA, and its decision not to appoint a new Chairman
after it had asked the then current Chairman to resign, effectively
prevented the ERA from continuing to do its job. Instead a completely
different team was formed to do the work for which the statutory board
was formed. The reasons for such action, or lack thereof, are a
mystery. Perhaps you could enlighten us Mr Watler.

---

Don Hardy: The key issue now is the future of
electricity on Grand Cayman Island. This is discussed, in some detail,
in my Cayman Electricity
Choices letter, published in the Cayman News Service.
However, Mr Olivaire Watler, who was the Chairman of the Government
Negotiating Team (the “Team”) that negotiated the new 2008 licences
with CUC, has written again, twice.

Let’s take a deep breath and relax. My presumption is that Mr.
Olivaire Watler is a very competent and respected Cayman attorney. I
would think that he devoted many hours to the activities of the
Government Team. And he may have received little thanks or recognition
for his efforts.

As to the 2003 PanAero wind study report itself, my understanding is
that CUC is treating the PanAero report as confidential. Apart from
the prior PanAero report, I believe that renewable energy, including
wind power, is feasible for the Cayman Islands. Much has changed
between 2003 when the PanAero report was sent to CUC and now, July
2008. These changes arelisted in the very letter (Cayman Renewable Energy: Is There Hope?) that Mr
Olivaire Watler says he is discussing. For example, since 2003
renewable energy technology has continued to improve and Grand Cayman
electricity prices have greatly increased. Circumstances today are
quite different than conditions years ago. These factors make
renewable energy more desirable and more necessary than ever. The
world moves on, and we must adapt to the priorities of the present.

Open community meetings where alternative policies and laws are freely
discussed are (a) commonly done, and (b) very effective in developing
public policy. Defining policy usually comes before and precedes
creating specific regulatory details. As one of many examples, please
see the California Energy Commission’s Website at www.energy.ca.gov where information is provided about community
meeting announcements, Energy Commission Hearings, available policy
papers, public staff reports, renewable energy facts, and climate
change programs.

While Mr. Olivaire Watler still calls for more research and
development on renewable energy, the future has passed by him. The
first commercial wind power facilities (projects using multiple wind
turbines selling electricity into the grid through a substation) were
built in the U.S. in the early 1980’s. That was 25 years ago. For
perspective when considering today’s existing global large-scale
commercial use of renewable energy, it is helpful to know (see the CUC
April 2008 annual report) that the total CUC generating system peak
load was only 93 megawatts (MW).

*At the end of 2007 commercial wind power installed in over 70
countries around the world totaled 94,123 megawatts (MW). Global wind
power in 2007 was over 1,000 times larger than CUC’s peak load*

The UK has large commercial wind power installations. The European
Union has large and expanding use of renewable energy. Spain installed
3,522 MW of wind power in 2007. As another EU example, Germany uses
large amounts of solar photovoltaic (PV) power, as well as wind power.
India is an important manufacturer of wind turbines and is among the
top five countries for installed wind capacity, with 8,000 MW in 2007.
China installed 3,449 MW of new wind power in 2007 alone, an
investment worth over US$ five Billion in just one year. Global wind
power sales were approximately 25 Billion EUR (36 Billion US$) in
2007. Wind power by itself, in 2007, was nearly one-third of all new
US electric generation installed. In 2007 5,244 MW of new U.S. wind
turbines were installed.

Renewable energy is an essential part of combating Climate Change.
Burning fossil fuels for energy is not sustainable. Without
sustainable energy resources, we can not have sustainable economic
systems. Without sustainable economic systems, society as we know it
today unravels.

In defense of the 2008 Government Team, the responsibility is
primarily with CUC for Grand Cayman oil-dependence and related very
high electricity prices. CUC always has been free to be more
innovative and more environmentally friendly. The Government Team did
not order in April 2008 a new US$24.3 million diesel oil burning
generator in disregard of record high oil prices. CUC took that
action. It is odd that, concerning these issues, we have not heard
from Mr. Richard Hew, the CEO of CUC. Is Mr. Hew perhaps off-island
now?

The Government Team is not even the new Cayman ERA, the Electricity
Regulatory Authority. The work of the Government Team presumably is
over. Neither Mr. Alan Roffey nor I are using scapegoat tactics and
blaming the 2008 Government Team, when the fundamental responsibility
lies elsewhere.

I will mention, however, that Mr Olivaire Watler is not correct in
saying that I “decided to impugn the integrity ofthe Negotiating
Team” or that my comments are a “campaign of disinformation to
disparage the negotiations including a personal attack upon the
members of the Team”. Mr Olivaire Watler also attempts to speak for
me. Doing that is wrong. For example, I did not advocate the immediate
end of all diesel oil generation. Realistic change includes a
transition period. The Cayman people are smart enough to know that it
is pointless to read what Mr. Olivaire Watler wishes I said, rather
than reading what I actually did say.

It is unproductive for Mr. Olivaire Watler to keep using “shoot-the-
messenger” tactics. The problem is not caused by those who bring the
message. The Grand Cayman electricity problem is this: an oil-
dependent utility company, lack of genuine competition in electricity
supply, and lack of consumer electricity choices, e.g. choices about
how and from whom consumers get their electricity.

In public policy matters, I recommend transparency. I also recommend
the involvement of the Cayman community. The collective wisdom of the
Cayman people, nurtured in an open exchange of ideas, knowledge, and
experience will produce the electricity solutions needed. I am
confident that this will occur.

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