caribbean energy macro-related challenges
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Caribbean Energy: Macro-Related Challenges
Presentation to the Annual Meetings of the Caribbean Development Bank
May 18, 2016Montego Bay, Jamaica
Arnold McIntyreWestern Hemisphere Department
Caribbean Energy:The Macro Challenge
The Caribbean Forum in 2014 identified the need for sustainably lower energy costs to improve growth and competitiveness. The region remains too dependent on fuel oil, which significantly pushed up energy costs in the past decade and its price outlook remains highly volatile.
Dilemma: investment in effective energy reform would be valuable, but few countries have fiscal space for ambitious investments.
Task for IMF: move the dialogue from diagnostics (“lower energy costs would be better”) to actionable policies—meaning clarification about what would be a macro-feasible strategy for cutting costs and improving growth
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Caribbean Energy:Key Macro-Questions
To get a grasp of what’s macro-feasible, the IMF tackled a few fundamental questions:
i. How important is energy sector reform to growth and competitiveness?
ii. Are countries’ existing energy strategies appropriate/adequate?
iii. If these strategies were implemented, what macro-gains could be expected?
iv. How much would it cost to reach the targets in the energy strategies?
v. And finally, could countries afford it?
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Caribbean Energy:Sector Overview
Energy costs in the region have been significantly elevated over the past decade.
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Average electricity tariffs in the region increased by almost 80 percent over 2002-2012 exceeding 0.34 US$/kWh for the bulk of the region in 2012, almost twice the LAC average (0.18 US$/kWh).
For the bulk of the Caribbean, oil price pass-through to electricity tariffs was achieved through fuel-surcharge since 2005/6.
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Un
ited
Sta
tes
Trin
idad
Su
rin
am
e
Belize
Jam
aic
a
St. K
itts
St. L
uci
a
Barb
ad
os
St
Vin
cen
t &
Gre
n.
Bah
am
as
Nevis
An
tig
ua &
Barb
ud
a
Do
min
ica
Gre
nad
a
Domestic Electricity Tariffs, 2012(In US ₵/kWh)
Source: CARILEC tariff survey and World Bank
LAC Average
$26$31
$42 $57
$66$72
$100
$62
$79
$95
$0.20$0.23 $0.23
$0.27 $0.28
$0.33
$0.40
$0.31$0.35
$0.09 $0.09 $0.10 $0.11 $0.11 $0.12 $0.12 $0.12 $0.12
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2002 2004 2006 2008 2010
Crude Oil price Caribbean average (RHS) US (RHS)
Tariff prices and oil price co-movement, 2002-2011 (in US$)
Source: IDB, CARILEC and IMF staff calculations.
Caribbean Energy:Sector Overview
Overdependence on imported fossil fuels exposes the region to episodes of high and volatile oil prices
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85 percent of primary energy consumed is in the form of imported petroleum products, of which 40 percent is to cover transport fuel. Natural gas is only prominent in T&T.Hydro power is the most currently utilized form of renewable energy.In tourism-based economies, the most energy intensive users are hotels.
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20%
40%
60%
80%
100%
Total
Caribbean 1/
Tourism-
dependent
Commodity
Exporters
Residential
Commercial
Industry
Public Sector
Energy Consumption in the Caribbean by Sector(In Percent of Total)
1/ excludes Trinidad and Tobago and HaitiSource: IDB and IMF staff calculations
Caribbean Energy:Macro-Impact
High and volatile energy prices have serious negative macro implications
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High energy prices increase external vulnerability: the oil trade deficit widened by of 3.7 percent of GDP annually for Caribbean economies, on average, over 2005-2014.
High and volatile electricity prices raise the cost of doing business in the region and increase uncertainty of investment planning.
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Non-oil deficit Oil deficit
Current account deficit Average oil price (US$; RHS)
Average Current Account Deficit in the Caribbean 1/
(In percent of GDP)
Sources: Country Authorities and IMF staff calculations.
1/ Excludes Trinidad and Tobago and Haiti.0 50 100
Dominica (2010)
St. Kitts and Nevis (2010)
Dominican Republic (2010)
St. Lucia (2010)
Barbados (2010)
Antigua and Barbuda (2010)
Guyana, CR (2010)
Belize (2010)
Jamaica (2010)
St. Vincent and the Grenadines (2010)
Bahamas, The (2010)
Suriname (2010)
Grenada (2010)
Trinidad and Tobago (2010)
Other countries, average (2014 or latest)
LA6, average (2014 or latest)
Caribbean average
Electricity as a Major Constraint to Firms
Percent of firms
identifying electricity
as a major constraint
Percent of firms
owning or sharing a
generator
Sources: World Bank Enterprise Survey (2015), Fund staff calculations.
Caribbean Energy:Macro-Impact
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High and volatile energy prices have serious negative macro implications
Oil price shocks triggered inflationary episodes generating real exchange rate appreciation, with negative implications for competitiveness.
The energy bill has absorbed a significant share of household’s discretionary income in 2012 (8½ percent of GDP).
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REE
R
Lagged oil price
ATG
KNA
LCA
VCT
Trendline (Corr=0.71)
REER vs. One-year lagged Oil Price (2006-2014)
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-10
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Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
Fuel and Light Subindex
Core Inflation (RHS)
OECS: Energy Price Volatility vs. Core Inflation 1/(Y/Y change in percent)
1/core inflation excludes food and fuel; weights are based on St.
Lucia consumption basket.
Source: ECCB; IMF staff calculations.
Caribbean Energy:Macro-Impact
The recent oil price decline has reduced electricity tariffs by around 35 percent in 2015, while the oil trade balance is expected to have shrunk by around 4 percent of GDP in 2015.
The decline in oil prices may look like a panacea but its not as the region is still relatively uncompetitive as prices dropped in the rest-of-the-world as well.
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Caribbean Energy:Empirical Findings
Growth:
• Real oil price shocks explain on average about 7% of variation in real GDP growth.
• A 10% increase in real oil prices reduces real GDP growth by about 0.5 pp over 5 years in tourism-intensive countries.
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15 14 139 9 8 7 5 5 3 2 1 0 2 20
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DMA GRD SUR JAM BLZ BHS LCA KNA TTO VCT ATG BRB GUY CHL GTM
Oil price AEs Demand AEs int. rate
Impact of Oil Price Shocks on Real GDP Growth Variation(Precent, average over 3 years)
Competitiveness: • A 10% increase in real oil prices increases the rate of REER appreciation by 2.8 pp over 5 years in tourism-intensive countries and 3.8 pp in commodity-producers.
Over the long run, reducing high energy costs through improving energy efficiency would have a discernible growth impact:
• A 10 percent improvement in energy efficiency would leave GDP 2 percent higher.
Overall impact… significant, but not a panacea.
Oil Price Shocks can have a significant impact on growth and competitiveness.
Caribbean Energy:Existing Sector Strategies
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Regional Energy Plans
Regional (CARICOM Energy Policy) and national energy plans embrace recommended energy strategies to boost growth and competitiveness by focusing on: i) regulatory reforms; ii) diversifying the generation mix and iii) improving energy efficiency.
Building on the CARICOM Energy Policy (CEP), the Caribbean Sustainable Energy Roadmap and Strategy (C-SERMS) was developed to provide CARICOM member states with a coherent strategy for transitioning to sustainable energy. The Roadmap sets specific regional energy targets for:
Renewable Power generation: 20 percent renewable power capacity by 2017 (currently at about 15 percent), 28 percent by 2022 and 47 percent by 2027.
Energy Efficiency: 33-percent reduction in energy intensity by 2027.
CO2 emissions: reductions of 18 percent by 2017, 32 percent by 2022, and 36 percent by 2027.
Countries have national targets for renewable energy and energy efficiency that are aligned with regional targets
Caribbean Energy:Existing Sector Strategies
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Regulatory Reforms could contribute significantly. Regulatory reforms are needed to facilitate the expansion of alternative (cost-competitive) sources of energy, particularly renewable energy resources in the region.
Improving energy efficiency can generate significant gains in reducing energy costs.
Diversify the generation mix through
Exploring viable renewable energy technologies, particularly geothermal power in the Eastern Caribbean.
Diversifying through natural gas for countries where it is feasible.
Summary of Viable Renewable Energy Sources by Country
Country Solar
Win
dGeoth
ermal
Hydro
Biom
ass
Antigua and Barbuda
Dominica
Grenada
St. Kitts and Nevis
St. Lucia
St. Vincent and the Grens.
Bahamas
Barbados
Guyana
Haiti
Jamaica
Suriname
Source: CARICOM Caribbean Sustainable Energy Roadmap
Caribbean Energy:Existing Energy Strategies—Expected Macro Impacts
Implementing the measures needed to meet the energy efficiency targets already outlined in CARICOM’s regional energy strategy would lower electricity tariffs and fuel import costs—thus supporting growth.
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0% 20% 40% 60% 80%
Dominica
St. Lucia
Barbados
St. Kitts and Nevis
St. Vincent and the
Grens.
Antigua and Barbuda
Belize 2/
Jamaica
Effective Efficiency Target 1/
Implied reduction in oil
imports
Implied reduction in the
national electricity bill
Implied impact on long-term
GDP level
1/ Announced targets shown on the left are normalized to the same base to reflect the
targeted improvement in energy consumption in the entire economy, including the
transport sector.
2/The impact on the national electricity bill from achieving the target reflects the smaller
savings from energy efficiency technologies in Belize, where the electricity tariff rate is
relatively low.
Sources: CARICOM Caribbean Sustainable Energy Roadmap, Castalia Report, IDB, WEO,
IMF staff estimations.
National Energy Efficiency Targets and Implied Effects
(in percent, cumulative over the period of long-term target)
0% 50% 100%
Antigua and Barbuda
Jamaica
Barbados
The Bahamas
St. Lucia
St. Kitts and Nevis 1/
St. Vincent and the
Grens.
Belize
Guyana
Dominica
Grenada
Renewable target of
electricity
Implied reduction in oil
imports
Implied reduction in the
national electricity bills
Implied impact on long-
term GDP level
National Renewable Energy Targets and Implied Effects
(in percent, cumulative over the period of long-term target)
1/ Target is the average of a 20 percent renewable target for St. Kitts and 100
percent target for Nevis, weighted by size of electricity generation on each island.
Caribbean Energy:Cost of Implementing Energy Strategies
Total energy sector investment needs could be met by spending about 7 percent of regional 2015 GDP … not cheap but not insurmountable for most countries.
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Building/
Upgrading
power
plants 1/
Introducing
Natural
Gas
Facilities 2/
Renewable
Energy
Investments 3/ 4/
Energy
Efficiency
and
Conservation
Initiatives 5/
Total
Investment
Total
Investment
(%GDP)6/
Average
GDP
Growth
(2006-2015)
Gross
Public Debt
(% of GDP) 6/
The Bahamas 150 251 70 40 511 5.8 0.4 60.8
Barbados 190 129 80 40 439 9.9 0.6 103.8
Belize 59 - - 59 3.3 2.6 78.1
Guyana 135 110 5 20 270 8.4 4.4 70.2
Jamaica 400 280 60 120 860 6.2 0.1 127.7
Suriname 100 223 45 10 378 7.5 3.8 36.9
ECCU 421 30 451 9.8 1.2 82.9
Antigua & Barbuda 42 5 47 3.7 1.2 101.9
Dominica 52 5 57 10.6 2.4 79.4
Grenada 88 5 93 9.7 0.7 90.3
St. Kitts and Nevis 87 5 92 10.3 2.0 66.3
St. Lucia 66 5 71 4.9 1.1 82.6
St. Vincent & Gr. 87 5 92 12.0 1.0 77.0
Region Total 975 1,052 681 260 2968 6.9 1.9 80.0
Source: IDB and IMF staff estimates.
2/ Includes estimated costs of converting existing plants to natural gas and the construction of regasification facilities.
3/ Includes solar, hydro, wind, and waste-to-energy projects. For the ECCU, reflects cost for geothermal power development.
4/ For Antigua and Barbuda, reflects cost estimates for solar and wind power peneration of 20 percent by 2020.
5/ Includes cost for solar water heaters, grid loss reduction, street lighting retrofit and smart fund for EE projects.
6/ Based on 2015 estimates
Energy Sector Investment Needs in the Caribbean (2018-2023)
(in millions of USD)
1/ Includes cost of building new capacity of natural gas-fired power plants. IDB estimates do not include expansions for
generation capacity in Belize, which imports a significant share of its electric power from Mexico. For Guyana and Suriname
includes costs for rural electrification.
Caribbean Energy:Energy Strategies and Public Debt Sustainability
Proposed energy investments do not materially alter public debt trajectories in most countries.
Private participation would keep debt more sustainable.
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Caribbean Energy:Summary of Conclusions
Lowering energy costs can help growth … though is not “the” panacea.
The region’s existing plans go in the right direction toward realizing savings and generating growth.
However ,there are some regulatory gaps, including the lack of a clear framework for Independent power producers and an independent national (or regional) regulatory authority .
The investment envelope needed to realize these plans is large but not beyond possibility for most governments…
… and in particular, for most countries, would not be inconsistent with maintaining debt sustainability.
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Caribbean Energy:Some Recommendations
Press ahead with country/regional strategies, but always with reference to debt sustainability and quality of investments.
Caveat: If public investment is inefficient, with low return, or if collection rates of user fees are poor, then debt sustainability will be more at risk from large investments.
Pursue private financing of alternative energy investments, including through public-private partnerships, as a first best option.
Caveat: Avoid excessive guarantees and ensure adequate risk sharing.
Fill the gaps in the strategies. In particular, regulatory and legislative reforms are low hanging fruit to create an enabling environment for greater private sector participation.
1. Net billing schemes and feed-in tariffs
2. Strong independent national/regional regulators
3. Incentives for energy efficiency
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