First published in Cleantech magazine, November/December 2009. Copyright Cleantech Investor 2009
Huge renewable energy potential - but funding and regulatory obstacles
Renewable energy in its various forms is growing across the globe, but there is one area - the Caribbean - which is missing out on this growth. This is particularly ironic, since the region urgently needs to diversify away from the imported oil on which it is largely dependent. The Caribbean region (defined here as the 15 CARICOM nations), which has a population of 15.9 million and a combined GDP of US$52 billion, spent US$12 billion on imported fuel in 2007, almost double the 2004 bill of US$6.5 billion. The high cost of imported oil uses up scarce hard currency reserves, reduces competitiveness and diverts funds away from social and economic development. The generation capacity of several countries is close to peak demand and the Bahamas, the Dominican Republic, Jamaica and Guyana regularly suffer blackouts. Energy in the Caribbean is among the most expensive in the world: in 2006 it cost between US$0.24 and US$0.37 per kWh compared with US$0.08 per kWh in the US. Some nations in the area have fossil fuels: these include Trinidad & Tobago, which has both oil and natural gas, while Barbados, Belize and Suriname have small oil deposits.
Although the Caribbean has abundant natural resources, including sun, wind, tidal, geothermal, hydro-power and biomass (bananas and sugarcane), less than 3% of the 3,000MW generated in the region comes from renewable sources. The main obstacles to the Caribbean realising its potential in alternative energy generation are the small size of the region’s markets, the scarcity of capital and the lack of a regulatory framework. In addition the absence of and inadequacy of some service institutions inflate transaction costs and hinder foreign investment.
Another reason for the lack of uptake may be related to the fact that several Caribbean nations are obtaining cheap oil from Venezuela. That country’s firebrand leftist president, Hugo Chávez, is building political influence in the region by supplying oil on preferential terms. The 2005 Petrocaribe energy agreement provides oil for 17 Caribbean and Central American countries (the notable exceptions being Barbados and Trinidad & Tobago). In the majority of cases only 60% of the cost is required up front and the rest is financed at 1% over 25 years. On occasions Venezuela has accepted payment in kind, including Cuban doctors and teachers. In 2007 Venezuela shipped 176,000 barrels per day to the region with the largest recipients being Cuba (93,000bpd), the Dominican Republic (27,000bpd) and Jamaica (24,000bpd). While the deal makes economic sense for cash-strapped Caribbean nations, it exacerbates their energy vulnerability. When Mr Chávez is no longer in power the flow of subsidised oil will dry up, leaving the beneficiaries of Petrocaribe with a more expensive energy bill.
Regional initiatives to promote green power have been slow to get off the ground. CARICOM is seeking to develop renewable energy and energy efficiency through the Caribbean Renewable Energy Development Programme (CREDP). This programme, which has a budget of €8 million for technical assistance, covers 17 Caribbean countries and currently has 23 projects in the pipeline. However, the programme’s technical advisor, Sven Homscheid, warns that not all the projects will be completed given the limited resources. Eligible grid-connected projects include wind, biomass cogeneration, mini-hydro and geothermal. Off-grid and rural electrification projects cover solar, micro-hydro and solar water heating. In order to qualify a project must demonstrate that it can generate an after tax ROI in excess of 15%, reduce GHG emissions, have strong potential for duplication and support from the relevant government.
The tourism industry is one of the region’s largest energy consumers and an obvious sector to lead the drive into renewable energy. Earlier this year the Inter-American Development Bank launched an initiative to perform energy audits on hotels across the Caribbean with a view to formulating energy policy and encouraging micro-generation within the sector. The US$2 million, two-year project, known as the Caribbean Hotel Energy Efficiency Action Programme (CHENACT), has chosen Barbados, which has a well developed hotel infrastructure, as a case study. But the global slowdown has reduced occupancy levels across the Caribbean and at present hotels are likely to shy away from capital expenditure even though it has the potential to lower their energy bills.
Although there is little grid-connected solar power in the Caribbean, some islands use solar for heating water. Barbados was an early adopter, following the introduction in the 1970s of tax breaks on imported equipment and a mandate that all public sector facilities have solar-based heating systems. Today 39% of households in Barbados have water heated by solar, including hotels. The risk of hurricane damage is largely mitigated as the photovoltaic panels can be easily unscrewed and removed. Other Caribbean nations are considering introducing similar solar water heating initiatives.
Geothermal energy has considerable potential. A volcanic range runs through the Caribbean on the lesser Antilles plate and there are 19 potentially active islands, including Dominica, Grenada, Guadeloupe, Nevis, St Vincent and St Lucia. Today only Guadeloupe generates power from its geothermal resources, with 15MW of capacity of which 4.5MW has been operating since 1986. Caribbean-based West Indies Power Holdings is developing a geothermal site in Nevis and is talking to the World Bank regarding the Caribbean Interconnect Project, which would supply other islands with geothermal power via submarine cables. Kerry McDonald, CEO of West Indies Power, believes that geothermal power could serve all of the Caribbean islands excluding Trinidad & Tobago. The company is also assessing Dominica’s geothermal potential and there is talk that its fields could generate 300MW, which would allow it to export to neighbouring Guadeloupe and Martinique. It is estimated that developing these fields would cost around US$350 million, which would be feasible only if the French Government (Guadeloupe and Martinique are overseas regions of France) or EDF provides funding.
Grid-connected wind power has not yet been widely developed in the Caribbean. Jamaica has a 20.7MW wind power facility and Martinique and Guadeloupe have wind farms which are subsidised by the French Government. The St Lucian Government hopes to have a 12.6MW grid-connected wind farm in operation within the next two years. The island’s energy provider, LUCELEC, and its Canadian partner, The Probyn Group (owner, operator and financier of independent power facilities), have completed feasibility assessments for the site on the island’s north-east coast. The project, which it is estimated will cost €12.2 million, has taken five years to reach the current stage and is currently delayed given problems acquiring land.
Biofuels, particularly ethanol, have potential in the Caribbean given the region’s tradition of sugarcane production and expertise in converting sugar into alcohol. Many islands have existing cane sugar infrastructure, but do not export sugar as it is no longer competitive following the dismantling of preferential access to the European market. However, few Caribbean governments - with the notable exception of Jamaica - have mandated an ethanol blend, so there is little incentive to invest in ethanol production. Jamaica, which operates a 10% ethanol blend, set up its first ethanol plant in 1986 with a capacity of 42 million gallons per year. It was mothballed in 1998 but re-commissioned in 2005.
Haiti is running a handful of pilot projects to grow jatropha. The shrub has been hailed as a wonder crop since it grows on marginal land, requires little water and bears non-edible, high oil yielding fruit which can be used for biodiesel production. Jatropha is indigenous to Haiti, making it a suitable choice for the country’s deforestation programme. Several countries are working on producing ethanol from banana waste. In St Lucia, Ken Aldonza of Applied Renewables Caribbean plans to convert waste from the banana trade to methane via biodigesters. The methane will power the plant and also produce ethanol.
The Caribbean’s potential for hydro-power has been damaged as the watershed has been reduced, meaning that flow is too low. In some areas this is being addressed and water resource management programmes are being put in place. Today Dominica is the biggest hydro-power producer with annual rainfall of 7,600mm and 19MW of capacity, which meets around half of its demand. Mr Homscheid points out that hydro power is underexploited as only one river is being utilised. He is enthusiastic about the South American country of Guyana, which suffers chronic blackouts and has some 6,000MW of hydro potential, of which 3,000MW could feasibly be exploited.
Water supply is another pressing concern facing the Caribbean region. The growth in tourism has put huge pressure on water resources and several islands can no longer rely on rain and ground water as freshwater reservoirs are becoming depleted. Seawater desalination is the answer in many cases. Reverse osmosis, which removes more than 99.5% of dissolved salts and surpasses WHO guidelines for drinking water, is in use for public water supplies in Antigua, the Bahamas and the British Virgin Islands.
Developing renewable energy in the Caribbean will be challenging. There are no incentives to generate clean energy and no sanctions for polluting. The region lacks a clear regulatory framework and some islands have no energy policy legislation. In fact some utility companies have responsibility for energy planning. Many islands privatised utilities in the 1970s and 1980s, and these privately owned monopolies have a vested interest in maintaining the status quo and preventing independent power producers (IPPs) selling to the grid. In order to change attitudes work must be done to build awareness at both the grassroots and institutional levels.
The region’s high regulatory risk and small market size translate into a hefty risk premium and a low financial return. In this context it is not surprising that the Caribbean has been unable to attract international capital under the Clean Development Mechanism (CDM) programme of the United Nations Framework Convention on Climate Change (UNFCCC), which is widespread in Asia. Bundling projects to meet a minimum size is an option, but the Caribbean is politically and culturally diverse and has little tradition of co-operation, suggesting that collaboration even on simple initiatives like the collective purchasing of wind turbines or the Caribbean Interconnect Project will be difficult.
In the short term, the main driver behind renewable energy growth in the Caribbean will be self- or micro-generation, which is already taking place, with the hotel industry likely to be the next area of growth. Conditions will become more favourable as awareness increases: for example, several islands that do not have credible energy legislation are now discussing energy policy. At some point market forces will kick in. The punitively high cost of electricity in the Caribbean makes it unlikely that subsidies will be required. What will be needed, however, is capital and political will.