Wednesday, June 22, 2022
• Industry can ‘ill-afford’ major BPL hike
• BHTA chief hopes fuel hedging stays as....
• ‘Power affordable for first time in long time’
By NEIL HARTNELL
Tribune Business Editor
The Bahamian tourism industry yesterday warned it “can ill-afford to be derailed” from its post-COVID recovery by a hike in electricity prices which remain “pivotal” to the sector’s global competitiveness.
Robert Sands, the Bahamas Hotel and Tourism Association’s (BHTA) president, in an e-mailed response to Tribune Business inquiries said any increase in Bahamas Power & Light (BPL) bills could disrupt “the balance” that the country’s largest industry is constantly striving to achieve between vacation cost and ensuring visitors receive “value for money”.
Reacting to Shevonn Cambridge, BPL’s newly-appointed chief executive, effectively confirming that light bills will soon increase, he called for “some type of fuel hedging” to continue as the strategy introduced by the former Minnis administration had meant “electricity was at affordable levels for the first time in a long time” over the past two years during the COVID-19 pandemic’s peak.
Pointing out that factors such as post-COVID “pent-up demand” will not drive the Bahamian tourism industry’s performance for ever, and that price competitiveness versus rival destinations will again become critical to maintaining market share, Mr Sands told this newspaper: “We are 100 percent on the road to recovery.
“However, given what we have just been through, and what may lie ahead, we can ill-afford to be derailed by factors such as a significant hike in the cost of electricity which is already a huge expense item for tourism stakeholders. The BHTA continues to stress the importance of the provision of ‘consistent and affordable clean power’ to businesses in The Bahamas as foundational to our ability to operate as a successful tourism destination.
“The tourism sector, historically, has faced challenges related to the cost of doing business in The Bahamas. The high cost of operating in The Bahamas is directly and inextricably related to the price of a vacation in the destination. Post-COVID, the pent-up demand for travel has - and will - continue to fuel the momentum of our economic rebound.”
Mr Sands, though, reiterated that it was “vital that we understand” many factors driving The Bahamas’ post-tourism rebound will likely be temporary. As persons regain confidence to travel long distances once again, as COVID-related travel restrictions are eliminated or eased, long-standing concerns over The Bahamas’ cost competitiveness will resurface.
“Pent-up demand will eventually begin to wane, [and] key motivating factors once prevalent in the face of COVID will play less of a part in the traveller’s decision-making process. Proximity, for example, while it will always play a vital role in our ability to entice persons to our shores, will be less of a motivating force in the face of fading transatlantic or other long-haul travel ‘fears’,” Mr Sands said.
“The removal of impediments put in place to combat COVID, such as cross-border entry protocols globally, will once again see people regain their appetite to travel farther to experience their destination of choice. Therefore, price competitiveness, albeit for comparable markets, will play a pivotal role as travel determinants begins to ‘normalise’.
“We must continue to offer value for money spent; we must continue to be competitive and ensure we attain our carefully constructed balance between pricing and the tourism product we provide. It is essential our tourism service offering must be top-of-class. Our ability to achieve this balance will be challenged if the industry is forced to face a heightened cost of doing business. All of these factors play a part.”
Mr Sands told Tribune Business that BPL’s fuel hedging strategy, first implemented in June 2020, had ensured electricity costs for the hotel industry were “manageable” at a critical time when the tourism economy collapsed virtually overnight due to the border closures, lockdowns and other restrictive measures designed to combat the COVID-19 pandemic.
The fuel charge component of customer bills, which typically accounts for 50-60 percent of the total amount, was held at a stable, relatively cheap 10.5 cents per kilowatt hour (KwH) for a 24-month period that is due to end next week on June 30. The BHTA president yesterday affirmed that BPL’s fuel hedging was “absolutely” critical to minimising hotel/tourism industry costs and losses at a time when the COVID-19 strain was greatest.
“That played a significant role in the stabilisation of prices and held the fuel charge at a manageable level for The Bahamas and the tourism sector in particular,” Mr Sands told this newspaper. “When we speak of doing everything in their [BPL’s] power to mitigate increases and look at options, we hope - or would have hoped - some type of hedging would have been continued.”
The Davis administration and BPL have yet to clarify whether the latter’s fuel hedging strategy will continue beyond July 1, and if a new structure has been put in place. Mr Sands acknowledged that the increase in global oil prices, which last night stood at $110.7 and $114.1 per barrel on the West Texas and Brent Crude indices, respectively, meant BPL will inevitably have to pay more for its fuel even if a fresh hedging strategy is implemented.
The Government has allocated $29m in the 2022-2023 Budget for “finance/hedging charges”, and the BHTA president said such a strategy - even if it locks in higher prices - will be a help. Noting that hotels remained major consumers of electricity despite having no customers at COVID’s peak, as air conditioning and security lights still had to be run, he added: “That was a significant help during that period.
“It meant electricity for the first time in a long time was at levels that were affordable. There are elements beyond the control of BPL that we recognise, but whatever they can do in their power to ensure fuel pricing is minimised will be to the benefit of not only The Bahamas but the tourism sector as well.
“We encourage BPL to do everything within their power to mitigate increases in the cost of electricity for businesses in The Bahamas, including our tourism sector, which is a massive consumer of electricity in the jurisdiction.”
BPL’s fuel hedging strategy has effectively been the one successful constant that has, to-date, helped to ease the growing cost of living crisis for Bahamian businesses and consumers. Yet it is unclear whether a new structure will be in place from July 1.
The Bahamas Electricity Corporation (Amendment) Regulations 2020, which govern BPL’s fuel hedging activities, mandate that the “fuel charge may be held constant for a period of up to 12 months in order to provide price stability to the consumer”. This, though, has to be assessed and adjusted every 12 months by July 1 each year.
BPL’s Mr Cambridge was likely referring to this when he said that BPL is examining whether the necessary “triggers or threshold” have been reached that require it to make the adjustment. “Right now, there is a fixed fuel charge,” he said.
“There is a mechanism in place that allows for the adjustment of that fuel charge. We’re currently conducting an internal review to see if the necessary triggers or threshold have been reached that will require us to do that adjustment.
“Based on the current fuel prices, right, when it does come it will be up - it won’t be down. Exactly when that will occur, we’re not certain as yet. The prices have gone up, so obviously when we adjust more than likely the adjustment will be an upward adjustment.”
Asked for clarity on whether the adjustment will mean bills are likely to increase, he said: “They will see an increase in the fuel charge when that adjustment occurs. Their bills depend on their consumption but remember I told you we’re going into our peak demand period.” Summer, and peak demand, could thus coincide with higher fuel charges and send electricity bills soaring come August and September - the period when they traditionally are highest.
The 2020 regulations stipulate that this “adjustment” takes place via an “over and under account”, which was created to monitor fuel price movements over the hedge’s year-long period. The “over and under account” is allowed to fluctuate by 5 percent either side of the fixed price at which BPL purchases fuel, and if it exceeds those limits then the fuel charge - presently standing at 10.5 cents perKwH - has to be adjusted.
One source explained that if BPL’s fuel costs were more than 5 percent below the price it paid for fuel, then the excess savings had to be passed on to the customer. But if fuel costs exceeded that purchase price by more than 5 percent, then BPL has to also pass these extra costs on to consumers via increased fuel costs.
There has also been no indication of how the Government plans to solve BPL’s financial woes with the $535m Rate Reduction Bond (RRB) left behind by the Minnis administration having been shelved for fear of the cost it will impose on Bahamian businesses and households.
And there has been no discussion surrounding the fate of the proposed Shell North America liquefied natural gas (LNG) terminal and power plant at Clifton Pier - a project that was supposed to enable BPL to exit power generation and become solely a customer-focused, transmission and distribution business.