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Electricity

Policy

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ColophonPublished by the Government of Curaçao

Fort Amsterdam

Curaçao

Text: Practical Business Solutions B.V.

Design and Lay-Out: Hagen Design & Strategy

Printing: Tramm Imaging

This brochure is part of a series on Electricity consumption on Curaçao:1. Electricity Management

2. Electricity Savings

3. Sustainable Energy

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ContentsIntroduction 4

The Previous Market Model 6

The New Electricity Policy 8

Electricity Policy Priorities 9 Vision 10

The New Market Model 11 Implementation of the New Market Model 12

Independent Supervisory Entity 13

The Policy Framework 15 Technical Regulation 15

Promotion and Regulation of Sustainable Energy 18

The Supervisory Framework 19 The Concession 19

Production mix 19

Legal Supervision: Concession Policy and Compliance Supervision

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Consumer Supervision: Protecting the interests of end consumers 20

Economic Regulation 20

Price Regulation 21

Effectiveness and Efficiency of the Policy 22

More info 23

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IntroductionIn the second half of 2008 the Executive Council of Curaçao of that time organized a dialogue on energy. As a result, an “Energy Policy for Curaçao” was composed. The energy policy relates to electricity, water and fuel. As part of the new energy policy on February 16, 2011 the Government of Curaçao established the “Electricity Regulatory Policy 2011-2015 Curaçao - Customized for reliable service, affordable prices and sustainable energy for the Curaçao community” (“Beleidsnota Regulering Elektriciteitsvoorziening Curaçao 2011-2015 – Maatwerk voor betrouwbare dienstverlening, betaalbare tarieven en duurzame energievoorziening ten behoeve van de Curaçaose gemeenschap”). This policy consists of the vision and the policy intentions of the Government regarding electricity provision in Curaçao. This policy therefore concerns only one of the three components of energy, namely electricity. This brochure will therefore only elaborate on the electricity policy.

The electricity policy covers both quality requirements imposed on the various links in the chain of electricity production, as well as the interests of the end consumer. The ultimate goal of the electricity policy from the economic point of view is to achieve greater transparency in the development of electricity tariffs, affordable electricity prices for consumers, while ensuring an efficient, high quality and sustainable electricity supply. A New Market Model is also introduced which will bring greater market orientation among the various players on the market. The new policy will also ensure a better regulation of the entire electricity sector, which did not previously exist in this form.

The brochure “Electricity Policy”, number 1 in this series on electricity consumption in Curaçao, deals with the electricity policy: how the policy came about, how the policy is made, the key issues and objectives. Both the old and the New Market Model are discussed and the effectiveness and efficiency of the new policy will be mapped.

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The complete document of the “Electricity Regulatory Policy 2011-2015 Curaçao - Customized for reliable service, affordable prices and sustainable energy for the Curaçao community” is available to the public on www.energiakonsiente.com.

Government of CuraçaoNovember 2011

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The Previous Market Model In the previous market model, there was extreme dominance of one company in the field of production and distribution of electricity. Production, transportation, distribution and supply of electricity, and regulation were all integrated within the public enterprise Aqualectra. From a regional comparison, with for instance, Barbados and Aruba, Curaçao appeared to have high rates.

“Aqualectra”Integrated Utility Holding N.V.

“Aqualectra” Production

(water and electricity)

“Aqualectra” Distribution(transport, distributon en supply water and electricity)

PrivateCustomers

265 GWh 400 GWh

Special Rate Customers

BusinessCustomers

Fig.1: Schematic overview Previous Market Model

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Economic impacts This market model entailed high costs of doing business and high costs of living, which led to dissatisfaction among private and business consumers. The high costs of doing business have also eventually led to an increase of own (private) production in the form of installation of generators in large companies. But most of all these high costs resulted in higher inflation and a negative effect on economic growth.

It is not uncomplicated to abolish monopolies in the infrastructure market (or market for public utilities), simply because these markets have to do with heavy investments in production and transport. They also require specific expertise of providers in order to supply the product (in this case electricity) to the customer. If a monopoly involves in practice issues regarding availability of electricity and/or quality of service, combined with excessive prices that increase too rapidly, then the market model needs to be analyzed. This was done eventually. In the chapter “The New Market Model” a New Market Model is presented. Prior to this, in the next chapters the new policy on electricity is explained.

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The New Electricity PolicyAfter an intensive round of consultation with relevant stakeholders on February 16, 2011 the Government of Curaçao established the “Electricity Regulatory Policy 2011-2015 Curaçao”. As a general philosophy it was chosen to primarily pay attention to the following: efficiency, transparency and safeguarding of the interests of consumers.

1. Efficiency means that the operating costs (inputs) will develop in a reasonable manner in relation to production (output), so that service can be as affordable as possible for the public. There must also be stability in the energy production, and gradual transition to sustainable forms of energy generation.

2. Transparency will provide more insight into the production processes, which will help to avoid cross-subsidization and high fees.

3. The interests of consumers are safeguarded by among others ensuring that there is supervision on the delivery conditions and disconnection conditions, ensuring universal service and to create the possibility to lodge complaints which can then be handled in an effective manner.

4. Alongside the abovementioned points, a new and independent supervisory system will be introduced.

The policy is based on four spearheads and a vision for the electricity policy. These will be dealt with in the next chapter.

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Spearheads Electricity Policy As part of the electricity policy, the following four spearheads were formulated:

1. A transparent and stable system for determining the local electricity prices There will be transparency and distinction between and within the financial and administrative aspects of the production and distribution of electricity. Also an independent regulation of the prices will take place.

2. Trustworthy and effective management and control mechanisms for public and private responsibilities in the electricity sector The Government sets the electricity policy and organizes the implementation and the supervision. Laws and regulations will be updated. Independent supervision will be established and private responsibilities will be executed by the utility companies themselves.

3. 3. To stimulate the use of sustainable energy (solar and wind) that is available in the country The electricity supply should use as much as possible sustainable energy sources that the country has available. The use of sustainable energy is also strongly stimulated by: • large and small scale re-supply of electricity to the grid

• a concession regime that focuses on sustainable energy • more Government contracts to produce energy from waste, sun and wind

4. 4. A drastic reduction in electricity consumption per capita Saving electricity is considered a serious matter. Therefore the energy saving plan will also consist at least of the following points:

• establish new building codes, so that current engineering standards can come into force • tax incentives for the use of energy saving products

The Government will also function as an example by taking measures to reduce its own electricity use.

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VisionThe vision behind these four spearheads consists mainly of two principles: sustainability and good governance.

Sustainability includes a social component (an energy policy that serves the community), an ecological component (reducing air pollution and greenhouse gas emissions) and an economic component (contributing to the prosperity of the country).

Good governance includes the independent monitoring of the policy, openness of information, good information to all stakeholders and transparency of roles and responsibilities of the various players, including the Government.

Based on these spearheads and vision, a Policy and Supervisory framework for the electricity sector is formulated based on a New Market Model.

In the next chapter the new Market Model will be discussed first. This is followed by the Supervisory Entity and the Policy and Supervisory Framework.

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The New Market ModelThe implementation of the policy components requires both a New Market Model as well as a new form of supervision. The New Market Model is based on the introduction of more market orientation in the electricity market. The starting point is the further development of the electricity market by introducing New Market Models and the associated regulatory techniques which are aimed at creating better incentives for efficient operation of electricity suppliers.

It will also have to provide:

• regulation for each link (in the energy production) and will focus more on efficiency• exclusive concession for the network company• encouraging of the use of gas and sustainable energy (solar and wind)• the desired production mix between crude oil (50%), gas (25%) and sustainable

energy (25%)

The New Market Model encourages clean and sustainable energy. In this case the priority lies in sustainable energy. The New Market Model is presented in the following scheme:

NETWORKCOMPANy

(Aqualectra)

Supplier Customer’s files

Producer 1:

Producer 2:

Producer 3:

Producer 4:

Fig.2: Schematic overview New Market Model

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Implementation of the New Market ModelThe implementation of the new market will not happen at once. This is an implementation broken up in different phases. A phased introduction of the New Market Model will ensure smooth running of the implementation of both the energy policy and the new developments that comes with it.

Implementation Phase 1The first implementation phase will consist of reviewing and granting concessions to electricity producers. The possibility of interconnections with other countries or islands will be considered at this stage. In this phase, the network company will have to grow in its role as facilitator to be able to deal with multiple producers in order to achieve a reliable and efficient service and electricity supply.

During the introduction of the New Market Model the development will be followed very closely. Based thereon it is possible to determine the next step in the implementation process. Also evaluations will take place during all the different implementation phases, in order to analyze the extent to which the objectives are actually achieved or still need to be realized. At least six months before the end of implementation phase 1, a policy research will be conducted to see to what extent it met the objectives established in the Policy and Supervision Framework. It will then be assessed whether there are objections to start implementation phase 2.

Implementation Phase 2 After the necessary evaluations are done, the other elements of the New Market Model will be implemented during the second implementation phase. In the second phase, the end consumers have the possibility to choose a supplier that operates on the market. Prior to this the current legislation must first be amended.

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Independent Supervisory EntityAn important part of the electricity policy is to establish an independent supervisory entity. As of December 2009, the Bureau Telecommunicatie en Post (hereinafter “BT&P”) is responsible for regulating the production and supply of electricity.

The main points are efficiency, transparency and quality. BT&P formulated a Policy and Supervision Framework, and also provides the implementation hereof.

The electricity policy forms the basis for the new style market regulation, which is implemented by BT&P as a supervisory entity. This regulation is technically divided into two parts and sub-components, namely:

1. The Policy Framework a. Technical Regulation b. Policy on promotion and regulation sustainable energy

2. The Supervisory Framework a. Legal Supervision, including Consumers supervision b. Economic Supervision

The reform of the electricity market through the introduction of a new Policy and Supervisory framework follows international developments in the field of utility regulation. In particular, the positive effects for consumers and society as a whole following the reform of the telecommunications market is an important motivation for introducing more market orientation in the electricity sector.

Below a total overview of the regulation in the electricity policy is presented.

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In the following chapters each component of the overall will be further explained.

Minister ofEnergy Affairs

Electricity Policy Vision and Spearheads

BTP –Supervisory Entity

Policy Framework Supervisory Framework

Execution Policy

Technical Regulation

Legal Supervision and Consumers’ Supervision

Stimulation and Regulation of Sustainable

Energy

Economic Regulation and Price Regulation

Fig.3: Schematic overview Energy Policy

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The Policy Framework The overall objective of the electricity policy is to ensure efficient, high quality and sustainable electricity in Curaçao, both for the business market and for private households. To realize the overall objective of the new electricity policy, six concrete policy objectives relating to energy supply, which are based on the above general policy principles (priorities), are formulated. These policy objectives are:

1. achieving an affordable service by means of stable development of tariffs2. achieving a reliable service considering the availability of electricity for the

commercial and private markets3. structurally safeguarding the interests of the end consumers of electricity4. the introduction of more market orientation in the electricity sector5. achieving more sustainable energy and achieving the necessary energy saving on

medium term and6. introducing an independent form of market regulation

In the new policy the achievement of the objectives described above is essential, with a reduction in end consumer prices being socially, economically and politically the highest priority for the short term. To achieve the latter (the reduction of tariffs) greater transparency should be attained in the structure of electricity prices.

Technical Regulation Based on the above information the new policy ensures, in short, for Technical Regulation:

1. technical and quality requirements for all links and determining the energy balance for the coming year

2. managing contractual relationships and network use between the network company (network operation) and the producers

3. a status of “supplier of last resort” for the network company4. policy regarding promotion and regulation of sustainable energy5. a situation where the policy framework is the new subject for technical regulation

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Technical RequirementsThere is a growing worldwide trend toward a more sustainable electricity production, where many technologies will coexist and innovations will follow each other. In this context a decentralized production model gradually arises in which as said, multiple (sustainable and non-sustainable) energy producers will be active in the production link.

As a result of the above, in the case of a development of a classic centralized production of electricity toward a more decentralized production, the energy supply will not merely flow centrally and unilaterally from large power plants to the energy consumers. There will be an increase in energy traffic, where energy will be flowing in different directions through “knots” in the net.

To facilitate the proper functioning of the decentralized production system, a so called “smart grid” is necessary. This is an electricity network which, supported by advanced IT systems, measures the energy flows at all necessary levels to control and regulate the production and consumption of electricity. Herewith the balance between supply and demand can automatically be guaranteed at all times.

Fig.4: Example of a decentralized production model

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There are (technical) requirements associated with an infrastructure or network which is used for commercial purposes with the aim on making profit. The technical supervision is focused on this, which means that technical and quality requirements, including the related standards, are set for the three distinct stages in the electricity supply chain (in this case production, transport and delivery). The technical supervision is therefore the basis for achieving the objectives for a reliable and guaranteed service (“security of supply”), sustainable energy and energy saving.

Economic Objectives An important economic objective of the policy framework is: to provide affordable services for the end consumers. Considering this, market reform should take place by introducing more market orientation in the market. The aforementioned objectives are examples of general economic objectives. To manage more efficiently on business level, thus within the corporate management of the concessionaire, is an example of an objective at microeconomic level.

Monitoring and where necessary, influencing the business development of a concessionaire and the industry through price regulation or long-term planning is an example of a business specific as well as an industry specific economic objective.To achieve the abovementioned objectives, based on the economic supervision, requirements are set for and information has been gathered on certain relevant aspects of the business. These requirements could include transparency in the price structure, operational efficiency, a long-term planning and market orientation. All four aforementioned measures of economic regulation (transparency, efficiency, long-term planning and market orientation), directly or indirectly aim on keeping tariffs as low as possible for the end consumers.

Without economic regulation in the broad sense (not just price regulation) little or no economic incentive exists – for in particular a monopolistic supplier – to be transparent, to produce efficiently and to focus on the dynamics of market orientation. Therefore, economic regulation is the base for the new supervisory framework.

Promotion and Regulation of Sustainable EnergySince the 90’s the topic of sustainable energy is growing quickly worldwide because of the need to protect the environment (in this case reducing greenhouse gases and their effects) and the decreasing availability of fossil fuels and the rising prices associated herewith. Sustainable energy will increasingly become (more) profitable due to technological developments and rising oil prices.

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Hence, the future is in sustainable energy. A separate policy document was developed on this topic and on November 16, 2011 the Council of Ministers of Curaçao stipulated the: “Policy for Small-scale Approach on Sustainable Electricity Supply - Small Green Interconnection” (“Beleidsnota Kleinschalige Duurzame Stroomvoorziening - Kleine Groene Koppeling”). This policy covers the requirements for the interconnection of facilities, for non-commercial production of sustainable electricity on the public transport and distribution network of Curaçao for the purpose of re-supply of electricity.

In this policy the introduction of a new regime for small-scale clean or sustainable energy production for own use, is essential. In addition to the small-scale production of sustainable energy, the large scale production of (sustainable) energy will continue.

This topic is extensively and thoroughly addressed in the brochure “Sustainable Energy”, number 3 in this series on electrical consumption in Curaçao.

Fig.5: Basic components grid connection

Security

Invertor & Security

Invertor & Security AC Panel

Supply BackMeter

Invertor

Batteries(optional)

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The Supervisory FrameworkThe supervisory framework is especially important given the need for a more active and independent implementation of the new policy framework. Besides to protect the end consumer, the parties on the market must be under supervision. This is mainly reflected in the consumer supervision which falls under legal supervision. The economic supervision is aimed at among others the stipulation of the tariffs.

The ConcessionBesides the formal legislation the most important piece of regulation within the framework of legal supervision is the concession. The concession is the specific permit or authorization issued by the Government that is granted to an electricity company (producer, distributor, or combination thereof) to make electricity available to the public. The concession is issued for a specified period by national decree by the Government of Curaçao, after receiving the recommendation of the independent supervisory entity.

Based on the National Ordinance electricity concessions, for the sake of brevity a concession would be necessary for those who generate electricity and deliver this to “third parties”. This means that every producer of (sustainable and non-sustainable) electricity that technically supplies the generated electricity to a “third party”, operates in principle within the statutory provisions.

The term “delivery to a third party” is by definition certainly not producing for” personal use “, or production in order to supply to the own household, own organization or own private group. So when one’s own household, organization or group is the end consumer of the generated electricity it is not a matter of “delivery to third parties”. This important subject is extensively covered in the brochure “Sustainable Energy”, number 3 in this series on Electrical consumption in Curaçao.

Production mix The concession policy is directly linked to the policy of the desired production mix, namely the relationship between the use of crude oil, gas and alternative energy sources in the electricity production. This policy must be linked to the granting of concessions by the government. The concession primarily stipulates for the concessionaire the authorized and any unauthorized activities.

In this framework, the Government is working toward granting concessions with the aim on realizing a production mix of around 50-25-25 with regard to the percentage ratio between the use of respectively oil, gas and alternative energy sources in the electricity production in Curaçao.

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Legal Supervision:Concession Policy and Compliance SupervisionLegal supervision mainly concerns the implementation of a concession policy and supervision on the compliance hereof. The latter means that an independent supervisory entity examines how the concessionaires comply with laws and regulations. Besides, it shall also report on this.

The concession policy indicates in effect which subjects are eligible for a concession and on what grounds. The concession is granted for a specific duration. The conditions and requirements set by the Government and with which the concessionaire must comply during the period in which the concession is valid, are included in the concession.

Consumer Supervision: Protecting the interests of end consumersThe new form of regulation is based on safeguarding the basic rights of consumers. It contains the following components:

a. universal serviceb. non-discriminationc. terms and conditionsd. delivery conditions and delivery timese. billing and collectionf. disconnection policyg. change of supplierh. complaints and disputes handling

Economic RegulationEconomic regulation is the regulation of both micro and macro-economic aspects of the electricity industry, in order to achieve the economic objectives of the policy framework. Economic regulation concerns mainly:

• promoting market orientation• tariffs (non-discrimination and cost orientation)• quality primarily measured by availability• universal service and• external effects

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Price RegulationGiven the very limited market orientation due to the existence of a dominant provider, the nature of the product and the interests of the end consumers, extensive price regulation focused on transparency, level and structure of tariffs is applied on the electricity industry.

At company level, the following principles are applied:

• non-discrimination• financial unbundling of the various activities that a business component applies for

the sake of transparency • cost orientation of tariffs based on the costs of an efficient provider• the normative return is based on market considerations

As of July 2011 the electricity price is determined monthly based on the price of the fuel component. Herewith the society can easily follow the changes based on the movement of oil prices.

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Effectiveness and Efficiency of the PolicyIn summary it can be stated that the policy: • introduces more market orientation, in the production of electricity, in order to

achieve lower prices• increases availability and quality of electricity supply • introduces external regulation and supervision, also in the interest of consumers• promotes clean/sustainable energy production• protects the end consumer• addresses any aspects of small scale approach (including the protection of natural

monopoly and no introduction of full competition) • does not have the risk of implementation of a completely free or liberalized market• has positive impact on the community as a whole• is expected to be more effective than the status quo, because the core issues

(such as the level of the prices, availability of electricity and consumers interests) are addressed with appropriate and effective means and external supervision is introduced on the market parties, enabling timely and structural adjustment

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More infoFor more information, please visit the website

www.energiakonsiente.com

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