Since 2012, the Ten Island Challenge has garnered much attention from clean energy stakeholders in the Caribbean. It is the brainchild of Richard Branson, the Carbon War Room and Christiana Figueres, Executive Director of the United Nations Framework Convention on Climate Change (UNFCCC), and aims fast-track the transition to renewable energy for targeted Caribbean island, reducing their dependency on fossil fuels.
Islands are important markets for new renewable energy projects, with lessons for other, larger markets.
There are likely to be few places that represent a more suitable market for homegrown renewable energy than the world’s island nations. Almost wholly reliant on imported fuel to support diesel-based power generation, islands face some of the world’s highest energy costs, as well as greater exposure to price volatility and supply disruptions. It is estimated that the average cost of electricity in the Caribbean for example, ranges from US$0.32 to US$0.65 per kWh, around five times that of the mainland United States.
Fossil fuels make up a large share of GDP in the Caribbean, and an especially costly share of operating expenses for the energy-intensive hospitality and tourism industries, often the driving force of many island economies.The stability and resiliency of energy supplies have also become critical, especially with the increasing vulnerability to the impacts of climate change.
Domestic renewable energy, particularly in the form of distributed generation that can circumvent the ageing power infrastructure, has become an economic, social and environmental imperative foremost island nations. That said, the ageing infrastructure on many islands, such as Puerto Rico, remains a significant obstacle.
Rocking the Boat
So what is holding the Caribbean back? Firstly, typically smaller renewables projects can result in relatively high upfront development cost on per kWh basis, and there is also some skepticism about the scale of the opportunity given the low energy demand of some islands in absolute terms compared with many mainland markets.
Secondly, the economic picture can be distorted. Venezuela’s Petro Caribe initiative, for example, creates an alliance with 17 Caribbean states to purchase oil on preferential payment terms, with exports to these markets accounting for more than 40 percent of their total energy consumption in 2013. While the terms of the initiative are expected to become less attractive as Venezuela battles its own fiscal deficit, anticipated revisions have been delayed, allowing members to draw on subsidized financing for another year. Relatively weak credit ratings and limited borrowing capacity across some Caribbean states also make it vital to get organizations such as the World Bank and OPIC on board to help arrange low-cost financing for energy ventures.
Thirdly, non-economic barriers such as community landownership and special constraints can make permitting and build-out at scale more challenging, while a tradition of vertically integrated and state-owned utilities weakens the incentive for competition. Many governments have been slow to reform their energy sectors and offer the fair market conditions for RE to flourish.
Help on the Horizon
It is tempting to write off island renewables as a niche investment for entrepreneurs and multilaterals. And yet, it is not that easy to ignore the opportunities. Warren Smith, President of the Caribbean Development Bank, claims the region is looking to attract as much as US$30b of investment to expand and upgrade the power sector, with potential to replace 4,750 MW of fossil fuel generation with renewables by 2019.
Specific initiatives are already underway to galvanize increased investment and deployment of renewables such as the Ten Island Renewable Challenge, which aims to fast-trackingthe transition to renewable energy. Together with the Rocky Mountain Institute,World Bank and OPIC, it has already earmarked US$300 million for new projects, while Richard Branson’s home of Necker Island will serve as a demo for the initiative, with major U.S. energy company NRG Energy lined up to develop a renewables-driven microgrid for the whole island. The Clinton Foundation’s Climate Change Initiative has also already voiced its support for Caribbean renewables.
More than Treading Water
It also should not be ignored that some islands themselves are already spurring on renewables deployment, and on a larger scale than might be anticipated.
Aruba, whose top industry is tourism, now gets 20 percent of its energy from renewable sources having investedUS$300 million in expanding its wind power capacity including a 30-MW project, and cut diesel consumption by half in only two years. Meanwhile, Cuba, the Caribbean’s largest island nation, is reportedly pushing through policy changes that could open the door for new renewable energy investors, with pending legislation expected to allow wholly owned foreign companies to exist in Cuba for the first time.
In June, the Dominican Republic approved US$150 million of new renewables projects, including a 30-MW wind farm and 25-MW biomass plant, while Germany’s Wirsol is also developing a 62-MW solar park in the country, the largest in the Caribbean. The country has already receivedUS$800 million in investment since 2007, having set legislation targeting 25 percent renewables generation by 2025,providing tax breaks for imported equipment and mandating the purchase of renewable power by distributors. In the same month, Jamaica’s Energy Minister claimed that the country will be the leading nation for gross production of renewable energy thanks to an anticipated additional capacity of 78 MW by the middle of next year.
Beyond the Caribbean, Spain’s Ence Energia y Celulosa plans to build 210 MW of biomass plants in the Canary Islands at a cost of US$730 million, while the British Channel Islands are continuing to explore the potential for marine energy, aiming to install a 300-MW tidal array off Alderney by 2020.
Enablement technology is also coming to the fore as a means of facilitating the transition to renewables-led island economies. Hawaii, which plans to obtain 40 percent of its current power consumption from renewables, recently launched a request for proposals for 60 MW to 200 MW of storage capacity. Meanwhile, Puerto Rico, which has committed to co-invest US$290m in renewable energy projects and other initiatives over the next 10 years via its Green Energy Fund initiative, which introduced new minimum technical requirements that mandate all new renewable energy projects to meet specific storage requirements.
Creating a Wave
Island nations are therefore already well on their way to demonstrating that an economically viable clean energy transition is possible and desirable. However, significant commercial investment and deployment activity is still required to fulfill this potential.
Further, with such islands effectively microcosms of larger markets facing similar energy crises, and their potential as living laboratories to demonstrate and scale innovative solutions as well as circumvent traditional grid infrastructure, there is much to recommend such investment as a means to establishing a template for the successful transition to a fossil-fuel free economy at a global level. Initiatives to establish greater collaboration between islands to aggregate demand, foster stakeholder engagement and reduce cost and policy barriers, will also help to make projects more bankable and attractive to a wider array of participants.
The question is therefore whether today’s investors, developers and innovators want to be at the forefront of creating an island model of energy with potentially far-reaching implications for the global energy sector, or just wait to ride the second wave as micro goes macro.
Credit: Ernst & Young
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