## 1. Illustrative Scenarios on the External Account Channel

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### A. Economic benefits overview
- Transition effects depend on: speed of adoption, related investment, carbon pricing, and regulatory measures.
- Potential macro effects:
  - Positive demand shock if transition is investment-led.
  - Potential negative productivity shock if green investment replaces rather than increases productive capital.
  - Financing risks: crowding out of other productive investments unless mitigated by concessional external finance or investment structures such as Purchasing Power Agreements (PPAs).
- Small island (Caribbean) specific amplifiers:
  - Heavy reliance on imported fossil fuels for electricity and tourism exposure to energy price swings.
  - Limited industrial sector simplifies decommissioning brown assets with minimal displacement of capital stock.
  - Large reductions in electricity prices benefit households, corporate profits, and competitiveness.
- Financing options to alleviate constraints: external concessional finance and PPAs where external investors (IPPs) cover initial investment and spread repayments over long periods.

### B. Electricity supply channel (productivity and costs)
- Current and comparative generation costs:
  - St. Kitts and Nevis diesel-based generation: 0.33 USD per kWh.
  - Global average LCOE (2021): geothermal 0.068 USD per kWh; solar PV 0.048 USD per kWh.
  - Caribbean estimated LCOE (Masson et al. 2020): geothermal 0.12 USD per kWh; solar PV 0.11 USD per kWh; solar plus battery storage 0.21 USD per kWh.
- Implications:
  - Electricity generation costs in St. Kitts and Nevis could be reduced by more than half based on these estimates.
  - Growth accounting estimate: a 2/3 reduction in the cost of electricity generation will lead to an increase of GDP by 1.1 percent (Annex I).
  - Energy resilience benefits estimated by IDB are about ¾ of the benefits from lower energy costs.

### C. Total Factor Productivity (TFP) channel
- Mechanisms: transition can raise aggregate TFP via better allocation of capital and labor and by catalyzing new sectors.
- Empirical transformational cases (renewable share +10 percentage points over five years) show:
  - TFP growth is on average 2.5 percent higher 5 years after the transition compared to 5 years before.
  - Labor productivity growth is on average 0.5 percent higher 5 years after the transition compared to 5 years before.
- Relevance: transformational cases reduce reverse causality concerns and are informative for St. Kitts and Nevis given pipeline solar PV and geothermal projects could cover 100 percent or more of domestic electricity needs.

### D. Inflation channel
- Renewables stabilize domestic energy prices and reduce inflation volatility by lowering exposure to global fossil-fuel market fluctuations.
- Cost profile: higher upfront capital and financing costs but lower operating costs once infrastructure is in place, enabling lower energy expenditure and potentially lower consumer prices.
- Contractual predictability: example PPAs for the solar project have a duration of 25 years and the electricity price is set for an initial period of 10 years.
- Empirical relationship: countries with higher WEF Energy Transition Index (ETI) tend to have lower CPI volatility; countries above a 60 percent ETI experience on average ½ of the CPI volatility experienced by countries on the left of the scatterplot.

### E. External account channel (trade and current account)
- Mechanisms: domestic renewables reduce energy imports, enable exports of green energy or energy-intensive products, and attract foreign direct investment.
- St. Kitts and Nevis projected impacts:
  - Solar facility expected to reduce SKELEC fuel imports by 40 percent, yielding annual savings of about $37 million USD.
  - Self-sufficiency scenario (100 percent of electricity needs covered domestically):
    - Annual fuel import savings = 3.7 percent of GDP.
    - Current account improves from deficit to a surplus of about 1.5 percent of GDP.
  - Aspirational scenario (domestic needs covered plus 50 MW of exports):
    - Current account surplus rises to about more than 5 percent of GDP.

### F. Sectoral diversification channel
- High energy costs restrict diversification into energy-intensive industries; lowering electricity costs can enable development of such industries.
- Regional contrast: ECCU energy-importing economies have very small manufacturing sectors versus Trinidad and Tobago which has low electricity costs and larger, diverse manufacturing (energy-intensive products like cement, glass, paper).
- Declines in electricity costs in St. Kitts and Nevis could permit development of energy-intensive industries, increase diversification, and reduce imports of energy-intensive products.

### G. Country-specific energy market and policy context
- System facts:
  - Reliance on fossil fuels (diesel) for grid power; the two islands are not interconnected.
  - Retail and commercial electricity prices highly subsidized through an oil surcharge mechanism: subsidy applies when diesel price exceeds a threshold of 28 cents per kWh; the utility does not fully pass on costs and residual cost is socialized through a budgetary transfer to the electricity utility.
  - Base electricity price unchanged since 2010.
  - An energy commission under the Public Utilities Act is mandated to determine energy prices based on technical factors such as price recovery but has not yet been activated.

---

### 17. Abundant access to energy

### Energy access and economic complexity
- Empirical relationships:
  - Countries with large domestic energy production have seen larger increases in economic complexity over the past decade.
  - Countries more advanced in energy transition (WEF ETI) tend to have higher economic complexity (ECI); relationship holds across income levels and irrespective of oil export size.
- Mechanism: cheaper energy production (from renewables or traditional resources) supports economic complexity; rapid electrification has been found to catalyze industrial development (Kassem 2018).

### Country cases and outcomes
- Iceland:
  - Large renewable energy production enabled development of high-tech, high value-added services and agriculture; PPA-adjusted GDP per capita reached USD 55,567.
- Kenya:
  - Surge in renewable energy since 1990 powered electrification, generating large productivity gains and contributing to a fourfold increase in income per capita toward middle-income status.

### Box 1 — Illustrative scenarios on the external account channel (St. Kitts and Nevis projects)
- Portfolio: one solar facility in St. Kitts and one geothermal project in Nevis.
- Solar project details:
  - Total investment: 80 million USD.
  - Expected fully operational in 2026.
  - Peak capacity: 35MW.
  - Average contribution to St. Kitts’ grid: about one third of needs, about 9 MW.
  - Peak solar generation will power a Battery Energy Storage System (BESS) of 43 MW.
- Geothermal project details:
  - Initial investment: 17 million USD for drilling and exploration (contingent loan of CDB acting as intermediary for GCF).
  - Construction stage expected to take three years (2025-27).
  - Planned operational capacity: 30 to 45MW (three production wells of 10 to 15MW).
  - Unit price of electricity once operational expected to decline by around 63 percent for NEVLEC.
  - Cost of electricity generation anticipated to decrease by around 45 percent for the Federation.
- Operational impacts and financing:
  - Solar launch assumed to reduce island utility fuel imports by about 40 percent (4 mil gallons of diesel from total annual imports of 10 million), resulting in annual savings of about 100 mil EC (37 mil USD).
  - Solar project financing: foreign equity about 25 percent of total investment and domestic loans; small impact on primary income through profit outflows per staff calculations.
- Scenario outcomes:
  - Self-sufficiency (renewables fulfill 100 percent): annual fuel import savings could reach 3.7 percent of GDP, improving the current account from a deficit of about 2½ percent of GDP to a surplus of about 1½ percent of GDP in 2029.
  - Aspirational (domestic needs plus 50 MW export): export revenue could amount to about 4   percent of GDP; current account surplus may increase to about more than 5 percent of GDP.

### Policies for enabling economic benefits of the energy transition
- Policy priorities:
  - Prepare national plans, rigorous procurement, utility governance, pricing and regulatory frameworks, and fiscal policy to capture rents.
  - Address external constraints: higher investment costs, raw material costs, supply chain disruptions, and complications for IPP/ PPA negotiations.
- National Integrated Resource Plan (IRP):
  - IRP as roadmap to meet forecasted demand with supply- and demand-side resources; include PPAs, renewable energy, transmission and distribution upgrades, and decentralized resources.
  - CCREEE finalizing an IRRP for St. Kitts and Nevis with delivery expected in 2024.
  - Evaluate PPA tax concessions for pluri-annual foregone revenue and report in annual budgets.
  - Assess utility governance and financial structure; publish audited financial statements.
  - Peer experience: commercially managed arms-length utilities with pricing guaranteeing full cost-recovery better positioned to invest.
  - Consider regulatory amendments to buy electricity from small PV producers (net metering, feed-in tariffs).
- Energy pricing and feed-in tariff options:
  - PPA prices could generate a decrease of about 50 percent in electricity prices for St. Kitts and Nevis.
  - With Nevis geothermal, production costs in the Federation could fall below 0.1 USD per kWh.
  - Pricing options:
    - Full pass-through to final users.
    - Partial pass-through to rebuild utility buffers and invest in grid upgrades/resilience.
    - Channel savings to the budget via energy taxation or dividends from utilities.
  - Optimal mix depends on trade-offs: short-term vs long-term gains; domestic absorption capacity; reinvestment, saving, or debt reduction choices.
- Natural resource taxation and fiscal impact:
  - Consider rent taxation to capture gains from inexpensive renewable energy for public investment, redistribution, fiscal buffers, and inclusive growth.
  - Broader fiscal impact hinges on net fiscal effects of existing generation given waning fossil fuel taxes and electricity subsidies.
  - Assessment should factor reduced fossil fuel demand, tax rates on fossil fuels vs electricity, new taxation of low carbon electricity, and increased economic activity from lower electricity prices.
- Spatial, geographical, and human limits to diversification:
  - Diversifying away from tourism is difficult; large-scale renewable-linked exports typically involve energy-intensive intermediary goods requiring heavy industrial bases and large land use.
  - Environmental footprint, financing modality risks (debt build-up), and downstream local impact must be balanced.
  - Submarine power transmission cable cost estimates range between 2 and 5 million USD per kilometer. Distances to neighbors: Dominica 263 km, Guadeloupe 179 km, US Virgin Islands 300 km, Puerto Rico 418 km.
- Lower hanging fruits:
  - Selling electricity to cruise ships at anchor could be feasible; cruise ship consumption ranges between 5 and 10 megawatts; a port hosting up to 10 ships could demand up to 100MW.
  - St. Kitts’ Port authorities expect about 350 ships (about 1 million passengers) will set anchor in Basseterre in total between April 24 and April 25.
  - Other avenues: powering desalination with renewables; inter-island electric ferries and water taxis; hub for short-haul electric airlines.
  - Data centers (including AI services) are energy intensive; IEA predicts global electricity demand from data centers, Artificial Intelligence and cryptocurrencies mining could double between 2022 and 2026.
- Electrification of other domestic uses:
  - Oil import shares: electricity generation about 55 percent, road transport roughly 30 percent, aircraft refueling 6 percent, remainder by households and businesses.
  - Electrifying transport and other uses would allow surplus renewable electricity to further reduce oil imports; policy tools include electrifying public vehicles and incentives for household EV adoption.
  - Desalination (reverse osmosis) energy and environmental costs: 4.0-4.5 kWh electric energy/m3 and 0.08-4.3 kg CO2/m3.

---

### Annex I. Estimation Methodology (summary)
- Electricity supply channel:
  - Growth impact estimated using Hulten (1978) growth accounting framework.
  - First-round effect approximated by d(log GDP) ≈ λi d(log Ai), with λi = Yi/GDP estimated as 1.68 percent using St. Kitts and Nevis industry composition and St. Lucia’s Supply-Use Table.
  - Assuming a 2/3 reduction in electricity generation cost yields an increase of GDP by 1.1 percent.
- TFP channel:
  - Difference-in-differences (DID) on 116 countries (2000-2019) using Penn World Tables.
  - Transformational cases defined as a +10 percentage point increase in renewable share over five years; outcome compares average TFP (or labor productivity) growth five years after versus five years before transition.
  - Empirical specification includes controls, country fixed effects, year fixed effects, and clustered standard errors.

### Annex III. Potential for Carbon Capture in St. Kitts and Nevis (summary)
- CCS methods:
  - Point source capture (PSC) and Direct Air Capture (DAC).
  - PSC can potentially capture more than 90 percent of CO2 from hydrogen production exhausts.
  - DAC involves large air volumes, capture, compression, transport, and injection into geologic formations.
- Relevance and capacity:
  - Renewable expansion may produce surplus energy improving CCS feasibility.
  - 2022 emissions: St. Kitts and Nevis produced 102.1 percent of the total CO2 emissions it did in 2010 (versus climate goal of a 61 percent reduction compared to 2010).
  - Manufacturing constituted 2.9 percent of GDP in 2023, limiting PSC potential relative to DAC.
  - Example: Iceland’s Orca plant captures up to 4,000 tons of CO2 and covers less than 20,000 sq. ft.; geothermal synergy could reduce DAC costs by 23 percent on average.
- Carbon credit markets and DAC costs:
  - Voluntary large-package credit prices: $600 to $1000 per tCO2; example sale to JPMorgan Chase for about $800 per ton in 2023.
  - Typical open market pricing: around $65-110 per tCO2.
  - DAC cost estimates including capture, transport, and storage: $200-$700 per ton.
  - DAC energy demand: about 1.2 megawatt hours per ton of CO2 (likely less with geothermal synergy).
  - Implementation risks: delays and cost overruns; revenue potential depends on appropriate pricing and avoiding double-counting of sequestration.

*Source: 1knaea2024002 - 1. Illustrative Scenarios on the External Account Channel; 17. Abundant access to energy; Annexes I–III*

### 1. Illustrative Scenarios on the External Account Channel ________________________________ 9

### 1. Illustrative Scenarios on the External Account Channel

### A. Economic benefits overview
- Renewable energy transition effects depend on: speed of adoption, related investment, carbon pricing, and regulatory measures.
- Transition can produce a positive demand shock (investment-led) and a potential negative productivity shock if green investment replaces rather than increases overall productive capital.
- Financing the transition may crowd out other productive investments unless mitigated by concessional external finance or investment structures such as Purchasing Power Agreements (PPAs).
- Small island economies (Caribbean) present distinctive characteristics that can amplify net benefits:
  - Heavy reliance on imported fossil fuels for electricity and tourism exposure to energy price swings.
  - Limited industrial sector simplifies decommissioning brown assets with minimal displacement of capital stock.
  - Large reductions in electricity prices would benefit households, corporate profits, and competitiveness.
- Financing options that can alleviate constraints include external concessional finance and PPAs where external investors (IPPs) cover initial investment and spread repayments over long periods.

### B. Electricity supply channel (productivity and costs)
- St. Kitts and Nevis current cost of diesel-based generation: 0.33 USD per kWh.
- Global average LCOE (2021): geothermal 0.068 USD per kWh; solar PV 0.048 USD per kWh.
- Caribbean estimated LCOE (Masson et al. 2020): geothermal 0.12 USD per kWh; solar PV 0.11 USD per kWh; solar plus battery storage 0.21 USD per kWh.
- Based on these estimates, electricity generation costs in St. Kitts and Nevis could be reduced by more than half.
- Growth accounting estimate: a 2/3 reduction in the cost of electricity generation will lead to an increase of GDP by 1.1 percent (Annex I).
- Energy resilience benefits are sizable; IDB estimates benefits from energy resilience are about ¾ of the benefits from lower energy costs.

### C. Total Factor Productivity (TFP) channel
- Transition can raise aggregate TFP via better allocation of capital and labor, and by catalyzing new sectors.
- Transformational cases (countries that increased renewable share by 10 percentage points or more over a five-year period) show:
  - TFP growth is on average 2.5 percent higher 5 years after the transition compared to 5 years before.
  - Labor productivity growth is on average 0.5 percent higher 5 years after the transition compared to 5 years before.
- Transformational cases reduce concerns of reverse causality and are informative for St. Kitts and Nevis, given pipeline solar PV and geothermal projects could cover 100 percent or more of domestic electricity needs.

### D. Inflation channel
- Transition to domestic renewables can stabilize domestic energy prices and reduce inflation volatility by reducing exposure to global fossil-fuel market fluctuations.
- Renewable energy typically has higher upfront capital and financing costs but lower operating costs once infrastructure is in place, enabling lower energy expenditure and potentially lower consumer prices.
- Long-term contracts (example PPAs) provide predictability: PPAs negotiated for the solar project have a duration of 25 years and the electricity price is set for an initial period of 10 years.
- Empirical relationship: countries with higher WEF Energy Transition Index (ETI) tend to have lower CPI volatility; countries above a 60 percent ETI experience on average ½ of the CPI volatility experienced by countries on the left of the scatterplot.

### E. External account channel (trade and current account)
- Domestic renewable deployment can improve the trade balance and current account by reducing energy imports, and can enable exports of green energy (green hydrogen, methanol), energy-intensive products, or renewable equipment.
- Renewable projects attract foreign direct investment, strengthening the external financial position.
- St. Kitts and Nevis projected impacts:
  - Solar facility expected to reduce SKELEC fuel imports by 40 percent, yielding annual savings of about $37 million USD.
  - Self-sufficiency scenario (100 percent of electricity needs covered domestically):
    - Annual fuel import savings = 3.7 percent of GDP.
    - Current account improves from deficit to a surplus of about 1.5 percent of GDP.
  - Aspirational scenario (domestic needs covered plus 50 MW of exports):
    - Current account surplus rises to about more than 5 percent of GDP.

### F. Sectoral diversification channel
- High energy costs restrict diversification into energy-intensive industries; lowering electricity costs can enable the development of such industries.
- Within the Caribbean, energy-importing economies (ECCU) have very small manufacturing sectors contrasted with Trinidad and Tobago, which has low electricity costs and larger, diverse manufacturing (energy-intensive products like cement, glass, paper).
- Declines in electricity costs in St. Kitts and Nevis could permit development of energy-intensive industries, increase diversification, and reduce imports of energy-intensive products.

### G. Country-specific energy market and policy context
- St. Kitts and Nevis rely heavily on fossil fuels (diesel) for grid power; the two islands are not interconnected.
- Retail and commercial electricity prices are highly subsidized through an oil surcharge mechanism: subsidy applies when diesel price exceeds a threshold of 28 cents per kWh; the utility does not fully pass on costs to users and residual cost is socialized through a budgetary transfer to the electricity utility.
- The base electricity price has remained unchanged since 2010.
- An energy commission mandated under the Public Utilities Act is tasked with determining energy prices based on technical factors such as price recovery, but it has not yet been activated.

*Source: 1knaea2024002 - 1. Illustrative Scenarios on the External Account Channel*

### 17. Abundant access to energy

### 17. Abundant access to energy

### Energy access and economic complexity
- Countries with large domestic production of energy have seen, on average, larger increases in economic complexity in the past decade.
- Many of these countries are large oil and natural gas producers and therefore have access to cheap energy sources; several others rely primarily on renewables, chiefly hydropower.
- A rapid increase in electrification has been found to catalyze industrial development (Kassem 2018).
- Countries more advanced in energy transition—measured by the World Economic Forum’s Energy Transition Index (ETI)—tend to have higher economic complexity (ECI). This relationship holds across high-, middle-, and lower-income countries and regardless of oil export size, suggesting it is not driven solely by income level or oil production.
- Cheaper energy production supports economic complexity; cheap energy production can come from renewable energy as well as from traditional resources such as oil and natural gas.

### Country cases and outcomes
- Iceland and Kenya exemplify how cheap and abundant energy can boost economic diversification and income per capita:
  - Iceland: large renewable energy production helped overcome disadvantages of geographic isolation and a small population, enabling development of high-tech, high value-added services and agriculture, reaching a PPA-adjusted GDP per capita of USD 55,567.
  - Kenya: surge in renewable energy production since 1990 powered electrification, generating large productivity gains and contributing to a fourfold increase in income per capita toward middle-income status.
- Country case figures and graphical analyses reference ETI and ECI averages and UN Comtrade/Atlas of Economic Complexity data (figures described in source).

### Box 1 — Illustrative scenarios on the external account channel (St. Kitts and Nevis projects)
- Portfolio: one future solar energy facility in St-Kitts and one geothermal project in Nevis.
- Solar project:
  - Total investment: 80 million USD.
  - Expected fully operational in 2026.
  - Peak capacity: 35MW.
  - Average contribution to St. Kitts’ grid: about one third of needs, about 9 MW.
  - Peak solar generation will power a Battery Energy Storage System (BESS) of 43 MW to maintain baseload, shift energy to night consumption, and rebalance the grid during peak surges.
- Geothermal project:
  - Initial investment: 17 million USD for drilling and exploration (provided through a contingent loan of the Caribbean Development Bank acting as intermediary for the Green Climate Fund).
  - Construction stage expected to take three years (2025-27).
  - Planned operational capacity: 30 to 45MW (corresponding to three production wells of 10 to 15MW).
  - Unit price of electricity once operational expected to decline by around 63 percent for Nevis’ utility company (NEVLEC).
  - Cost of electricity generation anticipated to decrease by around 45 percent for the Federation.
- Operational impacts and assumptions:
  - Staff assumed operational launch of the solar facility will reduce the Island utility company fuel import by about 40 percent (4 mil gallons of diesel for total annual imports of 10 million), resulting in annual savings of about 100 mil EC (37 mil USD).
  - Solar project financing: mix of foreign equity (about 25 percent of total investment) and domestic loans; small impact on primary income through profit outflows per staff calculations.
- Scenario outcomes:
  - Self-sufficiency scenario (renewables fulfill 100 percent of electricity generation): annual fuel import savings could reach 3.7 percent of GDP, improving the current account from a deficit of about 2½ percent of GDP to a surplus of about 1½ percent of GDP in 2029.
  - Aspirational scenario (renewables cover domestic needs and export 50 MW): export revenue could amount to about 4   percent of GDP; current account surplus may further increase to about more than 5 percent of GDP.

### Policies for enabling economic benefits of the energy transition
- Overview:
  - Maximizing economic benefits from renewable energy requires policy initiatives and intentional planning in utility management, energy pricing, natural resource taxation, and infrastructure project planning.
  - External environment constraints: higher investment costs from tightened global financial conditions, mounting raw material costs, supply chain disruptions, and complications for IPP negotiations and PPAs.
  - Policy agenda priorities include preparing national plans, rigorous procurement, utility governance, pricing and regulatory frameworks, and fiscal policy to capture rents.

- Preparing a National Integrated Resource Plan (IRP) for Electricity Production:
  - An IRP is a roadmap to meet forecasted energy demand using supply- and demand-side resources to ensure reliable service cost-effectively.
  - Modern IRPs must include PPAs negotiated with IPPs, renewable energy, upgrades to transmission and distribution, and decentralized energy resources.
  - The Caribbean Center for Renewable Energy and Energy Efficiency (CCREEE) is finalizing an IRRP for St. Kitts and Nevis with delivery expected in 2024.
  - Renewable energy planning in small island economies should be based on forward-looking assessment of renewable potential and rigorous procurement; PPA tax concessions need evaluation of pluri-annual foregone revenue and reporting in annual budget documents.
  - Governance and financial structure of utility companies should be evaluated, including publication of audited financial statements.
  - Peer experience: commercially managed arms-length utility companies with pricing schemes guaranteeing full cost-recovery are better positioned to bear investments for the transition.
  - Regulatory amendments to buy electricity from small PV producers (including net metering and feed-in tariffs) should be considered to facilitate grid investment.

- Energy pricing policy and regulatory framework for feed-in tariffs:
  - Electricity prices in small island economies are currently largely driven by oil and gas prices but will ultimately reflect renewable generation as transition unfolds.
  - PPA prices negotiated for the solar project in St. Kitts and Nevis could generate a decrease of about 50 percent in electricity prices.
  - With Nevis’s geothermal facilities, electricity production costs in the Federation could fall below 0.1 USD per kWh.
  - Pricing options to consider:
    - Full pass-through of lower electricity prices to final users.
    - Partial pass-through to allow utilities to rebuild financial buffers and invest in grid upgrades and resilience (e.g., underground power lines).
    - Channel savings to the budget via energy taxation or dividend payment from utility companies.
  - Optimal policy may mix options depending on trade-offs: short-term vs long-term gains, domestic absorption capacity to avoid excessive import leakages, and whether to reinvest, save, or use windfalls for debt reduction.

- Natural resource taxation and broader fiscal impact:
  - Rent taxation could be considered to capture economic gains from inexpensive renewable energy, supporting public investment, redistribution, fiscal buffers, and sustainable inclusive growth.
  - Broader fiscal impact depends on whether existing electricity generation has net positive or negative fiscal effects due to waning taxes on fossil fuels and subsidies/taxes on electricity use.
  - Assessment should factor reduced fossil fuel demand as electrification proceeds, tax rates on fossil fuels vs electricity, new taxation of low carbon electricity, and increased economic activity from lower electricity prices.

- Spatial, geographical, and human limits to economic diversification:
  - Renewable energy could spur diversification, but diversifying away from tourism is difficult for Caribbean islands; St. Kitts and Nevis’ convergence toward the US stopped in 2010.
  - Energy exports on a large scale present challenges: most renewable-linked exports are not direct electricity exports but trade in energy-intensive intermediary goods (e.g., aluminum sheet in Iceland, ammonia and methanol in Trinidad & Tobago), requiring heavy industrial bases with large land use and environmental implications.
  - Prospects for producing green hydrogen, ammonia, fertilizer, glass, cardboard, cement, special metallurgy (silica), and carbon capture and storage should be balanced against environmental footprint, financing modalities (to avoid risky debt build-up), and downstream local economic impact.
  - Exporting electricity to neighboring islands requires assessment given large investment needs; submarine power transmission cable cost estimates range between 2 and 5 million USD per kilometer. Distances: Dominica 263 km, Guadeloupe 179 km, US Virgin Islands 300 km, Puerto Rico 418 km.

- Potential “lower hanging fruits”:
  - Selling electricity to cruise ships anchoring overnight could be feasible given high cruise ship energy consumption and limited infrastructure needs to connect power lines to ships; this would reduce air pollution.
  - Cruise ship energy consumption can range between 5 and 10 megawatts; a port hosting up to 10 ships could see total power demand up to 100MW. St. Kitts’ Port authorities expect about 350 ships (hosting about 1 million passengers) will set anchor in Basseterre in total between April 24 and April 25.
  - Other avenues: powering water desalination plants with renewable energy; developing inter-island electric ferries and water taxis; developing a hub for short-haul electric airlines for island connections.
  - Service sector prospects: data centers (including AI services) are extremely energy intensive and may be attracted to cheap abundant renewable energy; IEA predicts global electricity demand from data centers, Artificial Intelligence and cryptocurrencies mining could double between 2022 and 2026.

- Electrification of other domestic energy uses:
  - Imported oil products in St. Kitts and Nevis: electricity generation accounts for about 55 percent of total oil imports, road transport roughly 30 percent, refueling of aircraft 6 percent, remainder by households and businesses.
  - Electrifying transport and other uses would enable surplus renewable electricity to further reduce oil imports. Policymakers could start by electrifying public vehicles such as buses and encourage household adoption of EVs using subsidies, tax breaks, or incentives such as free charging stations.
  - Desalination using reverse osmosis: energy and environmental costs are estimated at 4.0-4.5 kWh electric energy/m3 and 0.08-4.3 kg CO2/m3 of GHG emission.

*Source: 1knaea2024002 - 17. Abundant access to energy*

### References

### 1knaea2024002 - References

### Annex I. Estimation Methodology
- The Electricity Supply Channel
  - Growth impact from lower electricity cost estimated using Hulten (1978) growth accounting framework.
  - First-round effect approximated using d(log GDP) ≈ λi d(log Ai), where λi = Yi/GDP is the output-to-GDP ratio of the electricity production industry.
  - Electricity-output-to-GDP ratio estimated using St. Kitts and Nevis’s industry composition from national accounts and St. Lucia’s Supply-Use Table: 1.68 percent.
  - Assuming a 2/3 reduction in the cost of electricity generation, this gives an increase of GDP by 1.1 percent.
  - Footnote: The Supply-Use Table (SUT) of St. Lucia is used because the SUT for St. Kitts and Nevis is not available.

- The TFP Channel
  - Estimated using a difference-in-differences (DID) approach.
  - Data: labor productivity and TFP from Penn World Tables for 116 countries during 2000-2019.
  - Transformational cases: countries that increased renewable energy generation as a share of total energy generation by 10 percentage points or more over a five-year period.
  - Transition date: year when the five-year increase first passed 10 percentage point or more.
  - Outcome: compare country’s average TFP growth rate five years after transition to five years before transition.
  - Empirical specification (as in source):
    - ddTFP5years_c,t = α + β·Transition_c,t + γ·Controls_c,t−4 + τ_i + μ_c + ε_i,c
    - Variable of interest: Transition dummy equals 1 for the transition year.
    - Dependent variable: difference in average annual growth rate in labor productivity or TFP five years after minus five years before transition.
    - Controls include initial economic conditions: real GDP per capita (PPP) and level of labor productivity or TFP.
    - Country fixed effects and year fixed effects included; standard errors clustered by country.

### Annex II. Country Case Studies

- Box 1. Iceland
  - Energy system transformation
    - Before the 1970s: energy consumption primarily relied on fossil fuel and imported oil and coal.
    - Current: 100 percent of the electricity production and 100 percent of house heating provided by domestic, renewable resources from geothermal and hydroelectricity.
  - Sectoral impacts and statistics
    - Aluminum smelting
      - Aluminium products represent 40 percent of the country good exports.
      - Energy-intensive smelting benefited from abundant, stable, and affordable geothermal and hydropower; smelter investment accelerated in the 1990s and secured low electricity prices through PPAs.
    - Data centers
      - Iceland is home to 10 data centers.
      - Energy use by data centers: 200GWh in 2016 → 800GWh in 2019.
      - Data centers contributed to 5.3 percent of the Island GDP in 2023.
    - Aquaculture, fish processing, and greenhouse agriculture
      - Warm water from geothermal sources supports aquaculture and fish processing.
      - Geothermally heated greenhouses extend growing season and use electricity to produce light and heat.
    - Renewable energy technology and services
      - Expertise in geothermal exploration, development, and management has supported growth and exports of services related to renewable energy.

- Box 2. New Zealand
  - Renewable generation and consumption (as of 2022)
    - 87 percent of electricity generation from renewable sources.
    - About three quarters of renewable electricity generation from geothermal.
    - About one quarter from hydro and solid biofuels sources.
    - 30 percent of total energy consumption from renewable sources.
  - Usage and sectoral patterns
    - Geothermal primarily used for electricity generation; a small fraction of geothermal steam used for direct heat (drying paper or milk, residential/commercial heating).
    - Geothermal supports aquaculture and horticulture (heating glasshouses to reduce production costs for flowers and vegetables).
    - Electricity consumption increased following expansion of renewable supply, but sectoral shares of electricity consumption remained relatively stable (contrast with Iceland).

- Box 3. Kenya
  - Geothermal’s role and impacts
    - Geothermal accounts for approximately 30 percent of the country’s total electricity generation in 2020.
    - Other renewables and geothermal have brought the share of fossil fuel in power generation to 10 percent.
    - The integration of geothermal and other renewables reduced reliance on fossil fuels, reduced GHG emissions, and enhanced energy security.
    - Reliable and affordable electricity from geothermal has bolstered industrial productivity (stable power supply, reduced downtime, improved quality control).
    - Energy sector reforms and growth of renewables accompanied a steep increase in GDP per capita growth in Kenya: 5 times over in 20 years.
    - Anecdotal evidence links renewable adoption with higher production levels and cascading positive effects on employment and supply chains.

### Annex III. Potential for Carbon Capture in St. Kitts and Nevis

- CCS methods overview
  - Two CCS methods considered: point source capture (PSC) and direct air capture (DAC).
  - PSC: CO2 separated from flue gas or other exhaust of industrial plants; PSC can potentially capture more than 90 percent of CO2 from hydrogen production plant exhaust steams.
  - DAC: large volumes of air drawn into filter banks or cooling towers that chemically bind CO2; captured CO2 compressed, liquefied, transported by pipelines (or truck and railway for small quantities), and pumped more than a mile underground into geologic formations (saline or basalt formations, unmineable coal seams, organic shale, oil and natural gas reservoirs).

- Relevance for St. Kitts and Nevis
  - Renewable expansion (geothermal and solar) may produce more energy than domestic demand can absorb, improving economic feasibility of CCS.
  - 2022 emissions: St. Kitts and Nevis produced 102.1 percent of the total CO2 emissions it did in 2010 (falling far behind its climate goal of a 61 percent reduction in total CO2 emissions compared to 2010).
  - Small industrial base: manufacturing constituted 2.9 percent of GDP in 2023, which limits PSC potential relative to DAC.
  - DAC footprint and compatibility
    - Example: Iceland’s Orca plant covers less than 20,000 sq. ft. and captures up to 4,000 tons of CO2.
    - DAC plants are compatible with geothermal infrastructure planned in St. Kitts and Nevis.
    - Using geothermal infrastructure to inject captured CO2 into the geothermal reservoir is estimated to reduce costs by 23 percent on average.

- Carbon credit markets, costs, and constraints
  - Carbon credit price ranges
    - Voluntary carbon market large subscription packages: $600 to $1000 per tCO2.
    - Example: Climeworks sold credits to JPMorgan Chase for about $800 per ton in 2023.
    - Typical pricing on the open market: around $65-110 per tCO2.
  - DAC cost estimates and energy intensity
    - DAC plants estimated to sequester CO2 at $200-$700 per ton including capture, transport, and storage.
    - Energy demand of DAC: about 1.2 megawatt hours per ton of CO2 (likely less due to geothermal synergy).
  - Implementation risks and considerations
    - DAC projects have experienced delays and cost overruns in the past.
    - With the right price, selling carbon credits from DAC could be profitable for St. Kitts and Nevis, but sequestration cannot be double-counted for both national climate goals and sold credits.
    - DAC is noted as 2-  3 times cheaper than abatement of “residual emissions” that are uneconomical or technically infeasible to reduce (e.g., certain biofuel uses to reduce air travel’s carbon footprint).

*Source: 1knaea2024002 - References*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1knaea2024002.pdf_