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

2

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?

3

Caribbean Energy:Sector Overview

Energy costs in the region have been significantly elevated over the past decade.

4

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.

12

5 5

19

34 34 3435

38 38 3940 40

41

0

5

10

15

20

25

30

35

40

45

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

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0

20

40

60

80

100

120

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

5

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.

0%

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

6

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.

0

20

40

60

80

100

120

0

2

4

6

8

10

12

14

16

18

20

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

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

7

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).

80

90

100

110

120

20 40 60 80 100 120

REE

R

Lagged oil price

ATG

KNA

LCA

VCT

Trendline (Corr=0.71)

REER vs. One-year lagged Oil Price (2006-2014)

-5-4-3-2-1012345

-30

-20

-10

0

10

20

30

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.

8

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.

9

15 14 139 9 8 7 5 5 3 2 1 0 2 20

10

20

30

40

50

60

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

10

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

11

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.

12

13

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.

14

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.

15

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.

16

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

17