ECONOMIC EVALUATION OF COAL CONVERSION IN THE JAMAICAN ELECTRIC POWER SECTOR

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000100400001-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: January 6, 2011
• Sequence Number: 1
• Publication Date: March 20, 1986
• Content Type: MEMO

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Central Intelligence Agency
DATE 3 120 1&(.
DOC NO G.z M a00
OCR 3
P&PD I
I -., le I- So U2CED
Washington, D. C. 20505
DIRECTORATE OF INTELLIGENCE
MEMORANDUM FOR: Robert J. Blohm
Jamaican Desk Officer
ARA/CAR
Department of State
Chiet, Strategic Resources Division
Office of Global Issues
SUBJECT: Economic Evaluation of Coal Conversion in the
Jamaican Electric Power Sector
1. Attached is our economic analysis of the use of coal in
selected power plants in Jamaica. Prior to his departure for
Kingston, the Honorable Michael Sotirhos, United States
Ambassador to Jamaica, suggested that he might find it useful to
have a detailed analysis of the economic benefits of switching
some portion of the electric power sector in Jamaica from oil to
coal. If you believe he might still find this report
interesting, please feel free to forward it to him.
2. Our results suggest that the proposed use of coal is
only marginally economic. Despite the substantial cost advantage
of coal over oil as a fuel for electricity generation, the
capital costs of conversion to coal and of construction for the
size of the generating facilities under consideration are
probably too large to merit the expenditure.
Attachment:
Jamaican Power Generation Facilities:
Conversion to Coal too Expensive?
GI M-20046, Februarv 1986
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SUBJECT: Jamaican Power Generation Facilities:
Conversion to Coal too Expensive?
OGI/SRD/EM~ I(10 February 1986)
1 - Robert J. Blohm, State
1 - SA/DDCI
1 - EXDIR
1 - DDI
1 - DDI/PES
1 - NIO/ECON
1 - DD/OGI, D/OGI
1 - CPAS/ISS
3 - OGI/EXS/PG
5 - CPAS/IMC/CB
1 - Ch/SRD
1 - SRD/EMB (Chrono)
1 - SRD/PRB
1 - SRD/SFB
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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
10 February 1986
Jamaican Power Generation Facilities:
Conversion to Coal too Expensive?
Summary
Despite the availability of significant coal deposits within
short distances of Jamaica and the relatively high costs of
generating electricity from oil relative to coal, the conversion
of certain existing generating plants to coal and the
construction of a new coal-fired power plant appear marginal when
judged solely on economic grounds. While the current cost of
coal is less then half the cost of oil on a heat-equivalent
basis, the cost of construction, conversion, and receiving and
handling facilities make coal uneconomic even for the largest
installations in Jamaica. Other oil-fired plants, even though
some are located at water's edge and could receive imported coal,
are too small to justify the high capital costs of conversion and
handling. A July 1985 report of the Petroleum Corporation of
Jamaica forecasts that Jamaica will be using coal to generate
electricity beginning in 1988, but we believe the authorities
have yet to make final decision on coal use.
This memorandum was prepared byl Energy riarkets
Branch, Office of Global Issues. The information contained
herein is updated to 8 February 1986. Comments may be directed
to Chief, Strategic Resources Division
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Introduction
Over the past ten years, the Jamaican economy has been under continuous
pressure, mainly due to stagnating bauxite/alumina exports, falling tourism
receipts, private capital outflows and a mounting oil import bill. Imported
oil is the main energy source for the Jamaican economy, accounting for over 90
percent of energy supply. In 1984, oil imports cost the country $392 million
or about one-third the value of total merchandise imports. The country's
external debt of nearly $3 billion, which required payment of $400 million in
1984, provides the impetus for Jamaica to look for an energy alternative which
is cheaper than oil. In a study released in April 1985, the World Bank
recommended that Kingston reduce its dependence on imported oil, primarily by
converting part of the electric power generation sector--which is heavily
dependent on imported oil--to relatively inexpensive coal.
Jamaican Energy Demand and Supply
Jamaica's energy consumption totaled about 13.8 million barrels of oil
equivalent in 1984. Of this amount, indigenous resources--including bagasse (a
residue from sugar manufacturing), fuelwood, and hydropower--accounted for less
than 10 percent, while 12.5 million barrels of imported oil supplied the
remainder. The electric power sector is the second largest consumer of
petroleum on the island--surpassed only by the alumina industry--accounting for
about one-fifth of all petroleum demand. The World Bank has estimated that oil
demand for power generation could grow at a rate as high as 4.3 percent
annually to 1993, and as high as 3.9 percent annually to 2003, thus adding to
foreign exchange burdens, unless a concerted effort to exploit coal
substitution opportunities, improve maintenance, and decrease losses and theft
is undertaken. In addition, the Bank found that energy efficiency in power
generation in Jamaica has actually decreased since the mid-1970s, running
counter to the trend in most other countries where higher oil prices have
brought about significant improvement. Substitution of indigenous energy
resources for oil used in power generation has been minimal and even if proven
reserves of peat, hydropower and bagasse were developed to their optimum
capacity, only a minor contribution to future energy supplies can be expected,
The power generation facilities in Jamaica are about 70 percent in the
public sector, operated by Jamaica Public Service Company (JPS), and 30 percent
in the private sector, operated primarily by the bauxite/alumina, cement and
sugar industries for their own use. The systems operate on different cycles
and are not interconnected. The alumina/bauxite industry is almost totally
dependent upon imported oil. The sugar industry uses mainly bagasse, while the
cement industry is reportedly moving from oil to imported coal. The World Bank 25X1
has recommended that the public power sector follow the lead of the cement
industry and switch to coal.
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The Public Power Sector in Jamaica
As of 31 December 1983, the latest year for which data are available,
installed generating capacity of the Jamaica Public Service Company amounted to
about 511 megawatts (MW). Of this capacity, 73 percent is fired by residual
fuel oil and 2.5 percent by diesel fuel oil, consuming 2.8 million barrels of
petroleum in 1984. The remaining capacity was provided by gas and hydro power,
with the former used for peaking purposes, and the latter's actual use
dependent on seasonal river flow. The largest individual units were three
oil-fired generating plants of 68.5 MW. While this is the largest size
generating plant in Jamaica, most coal-using plants elsewhere in the world are
in the. neighborhood of 300-600 MW capacity, thus permitting lower unit costs of
The World Bank proposal calls for the conversion of two of the 68.5-MW
facilities located at Old Harbour, and the construction of a new 66-MW
coal-fired unit at that location. If the recommendations are completely
implemented, coal would be the fuel source for about 35 percent of total JPS
electricity generating capacity. The proposal would reduce JPS dependence on
oil as a fuel from 75 percent to about 40 percent.
The World Bank estimated that the proposed conversions would cost about
$95.5 million in 1984 dollars, in addition to its estimate of another $36.5
million for the coal receiving and handling facility at Old Harbour. The cost
of the new plant was placed at 6 .6 million. Total outlays would therefore be
about $202 million.
Economics of the Proposed Coal Conversion and Construction
While the World Bank recommends the use of coal for the three power
plants, and cites feasibility studies that suggest the facilities could be put
in place, nowhere does it present an economic analysis of its recommendations.
It is unclear at this time whether the World Bank proposal calls for conversion
to coal as the single source of fuel for the two existing plants, or for
retention of dual-fired oil and coal capability. A 1982 study by a US
engineering firm recommended retention of the oil burners.
In most industrialized countries, the cost of generating a unit of
electricity from oil is far more costly than from coal. On a Btu basis, recent
industry estimates suggest that steam coal prices may be as low as $1.50 per
million Btu (MMBtu), while heavy fuel oil may cost about $3.30 per MMBtu.
Assuming that this relationship continues to hold, then on the surface the
savings from the use of coal rather than oil appear extremely attractive.
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These operating savings, however, would be deferred until completion of
the construction of the receiving and handling facilities, as well as plant
conversion and construction.
the construction leadtime for the two existing plants, the new plant, and the
port facilities could be from three to five years, so any operating savings
would not begin to accrue until the end of this decade even were the project to
One way of estimating the operating savings is to calculate the net
difference between the cost of the oil displaced and that of the substituted
coal. We separate the project into two parts: first, the conversion of the
two existing plants and second, the construction of both the new plant and the
receiving and handling facilities. In this instance, it is assumed that the
receiving facilities would have to be built for the new plant, and that none of
these capital costs need be attributed to the converted plants.
The two 68.5-MW units are estimated to consume, at a 60-percent capacity
factor, about 3,630 barrels per day of oil equivalent, or 1.3 million barrels
of oil a year.1/ When converted to coal and operating at the same capacity
factor, the units are estimated to consume 268 thousand tons of coal per year.
These estimates, provided in the Technical Appendix, rely on standard industry
conversion factors for megawatts, barrels per day of oil equivalent, and metric
Using a recent price of about $21 per barrel for residual fuel oil from
the Caribbean area, annual oil expenditures would be about $27.8 million.2/ The
coal trade press report that Colombian coal could be
delivered at about $36 per ton, resulting in outlays of about $9.7 million per
Although the oil price estimate does not incorporate any transportation
charges, these estimates nevertheless suggest that, if the two existing plants
were operating on coal, the savings would amount to about $18 million per year
at today's relative fuel prices. If this real relationship or spread between
the two fuels' prices were to hold over the 21 year life of the plants (length
of life used by one engineering firm), then the undiscounted total savings
would amount to some $380 million. Discounting at a real rate of
1/ Electric power generating plants normally operate at an annual base-load
factor of about 60 percent of name-plate capacity, so as to allow increased
output to meet periods of peak demand.
2/ Jamaica relies primarily on Venezuela for its petroleum supplies.
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5 percent (since we are not forecasting an inflation rate), and assuming that
realization of the annual fuel savings of $18 million does not occur until
after a three-year construction period, this project pays back in about 10.5
years after the initial commencement of expenditures, with no allowance for the
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capital and operating costs of the coal receiving and handling facilities.F
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The calculation above is extremely sensitive not only to the assumed
spread between residual fuel oil and coal prices, but also to the length of the
construction period and the capacity factor.
o A one-year reduction in the construction period shortens the payback
period by about a year and one-half.
o A rise in the capacity factor to 70 percent reduces the payback period
by about one year.
o A 25 percent increase in the annual fuel savings reduces the payback
The second part of the project--the construction of the new coal plant and
its associated receiving and handling facilities--involves estimated capital
expenditures of $106 million. If the new 66-MW plant were constructed to run
on oil, its cost would be about 30 percent
less, or about $74 million, since an oil-fired plant does not require the
special equipment needed at a coal plant. The problem then becomes whether the
extra $32 million in construction costs is more than offset by the savings
arising from use of cheaper coal.
If the new 66-MW plant were oil-fired, it would consume--at a 60-percent
capacity factor--about 1,750 barrels per day of oil equivalent, or about 638
thousand barrels per year. At $21 per barrel, annual expenditures would amount
to $13.4 million. Operated on coal, this unit would consume about 129 thousand
tons of coal annually. At $36 per ton, annual expenditures on coal would
amount to $4.6 million, for a savings of $8.8 million. Again assuming that the
current spread between oil and coal prices continues to hold, and discounting
at 5 percent, this proposal pays out in eight years. If the construction
period were shortened by a year, it would pay back in just over six years; were
it lengthened by a year, payback would occur in a little over nine years after
It should be noted that these projected savings could disappear with the
inclusion of interest costs, translation of costs into current dollars at the
time of commencement of the project, unanticipated cost overruns in
construction and conversion, maintenance expenditures, and/or potential labor
difficulties delaying completion of the project. Factors tending to point to
greater savings would include a widening of the differential between oil and
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coal prices, a higher capacity factor, and the inclusion of revenues from
cogeneration if steam or electricity could in the future be sold to the private
sector. Table 1 shows how the payback timetable changes with the capacity
factor and an assumed 25 percent increase in fuel savings beyond those
calculated using the current price data. In this analysis, neither interest
rates nor future oil and coal prices are predicted, plant life is not extended
given the past failure of JPS to retain a competent and reliable labor force
and to maintain its facilities in good repair, and revenues from cogeneration
have been ruled out in view of the depressed state of Jamaican industry and the
absence of linkage between the public and private power grids.
Other Factors for Consideration
There are additional issues that should be of concern to JPS, in our view,
rather than just coal's attractiveness for electricity generation.
o The World Bank proposal is considered controversial at this time
because of the possible impact on Jamaica's oil refinery. To the
extent that coal penetrates the electricity sector, the refinery will
develop surplus fuel oil production capacity. Disposal of excess fuel
oil would then become a major issue, and might even lead to the
shutdown of that refinery, according to views presented at the
November 1985 Coal Symposium in Jamaica.
o Were the recommendations followed, 35 percent of JPS capacity would be
located at Old Harbour, in opposition to JPS's desire to diversify
supply away from Old Harbour, and posing an increased vulnerability
to potential sabotage.
o In view of labor relations problems at Old Harbour, it might not be
either convenient or wise to rely on that site for the bulk of JPS
power supply. Since coal operation and maintenance is more
complicated than oil, higher-paid operators would be required,
possibly leading to rivalries within the labor force and friction
between management and labor.
o In view of the historic inability of JPS employees to maintain
adequate quality control and the chronic shortage of foreign
exchange with which to purchase repair parts for any of its units
regardless of fuel type, the preferred solution
might be to encourage the private sector--particularly the
bauxite/alumina producers--to take steps to switch their genera facilities from oil to coal. It is widely believed
that the labor force is far more highly motivated and
knowledgable in the private sector, and while we have no current
information on the size of the installed generating facilities in
that sector, it is possible that they might be sufficient to make
coal conversion more economic. The immediacy with which the
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Years to Pay Back for Selected Jamaican
Electric Power Plants'
Capacity Factor
Estimated 60%
70%
60% 70%
Capital
25 Percent Hypothetical
Costs
Increase in Projected
($ Million)
Fuel Savings
Two Existing Plants
$95.5 10+
9+
8+ 7+
New Plant2
$32.0 8
7+
7 6+
'Three year construction period, 5 percent real discount factor.
2Incremental capital expenditures required for coal plant.
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bauxite/alumina industry might turn to fuels other than oil, however,
clearly depends on the outlook for that industry. Given the current
depressed state of demand, with several plants closed, we judge that
the industry would be unwilling to commit to major new fuel projects
unless bauxite demand projections were to improve substantially.
Conclusions
The economics of coal over oil in electric generation are extremely
favorable for new large base-load facilities in the 300-600 MW size, but not
for plants one-tenth that capacity. Big coal-fired generating plants, properly
maintained, offer large economies of scale and permit lower unit costs of
operation. They also require far less than proportionate increases in
expenditures on receiving and handling facilities. Two 500-MW plants, operated
at a capacity factor of 60 percent, would provide adequately for all of the
currently anticipated power needs of the whole JPS system. Normal industry
practice, however, requires that no more than 10 to 15 percent of total system
capacity be provided by any one generating facility. This provides a margin
for scheduled downtime for maintenance as well as for unanticipated outages.
Consequently, while two such plants would be economic for JPS, they present an
At a 5 percent discount factor, most capital projects are expected to pay
back in no more than seven years to be economically justifiable; the earlier
the payback, the more attractive the proposed investment. Of the alternatives
considered in the above analysis, only the incremental cost of the new
coal-fired facility, operated at a 70-percent capacity factor, results in a
payback period of seven years. The other alternatives take 1-3 years longer
These conclusions are consistent with revised industry findings, whose
results recently have been updated to reflect current market conditions. In
that study, an 80-percent capacity factor was used, which made the projects
examined profitable in 1982 and marginally profitable from today's vantage
point. The company now believes a four-year construction period is more
realistic, which of course defers realization of fuel savings one year further
into the future with concomitant reductions in the net present value of the
capital expenditures. Most however, believe an 80 percent
capacity factor is unrealistically optimistic. Papers presented at the
November 1985 Coal Symposium in Jamaica suggest that the coal conversion
project now carries real economic risk in view of both the softening of world
oil prices and the historically poor turbine reliability of the Old Harbour
units. Moreover, papers presented at the Coal Symposium raise doubts as to
whether a wholly new generating facility designed to burn coal is needed at
this time, given that installed capacity is well above peak demand, and that
improvements in efficiency have at mpanied the rehabilitation of major
generating units of JPS. New capa i_v may not be required until the mid to
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late 1990s. These papers recommend that the Old Harbour facilities plans be
implemented only if and when they offer a minimum annual rate of return equal
to that on all public sector investment projects and that they be considered
again if and when residual fuel prices exhibit a rising trend. What all of
this suggests is that the $202 million could be used more economically in
alternative public investments that would pay back in a shorter period.
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Technical Appendix 25X1
Calculations of consumption of oil and coal for given sizes of electric
generating plants were estimated according to industry standards using the
following rules:
Rule 1: A 1,000 MW plant operated at a 60-percent capacity factor for one
year consumes 26,500 barrels per day of oil equivalent (bdoe).
Rule 2: 1,000,000 metric tons of coal per year equals 13,541 bdoe.
Assumptions used in estimating annual fuel savings: three-year construction
A. Conversion to coal of the two exiting oil-fired plants only (137 MW),
with no inclusion of the costs necessary for coal handling and receiving
facilities:
Applying Rule 1: 137/1,000 = x/26,500
x = 3,630 bdoe or 1,324,950 barrels per year
Applying Rule 2: 3,630/13,541 = y/1,000,000
y = 268,075 tons of coal per year
With oil at $21 per barrel and coal at $36 per ton, the expenditures on
the former would amount to $27.8 million per year, and on the latter to $9.7
million per year, for an annual savings of $18.1 million once the construction
period has been completed.
B. Construction of a new coal-fired unit (66 MW) and its associated
receiving and handling facilities:
Applying Rule 1: 66/1,000 = x/26,500
x = 1,749 bdoe or 638,385 barrels per year
Applying Rule 2: 1,749/13,541 = y/1,000,000
y = 129,163 tons of coal per year
With oil at $21 per barrel and coal at $36 per ton, the expenditures on the
former would amount to $13.4 million per year, and on the latter to $4.6
million per year, for an annual savings of $8.8 million once the construction
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