We should return to the energy drawing board

Dear Editor,

Thanks to relentless scrutiny from the opposition political parties and informed patriots like Mr Christopher Ram, Mr Ramond Gaskin and others, the people have finally received some data and information on the proposed US$858M Amaila Falls Hydroelectric Project. The public can only make informed decisions if they have information and data.

Given the revealed information it appears as if the choices the nation faces are (i) invest today in a risky high-priced project for future gains in terms of reduced electricity price and foreign exchange savings; or (ii) return to the drawing board and come up with a better priced project (with acceptable risks) for achieving the same reduced electricity price and foreign exchange savings.
Guyanese have been assured by Mr Brassington and the President of Sithe that the unit price of electricity will decline immediately as the project comes on stream. I hope that the government has enshrined this projection into a contract. According to Sithe’s President the present cost of electricity is US 30 cents and US 19 cents per kilowatt hour depending on whether diesel or heavy fuel oil (HFO) is used. This is projected to decline to US 11 cents per Kwh in the first 12 years, then to US 5.6 cents from year 13 and eventually to US 1.8 cents after year 20. This appears like a big saving in the future if the nation is willing to pay the high initial investment cost, which involves great risks given the recent history in Guyana with large and small projects alike. However, the recent disclosures stopped short of saying what demand projections were made in the cost-benefit analysis to come up with the price structure given above.

The foreign exchange savings resulting from not importing fossil fuel are projected to be around US$200 million, according to Mr Brassington. However, this saving is dependent on whether the local demand for electricity exceeds 700 giga hours. If the demand remains around 700 to 750 giga hours, which is its present level, the savings would be around US$120 million per year as Mr Christopher Ram noted. The public was also not told what the annual operating cost of Amaila would be (including fees, risk insurance, maintenance, etc). But given the present demand of around 720 giga hours and using a suitable discount rate, the social net benefit of this project would be negative or just above zero. If negative, as I have always believed, the project is not socially feasible. The non-feasibility, of course, stems from the fact that the initial set up cost is so high. If just above zero, and given the risks (as can be deduced from the Skeldon sugar factory, Moca Moca hydro, Mazaruni hydro, etc), is it socially responsible to pursue this investment at this point in time? Note I am dealing here with the social cost-benefit instead of the private net present value, which is obviously positive since the private investor is earning a return of 19% on investment.

One thing to note is the fundamental changes that will come in the energy market in the next decade. The natural gas revolution in the United States is gaining steam. Ford announced a few days ago it will build a natural gas F150 truck. Several cities in the US have switched their buses to natural gas. This is likely to place downward pressure on the price of oil in the coming years, thus the US$200M might have to be revised downward. In this case the social viability of the project is even more questionable. Philosophically, however, I am of the view that Guyana should pursue renewable energy regardless of whether the price of oil falls or not. My view is production capacity must be developed, particularly in renewable energy.

The rate of interest of 8.5% appears high to me for a development project.  It would be interesting to know why the government has refused to deal with the World Bank in this instance. Given its low income status, Guyana could qualify for an interest rate of about 3.5% with very long payoff period. Does it have anything to do with Mr Ashni Singh’s fight with the Bank a few years ago? We know the World Bank is always serious about transparency and accountability. The opposition would have been given the information had the project been financed by the Bank. It seems like the PPP government is willing to pay a premium of about 5% so that this project can be sealed in secrecy. I like to call it the 5% corruption perception premium. I hope the Guyanese people see this as a cost they must bear because the PPP government wants limited accountability.

This takes us to the second option. Amaila will indeed save foreign exchange, but it has a steep initial cost plus its size means if something goes wrong then we have something really big going wrong – in other words the risks are very high. Nevertheless, with high risks could come high payoff from Amaila; as any first year finance student will know higher returns are associated with greater risks. I guess the people will have to decide. My preference would be to return to the drawing board. Establish a national renewable energy policy document, which should include a portfolio of renewable energy sources such as bagasse, ethanol, bio-diesel, hydroelectricity and other forms that will simultaneously engender inter-industry production linkages and ignite demand spill-overs among sectors in the economy. I would prefer working with the World Bank on a project of this magnitude. If the nation gets this right not only will the initial set up cost be about 40% lower, but also the same savings of foreign exchange will be realized. Spending prudently should be of utmost importance given the headwinds coming towards Guyana.

Yours faithfully,
Tarron Khemraj

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