Power Shift in Cuba: Seven Reasons to Watch the Renewable Energy Sector in the Post-Fidel and Trump Era

In 2014, the Cuban government announced plans to generate 24 percent of the country’s electricity from renewable sources by 2030, with an installed capacity of up to 2GW. It was an ambitious goal — and in order to achieve it, Cuba would need capital investments of approximately US$3.5 billion. The government’s designation of technology-specific targets and departments in charge suggested that it did not take the challenge lightly.

In the three years since, much has changed geopolitically. For a time, it appeared that the world might be witnessing a thaw in U.S.-Cuba relations, culminating in then-President Barack Obama’s historic visit in 2016 and the death of Fidel Castro a few months later. Now, the inauguration of Donald Trump — a U.S. president who has promised a decidedly less-friendly approach toward Cuba — has cast uncertainty over the future.

Facing a fiscal crisis and with scant foreign reserves, Cuba has little choice but to turn to international investors to achieve its renewable energy targets.

Opportunities and risks abound. Understanding why renewable energy should be developed in Cuba and what the major risks and policy obstacles are will be critical for international investors to assess their potential operations in the country.

Here are four key reasons to be optimistic about the future of renewable energy in Cuba — as well as three potential pitfalls:

1. Cuba Has Abundant Renewable Energy Resources

Cuba, like many island countries, is blessed with abundant sunshine, a windy coast and diverse biological sources. Cuba has an average solar irradiance of 223.8 W/m2 (5.4 kWh/m2/day). 3.5 kWh/m2/day is generally classified as “Good” potential. The average wind speed in Cuba is about 5.7 m/s. Wind speed is particularly higher in the southeast (above 7 m/s).

Table 1. Solar and wind resource potential in Cuba. Credit: VAISALA Global Renewable Energy Database

Today, the majority of Cuba’s existing renewable energy installed capacity comes from bioenergy, driven mainly by the sugarcane industry, which has supported the Cuban economy for decades. In 2015, out of Cuba’s total 566 MW of renewable energy installed capacity, 83 percent was from bioenergy. That figure has been declining as the once-strong sugar industry has weakened; even so, Cuba continues to have a substantial bagasse (the dry pulpy residue left after the extraction of juice from sugar cane, used as fuel for electricity generators, etc.) availability and a deep understanding of the industry.

Figure 1. Renewable energy installed capacity by technologies. Credit: IRENA

Figure 2. Total renewable energy installed capacity in Cuba. Credit: IRENA

2. Energy Security Concerns Rise as the Supply of Oil from Venezuela Falters

As Figure 3 shows, 82 percent of Cuba’s electricity is generated from burning imported oil. This skewed reliance on imported fossil fuels has led to serious concerns about energy security. In Cuba, the mere word “blackout” evokes traumatic memories from the “Special Period,” right after the collapse of Soviet Union when supplies to Cuba were cut off and it suffered prolonged economic crisis and power outage.

Cuba has relied heavily on subsidized imports from Venezuela with an average daily import of 98,000 barrels of oil from 2000 to 2015. Since the beginning of 2016, however, Venezuela’s economic woes have led to a 40 percent drop in its exports to Cuba (58,800 barrels). The Cuban government fears a return to a state of energy insecurity and political chaos. This concern is not inconsequential. With an increasingly open economy and expanding tourism, in 2015 Cuba’s power consumption jumped 4.8 percent. With more renewable energy development, reliance on external oil supply on power generation will be greatly reduced.

Figure 3. Electricity generation in Cuba, 2014. Credit: International Energy Agency

3. Sky-high Electricity Prices Put Stress on the Cuban Economy, Making Renewable Competitive

Electricity prices in Cuba are dizzyingly high, mainly due to the country’s reliance on burning costly imported diesel fuel. As the recent electricity in Figure 5 reveals, it is not unusual for residential electricity prices in Havana to reach as high as US$0.20/kWh (3 CUP/kWh). During a hot September, with 3 AC units running, this homeowner spent a total of US$125 (3100 CUP) on electricity. The homeowner’s monthly household income was US$2,400, almost all of which came from leasing out two rooms on Airbnb. And this is the revenue before reporting a large portion to the government. Outside of the tourism industry, the average monthly income is US$25 per person.

Figure 4. A Havana household electricity bill from September 2016

Not only do these high electricity costs burden local people, but they also encumber the economy as a whole. UNIÓN ELÉCTRICA (UE), Cuba’s vertically integrated, state-run national utility, uses mainly liquid fuels from Venezuela, resulting in very costly generation, high technical losses (15 percent) and low labor productivity. Without subsidies from the Cuban government and when crude oil prices were at a peak of US$140 per bbl, UE’s annual economic loss was almost $3 billion. Now, with the prospect of a decline in — or the altogether cessation of — its subsidized oil supply from Venezuela, Cuba’s electricity prices can only be expected to ramp up in the future — making renewable energy an even more attractive option.

4. Cuba’s Growing Reliance on Tourism Means It Needs Cleaner and More-stable Power

Blue skies and pristine beaches are the natural backbone of Cuba’s island economy. According to the World Travel and Tourism Council, in 2014, the total contribution of travel and tourism to Cuba’s GDP was about CUP 8.17 billion (about US$8.17 billion) (10.4 percent of GDP). This figure is forecast to rise by an average of 4.3 percent each year to about CUP 12.98 billion (about US$12.98 billion) (12.0 percent of GDP) in 2025. This forecast was conducted before the death of Fidel Castro and the beginning of the thaw in U.S.-Cuba relations. In the post-Fidel era, we can expect an increasingly open Cuban economy, heavier reliance on tourism and more power consumption. The change is already taking place. Residential power usage saw a sharp increase of 66.5 percent from 2005 to 2015, compared with only a 9.6 percent increase in state-run sectors.

It goes without saying that the attractiveness of a place is negatively correlated with its pollution levels, especially in an island country where the economy depends heavily on tourism. Walking around Havana, one can’t help but cup one’s nose and mouth to shield from the black clouds of diesel exhaust as 50-year old cars drive by. A combination of low-grade imported diesel, vintage engines with no emission control and power generation from oil will eventually take a toll on the tourism industry. Cleaner energy sources are imperative to mollify this grim picture of beautiful Cuba.

There are three major potential pitfalls for international renewable energy investors who consider operations in Cuba.

1. Private Ownership of Renewable Energy Power Plants Remains Uncertain

Whether or not private ownership of power plants is guaranteed in Cuba is a fundamental concern for international renewable energy developers. Private ownership would mean that international developers have the right to retain revenue from power sales, such as build-own-operate or build-own-operate-transfer arrangements, according to the World Bank.

Previously, Cuba’s 1995 foreign investment law allowed for foreign ownership, although in practice deals typically had limited foreign ownership to 49 percent.  There were also concerns among foreign investors that Cuban authorities can always change the law at will.

Then, in 2014, Cuba enacted a new foreign investment law aimed in part at addressing those concerns. The law specifically allows for 100 percent direct foreign capital and business operations in the field of renewable energy development. Foreign companies are allowed to have 100 percent ownership, but for companies that engage in joint ventures, the profits tax will be cut from 30 percent to 15 percent. Those companies also will be exempt from paying the tax for at least eight years.

Actual successful foreign deals in renewable energy will bring more confidence to investors. Hive Energy, a U.K. renewable energy firm, will become one of the first foreign companies to develop a utility-scale PV project in Cuba, a 50-MW solar installation which will become the country’s first utility-scale solar power plant. U.S. firms are still restricted under the embargo. With the new Trump administration, the prospects for U.S.-Cuba relations have become less predictable, but if the normalization of relations continues, the Cuban market will gradually become a natural destination for U.S. renewable energy investors.

2. Cuba’s Dual-currency System Poses Difficulties for Electricity Tariff Collection and Convertibility

For renewable energy developers who are considering entering the Cuban market, there is one critical question: what do they do with the electricity fees collected in CUP from local residents? In other words, how do they convert CUP to international currency and what restrictions will there be on transferring profits outside of Cuba?

The best practice for international investors is that tariffs should be indexed (in part or in whole) to an international currency or to inflation, so investors can be certain their revenue will cover their costs regardless of currency fluctuations, according to the World Bank. Cuba’s new foreign investment law allows the free transfer of profits and dividends off the island without additional tax. However, there are no clear rules on currency indexation.

Similar to China back in the 1980s, Cuba still runs a dual currency system that investors view as a serious obstacle to business. A legacy from the dismantling of the Soviet Union, Cuba has had two currencies since 1993: the convertible Peso (CUC), which is valued on par with the Euro and is fully tradable, and the Cuban Peso (CUP), which is valued at a rate of 25:1 with the CUC. Neither the CUC nor the CUP is tradeable outside of Cuba.

This currency uncertainty is particularly real in the post-Fidel era as Raúl Castro and his new government want to reform, however, without concrete plan as to how and when. In 2013, Cuban authorities announced that the dual currency system would be removed, but no details of how or when the change would be implemented were revealed. In 1994, China bit the bullet and devalued the RMB to 8.7 to the dollar (much lower than the official rate of 5.8 to dollar), then unified abolished its famous (and infamous) Foreign Exchange Certificates (FEC) when foreigner could only use FEC. But in Cuba, unifying the twin highly divergent currencies will be trickier because it would lead to massive devaluation of Cuban currency. If no currency indexation is provided from the government, significant devaluation poses a great threat to investors’ revenue.

3. Cuba Is Not a Member of International Finance Institutions

Cuba is one of the few countries in the world that does not belong to any major international finance institutions (IFIs), including the International Monetary Fund (IMF), the World Bank, and the Inter-American Development Bank (IDB). When a distressed macroeconomic situation is coupled with weak institutional capacity in the energy sector, IFIs can provide a guarantee that is critical to addressing the risks associated with these factors.

For international renewable energy investors, entering an authoritarian and unpredictable market that has been closed off for decades is not an easy decision. It means investing huge trust in that government’s good faith. If such trust proves well-founded, the benefits would be substantial. In Cuba’s case, the economic fundamentals, technology and political will are all there. When it comes to demonstrating the government’s good faith, forceful implementation of the new foreign investment law and a move to begin the process of joining the international community would be two welcome steps. 

Author

  • Yao Zhao is renewable energy specialist at the World Bank.   In his current role, Yao is the renewable energy pillar lead for Regulatory Indicators for Sustainable Energy (RISE) which assesses policy framework for energy access, energy efficiency and renewable energy in 111 countries. Prior to the World Bank, Yao worked for the International Renewable Energy Agency (IRENA) in Abu Dhabi, the UAE, primarily focused on helping small island developing states (SIDS) develop renewable energy projects. Yao has also worked on renewable mini-grids in rural India with the Rockefeller Foundation. Born and raised in China, he has work experience in China, India, East Africa, the Middle East and the United States. Yao has a masters’ degree in Economics from Johns Hopkins University School of Advanced International Studies (SAIS). When Yao is not trekking through the Pantanal wetland in Brazil, in the tribal communities in Tanzania, or backroads in India, his main hobby is scuba diving – Indian Ocean (Zanzibar), Strait of Hormuz and the Caribbean are many of his favorite spots.

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Yao Zhao is renewable energy specialist at the World Bank.   In his current role, Yao is the renewable energy pillar lead for Regulatory Indicators for Sustainable Energy (RISE) which assesses policy framework for energy access, energy efficiency and renewable energy in 111 countries. Prior to the World Bank, Yao worked for the International Renewable Energy Agency (IRENA) in Abu Dhabi, the UAE, primarily focused on helping small island developing states (SIDS) develop renewable energy projects. Yao has also worked on renewable mini-grids in rural India with the Rockefeller Foundation. Born and raised in China, he has work experience in China, India, East Africa, the Middle East and the United States. Yao has a masters’ degree in Economics from Johns Hopkins University School of Advanced International Studies (SAIS). When Yao is not trekking through the Pantanal wetland in Brazil, in the tribal communities in Tanzania, or backroads in India, his main hobby is scuba diving – Indian Ocean (Zanzibar), Strait of Hormuz and the Caribbean are many of his favorite spots.

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