Energy Production & IPPs Cast-iron Contracts

Editorial

By M.K.

In the din of party politicking, especially in the run-up to general elections and sensational news bandied about on different media platforms, with one “affair” crowding out the previous week’s, as could be expected the real issues that should inform debates and occupy the minds the people – and especially of politicians and social activists who really place the interest of the country above any other – get lost in the maze. One such issue that has come up just yesterday is the resignation of Minister Lutchmeenaraidoo – there is a real risk that a forthcoming by-election will dominate the scene and used as a convenient pretext to deflect attention from the critical issues that directly impact the people. In this category are our energy needs and security, and the cost that we are still having to bear for the questionable contracts entered by the CEB and a number of Independent Power Producers (IPPs), which have or should come up for renewal this year. It bears repeating, given the cost and the implications to consumers especially, that this matter be revisited so that public pressure would force decision-makers to yield to reason and defend the consumer instead of bending over to accommodate vested interests that go against the common good.

 Energy production for public consumption was at one time fully in the hands of the public sector. The Central Electricity Board (CEB) was both the producer and distributor of electrical energy to the whole country. Then, we had wizards coming from the World Bank and the IMF in the mid-1990s advocating that the CEB should give up its role as producer of electricity, restricting itself to being solely its distributor on the national grid as well as the collector of electricity bills. The private sector was to be the producer of electricity with the CEB acting as its distribution and marketing agency. It was a recommendation made at a time the big traditional sugar producers were thinking of diversifying away from sugar into real estate and energy production.

After the government adopted this recommendation, the CEB lost its key role in the production of our electricity needs. Today, up to 60% of the electricity it supplies to the public comes from the electrical production of independent power producers (IPPs) of the private sector. From 1997, when the first authorisation was given to an IPP, other private sector IPPs having formed part of the previous sugar conglomerates have been added to the major private power producers of the country. According to contracts signed between the IPPs and the CEB, the latter has to buy up all the electricity produced by the IPPs in the first place and only then make good any residual shortage in the demand through its own production.

This arrangement relegates the CEB to a subsidiary position. The latter has to install spare capacity (thermal and hydro-electric) and keep it aside so as activate it to make good any shortfalls in supply from the IPPs. But if IPPs are increasing their supply, the CEB should cut down its own production to take up the IPP supply, no matter if its own installed capacity has to remain idle. Moreover, the contract between the two parties provides that any fluctuations in cost due to higher cost of inputs (including coal) by the IPPs, any external or internal price inflation, changes in freight rates, any adverse effect of exchange rate changes on the cost of production of the IPPs, any taxes – all of these will be factored into the price of electricity charged by the IPPs to the CEB. In simple words, the IPPs are passing on all risks to the CEB and, through the latter, to the public while guaranteeing to themselves a riskless high rate of return.

Furthermore, that CEB has to keep aside extra idle capacity has cost implications. If this cost is not passed on into the electricity bill, it is the government, i.e., taxpayers, who have to foot the bill. The CEB is contractually bound to buy up any amount the IPPs produce and bridge any gap between supply and demand. It will be noted that, in contrast to the treatment given to IPPs, small household units producing their own electricity are being authorised by the CEB to sell to it any surplus electricity they produce subject to a specified limit.

The domestic price of electricity impacts directly on the price our producers will charge to domestic and external consumers for their products. Under existing arrangements, the public sector has no say in the price at which electricity is delivered by the IPPs to the CEB. IPP contracts speak for themselves in this regard. As we know, the manufacturing sector promptly jumps up against any currency devaluation it is not getting to make itself more competitive on external markets. But it never makes mention of the efficiency with which our electrical production is being delivered by IPPs, i.e., the price being charged per unit of electricity consumed. Why? Are there inherent conflicts of interest on the two sides? Why is there no competitor to whose cost of production reference can be made to gauge whether existing IPPs are charging a fair price per unit of electricity?

Since all IPP contracts are standard, this set of producers operates as a quasi-collective monopoly. The only way to see through the monopoly practices of local IPPs was to bring up new players who would be in competition with them. We are aware how restrictive market practices have been put up by opposing the only other high-scale independent electricity producer trying to set up, notably CT Power at Albion, on the grounds that it would be polluting or compounding traffic congestion problems. What about pollution and traffic congestion by the existing coal-fired IPPs? Was the pollution control technology of CT Power inferior to that of the IPPs? No one has come up with comparative facts at this level — but all manner of obstructions have been placed to prevent CT Power from coming into operation on the presumption that it would be more polluting than the rest.

We ought to have rationalized all this by having an overall plan that goes beyond ensuring high rates of annual returns to IPPs. The country’s energy efficiency and security of supply should have primed above private interests. But this is Mauritius – and, yet again, the agenda of those who are elected to take decisions in the public interest does not seem to always coincide with the public’s.

The appeal of the Government against CT Power at the Privy Council will be heard early next month, and it is hoped this will clear the air. The irony of this case is that instead of government encouraging competition so as to reduce the country’s dependence on the IPPs thereby ensuring energy security and the cost to the consumer, government has done the exact opposite by appealing against a competitor! What lies behind this bizarre decision?

* Published in print edition on 282 March 2019