The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamas Power & Light's (BPL) newly-executed fuel hedging strategy will save hard-pressed consumers and the wider economy some $150m over 18 months, senior officials disclosed yesterday.

K Peter Turnquest, deputy prime minister, and Marlon Johnson, the Ministry of Finance's acting financial secretary, told Tribune Business the move effectively represents a triple win for BPL's household and business customers; the Government and its fiscal position; and the overall economy and the foreign exchange reserves.

Both the Government and BPL said the $150m total savings will translate into a 30 percent reduction in consumers' electricity bills when compared to the 18-month period prior to August 2020, as the hedge will eliminate for "the first time ever" the cost volatility created by swings in global oil prices.

The hedge will lock-in the fuel charge component of customer bills at 10.5 cents per kilowatt hour (KWh) for the next year-and-a-half, providing businesses and households with electricity rate certainty at a time when their finances are under huge strain due to the economic crisis created by COVID-19.

BPL's move, in theory, puts control of the monthly electricity bill back in consumers' hands. With rates fixed, and no longer vulnerable to global oil price fluctuations, Bahamian energy costs will be determined by each business and households' management of their consumption.

While consumers will be the main direct beneficiaries, Messrs Turnquest and Johnson said BPL's reduced fuel costs will also help reduce the drain on the $2.026bn external reserves at a time when The Bahamas needs to preserve every cent of foreign currency it can get given that tourism-related inflows have virtually dried up.

BPL's annual fuel bill is one of the most significant drains on the foreign reserves, which are vital to maintaining the Bahamian dollar's one:one parity with the US dollar. The hedge will thus ease some of the anticipated pressure on external reserves that are projected to decline to around $1bn by year-end 2020 as import demand outweigh severely diminished foreign currency inflows.

Mr Johnson, confirming that all consumers will see the effects by their August billing, added that BPL's move - with support from the Government and the Inter-American Development Bank (IDB) - would also enable businesses to better plan while helping to ease the burden imposed on many Bahamian homes by the loss of income and jobs.

"Our estimate is that it will save $100m a year over the life of the hedge," he told Tribune Business, "so over 18 months it will look to save us $150m on the fuel import bill.

"For us, one of the compelling elements from a macroeconomic level was to do as much as we can to mitigate the fuel import bill. This will help to provide certainty at a macroeconomic level to help mitigate against foreign exchange outflows."

Mr Turnquest added: "It helps with our balance of payment issues and, over time, will save us a tremendous amount of money. Obviously it's a very significant saving for us in a very critical time when the balance of payments (foreign currency reserves) is in front of everybody as a concern.

"This is a significant event for us. It puts in certainty around the [fuel and total bill] pricing, which gives us better tools through which to manage our exposure both with the cost of fuel and foreign exchange, and our overall liabilities with exposure from the recurrent deficit and subventions to BPL over the 18-month life of the hedge.

"This is a very effective tool for us to build certainty into our financial modelling, and the main beneficiaries will be Bahamian consumers from reduced electricity bills. It provides them with a level of certainty around their electricity bill, and provides government with cost certainty for the major facilities we operate, which will help Bahamian taxpayers in the long-term."

BPL should receive little to no benefit from its hedging strategy, given that the fuel charge is a 'pass through' to the end-user that is supposed to be covered 100 percent by consumers. The latter, and the wider economy and its competitiveness, should be the main beneficiaries of locking-in long-term prices at a time when global oil prices are starting to recover from their COVID lows, having nudged up to $42-$43 per barrel last night.

"What's also equally important is the fact it brings some surety and stability to businesses and residential consumers," Mr Johnson told Tribune Business. "Businesses need stability in this environment, and households have to cope with people in the home losing income.

"The ability to have some surety, and have 30 percent savings on an electricity bill, allows people to plan and businesses to have some savings on their costs, stability and foreknowledge. When you have a [fuel] surcharge that varies, your operating costs vary at the same time.

"Especially for larger businesses, and businesses that rely heavily on electricity consumption, I feel confident this will be welcome news for them." Hotels, manufacturers and those few businesses able to operate 24/7 would likely be the main beneficiaries.

Mr Johnson confirmed that the predicted 30 percent savings in energy costs was the anticipated fall benchmarked against the 18 months prior to August 2020, when the hedge will take effect in customer bills. He urged Bahamian businesses and households to control their consumption so as to fully realise this benefit.

Explaining how the fuel hedge has been structured, Mr Johnson said the upfront costs associated with purchasing oil at the "hedge" price had been built into the 10.5 cents per KWh charge. BPL and the Government have reached an agreement whereby a portion of that 10.5 cents will go towards repaying the costs incurred by the Minnis administration in putting this structure in place.

The arrangement is "back stopped" by what remains of the $100m contingent credit facility provided by the IDB, which will only be called upon should BPL have difficulty in repaying the Government. Disclosing that the Government has "leveraged that [IDB] facility to make this happen for everyone's benefit", Mr Johnson said he expected no problems to emerge.

"We have an agreement between ourselves and BPL," he explained. "This is saving them a ton of money, so we're very confident they'll meet their obligations... It's all signed, done and dusted, and will come into effect by next month's billing. All the technical elements are signed off and fully agreed."

BPL said in a statement that its fuel charge over the past six years had swung from a high of 27.7 cents per KWh, achieved in October 2014, to a low of 8.38 cents per KWh in February 2016, causing greater uncertainty for consumers when it came to energy costs.

Whitney Heastie, BPL's chief executive, said: “Compared to recent history when rates were 19 cents [per KWh] and more in many months, the projected savings for the average customer will be about 30 percent through January 2022.”

“We would like to particularly thank the IDB for facilitating the transaction. They were able to give us access to the market, provide technical expertise and we were able to leverage their relationships.”

BPL's new hedged price, billed as providing rate predictability, will be subject to review after 12 months. Many observers will question why BPL did not move to hedge its fuel costs much earlier, but it represents the second significant reform at the state-owned utility monopoly following last year's replacement of its aged New Providence generation fleet.

The main challenge is now to achieve financial sustainability via the placing of its $535m bond issue, which will refinance its existing debt and provide monies to upgrade its creaking transmission and distribution (T&D) infrastructure.

"This unprecedented step will deliver local consumers fuel price certainty for the first time in BPL’s history,” Mr Turnquest said in a statement. "This move will deliver significant savings at a time when Bahamians are doing their best to restore their lives and livelihoods in the era of COVID-19.

“This move will position the country against abrupt oil price movements and offer protection against unexpected increases in electricity costs. It will help to protect the Government’s limited budget resources and allow for better financial risk management in these uncertain times."