By Carl B. Nisbett

Much has been said concerning geothermal resources in Nevis. However, there has not been much clarity of thought or explanation concerning the issues surrounding it. That is true even after the enactment of the Nevis Geothermal Resources Development Ordinance, 2008 (the “Bill”).

I have said publicly and often that I would like to see geothermal be successful in becoming a commercial resource Nevis. The two main sectors we rely upon for revenues, tourism and the financial services sector, are fickle industries. Geothermal, on the other hand, can be a stable source of revenues for Nevis if it is done correctly.

However, there has been too much hoopla about it. Caution has been thrown to the wind when in fact caution is required. On a number of occasions, the Honourable Premier Joseph Parry has repeated some “I am told” statements. “I am told that 34 megawatts will be provided” and he is told how many jobs and other benefits will flow from geothermal.

It is one thing for the Premier to be told these things but it is another matter for him to keep repeating them publicly. He is the leader of Nevis and not those who are telling him these things. He must be judicious with what he says publicly and in his actions. Those who are telling him what he keeps repeating are doing so for their own purposes, some selfish in origin.

Why should we be cautious? Hawaii is a state in the United States. It is 10,931 square miles. It is made up of hundreds of islands. It has five volcanic islands, four of which are active volcanoes. Yet, Hawaii only has one geothermal power plant and it has a capacity of 40 megawatts (MW). That power plant is located on the largest volcanic island in Hawaii and that island is 4,028 square miles. The state of Nevada is 110,561 square miles. Yet that state has about 300 MW of geothermal capacity to date.

The company that mined and built the geothermal power plant in Hawaii and has nine (9) of them in Nevada is Ormat, and the nine in Nevada have 100 MW of capacity. Ormat mines, develops and operates geothermal power plants and sells geothermal equipment in 71 countries. That is verifiable and has been verified. Here is Ormat’s website:

West Indies Power (“WIP”), on the other hand, has listed its experience in geothermal power plants by saying, “As of July 2007, WIP has a power plant in Nevis under development, with an estimated power output of 50 megawatts and a power plant in Saba under development with an estimated output of 75 megawatts.” Really?

Yet our Premier relies on the words of those who have not listed any established geothermal power plants and concomitant experience. Caution is required.

With that said, let us hope and assume that geothermal will be successful and, at the very least, supply all electricity needs in Nevis. There remain some confusion and secrecy surrounding it. I will start with some provisions of the Bill and work my way back over the next few weeks concerning geothermal matters.

The Bill establishes royalty payments to the NIA for geothermal energy used domestically “not to be more than Five Percent (5%) of gross annual sales of the [geothermal] Concession” and for export of the geothermal power, “such royalties shall not be more than Ten Percent (10%) of the gross annual sales value of the Concession.” Sections 50 (4) and (5).

The Bill further establishes how royalties are to be determined in the Third Schedule of Fee, Bond and Royalty Payments.  Section 6 says, “Commencing on the date the Concessionaire [WIP] has generated and has realized its first payment for ten (10) MW of capacity, the Licensee [WIP] shall pay the Government a Royalty.”

Although it says “shall pay” after WIP has “generated and realized its first payment for ten (10) MW,” it does not mean WIP has to pay the royalty at that time. The Bill further clarifies (or confuses) by saying, “Such Royalty shall be calculated as of the last calendar day of the twelfth (12th) month following the day of receipt of such payment for any capacity in excess of ten (10) MW.” Section 6 (a).

Therefore the royalty cannot be paid directly after the first sale and payment of 10 MW if such royalty is to be calculated “as of the last calendar day of the twelfth (12th) month” following receipt of payment by the WIP for “any capacity in excess of ten (10) MW.”

It gets further clarified (or confused) by section 6 (c) saying, “Royalty payments are due and payable ninety (90) days after the first twelve (12) month anniversary date and each subsequent anniversary date of the Royalty Date.”

The royalty date is the “last calendar day of the twelfth (12th) month following the day of receipt of such payment for any capacity in excess of ten (10) MW.”

There is nothing wrong with you reader. It is confusing. Here it is in other words: WIP has to first sell 10 MW; be paid for that first 10 MW; it then has to sell more MW; it has to then be paid for the amount that is greater than 10 MW; the day after WIP is paid for that amount greater than 10 MW, the clock begins to run to determine the royalty date, which will be 12 months after that payment.

It leads to a very peculiar series of events. Royalty payment may not be due until some 15 to 24 months or more after the first sale of geothermal.

Example: Let us say WIP generates five (5) MW daily in any given 12 months period. It does not have to be a calendar year but let us say it is from January to December. The first 10 MW of capacity is sold in the first two of days January and WIP gets paid for it.  Any MW sold after day two (after the first 10 MW has been sold) is subject to start the clock. Mind you, it does not start the clock because WIP will then have to be paid for the amount over the 10 MW. It may take one month or more for them to be paid for that capacity in excess of 10 MW. I am aware that a “bulk” sale and purchase may be had up front but that would not change the scenario in any material way.

Let us then say WIP starts receiving payment on February 28 for any sale over 10 MW. The clock to determine the royalty date starts to run on March 1st, which is “following the day of receipt [February 28] of such payment for any capacity in excess of ten (10) MW.” Royalty payment is then calculated 12 months after March 1st because it is  the “last calendar day of the twelfth (12th) month following the day of receipt of such payment for any capacity in excess of ten (10) MW.”

However, royalty payment is not due until 90 days, three (3) months, after that date. That is some 17 months after the first MW was sold and it could be longer than that. How? What if the payment for the capacity over 10 MW was not received by WIP until June 30th? The clock to determine the royalty date would not start to run until July 1st. Royalty payment is then calculated 12 months after that. Royalty payment then is not due until 90 days after July of the year following the first sale of geothermal. So royalty payment for MW generated January 1st through December 31st would not be due until June or November, some 17 to 23 months after January 1st when the first MW was sold.

There is more. Section 6 (e) of the Third Schedule says, “If the Royalties hereinbefore provided for shall not be paid within thirty (30) days of the due date, the Government may impose interest at the prime rate.” The WIP has an additional 30 days  to pay and the NIA “may impose interest.” It does not say “shall impose” but “may impose”. It is at the discretion of the NIA. So add 30 days to the 90 days due date and WIP now has four (4) months to pay the royalty.

It does not end there. The same section continues, “and if not paid within one hundred and eighty (180) days of the due date the Government may order forfeiture of the Concession”. So add six (6) months to the 90 days for a total of nine (9) months.

Let us not hurt our heads. Let us simply say WIP could have up to two (2) years or more to pay the royalty.

And here is the rub: When it is for domestic production in Nevis, it is the NIA or NEVLEC that will purchase electricity from WIP. It is the NIA or NEVLEC that will make payments to WIP.

WIP generates electricity capacity. It sells that capacity to NEVLEC. NEVLEC or the NIA pays WIP for that capacity. NEVLEC sells the electricity to Nevisians in the same manner it sells it now, sends out the bills, collects the payments on those bills, maintains the electrical lines, sends its employees to make repairs, sends its employees to read the meters, maintains the vehicles and equipment needed to do the things I’ve mentioned, buys petrol to put in those vehicles and pays its employees to continue to do all the other things they now do.

After all of that, the NIA receives up to, meaning it can be less than, a five percent (5 %) royalty payment from WIP.

What does WIP get in return? It gets the remaining 95 percent or more of the money.

Before WIP gets that amount and before the NIA gets its five percent (5%) or less, WIP gets to deduct from the gross annual sales any principal and interest amount that accrued during the relevant period on debt relating to geothermal (Third Schedule,  section 3 (b)). That is the money it borrowed to fund the entire geothermal project. In other words, over the years, it should be able to recover most, if not all, it spent on the geothermal project with such deductions from gross annual sales.

In addition, WIP gets to keep the revenues from the first 10 MW it sells each year. It pays less in taxes or no taxes at all each year because, in addition to other deductions, it gets a tax deduction for the five percent (5%) or less it pays the NIA as royalty (section 50 (2)). Also, WIP can hold on to the money it has received from “gross annual sales” for almost two years,  put it in a bank anywhere around the world, earn interest on that money and keep that interest.

WIP gets more bites of the apple to recover in short order all it spent on geothermal. It gets to claim as expenses for tax deductions over the years any amount it spent or is spending on geothermal, including the equipment, the production plant, the licenses it paid for, the money it expended to dig holes, to drill, for the bonds it has to post, any “debit accounts” that have “no recovery value”, all sorts of depreciation such as the annual loss in value of the power plant, the loss in value of the geothermal resource it is selling to the NIA , “depreciable goods”, which can be anything including loss in value of vehicles or any equipment owned by WIP. Section 60.

And, to top it off, each year WIP gets the remaining 95 percent or more of gross annual sales and that should make the investors in WIP smile all the way to the bank.

Do we know who they are?

There is more to come so keep reading.