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Belco: infrastructure upgrades now urgent

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Belco says it will decommission half of its ageing generators within the next three years — and it urgently needs permission to invest the necessary capital to replace them.

Sean Durfy, chief executive officer of the power utility's parent company Ascendant Group, said yesterday that Belco would need to act by this July in order to be able to ensure it could order and install the new engines in time to replace the old ones.

The message was clear from Mr Durfy — after more than a decade of proposals, talking and planning, now is the time for action.

But, as a regulated utility, Belco cannot make the investments without receiving the go-ahead from the electricity-sector regulator, the Regulatory Authority, and the Bermuda Government.

To spell out the urgency of the situation, Belco is today launching a publicity campaign through mail-drops and advertising, to lay out its case for investing in infrastructure.

Customers will have to pay more for electricity during the roughly three-year construction period if the new investments go ahead, Mr Durfy said. But the alternative is that they would pay more still for soaring maintenance costs and fuel inefficiency if the overhaul of the power system is delayed.

Mr Durfy also revealed that Belco submitted its capital plan, which details its intentions to invest in new infrastructure, to the regulator on February 28 this year.

The utility's three-part plan includes:

• Replacement generation: installation of efficient new generators that can run on either natural gas or heavy oil as a back-up, at the existing Serpentine Road power plant.

• Upgrades to overhead and underground cables and transformers, and introduction of advanced metering technology.

• Liquefied natural gas infrastructure: this would include a third-party LNG terminal and gas pipeline builder and operator, and an LNG supplier.

Asked what it would all cost, Mr Durfy said: “All in all, we expect it will add three to four cents [per kilowatt hour] to the tariff during the construction period, it will peak and then drop off.

“If we keep going as we are going, then the tariff will go through the roof.”

New generators would take about 21 months to install and could cut fuel costs by about $26 million a year, Mr Durfy said.

In Belco's layered pricing system, customers now pay between 17 cents and 35 cents per kilowatt hour, depending on the level of usage.

Denton Williams, Belco's chief operating officer, said that extending the life of the older generators does not make financial sense, as the experience of the past five years had proven.

“When we proposed the new North Power Station in 2012, we argued that it would pay for itself in a few years and, unfortunately, that has all come true,” Mr Williams said. He explained that by not constructing the proposed $72 million power station — after the plans were rejected by the Energy Commission and the environment minister of the time, Marc Bean — an extra $80 million has since been spent on fuel costs, repairs and maintenance associated with operating the older, inefficient generators.

Mr Durfy gave the example of one 35-year-old generator at the end of its useful life, known as E3.

“We opened it up for a major overhaul and found that out of 16 rods, which hold the pistons in place, almost half were toast,” the CEO said. “If a rod went, we would have a catastrophic failure that would be extremely expensive.”

Loss of a generator like E3 would require more use of gas turbines, normally used only to top up capacity at times of peak demand and which are more expensive to run, potentially adding millions of dollars to the year's generation expenses.

Since the Electric System Discussion Document in 2005 through to Belco's Integrated Resource plan, submitted to the regulator last year, there has been no shortage of ideas over how Bermuda's electricity-sector future should look — but approvals and action have not followed.

Mr Durfy, who succeeded Walt Higgins as Ascendant CEO in September last year, said: “I don't know why it's taken so long. Our people have been Herculean in their efforts to keep it going. They often work in very hot conditions with poor air conditioning and under great pressure and they don't complain.”

The “world-class reliability” of Bermuda's electricity system would be threatened by further inaction, he said.

Mr Durfy said he believed the regulator and the government understood the urgency of the situation.

By 2020, 80 megawatts — half of Belco's 161 megawatts of generation capacity — are due to be decommissioned, leaving insufficient supply to meet electricity demand. Belco wants to replace them with 60 megawatts of new capacity.

The new generators will be more reliable, efficient and cost-effective, less noisy and less polluting. Burning natural gas instead of the heavy oil Belco is burning now would slash carbon emissions by one third — the equivalent of taking all the cars off Bermuda's roads, Mr Durfy said.

The cables that form Belco's distribution network are also in urgent need of an upgrade — 25 per cent of the utility's underground cables are 60 years old or more and within a decade this will increase to 40 per cent.

Distribution upgrades will improve reliability, reduce costs and expand grid capacity, Belco says. Part of Belco's planned investment would be on reinforcing critical infrastructure supplying schools and cell towers, for example, and advanced metering technology that will give consumers greater insight into their own electricity consumption and Belco better data to improve to restore outages quicker.

The total cost of the new plant, including up to 25 megawatts of renewable capacity, and distribution network upgrades, will be in the range of $275 million to $315 million, Mr Durfy said, and all of it can be funded from Belco's own balance sheet, as the company carries no debt.

“Having no debt is not necessarily a good thing, as utilities usually have a 50 per cent debt ratio and debt is cheaper than equity,” he said.

The third plank of Belco's plan is the switch to LNG. This would involve two competitive bidding processes: one for selecting a vendor to build, operate and maintain an LNG import terminal and gas pipeline to Belco's central plant; and the other for an LNG supplier who would deliver via ship.

Mr Durfy believes there has never been a better time to upgrade Belco's infrastructure, since there is a natural gas glut and contractors are rapidly building LNG facilities around the world, meaning that Belco should be able to negotiate a favourable deal on both counts, while today's low interest rates mean the LNG plant builder will be able to borrow cheaply.

“Fracking” technology has unlocked huge natural gas supply, particularly in the US, and Belco expects the abundance of the fuel to make it cheaper and less volatile in price than the oil-based fuel it uses now, stabilising pricing for the consumer.

Mr Durfy said the plan would create about 200 jobs for the construction period and completely overhaul the island's electricity infrastructure, improving efficiency, reliability and environmental friendliness.

Belco and its staff feel they have a responsibility to serve the community, Mr Durfy added.

“Belco is one of the last bastions of Bermudian entrepreneurship,” Mr Durfy said. “It's run by Bermudians — 92 per cent of our staff are Bermudians — who live and work in this community. They keep this ageing system running and they can take great pride in that.

“This is a 108-year-old truly Bermudian company. We have 3,300 shareholders and 3,000 of them are Bermudian, and none of them owns more than 1 per cent of the company.”

Time to act: Sean Durfy, Ascendant Group CEO
Upgrade needed: half of the generating capacity at Bermuda's Pembroke power plant is due to be decommissioned by 2020

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Published May 19, 2017 at 9:00 am (Updated May 19, 2017 at 12:03 am)

Belco: infrastructure upgrades now urgent

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