Utilities in 2016: Desal in Mexico, solar in Cayman

The president, CEO and director of Cayman’s Consolidated Water Company, Rick McTaggart for the first time offered official opening dates and a host of fresh details for a long-planned, two-phase, 100 million gallon per day desalinization plant in Rosarita Beach, Baja California. 

“It’s a 40-year water-sale agreement, costing between $500 million and $600 million,” McTaggart told the Journal. “Phase one will supply 50 million gallons per day and open in 2019. Phase two will supply another 50 million gallons per day, opening in 2024.” 

He is optimistic about the project, but not just because, as CEO, he needs to be. CWCO achieved two significant milestones in 2015. 

Already, the company’s Mexican subsidiary, N.S.C. Agua, S.A. de C.V., in 2012 and 2013 agreed with Southern California’s Otay Water District to deliver as much as 40 million gallons of water per day from Rosarita to the U.S.-Mexico border for processing and distribution to San Diego County. 

CWCO’s 2014 annual report, the latest available, perhaps understates the significance of the scheme, saying the company “believe[s] the project can be successful due to what we believe is a growing need for a new potable water supply for the areas of northern Baja California … and Southern California.” 

McTaggart told the Journal the company had, in March, submitted to the Baja state government its unsolicited proposal for the giant project. 

“It was approved in June, but under laws and procedures, they have to put it out to tender,” published on Nov. 6, McTaggart said, pointing to CWCO’s Nov. 9 third quarter report. 

“In response to our March … proposal, we received a [June] letter … from the Director General of the Baja California State Water Commission, the state agency with responsibility for the project,” the report said, citing official assessment of the project as “in the public interest with high social benefits, and is consistent with the objectives of the state development plan, and therefore the project should proceed and the required public tender should be called. 

“Consequently, on Friday, Nov. 6, 2015, the State of Baja California, Mexico, officially commenced the tender for the project and has set March 23, 2016, as the tender submission date,” the report said, pointing to a CWCO’s five-year, $37 million expenditure on the project. 

“We are developing pricing right now,” he said, “and bids are due on March 23.” Pending late-May approval, construction will start in August and take between two-and-a-half years and three years. 

While much depends on Baja’s acceptance of the CWCO bid, McTaggart said partner NSC had already acquired 20.1 acres for the plant, leased another 5,000 square meters for water intake and discharge works, gained ocean access, contracted for power supplies from the nearby utility station and designed the pipe network for incoming seawater and outgoing fresh water “to the Mexican potable water infrastructure and the U.S. border.” 

Finally, he said, “we have obtained all of the environmental permits for the project. We have a big advantage.” 

He may not know it yet, but CWCO has significant support waiting in the wings. New York-born, San Francisco-resident hedge-fund billionaire and outspoken environmentalist Tom Steyer says he is prepared to invest in the first viable industrial-scale desalinization technology that presents itself. 

“Well,” McTaggart says, “the project has been fully accepted by Mexico, but we’re going to have to negotiate our way to California.” The Otay application to move the Rosarita product to San Diego, according to CWCO’s annual report, “we understand is currently being reviewed by the relevant authorities,” he says. 

The California drought has only compounded the long-standing “water wars” in the U.S. Southwest, where, too many dry seasons and overdevelopment mean too many people in too many communities, both urban and agricultural, competing for too little water from the Colorado River. 

Rosarita will place CWCO squarely in the middle of the conflict, which pits “upper basin” states like Wyoming and Colorado against “lower basin” states like Arizona and California, particularly Los Angeles, in increasingly bitter disputes over rights to the limited commodity. 

McTaggart told the Journal last year that Rosarita would form “part of a regional solution to water problems in northern Mexico and the southwest U.S.” Tijuana, a major industrial and tourist hub, he said, is “one of the biggest water users in the area.” 

CWCO desal may enable Tijuana to sell its upriver water rights to Las Vegas, at least contributing to alleviation of the problem, while sparking new company investment. McTaggart named nearby Hermosillo as one possibility. 

Reports from California, however, suggest April 1 water regulations may already be working to trim the sharp edges off the emergency. Governor Jerry Brown’s call to reduce consumption by 25 percent sparked a 27.3 percent decline in water use in the first month. 

Meanwhile, Cayman’s other public-service company, the Caribbean Utilities Company, is developing its own ideas to control consumption: the company’s “smart meter” project enables customers to track and modify how they use electricity while an accompanying “time of use” scheme later this year will charge according to when they use it, offering cheaper rates during nonpeak hours. 

The scheme is still being designed, and CUC officials are reluctant to say much. 

“We are aware that some customers have expressed an interest in ‘time of use’ rates and we are reviewing,” president and CEO Richard Hew told the Journal. “However, CUC is not about to make any announcement on the subject at this time.” 

Roughly speaking, the plan – unlikely to start before the third quarter of 2016 – will exploit the capabilities of CUC’s smart meters, officially dubbed “advance metering infrastructure,” encouraging consumers to shift consumption to off-peak hours, charging less for a kilowatt hour at 3 a.m., for example, meaning an early morning load of laundry will cost less than during afternoon or early evening hours. 

The scheme is expected in particular to boost Cayman’s nascent electric-vehicle industry, significantly reducing the approximately $5 overnight costs to recharge a lithium-ion battery. 

CUC launched its $5 million AMI program in 2011, planning to complete the 28,000 customer installations at the end of 2015. Changes to the meters by manufacturers Sensus of Raleigh, North Carolina, and Atlanta-based General Electric Digital Energy, have delayed completion by six months, however, Mr. Hew said. 

“Work is continuing on the AMI project,” he said. “Just over 50 percent of the meters have already been changed. The project was delayed to allow for manufacturer software and hardware upgrades. We anticipate that it will be completed by the end of June 2016. Customers who already have AMI meters are benefitting from the ability to monitor their consumption and manage their usage.” 

More generally, Hew said 2015 had proved a difficult year to control outages – two island-wide and any number of localized problems – which he blamed on retirement of major diesel generators, temporarily replaced with smaller and relatively untried equipment. 

“Without doubt, [last] year [was] a difficult one as it relates to outages with two all-island blackouts. In terms of having adequate generating capacity … there was a two-year delay in the bidding process to secure new generating capacity. As a result, we have had to rely on a number of small temporarily connected generators which are not as reliable as CUC’s large generators. 

“It is fair to say that until the new firm capacity is available in June 2016, the company will have to rely on temporary generation and we will continue to be challenged on reliability,” he warned. 

Smaller interruptions, he said, were due largely to “tree contacts, weather and failure of transmission-and-distribution equipment. 

“We certainly look forward to returning to our normal high level of reliability before the end of 2016,” the CEO said. “Our goal is always to keep the lights on, and we remain committed to providing a safe and reliable electricity service to our customers.” 

The other 2015 issue for the company was an unwelcome June rate rise of nearly 1 percent, which, Hew said, added “less than $1 on the average residential consumer’s monthly bill,” although it appeared to add as much as $1 million to CUC coffers. 

He argued that 2015 also saw a decrease in the “fuel cost charge rate,” the price customers pay to CUC to import 31 million gallons of diesel fuel every year. He attributed the decline to sharp cuts in global oil prices caused by oversupply and falling demand, and to government reduction of diesel-import duties. 

“These lower fuel costs continue and for December 2015 customers will be charged CI$0.14 per kWh for fuel costs, compared to $0.23 per kWh for December 2014, a reduction of 39 percent. The residential consumer who consistently uses 1,000 kWh per month would have seen their December 2015 bill decline by approximately $90 when compared to December 2014 as a result of the lower fuel cost charge rate,” Hew said. 

By this calculation, cost reductions far outweigh June’s average $1 increase, while Premier Alden McLaughlin, in his Dec. 30 New Year’s message, promised further import-duty declines. 

“We begin this New Year with a further reduction in the duty charged on diesel that Caribbean Utilities Company uses to generate electricity,” he said. “The first reductions were our gift to the country in January last year. These further cuts will mean even more savings to our people, residents and businesses. This reduction means a cost savings to all who use electricity in our homes and businesses and equates to $8.4 million dollars annually left in the pockets of CUC electricity consumers.” 

McLaughlin said cutting duty on CUC fuel imports and other consumable goods, in tandem with civil service pay raises would reduce the cost of living “and stimulate the economy as everyone will have more money with which to buy goods and services. It’s a win-win situation for all.” 

Those lower energy costs also reduced water bills to CWCO customers, but meant a modest third-quarter decline in the company’s revenues from $5.9 million last year to $5.8 million this year. 

Retail water revenues declined in the first nine months of 2015 to $18.1 million, compared to $18.5 million last year, while overall revenues in the first nine months dropped sharply to $43.8 million from last year’s $50.3 million. 

CWCO’s third-quarter report saw net income in the period fall from $1.9 million in 2014 to $1.8 million in 2016, which McTaggart attributed to an “impairment charge” on CWCO’s British Virgin Islands plant and exchange-rate losses on the company’s Bali, Indonesia operation, which supplies nearly 800,000 gallons of fresh water per day to a group of five-star hotels. 

License negotiations with government’s Water Authority-Cayman, where McTaggart was managing director for 6.5 years, continued to drag after a four-month hiatus in 2015, and another extension of the CWCO’s temporary license until Dec. 31. 

Since gaining licensing power from government in 2011, the Water Authority has sought to change CWCO’s pricing structure to its 5,300 residential and business customers. Since 1990, CWCO charges have relied on operating costs: an unchanging base water rate, Cayman’s consumer price index – which includes power – and the U.S. producer price index. Inflation can increase prices, deflation lower them. Capital and financing costs do not play a role. 

The Water Authority seeks a scheme resembling CUC’s “rate cap and adjustment mechanism,” which regulates the company’s profitability on the basis of invested capital. CWCO, however, fears the RCAM will reduce efficiencies, operating income and cash flows. 

McTaggart was noncommittal about the resumed negotiations, although indicating the RCAM loomed ever larger: “We continue to make progress. We were quite far apart, but we are closer now to what they have proposed. We are working together to close the gap.” 

He was reluctant to predict when talks might end: “It should be less than another seven years, but probably more than two weeks into the new year. We want to finish up as quickly as possible.” 

CUC’s third-quarter report detailed net earnings of $7.9 million in the period, $1.7 million higher than the same 2014 period. The document also reported net earnings of $16.7 million for the year to Sept. 30, $1.3 million more than the same 2014 period. The company attributed increases to higher sales, lower finance charges, lower consumer-services costs and higher “other income.” 

The most startling statistic, however, was the 37 percent fall in fuel costs, from $4.65 per imperial gallon in the third quarter of 2014 to just $2.93 in the corresponding 2015 period. 

Improving oil prices, while welcome, may, however, delay adoption of renewable energy. The CUC report details the slow preparations for solar power. 

On Oct. 30, CUC overseer, the Electricity Regulatory Authority, after nearly 11 months, approved a “power purchase agreement” between the utility and North Carolina-based Entropy Cayman Solar Ltd, employed by Pittsburgh’s International. Electric Power to execute a 5 megawatt solar project awarded in 2013. 

Entropy hopes to complete a 20-acre utility-scale solar farm in eastern Bodden Town by late 2016, generating a kWh of power for 14.28 cents, and a kWh price to CUC of 16 cents. 

CUC’s transmission and distribution license forbids the company to profit from renewable energy, a disincentive for adoption of solar, wind or ocean thermal generation. 

“[T]he 5 MW solar photovoltaic plan is cost neutral to CUC,” the third-quarter report said. Hew was equally plain: “The levelized cost of the energy is approximately 16 cents per kWh over the 25-year life of the PPA. These costs will be passed on to consumers without markup in the same manner as diesel fuel costs,” which solar generation eliminates. 

Both the ERA and CUC Manager for Engineering Services Sacha Tibbetts have spoken of 2016 solicitations for up to 6 MW more of renewable energy, in some combination of solar and wind, but have sparked controversy by claiming the T&D network, which carries approximately 100 MW, cannot tolerate more than 15 MW of “non-firm” renewable energy. 

CUC’s Consumer Owned Renewable Energy program, in which customers supply self-generated solar power to the network, buying it back at reduced prices for their own needs, already feeds nearly 4 MW into the grid. 

“CUC recently commissioned the Renewable Energy Infusion Study to analyze these impacts and identify potential mitigating strategies,” Hew said. “The results of the study show that CUC can have approximately 15 MW of renewable energy on its grid with minimal impact to stability, reliability or fuel efficiency of its engines,” two more of which the company agreed in 2014 to buy for $85 million from Germany’s Man Diesel and Turbo. However, the move commits CUC to another 25 years of diesel generation. 

“CUC is obligated to maintain a certain level of firm capacity for reliability reasons and requires the new generators as a replacement for retiring generators and to serve the growing demand,” Hew said. “Alternative technologies and fuels were considered in the decision and diesel remains the most competitive at this time. 

“For future capacity decisions, it may be that a technology other than diesel engines will prove most competitive.” 

Low oil prices, however, are unlikely to dethrone diesel generation anytime soon. 

“The oil industry is projecting continued weakness in global demand and an oversupplied market through 2016 which would indicate continued low prices,” Hew said. 

“OPEC [the 13-member Organization of Petroleum Exporting Countries] recently indicated their expectation for oil to recover to $70 per barrel in 2020 from the $40 level today.” 

In any case, CUC’s fuel-hedging program, he said, mitigates the risk of significant fuel price spikes. 

Hew, nonetheless, insisted CUC would move forward with renewables: “One of CUC’s corporate objectives is to promote and develop renewable energy as a source of electricity generation. CUC has demonstrated this with its various requests for proposals for wind and solar energy. 

“We believe utility-scale wind is a commercially viable energy source. However, it continues to face constraints in siting with the height restrictions imposed by … airport traffic and the Doppler Weather Radar installation in East End.” 

He said “much greater quantities” than 15 MW of renewables were possible, “but are likely to require mitigating practices and systems to be deployed to maintain stability and reliability. CUC will analyze these mitigating practices and the costs thereof when performing an upcoming Integrated Resource Plan in 2016.” 

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Rick McTaggart

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CUC headquarters in Sparkys Drive.

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