National Electricity Sector Policy Of Bermuda

Minister of Economic Development, Dr Grant Gibbons started off the debate today [June 26] in the House of Assembly on the National Electricity Sector Policy of Bermuda, calling it a ”significant milestone in the evolution of Bermuda’s energy policies.”

Dr Gibbons said, “Bermuda’s Electricity Sector is the most significant component of our island’s energy ecosystem. It has a substantial impact on our economy and on the daily lives of our residents – it is therefore, where we need to begin the implementation of the energy regulatory reform initiative.

“Honourable Members will be aware that continuing developments in renewable energy, energy efficiency, and conventional energy generation give Bermuda the opportunity to significantly change how it sources and uses energy.

“However, the current regulatory framework was developed during a time when the Utility was the only power producer and liquid fossil fuels were the only viable option. The current framework lacks the flexibility to properly integrate new technologies and energy sources.

“Our aspirational matrix, illustrates indicative targets for renewable energy generation, energy efficiency and energy conservation over the next 20 years and suggests that if these targets are achieved the cost of electricity supply over that period could be reduced by as much as 6 percent.

“In real terms, that would mean that Bermuda could save approximately $7 billion in the cost of electricity supply over the next 20 years.

Dr Gibbons added, “The utility [BELCo] will have new obligations under the proposed regulatory regime. In addition to their current obligation to supply electricity to the residents of Bermuda, BELCo’s responsibility for planning the electrical system will now fall under the constraints and obligations defined in law and regulation.

“It will be held to account for operating its assets efficiently, and it will be required to provide access to the grid in a non-discriminatory manner. In order to ensure economic efficiency, the Utility will also be the single buyer of power from all generators.

Dr Gibbons full statement follows below:

“Mr. Speaker, the publication of the Electricity Sector Policy represents a significant milestone in the evolution of Bermuda’s energy policies. It is the culmination of the efforts of the Department of Energy, their consultants, key industry stakeholders and the general public. Mr. Speaker, Bermuda’s Electricity Sector is the most significant component of our island’s energy ecosystem. It has a substantial impact on our economy and on the daily lives of our residents – it is therefore, where we need to begin the implementation of the energy regulatory reform initiative.

“Honourable Members will be aware that continuing developments in renewable energy, energy efficiency, and conventional energy generation give Bermuda the opportunity to significantly change how it sources and uses energy. However, the current regulatory framework was developed during a time when the Utility was the only power producer and liquid fossil fuels were the only viable option. The current framework lacks the flexibility to properly integrate new technologies and energy sources.

“Mr. Speaker, this Policy statement builds upon the work that was done in the past and provides the mechanisms by which many of the key objectives of those previously stated policy objectives can be achieved. The 2011 Energy White Paper was written at a time when the authors were unable to predict the impact of Bermuda’s economic recession, or the wider implications and resources required to implement the White Paper’s objectives.

“Mr. Speaker, the principal policy directions of the Energy White Paper were in many respects aspirational and focused heavily on the reduction of Greenhouse Gas emissions and energy efficiency. By contrast, the Electricity Sector Policy focuses instead on implementation and aspects of the White Paper, which were not addressed in detail, specifically capacity planning, electricity generation, legislation, regulation and cost to the consumer. The Policy also builds on input from a series of more recent stakeholder and public meetings that were held in November 2014, as well as in January and February of this year.

“Mr. Speaker, the objectives for Bermuda’s Electricity Sector are found on page four of the Policy document and include:

• The provision of high quality electricity services at the least cost, which satisfies customer expectations with respect to reliability and value without compromising safety standards;
• The migration to electricity services that are environmentally sustainable and do not harm Bermuda’s environment or the global environment.
• The provision of secure electricity services that are provided using a mix of energy options that are procured from reliable sources; that will, as much as practically possible, protect Bermuda from price and supply volatility.
• The provision of affordable electricity services so that all residents are at least able to pay for the basic supply of electricity, while still preserving the competitiveness of the sector.

“Mr. Speaker, the Policy also defines how Government will achieve these objectives; it is however important to note that there will be trade-offs between these objectives – there are no ‘free lunches’ – for example, features such as reliability or environmental sustainability are not necessarily least cost. These trade-offs, will, however, be evaluated transparently, using public consultations and data-driven decision making. Decisions will not be made in a vacuum and I will explain this decision-making process in more detail at a later point in this presentation

“Mr. Speaker, in addition to the Objectives for the Electricity Sector just mentioned, the Policy document also includes:

• A vision of what the sector will look like, using indicative [or illustrative] targets based on an aspirational matrix of both supply-side and demand-side management options; Mr. Speaker, Supply-side management options are those actions that can be taken by a Utility to ensure that the generation, transmission and distribution of electricity is conducted as efficiently as possible. These actions include optimizing the supply, transport and utilization of fuels, and the operational efficiency of the generating plant, the lines and the substations. On the other hand, Demand-side management options are those actions that can be taken by both the Utility and the consumers, to reduce peak electricity demand. Examples of this include conservation measures, the deployment of energy efficient appliances and the prioritization of electricity use.
• The desired structure of the sector, specifying the roles and responsibilities of all participants – such as the Regulatory Authority, the Ministry, independent power producers and the Utility – and including a role for the consumers;
• The process for determining the sources of Bermuda’s electricity generation and defining who will provide that generation;
• The framework to enable distributed generation – where users independently generate electricity, primarily for their own use, but sell excess amounts to the grid;
• The desired structure for the transmission, distribution, and retail subsector, including the role that this subsector will play in accommodating new generation technologies and independent power producers;
• Government support of more efficient use of electricity, and finally;
• The legal framework to support the implementation of this Policy.

“Mr. Speaker, the most complex aspects of the Electricity Policy are the “indicative targets” that are presented in the form of a target or aspirational matrix on pages five through seven. Indicative targets provide a measuring post to track performance toward achieving the Policy’s objectives. These targets were developed specifically for Bermuda and were derived from a planning model developed by our consultants. The specific targets for Bermuda are those that allow benchmarking and those that we believe are reasonable to achieve. These target areas are; i] Share of renewable generation, ii] Share of generation by source, iii] Share of peak demand by source, iv] Emissions of Greenhouse Gases, and v] Energy efficiency.

“Mr. Speaker, as mentioned, the purpose of these targets is to provide the basis for us to measure our progress. They are not designed to be absolute or to be used to implement punitive measures, but to allow us to determine if we are making real progress and moving in the right direction. In some jurisdictions targets have been associated with sanctions if they are not achieved; but evidence suggests that they would be difficult to implement effectively in an economy and an electricity sector of our size. In fact it is likely that the consumer would be penalized, which would be contrary to our core objectives.

Mr. Speaker, another aspect of the proposed targets that may draw attention, is the modest contribution of renewable energy to the total generation capacity. The share of renewable generation is projected to be 35% of generation by 2025 and 38% in 2035. It should be noted, however, that the most viable and affordable renewable alternatives, solar and wind, would not displace ‘base load’ generation capacity. Mr. Speaker, base load is the electric power that can be generated consistently in order to meet a minimum demand. Because of their intermittent nature, solar and wind cannot be relied upon to generate electricity consistently; therefore neither can be considered as direct replacements for generating base load electricity. However, solar energy in particular, can add substantially to peak demand periods, which often occur in the middle of the day due to air-conditioning and business lighting requirements. The higher target contribution of solar to peak demand by 2025 is illustrated in the Table on page 5.

“Mr. Speaker, there are, however, renewable energy alternatives being developed that can provide base load power. One such technology is Ocean Thermal Energy Conversion or OTEC, which can generate electricity from heat engines that operate using the temperature differences between cold deep water and the shallower warm waters of the ocean. OTEC systems can provide cold water for air conditioning and refrigeration, produce fresh water, and potentially use the nutrient-rich deep water for aquaculture. An OTEC system is currently being developed in Martinique, with construction scheduled to begin in 2016. This pilot project comes with a high price tag, but is being financed with a development grant. If this project proves to be successful, there is every chance that it would be commercialized and with an increase in demand, construction prices would become market driven and create new options for Bermuda.

“Mr. Speaker, another renewable technology that may have some promise for Bermuda in the long-term is the use of wave energy devices. These devices consist of submerged buoys that drive seabed pumps that generate water at high pressure to operate hydroelectric turbines. The high-pressure water can also be used to power reverse osmosis desalination plants. One Australian company has already commercialized their system in Perth. It is now connected to the grid producing both power and fresh water.

“Mr. Speaker, I should also add that even though Bermuda may be an ideal location to test many of the experimental ocean-based systems, we need to be sure that they are proven and commercially viable before integrating them into our generation systems.

“Mr. Speaker, we are also monitoring the energy storage industry, because as new battery and storage technologies are developed, the challenge of intermittent renewable energy systems may become a thing of the past. Continuing improvements in the cost and capacity of new batteries could become a “game-changer” for intermittent renewables like solar and wind and provide a practical way for them to be reconsidered as base load for both residential and bulk applications. Mr. Speaker, even though the use of renewable technologies to meet our base load requirements is very much a long-term goal, we must also focus on our short to medium-term objectives. As a result, we have opted to give serious consideration to introducing Liquefied Natural Gas, or LNG, as a bridging option and replacement for the diesel and fuel oil that currently produce our electricity. LNG is abundant, versatile, relatively easy to transport, cleaner burning and less costly that oil. It therefore warrants serious consideration as an attractive alternative to our current fuel sources.

“Mr. Speaker, we are aware that the indicative targets in the Policy seem to rely heavily on LNG as a base load fuel.

“Mr. Speaker, I can confirm that the Government has not yet made a firm commitment to LNG. There are still many issues to be considered and we are in the process of securing the necessary expertise to assist with that analysis. This internal work will commence in the near future with the intent of publishing the initial findings before the end of the year. LNG options will also likely form part of an integrated resource plan [IRP] which is an important part of this Policy approach. Mr. Speaker, it’s difficult to admit, but we still need fossil fuels. They are, for the moment, the least costly means by which we can generate electricity. LNG is one of the least expensive fossil fuels and with the ability to enter into long-term contracts, we should be able to avoid the price volatility that we have seen in oil over the past decade. LNG can be used in the transportation sector and could enable us to lower our Greenhouse gas emissions. However, Honourable members will be aware that the implementation of an LNG option requires a significant upfront, capital investment to build the infrastructure required for the importation, storage and distribution of this cryogenic fuel.

“In any case, should the Government and Bermuda decide to move to LNG, this would ensure the continuation of a stable high-quality electricity supply that is available at less cost, reduce our harmful emissions and still allow for the integration of renewable sources at a sensible and measured pace.

“Mr. Speaker, the aspirational matrix also provides targets for energy efficiency and conservation. Bermuda’s per-capita energy consumption is one of the highest in the world. Our isolation, high standard of living, lack of economies of scale and lack of cross-subsidization from other business sectors are all contributing factors to both our high rates of consumption and the cost of electricity.

“Mr. Speaker, it is sometimes said that the cheapest electricity possible is the electricity that we don’t use. As a result, the Electricity Sector Policy also includes conservation and efficiency targets along with the proposed portfolio of future technologies. These targets will track the average consumption by end user and we anticipate that, in spite of an overall projected increase in demand, it will be possible to realize a reduction of over 5 percent from the “business as usual” scenario thanks to energy efficiency and conservation.

“Mr. Speaker, our aspirational matrix, illustrates indicative targets for renewable energy generation, energy efficiency and energy conservation over the next 20 years and suggests that if these targets are achieved the cost of electricity supply over that period could be reduced by as much as 6 percent. In real terms, that would mean that Bermuda could save approximately $7 billion in the cost of electricity supply over the next 20 years.

“Mr. Speaker, all of these targets and the mix of supply side generating sources are illustrated in the diagram on page seven which sets out the projected changes over the next 20 years. It’s useful to contrast this diagram with the “business as usual” diagram on page two, which illustrates expected future developments if the proposed Policy changes are not adopted and we continue our reliance on current sources of generation and fuels.

“Mr. Speaker, the next major section of the Electricity Sector Policy is the proposed structure of the Sector beginning on page nine in the document. This section specifies each sector participant and defines their respective roles and responsibilities. The participants are:

• The Ministry with responsibility for energy – currently the Ministry of Economic Development;
• The Regulatory Authority of Bermuda, the RA, that currently has responsibility for only regulating telecommunications;
• The electric utility – BELCo.;
• Independent power producers [IPPs];
• Distributed generators; and
• End users or consumers.

“Mr. Speaker, the Ministry will continue to set policies for the electricity sector, which will guide the Regulatory Authority in execution of its regulatory duties. The Ministry will also be responsible for leading the Government’s efforts to coordinate and enable the development of large-scale electricity and other energy related infrastructure projects, such as supporting the Ministry of Public Works with issuing a Request for Proposal [RFP] for the development of a utility-scale solar photovoltaic facility on the “Finger” at the LF Wade International Airport.

“Mr. Speaker, the regulation of electricity will be transferred to the Regulatory Authority, which, in addition to implementing the sector policies published by the Government, will continue to operate under the rules established by the Regulatory Authority Act 2011 and the proposed new Electricity Act. The RA will also be committed to continuing the practice of holding frequent and extensive public consultations on important determinations. The RA will oversee the operations of BELCo to ensure that their service rates and tariffs are properly aligned with the cost of providing those services and that BELCo receives a fair rate of return for their investments. The RA, with the use of properly constructed regulatory mechanisms will also ensure that BELCo operates as efficiently as possible and will benchmark the Utility’s performance against other jurisdictions. The RA will also regulate BELCo’s relationship with those who wish to interconnect to the grid, no matter how large or small. Finally, the other main responsibility of the RA will be to investigate and respond to complaints from customers that would not otherwise be handled by the Department of Consumer Affairs. By transferring the responsibility for regulating electricity to the RA, they will be able to achieve economic and functional efficiencies through the use of shared resources. The RA will continue to fund itself through charging regulatory fees to the electricity sector, thereby ensuring proper accounting separation between the costs of regulating the two sectors – telecommunications and energy.

“Mr. Speaker, the utility [BELCo] will have new obligations under the proposed regulatory regime. In addition to their current obligation to supply electricity to the residents of Bermuda, BELCo’s responsibility for planning the electrical system will now fall under the constraints and obligations defined in law and regulation. It will be held to account for operating its assets efficiently, and it will be required to provide access to the grid in a non-discriminatory manner. In order to ensure economic efficiency, the Utility will also be the single buyer of power from all generators. There will be long-term contracts for interconnection and power purchases, and there will also be more transactional relationships with customers, meaning that services provided by residents that benefit BELCo will be fairly compensated, and those transactions will themselves be regulated. Power purchase transactions could also involve demand-side management, which includes measures to limit or reschedule electricity use to off-peak periods so that the utility’s generators can be re-deployed or even used less. Power Purchase Agreements will be based on a disaggregated tariff structure so that those who wish to sell power to the grid understand exactly what costs would be offset by their service. BELCo will also be responsible for management of the grid, for forecasting demand and for procuring the resources to meet that demand. This will be accomplished using an ‘Integrated Resource Planning’ mechanism.

“Mr. Speaker, in the past, BELCo projected future demand based on historical experience and projected future economic growth in Bermuda – and then sourced the appropriate incremental generating equipment to supply the power required to meet their projections. The new Integrated Resource Plan, or IRP approach will be more transparent and integrate the input and feedback from stakeholders and the public. IRPs will be developed by BELCo at intervals determined by the RA – possibly every three to five years. The process will be iterative, and will be open to public participation, challenge, and regulatory scrutiny. BELCo has a particular vested interest in the development of a comprehensive resource plan and since they are the only local entity that has the technical expertise and resources to draft an IRP, the assignment of this responsibility to them was an obvious choice. The process for ratifying the IRP will be as follows: i] BELCo submits the IRP, with a procurement plan to the RA; ii] the RA reviews the plans while inviting all other sector participants and the public to challenge and/or comment; iii] the RA will request revisions to the IRP after providing guidance and receiving feedback from BELCo on any challenges and comments received; and iv] the process is repeated, while being open to the public, until the RA approves the final plan, after which BELCo, and potentially other Independent Power Producers, proceed with its implementation. Mr. Speaker, with respect to the introduction of new technologies, it is assumed that these will be introduced by BELCo and the Independent Power Producers, but they will only be considered for incorporation into the IRP, if they meet certain criteria – the technology must be commercially proven and the developers must have secured investment-grade feasibility studies, have demonstrated expertise in building, developing and operating the proposed facilities and have the financial resources to execute the proposed project.

“Mr. Speaker, Independent Power Producers, or IPPs will benefit from an enabling environment created by this new policy and the ensuing legislation. Competition will be introduced for utility-scale or ‘bulk’ generation, which will result in BELCo no longer having a monopoly in that area. IPPs will not be restricted to renewable energy technologies, but will be able to propose any means of generation that can yield high-quality, sustainable and affordable electric power. IPPs may also provide other services, such as storage, to the grid. Long-term power purchase contracts will be the norm, which will give investors the confidence and regulatory certainty that will encourage capital investment, both foreign and local.

“Mr. Speaker, Distributed Generators, will be those who generate power primarily to offset their own use, and then sell excess to the grid. Long-term contracts, or power purchase agreements, will also be available for these investors, which will facilitate cost recovery within a reasonable amount of time. These cost recovery issues and the value of distributed generation to BELCo will also be regulated by the RA, along with the issuance of simplified licenses and permits.

“Mr. Speaker, another feature of this Policy is the decision to allow BELCo to retain their monopoly over transmission, distribution and retail services in return for enhanced regulation. The basis for this decision is quite simple – economic efficiency. In order to introduce competition in this area, an investor would need to build a separate grid. This would require extensive regulatory approval from several areas of Government and the installation of new poles, transformers, wires, and meters, etc. at a cost that would need to be recovered at an unacceptable level from the consumers. The decision was therefore made to allow BELCo to retain a monopoly over these services; but with strict regulatory scrutiny.

“Mr. Speaker, one of the means by which the Regulatory Authority will monitor and scrutinize BELCo’s operations is by requiring the implementation of a disaggregated costing model. This model will require BELCo to maintain an accounting separation for each of its services; i.e. generation, transmission and distribution, and retail. The RA will also carry out periodic benchmarking studies against comparable international peers, ensuring that BELCo’s pricing and service standards are aligned with global best practice.

“Mr. Speaker, efficiency plays a stronger and more sensible role in the new Policy. Government will need to help break down the barriers in this area, including lack of awareness about energy efficiency technologies, lack of financing to purchase equipment, and misalignment of incentives, to name a few. Government will work on more aggressive public education, providing public outreach materials and consider requiring energy labelling on energy-consuming products. Other options include “time of use pricing”, which will involve ‘smarter’ meters that will help end users monitor and regulate their own consumption.

“Mr. Speaker, in order for all of the aforementioned to occur, an appropriate legal framework has to be established. As detailed in section 10 of the Policy document, pages 22 through 27, this will include a new Electricity Act, as well as amendments to the Regulatory Authority Act 2011 and other relevant acts. This work is well underway, and it is my intention to table for information, a draft of the Electricity Bill prior to this Honourable House rising for the summer. This Bill is intended to repeal and replace the current Energy Act 2009 and includes amendments to the Regulatory Authority Act 2011, which will transfer responsibility for the regulation of the electricity sector to the RA. The Electricity Act will create the new structure for the Electricity Sector and define the roles and responsibilities for each type of sector participant. The Act will also establish the licensing regime for generation, transmission and distribution, and retail services. The general functions of the Minister and the Authority, with respect to the Electricity Sector, will be clearly defined to ensure the proper separation of duties. The structure of the sector will also be defined, which will include the responsibilities and obligations of the utility. This structure will follow the ex-ante regulatory model that was created for the Electronic Communications Sector, where the prerequisites and criteria for intervention by the RA are defined in the regulatory framework. The criteria will help the RA intervene at the right time and in the most appropriate manner. The Independent Power Producers will also have their responsibilities defined, which will include their licensing requirements and standards of performance. The Integrated Resource Planning [IRP] process will also be enshrined in the legislation and this will mitigate fears that BELCo’s future development plans could be developed solely for their benefit and perhaps at the expense of the public. Finally, there will be transitional provisions, to allow for a smooth transfer of responsibilities from the Energy Commission to the Regulatory Authority.

“Mr. Speaker, this Policy is not the end of our work, but rather the beginning. The transformation of Bermuda’s energy regulatory environment is a significant undertaking and the publication of the Electricity Sector Policy is the first step. As mentioned previously, it is my intention to table the draft Electricity Bill in this Honourable House prior to the end of the current session and use the time before the House reconvenes to allow all sector stakeholders and the public to provide their feedback and comments. Mr. Speaker, this time will also be used to develop the licensing framework for the various licenses that will be required. These include generation licenses for BELCo, Independent Power Producers and Distributed Generators, and a transmission, distribution, and retail license for BELCo. The Ministry of Economic Development will also assist the Ministry of Public Works with a tendering process to secure a utility-scale Solar Photovoltaic facility on the “Finger” at the L.F. Wade International Airport.

“Mr. Speaker, this concludes my comments on the Electricity Sector Policy. I welcome comments from Honourable Members.”

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