BOJ clarifies position on LNG and electricity rates
THE EDITOR, Sir:
Bank of Jamaica (BOJ) has noted the interest being generated by a Box in our Quarterly Monetary Report (QMPR) for the June 2019 quarter titled ‘The impact of Jamaica’s Transition to LNG on Electricity Rates’. We have also noted several articles in the media referring to it.
While we are always grateful for such interest, it seems there is one issue in need of clarification.
The apparent conclusion being drawn by some, in the media and elsewhere, is that BOJ is predicting that as a result of the ongoing LNG transition, the Jamaica Public Service (JPS) will be significantly and permanently lowering its electricity bill in the near future.
This is actually not consistent with our thinking.
We first wish to clarify that the Box in question was intended to closely examine the impact of one particular variable (a relatively new one for Jamaica) which influences local energy-price inflation, in a context where several variables impact the price of energy in Jamaica.
BOJ, in its most recent inflation forecast, also took account of the JPS application to the Office of Utilities Regulation (OUR) for an increase in the non-fuel tariff rate, which was implicitly referred to in another section of the QMPR. Our overall analysis and inflation forecast was therefore built on the assumption that, while the fuel rate would fall in the December 2019 quarter, its effects would be offset by an increase in the non-fuel tariff in the March 2020 quarter. This analysis actually pointed to a net rise in the energy component of the CPI basket for the six-month period (October 2019 to March 2020).
More important, we wish to highlight that the change to BOJ’s inflation forecast for 2020 and beyond derives from our observation in the Box that
“... A comparison of the external prices of the two fuel types reveal that, since 2006, the West Texas Intermediate measure of crude oil price has been, on average, higher and more volatile than LNG. This disparity is expected to continue into the future.”
INFLATION FORECAST RISK
Simply put, what this means is that BOJ expects the less volatile price of LNG in Jamaica’s energy mix to offset the earlier expected moderate increase in crude oil prices. The end result is that LNG should prevent any drastic increase in JPS prices in the short term, which is not the same as stimulating a drop in prices.
Finally, the QMPR on Page 3 pointed out that one of the risks to the inflation forecast was the possibility that the impact of the planned diversification of Jamaica’s fuel mix on electricity cost may not be as significant as projected. This caveat derives from the multiplicity of factors that may affect energy prices in Jamaica, such as higher than projected commodity price and exchange rate volatility, the mix and dispatch of generating units available to the system, performance against regulatory targets such as losses and the terms of gas supply to the domestic generator.
As JPS continues its moves to diversify its energy mix and upgrade capacity and efficiency, Bank of Jamaica looks forward to the potential productive impact that eventual lower energy prices can have on our economy as eagerly as everyone else, but we recognise that this is not a short-term scenario.
We hope that this helps to clarify the considerations that went into Bank of Jamaica’s forecast and we stand ready to explain this issue further if needed.
BOJ Research Division