Bethesda, Maryland — Caribbean nations face an uncertain energy future. With an energy infrastructure designed in the era of low-priced and abundant oil, many of these nations depend almost entirely on petroleum to supply their electricity demands. With oil prices hovering between $90 and $110 a barrel and projected to rise, island nations reliant on heavy fuel oil for their electrical generation are being hard hit.
“The U.S. Virgin Islands (USVI) are almost 100 percent dependent on imported fuel,” says Adam Warren of the National Renewable Energy Laboratories (NREL). According to Bill Scanlon of NREL, in the USVI, electricity prices average US$0.35/kWh and are four to five times higher than prices paid in the continental U.S. Furthermore, there is a significant amount of price volatility; prices reached a peak of $0.50/kWh during 2008, according to Scanlon. Such electricity prices are crippling to USVI residents, who have an average annual household income of $22,000. The USVI are not alone. The islands of St. Kitts and Nevis are also fully dependent on petroleum imports for their electric supply and also suffer from high, volatile electricity rates. Even the larger islands struggle with high electricity prices. Puerto Rico uses petroleum to generate nearly 70 percent of its power, leading to electricity prices which are twice those of the U.S. mainland.
To look at it from another angle, Caribbean nations have, according to the World Bank, a per capita GNI of only $8,134, yet the average electricity price is a staggering $0.34/kWh with current data showing even higher prices. This is clearly not a sustainable model, particularly with the predicted demand growth in the next 20 years.
The lack of diversified power generation leaves Caribbean islands vulnerable to commodity market volatility, while the lack of new development leaves islands reliant on outdated, sometimes unreliable power plants. The key to reducing and stabilizing electricity prices on Caribbean islands is therefore to install a diversified and modern electrical generation portfolio. Some would argue that renewable energy systems should not be a part of the energy portfolio until they are cost competitive with fossil fuel generation. The notion that grid parity can or should be used as a benchmark is a fundamentally flawed standard, however. An electrical generation portfolio, similar to a stock portfolio, must be balanced to perform efficiently and without excessive volatility. A balanced energy portfolio can be achieved by carefully choosing both traditional and renewable generation to supply each island’s unique generation profile. While there will always be a place for traditional generation in a country’s power portfolio, the Caribbean islands provide a unique opportunity for renewables. Renewable energy can help to diversify electrical generation while stabilizing electrical prices and supply for islands; however, issues with scale, grid stability, and access to capital have to be overcome.
Many islands are planning or already have small scale renewable energy installations, including Puerto Rico, Barbados, Jamaica and Grenada. The USVI, which issued a request for proposals for solar photovoltaic (PV) projects at the beginning of 2011, recently announced the awardees that will install the first grid-connected utility scale solar power plants: SunEdison, Lanco, and Toshiba. However, there has yet to be effective large scale diversification of power sources or implementation of renewable energy projects in the Caribbean.
This is partially because many Caribbean islands lack an appropriate, consistent regulatory framework. Efforts are underway to help resolve this issue. The Caribbean Community (CARICOM) Secretariat’s Caribbean Renewable Energy Development Programme (CREDP) was founded in 1998 by 16 Caribbean nations to remove barriers to the use of renewable energy and thereby foster its development and commercialization throughout the Caribbean. CREDP has assisted with renewable energy policy reform in Jamaica, Barbados, Grenada, St. Kitts, Dominica, St. Lucia, and St. Vincent and the Grenadines.
The larger issue hindering large-scale renewable energy deployments, however, is scale. While Caribbean nations have quite significant renewable energy potential, most have small demand. The deployment of renewable projects at adequate scale will help to both attract international interest and to effectively diversify the energy portfolio. To build up enough scale, therefore, Caribbean islands must cooperate to form larger economic impact zones. Such cooperation has begun with organizations like the Caribbean Electric Utility Services Corporation (CARELIC), among others. Formed in 1989, CARELIC is a regional association of electric utilities comprised of thirty-three utility members from thirty countries in the Caribbean region. Even larger unions must be formed. By establishing cooperative measures, Caribbean utilities can take advantage of cheaper goods, gain access to cheaper capital, and pique the interest of independent power producers (IPPs) and developers worldwide. By creating economies of scale, Caribbean utilities can drive prices down, allowing for efficient investment in each island’s power sector.
If renewable energy projects are to be built at larger scales and contribute a greater portion of the Caribbean islands’ energy portfolio, grid operators on Caribbean islands must institute measures to support the integration of variable generation sources onto their grids. The majority of island networks are old, with the average diesel generators more than 20 years old. Furthermore, the power supply is relatively inefficient with high system losses. There is a need to identify technical criteria and designs that will allow grid stability to be maintained. Two power issues of particular concern are power output and frequency smoothing.
As a case study, consider Miyako Island of Okinawa, Japan. This island has a generation profile similar to many Caribbean islands, with a peak demand of 50 MW and 74 MW of gas and diesel power plants supplying the majority of its electricity. The island is promoting a microgrid project, integrating a 4.2 MW wind project and a 4 MW solar PV installation with 4.1 MW of batteries. Miyako Island illustrates the ability of batteries to provide power output and frequency smoothing. The batteries are able to ensure grid stability, helping to limit frequency fluctuations and accommodate varying outputs from the solar and wind projects. Future study on the island will attempt to determine the optimal ratio of variable generation to batteries to maintain grid integrity.
Like Miyako Island, most Caribbean islands are small and have a small peak demand. Their power generation infrastructure requires high reserve capacity to provide adequate reliability, and most of this capacity currently comes from inefficient and outdated diesel generation. To add variable capacity to an island’s grid, one must consider the issues unique to each island as well as the macro issues that affect the entire Caribbean region. Dealing with grid stability on a micro level, each island’s grid and power generation infrastructure will have to be overhauled.
The goal of each grid operator should be to discover and implement the most efficient solution possible. The first stage would be to upgrade existing power plants to high efficiency and quick response turbines with the ability to deploy fast acting reserve capacity to cope with the voltage fluctuations created by variable generation sources. The second stage would be for grid operators to integrate energy systems, such as battery solutions.
Caribbean island grid operators have to plan and provide a concrete set of measures for voltage and frequency stabilization or a dedicated spinning reserve capacity to prevent power fluctuations from affecting grid stability. While different grid stability solutions are possible, generally speaking there are two overall approaches: project-level or grid-level solutions. If battery systems are engaged, such systems can be installed along with each individual project or larger battery solutions can be integrated at the grid-level to manage and smooth the grid electricity.
Technical and economic data suggest that the most efficient course of action is to have a grid-level solution. Each grid operator could design and install, either themselves or through a third party, solutions at points where the grid is most vulnerable. This approach would allow for the greatest stability control. Furthermore, creating a grid-level stability solution could wholly or partially remove the economic burden from each individual project. The cost of a project-level solution can make a project financially unviable, and by reducing the overall solution cost and spreading it among all interconnected projects, the solution costs could be dispersed, improving each project’s economics. A grid-level solution could also allow the grid operator to better control the dispatch of power to stabilize the grid.
Dealing with grid stability on a macro level, is even more challenging than at the micro level. A macro solution requires developing an interconnected grid between the islands and possibly connected to the U.S. mainland. Interconnecting the islands can increase reliability of each island’s grid while enabling cooperation between nations. This macro solution is very capital intense, requiring regional and global cooperation to put it in place. Importantly, these improvements will require a capital investment, each plant and system upgrade will require investment capital.
Access to Capital
Local and international capital providers must work with international organizations to create an efficient and effective investment climate for renewable energy projects. Mobilizing local capital begins with educating investors on the risk profile of these investment assets; such education needs to be supported by international organizations with programs to encourage investment. In the Caribbean, as in most emerging regions, obtaining financing is a considerable challenge for any project, let alone a renewable energy project. One reason why investment is a challenge is that banks in emerging markets, particularly isolated ones such as the Caribbean islands, are hesitant to use renewable energy equipment as collateral due to an underdeveloped secondary market.
While many national governments in the Caribbean have enacted policies for the development of renewable energy projects, island governments should support, with the backing of international organizations, public guarantee mechanisms. Such mechanisms would allow investors to reduce their risk. By backing public guarantee mechanisms, governments and international development banks can encourage financial institutions to lend to underserved sectors.
Many international organizations support investment in renewable energy projects and programs. The Inter-American Development Bank (IDB) and International Finance Corporation (IFC) have both committed funds to help develop renewable energy projects on island nations. The two entities have different approaches, however. The IDB has, for example, provided $70 million to Barbados for the development of renewable projects, and approved a $20 million loan for Jamaica to design and implement investment measures in energy efficiency in the public sector. While these initiatives do support energy projects, they do not go far enough. The funds this international organization is providing will only support specific energy projects; it would be better for the organization to support programs that would develop the necessary local investment base, unlocking the necessary local credit to build long-term growth in the sector.
In contrast, the IFC has engaged in measures that will affect the underlying market. The IFC’s work will help to unlock credit for renewable energy projects, an important factor for the sector’s success. Instead of supporting individual projects, the IFC is working with Banco Hipotecario Dominicano (BHD), one of the Dominican Republic’s largest banks, as a local investment partner to develop investment programs. Specifically, the two partners are establishing a line of credit for financing renewable energy projects. BHD has already successfully financed, through corporate level debt, the 34 MW Los Cocos Wind Farm in the southwestern region of the Dominican Republic.
Another example is the recent loan guarantee from the Export Import Bank (Ex-Im Bank) of the U.S. for the export of solar modules to Barbados. Since local financing can be problematic, the Ex-Im Banks provides more favorable rates and hopes to use the Barbados project as a model throughout the Caribbean, states Ex-Im Bank spokesperson Steve Horning. The bank offers payment terms of up to 18 years for eligible exports under their Environmental Export Program. Such programs, as the ones set-up by the IFC, Ex-Im Bank, Overseas Private Investment Corporation and other development organizations, are a viable path to unlocking local credit markets and growing regional investment in renewable energy.
From Puerto Rico to the Dominican Republic, Caribbean governments are beginning to support the development of renewable energy projects. Similarly, utilities and IPPs are actively instituting policies to enhance the investment in and development of renewable energy projects. Unfortunately, even with support for the development of renewable power sources, there are still substantial obstacles to overcome.
As recognized by Hector Martinez, head of the Dominican Renewable Energies Business Association, “The main barrier for a larger deployment of renewable technologies was, and still is, finance. Dominican entrepreneurs see the opportunity and they see the potential, but there is currently no funding available for renewable energies.”
For renewable energy projects to thrive in the Caribbean, it will be vital for local governments and international organizations to facilitate a more favorable investment environment, work towards instituting effective grid stability solutions, and for Caribbean islands to aggregate projects to create economies of scale. A clear strategy has to be developed to address scale, grid and financing issues as a singular problem, not through piecemeal strategies.
Matthew Fellmeth is an analyst at renewable energy consulting firm Reznick Think Energy.