## _wp1653 ## Source details **Canonical URL:** [_wp1653](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1653.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1653.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1653.pdf.json) --- ### I. Introduction — purpose, questions, and analytical scope - Purpose: assist Caribbean policymakers by defining macro-related challenges for energy sectors and assessing impact and feasibility of announced strategies. - Central policy questions: - How important is energy sector reform to growth and competitiveness? - Are existing energy sector strategies adequate? - What gains could be expected from implementing these strategies? - What are the investment costs of achieving announced energy targets? - Could countries afford envisaged reforms while preserving fiscal space and debt sustainability? - Empirical and analytical exercises undertaken: - Quantitative assessment of impact of energy costs on growth and the real effective exchange rate (REER), short and long run (Section III). - Stock-taking of national and regional energy strategies and assessment of announced targets and regulatory gaps (Section IV). - Estimation of cost of required energy investments (Section V.A), in collaboration with the IDB. - Evaluation of impact of investments on public debt sustainability through 2030, augmenting IMF’s public debt sustainability analysis framework, under public and private financing scenarios (Section V.B). - Discussion of prerequisites and safeguards for Public-Private Partnerships in the energy sector (Section VI). ### II. Current shortcomings and macro rationale for reform - Infrastructure, institutional and market shortcomings: - Electrification: above 90 percent electrification rates on average (World Bank indicators) except Haiti; Jamaica access 92 percent; low grid access in Guyana and St. Vincent and the Grenadines. - Limited generation capacity, outdated power systems, isolated grids, lack of technical expertise. - Electricity tariffs rose by almost 80 percent over 2002-2012, exceeding 0.30 US$/kWh for most countries in 2012. - Except Trinidad and Tobago, all Caribbean countries are net oil importers; for importers other than Suriname, around 87 percent of primary energy consumed is in the form of imported petroleum products. - Hydroelectric power supplies about 6 percent of regional electric energy consumption; biomass about 11 percent excluding Haiti (mostly Jamaica). - Significant technical and commercial losses: Guyana up to 20 percent of net generation; Jamaica 16 percent; notable operational inefficiency in ECCU members. - Market structure: mix of state-owned and private utilities; mostly vertically integrated monopolies; many utilities unable to finance investments. - Regulatory gaps: absence of adequately-staffed and independent national energy regulators in many countries; Dominica only ECCU country with independent regulator; ECERA pilot in Grenada and St. Lucia. - Pricing, subsidies and fiscal costs: - In 2011-2012, fuel costs accounted for around 70 percent of the average cost of electricity generation in oil-dependent countries. - Trinidad and Tobago: tariffs much lower and without fuel surcharge due to domestic natural gas; Suriname tariffs about US$0.08/kWh but estimated generation cost about US$0.16/kWh. - Fiscal burden examples: Trinidad and Tobago subsidies estimated at 2.7 percent of GDP (annual, 2011-2013); Guyana 3.0 percent of GDP; Suriname transfers estimated at around 2 percent of GDP in 2013. - Forgone tax revenue from excise and consumption taxes on fuel/electricity ranged 0.4–0.6 percent of GDP plus about 0.5 percent of GDP from electricity consumption taxes in Antigua and Barbuda, the Bahamas, Barbados, and Grenada over 2011-13. - Macro exposure to oil price movements: - Net oil-importing countries: average value of net oil imports doubled between 2005-2014; worsened trade/current account deficit by an average of 3.7 percent of GDP annually vs the previous decade. - In 2012, national electricity bill in the Caribbean represented on average 9 percent of GDP (compared to 2½ percent of GDP in the US). - Around 40 percent of Caribbean firms identify electricity costs as a major constraint to doing business. ### III. Empirical impacts of oil prices and energy efficiency on growth and competitiveness - Short-term VAR and FSGM findings: - Movements in real oil prices explain, on average, 7 percent of real GDP growth variation in the Caribbean (variation across countries: 15 percent in Dominica to less than 1 percent in Guyana). - A 10 percent increase in real oil prices: - reduces real GDP growth by about 0.5 percentage points over five years in tourism-intensive economies; - reduces real GDP growth by 0.01 percentage point over five years in commodity producers (except Trinidad and Tobago); - raises real GDP growth by 0.8 percentage points in Trinidad and Tobago over five years. - A 10 percent increase in oil prices could increase REER appreciation by 2.8 percentage points over five years in tourism-intensive economies and by 3.8 percentage points over five years in commodity producers. - External demand shocks explain a larger share of growth variation: about 30 percent on average. - FSGM produces a larger initial GDP drop for a 10 percent permanent oil price increase (−0.4 percentage point) versus the VAR initial decline (−0.1 percentage point), but FSGM result is within VAR confidence intervals. - Long-run AMG results on energy and growth: - Long-run elasticities (AMG estimator, sample of 11 countries, 1980-2011): - Energy Consumption Per Capita elasticity: 0.14 [0.046]. - Energy Efficiency elasticity: 0.20 [0.044]. - Gross Capital Formation Per Capita elasticity: 0.15 [0.068]. - Interpretation: - A 1 percent increase in energy consumption per capita increases GDP per capita by about 0.14 percent on average long run. - A 1 percent improvement in energy efficiency is associated with a 0.2 percent increase in GDP per capita in the long run. - A 1 percent increase in gross capital formation per capita associated with a 0.15 percent increase in long-run GDP per capita. - Short-run multipliers: - Public investment multiplier estimated at about 0.37 after four quarters (from earlier Fund work). ### IV. National and regional strategies, targets, and expected macro effects - Regional targets (C-SERMS-Phase I): - Energy efficiency: 33 percent reduction in energy intensity by 2027. - Renewable power generation capacity: 20 percent by 2017 (about 15 percent then), 28 percent by 2022, and 47 percent by 2027. - CO2 emissions reductions: 18 percent by 2017, 32 percent by 2022, and 46 percent by 2027. - Selected national energy efficiency targets and implied effects (from reported tables and figures): - Antigua and Barbuda — Effective Efficiency Target 20% — Implied reduction in oil imports 10% — Implied reduction in the national electricity bill 6% — Implied impact on long-term GDP level 1%. - Jamaica — Effective Efficiency Target 20% — Implied reduction in oil imports 5% — Implied reduction in the national electricity bill 4% — Implied impact on long-term GDP level 0%. - Barbados — Effective Efficiency Target 29% — Implied reduction in oil imports 13% — Implied reduction in the national electricity bill 6% — Implied impact on long-term GDP level 1%. - The Bahamas — Effective Efficiency Target 30% — Implied reduction in oil imports 17% — Implied reduction in the national electricity bill 11% — Implied impact on long-term GDP level 1%. - St. Lucia — Effective Efficiency Target 35% — Implied reduction in oil imports 22% — Implied reduction in the national electricity bill 11% — Implied impact on long-term GDP level 1%. - Belize — Effective Efficiency Target 89% — Implied reduction in oil imports 25% — Implied reduction in national electricity bill 10% — Implied impact on long-term GDP level 1%. - Guyana — Effective Efficiency Target 90% — Implied reduction in oil imports 28% — Implied reduction in national electricity bill 21% — Implied impact on long-term GDP level 2%. - Dominica — Effective Efficiency Target 100% — Implied reduction in oil imports 45% — Implied reduction in national electricity bill 16% — Implied impact on long-term GDP level 2%. - Grenada — Effective Efficiency Target 100% — Implied reduction in oil imports 49% — Implied reduction in national electricity bill 31% — Implied impact on long-term GDP level 3%. - Selected national renewable energy targets and implied effects (from reported tables and figures): - Antigua and Barbuda — Renewable Energy Target for Electricity: 20% — Implied reduction in oil imports 20% — Implied reduction in the national electricity bill 13% — Implied impact on long-term GDP level 4%. - Barbados — Renewable Energy Target for Electricity: 12% — Implied reduction in oil imports 11% — Implied reduction in the national electricity bill 9% — Implied impact on long-term GDP level 2%. - Belize — Renewable Energy Target for Electricity: 3/30% — Implied reduction in oil imports 20% — Implied reduction in the national electricity bill 1% — Implied impact on long-term GDP level 6%. - Jamaica — Renewable Energy Target for Electricity: 71% — Implied reduction in oil imports 69% — Implied reduction in the national electricity bill 31% — Implied impact on long-term GDP level 14%. - Dominica — Renewable Energy Target for Electricity: 1% — Implied reduction in oil imports 1% — Implied reduction in the national electricity bill 1% — Implied impact on long-term GDP level 0%. - St. Kitts and Nevis — Renewable Energy Target for Electricity: 12% — Implied reduction in oil imports 11% — Implied reduction in the national electricity bill 8% — Implied impact on long-term GDP level 2%. - Summary statement on targets: - Meeting national targets could yield important savings in fuel imports and the national electricity bill and positive effects on long-run GDP, but announced targets are ambitious and often lack specified investment magnitudes and financing sources. ### V. Investment needs, costings, and self-financing potential (IDB-based estimates) - Aggregate investment needs: - IDB-based estimates indicate total energy sector investment requirements amount to about 7 percent of regional GDP. - Investment scope and examples: - Expanding/upgrading plants, introducing renewable sources (geothermal, solar, wind, hydro), implementing energy-efficiency initiatives (solar water heating, smart street lighting), and reducing technical losses. - Antigua and Barbuda: estimates for installing 10MW solar PV and staff estimates for 11MW wind to meet 20 percent target by 2020. - ECCU focus: geothermal development including testing, full exploration and 10MW geothermal plants. - Investment needs as share of GDP and regional variation: - ECCU countries: investment needs average about 9.8 percent of GDP (driven largely by geothermal costs). - Self-financing potential and required cost reductions: - IDB-costed plans target technologies expected to generate cost savings; Table 7 in source shows minimum cost reductions required for economic viability under amortization periods (15 to 30 years). - Staff base case: 20-year amortization schedule, loan interest 5 percent. - Financing scenarios modeled (versus baseline): - Scenario 1: public sector finances 100 percent of investment. - Assumptions: 20-year commercial loan, disbursed over three years (2016-2018), 3-year grace period, average interest rate 5 percent. - Scenario 2: private sector finances 80 percent; public sector provides equity tranche and limited infrastructure; public share financed on same terms as Scenario 1. - Efficiency and macro impact assumptions: - Net of debt service, estimated average cost savings from planned energy investments could improve operational efficiency by more than 25 percent through 2038. - ECCU under baseline energy price projections (2019-2038) efficiency gains average 19 percent. - Introducing natural gas in viable countries yields average cost savings about 35 percent of recent utilities’ operating costs under baseline U.S. EIA projections. - Countries with significant hydroelectric capacity (e.g., Belize and Suriname) will enjoy lower energy costs. ### VI. Debt sustainability implications and augmented debt dynamics framework - Augmented debt dynamics equation incorporates impacts of energy investments on debt service, growth, and the public sector primary balance using variables and parameters including: - d, ī, i*, α, θ, φ, π, s, μ, ρ, ζ, and λ (public sector share in financing). - Key modeling outcomes: - Magnitude of proposed energy investments did not materially alter public debt trajectories in most countries modeled; public financing raises debt-to-GDP in medium term but growth and cost-recovery can offset over long run. - Private sector financing (Scenario 2) produces lower debt-to-GDP paths compared to baseline in all modeled countries, conditional on private developers passing a measurable share of cost savings to end users. - If private partners retain bulk cost savings, growth dividends and public debt improvement may be limited. - Outcomes sensitive to public investment efficiency and private financing costs; cost overruns or high private risk premia worsen fiscal outcomes. - Tariff setting and collection rates critical: tariffs should cover operating expenses including debt service; low collection or administrative limits on tariffs can prevent projects from being self-financing. - Country groupings and implications: 1. Lower initial debt load and sustainable debt dynamics — can undertake investments without weakening sustainability (examples: Bahamas, St. Kitts and Nevis; projections show debt-to-GDP below 70 percent through 2030 under baseline and public investment scenarios). 2. High public debt load and unsustainable dynamics — not well-positioned to finance investments publicly; private financing recommended (examples: Dominica, St. Lucia, Barbados). 3. Countries undergoing adjustment — may finance high-yielding investments under strong conditions (example: Jamaica; investments estimated at 6.2 percent of GDP). - Fiscal risk and balance-of-payments: - Even with private financing, countries may accrue balance-of-payments benefits via reduced fuel import costs. - Fiscal contingent liabilities from PPPs and PPAs require management; hidden costs and guarantees can create fiscal burdens if not properly structured and disclosed. ### VII. Public-Private Partnerships (PPPs) in the power sector — institutional and legal prerequisites - Key elements for successful PPPs: - Predictable, low-risk policy and regulatory environment with level playing field. - Clearly-defined energy sector strategy and standard guidelines on PPAs. - Accommodating legal framework: dedicated energy law, recognition of renewable resources, clear permits/licenses, clarity on tariff-setting and regulator powers. - Sufficient institutional capacity and human resources for PPP project lifecycle. - Lenders’ core requirements: - Creditworthy private partner, equity backing, experienced management, proven technology, creditworthy executing contractor, ample renewable resource (for renewables), and financial projections with strong cash flows. - Regional institutional examples: - Jamaica and Trinidad & Tobago: PPP policy frameworks, selection criteria, institutional processes, oversight committees and operational PPP units. - PPP risks and safeguards: - Risks: lax selection standards, lack of transparency/competition, inadequate risk sharing, projects exposed to weather and demand evolution risks, poor execution, insufficient maintenance incentives. - Fiscal contingencies arise from implicit guarantees, minimum demand guarantees, or contract termination liabilities. - Case study: Renewable Energy Procurement in Jamaica (Box 3) - OUR tender 2013 to procure 80 MW renewable capacity: - 28 bids submitted; three winners selected: Blue Mountain Renewables (36 MW wind), WRB Enterprises (20 MW solar), Wigton Wind Farm (24 MW wind). - Process viewed as fair and transparent; lessons include well-designed PPAs, streamlined permit processes, and clear allocation of generator/distributor responsibilities. ### VIII. Policy recommendations and next steps - Core recommendations: - Pursue energy sector reforms to improve growth and competitiveness; energy efficiency and diversification reduce exposure to oil-price shocks and improve long-run GDP. - Strengthen regulatory frameworks: clear licensing for IPPs; introduce feed-in tariffs and net billing schemes with cost recovery; establish independent energy regulators with capacity. - Set and enforce national energy efficiency standards: energy labeling, appliance standards, energy-efficient building codes, and targeted fiscal incentives where cost-effective. - Promote private financing for high upfront capital projects, leveraging PPPs while ensuring risk sharing, competitive procurement, and transparent fiscal reporting to limit contingent liabilities. - For countries with high debt vulnerabilities, prioritize private financing and ensure projects are bankable and do not exacerbate debt sustainability. - International coordination: - Use the C-SERMS Platform and IFI coordination to develop, track and meet national and regional targets, promote regulatory frameworks, and mobilize financing for bankable projects. - IMF will increase attention to energy policy in Article IV surveillance, monitor impacts on growth, investment costs, and public debt sustainability, and collaborate with authorities and IFIs to facilitate private sector investment. ### IX. Annex methodological highlights (short summaries) - ANNEX I — Short-term VAR analysis: - Country-specific VAR with block exogeneity: domestic block (real GDP growth, REER) and external block (real oil price growth, advanced economies’ real GDP growth, advanced economies’ real interest rate). - Sample annual data 1976-2013. External shocks account on average for 30 percent of GDP variation; real oil shocks explain on average 7 percent. - ANNEX I — FSGM WHDMOD module: - Multi-economy forward-looking model with consumption microfoundations (overlapping generations and liquidity-constrained households), Tobin’s Q investment, Phillips curves for inflation, and three commodities (oil, metals, food). - FSGM calibrated heterogeneity contributes to differences with VAR results. - ANNEX I — Long-term AMG estimator: - Panel co-integration via AMG to estimate GDP elasticity to energy consumption per capita, energy efficiency, and gross capital formation per capita. Sample 11 countries, observations 389; significance levels preserved. - ANNEX II — IDB-based cost-savings assessment: - Financing assumption: 20-year loan at 5 percent with 3-year grace period; plants operational by 2019; savings calculated through 2038 and 2019-2030 horizon. - Natural gas methodology: compare LCOE of natural gas vs distillate fuel oil using IDB cost estimates, U.S. EIA price projections, and Henry Hub benchmark (IDB base-case US$4.00/MMBTU); Belize imports 40 percent of generation from Mexico at estimated price US$0.12/kWh. - Geothermal methodology (ECCU): IDB cost estimates for 10MW plant (US$45 million); small-scale geothermal generation cost applied: 10 cents/kWh. - Antigua and Barbuda renewables: 10 MW solar PV cost US$20.5 million; 11 MW wind upfront capital cost about US$22 million; currently 99 percent generation from distillate fuel oil. - Fuel oil non-fuel costs (conventional turbines): 4.4 cents/kWh. - IDB investment aggregate example: Regasification Facilities and Infrastructure — TOTAL US$661.7 million, additional capital US$128.4 million, Total US$870.1 million (annex tables). *Source: _wp1653 - References.* ### References ............................................................................................................. ### _wp1653 - References ### I. Introduction - Purpose: assist Caribbean policymakers by defining macro-related challenges for energy sectors and assessing impact and feasibility of announced strategies. - Central policy questions addressed: - How important is energy sector reform to growth and competitiveness? - Are existing energy sector strategies adequate? - What gains could be expected from implementing these strategies? - What are the investment costs of achieving announced energy targets? - Could countries afford envisaged reforms while preserving fiscal space and debt sustainability? - Empirical and analytical exercises undertaken: - Quantitative assessment of impact of energy costs on growth and the real effective exchange rate (REER), short and long run (Section III). - Stock-taking of national and regional energy strategies and assessment of announced targets and regulatory gaps (Section IV). - Estimation of cost of required energy investments (Section V.A), in collaboration with the IDB. - Evaluation of impact of investments on public debt sustainability through 2030, augmenting IMF’s public debt sustainability analysis framework, under public and private financing scenarios (Section V.B). - Discussion of prerequisites and safeguards for Public-Private Partnerships in the energy sector (Section VI). ### II. The case for energy reform: shortcomings of the current situation - Key rationale: reform rests on (A) poor state of infrastructure and institutions causing high-cost inefficiencies and limiting diversification; and (B) large macro-impact of current energy bills despite the oil price decline. #### A. State of the Caribbean energy sector — supply of energy - Electrification: - Caribbean countries have, on average, above 90 percent electrification rates (World Bank indicators), except Haiti. - Jamaica: access to electricity reaches 92 percent of the population. - Grid access remains low in Guyana and St. Vincent and the Grenadines. - Common supply constraints: - Limited generation capacity, outdated power systems, isolated grids, lack of technical expertise, and episodes of high and volatile oil prices. - Electricity tariffs increased by almost 80 percent over 2002-2012, exceeding 0.30 US$/kWh for most countries in 2012. - Fuel dependence and generation mix: - Except for Trinidad and Tobago, all other Caribbean countries are net oil importers. - For importers other than Suriname, around 87 percent of primary energy consumed is in the form of imported petroleum products. - Hydroelectric power supplies about 6 percent of regional electric energy consumption. - Excluding Haiti, biomass represents around 11 percent of Caribbean energy supply, mostly concentrated in Jamaica. - Barbados has installed capacity that uses natural gas for electricity generation; Dominican Republic has natural gas-fired plants representing about 20 percent of installed generation capacity (Latin Caribbean). - Suriname is the second largest oil producer in the region after Trinidad and Tobago but remains a net importer of petroleum products due to limited refinery capacity. - System inefficiencies: - Heavy reliance on medium-speed/low-speed diesel or heavy fuel oil generators, constrained by age and technology. - Old grids with inadequate maintenance leading to significant technical and transmission losses. - Commercial losses (illegal connections) are significant. - Commercial losses examples: Guyana up to 20 percent of net generation; Jamaica 16 percent; Antigua and Barbuda and St. Kitts and Nevis significant operational inefficiency with highest system losses in the ECCU. - Market structure and regulation: - Electricity market served by a mix of state-owned and private utility companies; mostly vertically integrated monopolies. - Many utilities unable to finance necessary investments in generation and grid. - Absence of adequately-staffed and independent national energy regulators in many countries. In the ECCU, only Dominica has an independent national regulator; ECERA under pilot launch in Grenada and St. Lucia. - Pricing and subsidies: - Most utilities pass fuel costs to consumers through a flexible tariff structure incorporating a fuel surcharge. - In 2011-2012, fuel costs accounted for around 70 percent of the average cost of electricity generation in oil-dependent countries. - Exceptions: - Trinidad and Tobago: tariffs much lower and do not incorporate a fuel surcharge because T&TEC uses domestically produced natural gas. - Suriname: electricity tariffs of about US$0.08 per kWh are heavily subsidized and do not cover estimated generation costs of around US$0.16 per kWh. - Antigua and Barbuda: significant cross-subsidies exist between the public sector and the power utility. - Guyana and St. Vincent and the Grenadines: government subsidizes electricity for some social groups and government departments. #### B. Demand for energy - Consumption trends: - Caribbean energy consumption has been growing despite high prices. - Consumption has grown fastest in Trinidad and Tobago due to abundant natural gas, cheap electricity, and expansion of hydrocarbon industries. - Consumption in the smaller importers of the Eastern Caribbean almost tripled to reach 28.7 trillion BTU in 2012. - Jamaica: aggregate consumption of 3.0 billion kWh in 2012 (32 percent of total regional electricity consumption excluding Trinidad and Tobago). ### Tables and figures referenced (topics only) - Tables include: Electric Utility Companies in the Caribbean; Net Benefit to Caribbean Economies from a Decline in Oil Prices; Summary of Viable Renewable Energy Sources by Country; Implied Effects of Energy Efficiency Targets; Implied Effects of Renewable Energy Targets; Energy Sector Investment Needs in the Caribbean (2018-2023); Minimum Cost Reductions for Costed Energy Investments to be Self-Financing; Potential Cost Savings from Energy Investments under Alternative Scenarios for the Oil Price Outlook. - Figures include: The Caribbean: GDP, Capital, and Energy Consumption; Summary of Existing and Proposed Energy Policies in CARICOM States; Electric Power Efficiency in the Caribbean; National Energy Efficiency Targets and Implied Effects; Installed Capacity of Renewable Energy; Impact of Energy Investments on Debt Sustainability; PPP Investments in the Energy Sector; Organizational Responsibilities for PPPs in Jamaica. - Boxes include: Recent Developments in the Global Oil and Gas Market; Benchmarking the Results of the VAR to an Oil Price Shock; PPP Case Study—Renewable Energy Procurement in Jamaica. - Annexes: Annex I (Quantitative Assessment of Macro-effects of Oil prices and Energy consumption in the Caribbean); Annex II (Assessment of Potential Cost Savings from Introducing Natural Gas and Renewable Energy Technologies in the Caribbean). *Source: _wp1653 - References.* ### 13. Countries’ energy intensity depends on their economic structure. ### 13. Countries’ energy intensity depends on their economic structure. ### Energy intensity across country groups and sectors - Guyana appears to be the most energy-intensive country among commodity exporters; Barbados is the most energy-efficient country, consuming the least energy per unit of GDP. - Antigua and Barbuda is the least efficient country in the ECCU and in tourism-dependent economies. - On a per capita basis, tourism-dependent Caribbean economies appear more energy intensive than commodity-exporting countries like Belize, Guyana, Jamaica and Suriname; this largely reflects how much larger the tourist population is in tourism-dependent economies relative to their small indigenous population. - In tourism-based economies: - Commercial consumers (hotels and tourist establishments) absorb around 41 percent of ex-transportation primary energy. - Air conditioning accounts for almost half of hotel/tourism energy consumption. - Residential consumers are the second largest users. - In commodity-exporting countries: - The industrial sector is the largest energy consumer with a share of about 57 percent. - Example: in Jamaica, the bauxite industry is the single largest user of energy with a share of 37 percent; Jamaica’s sugar industry uses around 12 percent. ### Sectoral shares (region-wide) - Of total primary energy consumed in the region, around 36 percent is for transportation. - Power consumption by sector (In Percent of Total) — region-wide pattern (excludes Trinidad and Tobago and Haiti in the Caribbean aggregate): - Residential, Commercial, Industry, Public Sector (exact sectoral percentages are presented in source charts). ### Empirical indicators presented in source - Energy Consumption Per Unit of GDP, 2012 (Thousand BTU per 1 US$ of GDP, 2005 prices) — country-level comparisons in source charts (e.g., Guyana highest among commodity exporters; Barbados lowest). - Energy Consumption per Capita, 2012 (Million BTU per capita) — time series by group (Tourism-based countries 1/; Commodity Exporters 2/) shown in source charts. - Growth in Primary Energy Consumption in the Caribbean (In percent of 1980 consumption) — time-series by ECCU, Trinidad and Tobago, Other Caribbean shown in source charts. - Net Consumption of Electricity Per Year (In billion kWh) — country-level net consumption in 2012 and average annual growth rate (1980-2012) shown in source charts. ### Footnotes and group definitions (as in source) - Tourism-dependent countries include ECCU countries, the Bahamas, and Barbados. - Commodity exporters are those countries where at least 20 percent of total exports in 2008–2012 were natural resources, including agricultural commodities; these include Belize, Guyana, Jamaica, and Suriname. - In power consumption charts, Caribbean aggregate excludes Trinidad and Tobago and Haiti. --- ### B. The Macro-Impact of Energy Costs ### High dependence on imported oil and macroeconomic exposure - The region’s dependence on imported fossil fuels has exposed it to adverse oil market developments, producing significant negative terms of trade shocks and fiscal costs. ### External balances and the energy bill - In net oil-importing countries, the average value of net oil imports doubled between 2005-2014, reflecting worsening terms of trade. - This widened the trade and current account deficit by an average of 3.7 percent of GDP annually, compared to the previous decade, and put pressure on foreign exchange reserves. - In 2012, the national electricity bill in the Caribbean represented, on average, 9 percent of countries’ GDP, compared to 2½ percent of GDP in the US. - Around 40 percent of Caribbean firms identify electricity costs as a major constraint to doing business (higher than the average of LA6 and other developing countries). ### Impact on domestic economy and investment - The energy bill has absorbed a growing share of households’ discretionary income, reducing consumption spending in other sectors. - Electricity costs have increased uncertainty of investment planning, with unfavorable repercussions for capital formation, the inflow of FDI, and long-term growth. ### Inflation and real exchange rate dynamics - Fixed exchange rate regimes in many countries (Barbados, the Bahamas, Belize and the Eastern Caribbean states) limit exchange rate adjustment to oil price shocks. - Large and persistent inflationary shocks from pass-through of higher fuel prices lead to real exchange rate appreciation and a difficult-to-reverse loss of competitiveness. - Tourism, a mainstay of many Caribbean economies, is exposed to oil price shocks via lower tourism receipts and higher airfare costs, encouraging substitution to closer tourist destinations. - Empirical points from source: - The real effective exchange rate is significantly correlated with the lagged oil price (0.7 in 2006-2014), except in Grenada, Dominica and Belize. - In the ECCU (with a fixed exchange rate), core inflation peaked at 4.7 percent y/y in November 2008 after oil prices surged to US$145 per barrel in July 2008. - In Jamaica, headline and core inflation reached 25.6 percent y/y and 15.8 percent y/y, respectively, in July 2008. - In Suriname, a 70 percent fuel tax increase in January 2011 and a 20 percent devaluation of the official exchange rate led to an increase of about 40 percent in fuel prices at the pump. ### Pass-through and core inflation - Oil price increases directly impact headline inflation through higher electricity (a fuel surcharge) and higher transportation costs; some energy price movement filters into core inflation and affects competitiveness. - Charts in the source show the relationship between energy price volatility and core inflation for the ECCU and for Jamaica and Suriname. ### Fiscal costs of subsidies and tariff settings - Fuel and electricity prices in Trinidad and Tobago and Guyana have been heavily subsidized with an estimated annual fiscal burden of 2.7 percent and 3.0 of GDP, respectively, over 2011-2013. - In Suriname, below-cost electricity tariffs are facilitated through cross-subsidies and transfers estimated at around 2 percent of GDP in 2013. - In Antigua and Barbuda, the Bahamas, Barbados, and Grenada, forgone tax revenue ranged from 0.4 to 0.6 percent of GDP from excise taxes on fuel and an average of another 0.5 percent of GDP from consumption taxes on electricity over 2011-13. - On the expenditure side, higher prices have increased spending on the public sector’s own consumption of energy, leading in some cases (e.g., St. Kitts and Nevis) to significant arrears to the electric utility. ### Disincentives to reform and PetroCaribe effects - Infrastructure energy projects are costly and often irreversible, which has led governments to delay transitions to technologies that generate affordable and efficient power because of perceived investment risks. - The availability of concessional oil financing under PetroCaribe Energy Cooperation Agreements has prolonged oil dependence by discouraging diversification into alternative fuels and increased vulnerability to sudden stops of these inflows. - Recent lower oil prices will substantially improve oil trade deficits of oil importing countries by an average of 3 percent of GDP in 2015. - PetroCaribe financing is expected to decline by nearly 1 percent of GDP in 2015, partially offsetting gains from lower oil prices. - The projected decline in PetroCaribe financing implies the need for replacement financing or adjustment estimated at around 0.7 percent of GDP on average in 2015 for countries where information is available. ### Table excerpt (Net Benefit to Caribbean Economies from a Decline in Oil Prices — Percent of GDP) — selected entries from source - Antigua and Barbuda: Decrease in Oil Trade Deficit (A) = 5.1; Decline in PetroCaribe Financing (B) = 1.3; Improvement in External Position (A-B) = 3.8; Improvement in External Position (other entry) = 3.1 - Belize: A = 2.4; B = 2.4; A-B = 0.0; other = -1.0 - Dominica: A = 2.2; B = 0.4; A-B = 1.8; other = 0.6 - Dominican Rep.: A = 2.3; B = 0.4; A-B = 1.9; other = 1.5 - Grenada: A = 3.1; B = 0.8; A-B = 2.3; other = 1.7 - Guyana: A = 8.6; B = 1.6; A-B = 7.0; other = 3.9 - Haiti: A = 4.1; B = 1.8; A-B = 2.3; other = 0.0 - Jamaica: A = 4.0; B = 1.3; A-B = 2.7; other = 1.5 - Nicaragua: A = 4.0; B = 1.8; A-B = 2.2; other = -0.3 - St. Kitts and Nevis: A = 1.9; B = 0.7; A-B = 1.2; other = 0.5 - St. Lucia: A = 1.5; B = 0.0; A-B = 1.5; other = 1.5 - St. Vincent and the Gren.: A = 1.8; B = 0.7; A-B = 1.1; other = 0.4 - Suriname: A = 5.0; B = 0.0; A-B = 5.0; other = 5.0 - Average: A = 3.5; B = 1.0; A-B = 2.5; other = 1.4 ### Box 1 — Recent Developments in the Global Oil and Gas Market (key points) - Sharp price declines since mid-2014 have eased pressures on external accounts of most oil-importing countries in the Caribbean, but may weaken near-term incentives for energy sector reforms; outlook remains highly uncertain with some rebound expected. - World oil price history highlights: - WTI averaged US$20 per barrel over 1990-2000; peaked at US$145 in July 2008; fell to US$33 in December 2008. - Prices recovered to over US$100 by early 2011. - Prices plunged nearly 50 percent through January 2015 from mid-2014 levels. - Average about $45/barrel ($55/barrel for Brent) in August 2015 noted in source. - Other fuel prices: - Diesel fuel prices dropped by around 30 percent as of end-June 2015. - Natural gas prices declined by around 45 percent; average fell to US$2.8/MMBtu thereafter (source note). - Factors behind price decline include slower world growth, increased supply from shale producers in North America, OPEC’s November 2014 decision to maintain production levels, long-term efficiency gains, greater reliance on renewables, and geopolitical developments. - Short-term downward pressure expected to persist from unconventional extraction; medium-term partial rebound expected as global demand rises, but prices likely remain below 2011-2014 levels. --- ### III. IMPACT OF ENERGY COSTS ON GROWTH: HOW IMPORTANT? ### Purpose and methodology overview - Policymakers need indicators of potential gains from energy sector reforms. - The section assesses how energy costs influence macroeconomic outcomes in Caribbean economies by: - (A) modeling the impact of oil price shocks on near-term growth and the real exchange rate; and - (B) assessing the potential for improving the efficiency of the power sector to deliver higher long-run sustainable growth. - The paper follows two distinct approaches: - Estimate the impact of oil prices (and hence the energy bill) on growth in the short and medium term. - Estimate the impact of energy savings on the economy in the long run. ### Framing the quantitative exercise - The analysis is intended to quantify short-, medium- and long-run impacts of energy costs on growth to inform whether energy sector reform is worthwhile. *Source: IMF staff analysis in content unit titled "13. Countries’ energy intensity depends on their economic structure."* ### 22. Changes in real oil prices have an important short-term impact on growth, ### 22. Changes in real oil prices have an important short-term impact on growth, although other factors dominate. ### Impact of oil price movements on growth - Staff estimates: movements in real oil prices explain, on average, 7 percent of real GDP growth variation in the Caribbean. - Variation across countries: 15 percent in Dominica to less than 1 percent in Guyana. - A greater share of real growth variation (30 percent) is explained by external demand shocks. - A 10 percent increase in real oil prices: - Reduces real GDP growth by about 0.5 percentage points over five years in tourism-intensive economies. - Reduces real GDP growth by 0.01 percentage point over five years in commodity producers (except Trinidad and Tobago). - Raises real GDP growth by 0.8 percentage points in Trinidad and Tobago (an oil exporter) over five years. - Comparison to alternative model: - The IMF’s Flexible System of Global Models (FSGM) predicts a larger initial drop in GDP growth (−0.4 percentage point) from a 10 percent permanent oil price increase versus the VAR’s initial decline (−0.1 percentage point). - The FSGM result falls within the VAR’s confidence interval. ### Oil prices and competitiveness (REER effects) - Staff estimates: a 10 percent increase in oil prices could increase the REER appreciation rate (i.e., reduce competitiveness) by: - 2.8 percentage points over five years in tourism-intensive economies. - 3.8 percentage points over five years in commodity producers. ### Long-run role of energy consumption and efficiency - Long-run quantitative estimates (AMG estimator): - A 1 percent increase in energy consumption per capita could increase GDP per capita by about 0.14 percent points on average. - A 1 percent improvement in energy efficiency would be accompanied by an increase in GDP per capita by 0.2 percent in the long run. - A 1 percent increase in gross capital formation per capita is associated with a 0.15 percent increase in long-run GDP per capita. - Interpretation: - Output per capita is strongly positively correlated with both capital stock per capita and energy consumption per capita. - Because growth typically requires more energy, containing the burden of the energy bill requires improving energy efficiency (defined as reducing primary energy consumption per unit of GDP). ### Benchmarks and explanations for model differences (Box 2) - Benchmark exercise: simulate a 10 percent permanent increase in oil prices in the Western Hemisphere module of the IMF’s FSGM (group including Bahamas, Barbados, Belize, Jamaica, Antigua and Barbuda, Grenada, Guyana, Haiti, St. Lucia, St. Vincent and the Grenadines, and Suriname). - Three likely explanations why FSGM shows larger GDP drop than VAR: - FSGM calibration not tailored to tourism-based economies; manufacturing sector response (more energy-responsive) drives larger output decline, while tourism energy use is more inelastic. - Loss absorption by state-owned Caribbean utilities: state-owned utilities in some countries partially absorb oil price shocks in their balance sheets, cushioning household consumption adjustments and reducing GDP response; this channel does not operate where utilities are privately owned. - Positive external demand shocks in the 2000s may have offset adverse oil price impacts; idiosyncratically large inflows (FDI, tourism receipts) may have mitigated the effect of rising oil prices during 2002–2008. ### Stocktaking of existing energy strategies and expected macroeconomic impact - Regional coordination: - CARICOM approved a regional energy policy (CEP) aligned with national policies, with objectives including increased energy efficiency and conservation, labeling and standards for electrical appliances and vehicles, and accelerated deployment of renewable and clean energy. - The Caribbean Sustainable Energy Roadmap and Strategy (C-SERMS-Phase I) set regional targets: - Energy efficiency: 33 percent reduction in energy intensity by 2027. - Renewable power generation capacity: 20 percent by 2017 (currently at about 15 percent), 28 percent by 2022, and 47 percent by 2027. - CO2 emissions reductions: 18 percent by 2017, 32 percent by 2022, and 46 percent by 2027. - Regulatory reforms (priority actions): - Address regulatory gaps for Independent Power Producers (IPPs): establish clear licensing frameworks and rules for selling to the grid. - Facilitate licensing procedures and introduce feed-in tariffs and net billing schemes with adequate cost recovery mechanisms. - Net metering has been introduced in Barbados, Grenada, Jamaica, and St. Lucia. - Create independent national and/or regional regulators to provide predictable, transparent frameworks for investors; pilot launch of the Eastern Caribbean Energy Regulatory Authority (ECERA) in Grenada and St. Lucia supported by US$5.6 million in World Bank IDA credit facilities. - Improving energy efficiency (short- and medium-term focus): - Generation-side: reduce technical losses by replacing old and inefficient power plants and transmission/distribution lines. - Consumption-side: improve energy consumption patterns of heavy users; example: air conditioning accounts for 48 percent of total electric consumption by hotels (study in Barbados). - Adoption of energy-efficient technologies (e.g., smart window technology) can materially reduce overall energy consumption and improve tourism competitiveness. - Limiting commercial losses (unmetered electricity consumption) would improve price signaling and reduce energy intensity. *Source: IMF staff analysis in the provided chapter on oil prices, energy efficiency, and Caribbean macroeconomic implications.* ### 33. Despite the potential gains from energy efficiency, the region has not taken decisive ### _wp1653 - 33. Despite the potential gains from energy efficiency, the region has not taken decisive ### Energy efficiency: policy gaps and recommended focus areas - Policies to promote efficiency improvements should focus on: - (i) encouraging households and businesses to buy energy efficient appliances; - (ii) energy-efficient building codes; particularly for hotels; and - (iii) energy labeling for consumer goods and appliance efficiency standards to encourage the use of energy efficient items. - Adoption constraints cited: limited financing, weaknesses in institutional capacity, and insufficient expertise on labels and standards. - Figure (Breakdown of Electricity Consumption in Barbados Hotels, 2013) component shares: - Air Conditioning, 48.2 - Lighting, 11.5 - Guestroom Equipment, 7.4 - Kitchen and Refrigeration Equipment, 10.6 - General Equipment, 5.4 - Hot Water & Laundry, 5.5 - Pool Pumps, 7.4 - Other, 3.9 ### Building codes and enforcement - Energy efficiency has not yet been addressed in Caribbean building codes; codes focus on safety and minimizing damage from hazards and natural disasters (fires, hurricanes, earthquakes). - Organization of American States’ study (2010-11) emphasized enforcement of building codes as an opportunity to improve energy efficiency because, based on US data, energy use in buildings typically accounts for one-third of all types of energy and two thirds of all electricity. ### Fiscal incentives and energy audits - Existing fiscal incentives: - Guyana: tax exemptions to encourage efficient lighting. - Trinidad and Tobago: a tax allowance of 150 percent granted to commercial and industrial enterprises for expenditure on energy savings systems. - No incentives currently to encourage businesses, particularly hotels, to conduct energy audits. - Caution: fiscal incentives can increase budget pressures and may generate many “free-riders”—consumers and businesses who would have purchased efficiency measures even without the tax incentive. - Net benefit of incentives needs careful assessment to ensure cost-effectiveness. ### Energy efficiency cost curve and commercial viability - IDB energy efficiency cost curve identifies commercially and economically viable strategies (examples include compact fluorescent lamps, power monitors, and efficient window and split air conditioning systems). - Tariff threshold for commercial viability indicated: at tariff rates of US$0.32/kWh or above, all energy-efficient technologies in the chart would be commercially viable. - Statement: Eight energy-efficient technologies would be economically viable at average generation costs of US$0.20/kWh. - Energy Efficiency Cost Curve (example technologies with cost per kWh shown visually in source; preserved thresholds noted above). ### National energy efficiency targets and implied macroeconomic effects (selected highlights) - If Antigua and Barbuda meets its target of improving overall energy efficiency in the economy by 20 percent: - implied 20 percent drop in oil imports; - implied 13 percent decline in the national energy bill; - long-run cumulative increase of 4 percent in the level of GDP over the long-run. - Overview of announced targets (selected entries from Figure 4): - Haiti: Achieve 36% of households using improved cooking stoves by 2015 - Jamaica: Reduce energy intensity from 22 million to 6.3 million joules per USD of GDP by 2030 - Trinidad and Tobago: No target currently exists; however, a 150% tax allowance is granted to commercial and industrial enterprises that achieve a target % of energy efficiency improvement (target currently being determined) - St. Lucia: Reduce public sector electricity consumption 20% by 2020 - St. Kitts and Nevis: Reduce projected electricity demand 20% by 2015 (resulting in peak demand of 45.7 MW) - Barbados: Reduce electricity consumption 22% compared to business-as-usual by 2029 - Belize: Improve energy efficiency and conservation by at least 30% by 2033 (suggested) - Table 4. Implied Effects of Energy Efficiency Targets (selected rows): - Antigua and Barbuda — Effective Efficiency Target 20% — Implied reduction in oil imports 10% — Implied reduction in the national electricity bill 6% — Implied impact on long-term GDP level 1% - Jamaica — Effective Efficiency Target 20% — Implied reduction in oil imports 5% — Implied reduction in the national electricity bill 4% — Implied impact on long-term GDP level 0% - Barbados — Effective Efficiency Target 29% — Implied reduction in oil imports 13% — Implied reduction in the national electricity bill 6% — Implied impact on long-term GDP level 1% - The Bahamas — Effective Efficiency Target 30% — Implied reduction in oil imports 17% — Implied reduction in the national electricity bill 11% — Implied impact on long-term GDP level 1% - St. Lucia — Effective Efficiency Target 35% — Implied reduction in oil imports 22% — Implied reduction in the national electricity bill 11% — Implied impact on long-term GDP level 1% - Belize 3/ — Effective Efficiency Target 89% — Implied reduction in oil imports 25% — Implied reduction in national electricity bill 10% — Implied impact on long-term GDP level 1% - Guyana — Effective Efficiency Target 90% — Implied reduction in oil imports 28% — Implied reduction in national electricity bill 21% — Implied impact on long-term GDP level 2% - Dominica — Effective Efficiency Target 100% — Implied reduction in oil imports 45% — Implied reduction in national electricity bill 16% — Implied impact on long-term GDP level 2% - Grenada — Effective Efficiency Target 100% — Implied reduction in oil imports 49% — Implied reduction in national electricity bill 31% — Implied impact on long-term GDP level 3% - Notes on Table 4: - 1/ Announced efficiency targets are normalized to a common base including the transport sector. - 2/ Savings in the energy bill of end-users from introducing energy efficient technologies at an average cost of US$0.13/kWh. - 3/ Impact on the national electricity bill in Belize reflects smaller savings where the electricity tariff rate is relatively low. ### Diversifying the generation mix: current renewables and potential - Installed renewable power capacity varies across CARICOM states; hydropower is the majority of installed renewable capacity, while biomass, wind, and solar are increasingly deployed. - Table 3 (summary of viable renewable energy sources by country) — selected country checkmarks preserved as presented: - Antigua and Barbuda — Solar:  - Dominica — Solar: ; Wind: ; Geothermal: ; Hydro:  - St. Kitts and Nevis — Solar: ; Wind: ; Geothermal:  - Jamaica — Solar: ; Wind:  - Suriname — Solar:  - Renewable generation cost context: - Estimates from U.S. Energy Information Agency and IRENA show many renewable energy technologies have generation costs of US$0.20/kWh or less and appear economically viable. - Renewable Energy Cost Curve indicators (selected cost levels noted in source visuals): - Solar PV (Small-scale) around 0.30 (USD per kWh) - Solar Thermal around 0.21 - Wind (Offshore) around 0.18 - Solar PV (Utility-scale) around 0.16 - Geothermal (10MW) around 0.10 - Biomass around 0.09 - Wind (Onshore) around 0.08 - Hydroelectric around 0.07 - Geothermal (100 MW) around 0.06 - National renewable energy targets (selected entries from Figure 6 overview): - Antigua and Barbuda — 100% by 2020 - The Bahamas — 25% by 2010, 100% through the addition of geothermal by 2020 - Barbados — 15% by 2030 - Belize — 20% by 2020 - Dominica — 30% by 2030 - Grenada — 15% by 2020; 30% by 2030 (other island targets and 100% by 2030 noted) - Jamaica — 20% by 2030 - St. Kitts and Nevis — 5% of peak demand (or 60 MW) by 2020; target averaged with Nevis where Nevis target is 100% by 2010 (Nevis) - Table 5. Implied Effects of Renewable Energy Targets (selected rows): - Antigua and Barbuda — Renewable Energy Target for Electricity: 20% — Implied reduction in oil imports 20% — Implied reduction in the national electricity bill 13% — Implied impact on long-term GDP level 4% - Barbados — Renewable Energy Target for Electricity: 12% — Implied reduction in oil imports 11% — Implied reduction in the national electricity bill 9% — Implied impact on long-term GDP level 2% - Belize — Renewable Energy Target for Electricity: 3/30% — Implied reduction in oil imports 20% — Implied reduction in the national electricity bill 1% — Implied impact on long-term GDP level 6% - Jamaica — Renewable Energy Target for Electricity: 71% — Implied reduction in oil imports 69% — Implied reduction in the national electricity bill 31% — Implied impact on long-term GDP level 14% - Dominica — Renewable Energy Target for Electricity: 1% — Implied reduction in oil imports 1% — Implied reduction in the national electricity bill 1% — Implied impact on long-term GDP level 0% - St. Kitts and Nevis — Renewable Energy Target for Electricity: 12% — Implied reduction in oil imports 11% — Implied reduction in the national electricity bill 8% — Implied impact on long-term GDP level 2% - Notes on Table 5: - 1/ Reflects impact of achieving the renewable target using viable renewable power technologies, up from existing penetration rate. - 2/ Assumes a 100 percent pass-through of cost savings from renewable energy technologies to end-users. - 3/ For St. Kitts and Nevis the 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. ### Potential macroeconomic gains from meeting specified targets - Summary statement: Potential gains from pursuing specified energy strategies are substantial; meeting national targets could yield important savings in fuel imports and the national electricity bill and positive effects on long-run GDP. - Selected country-level implied effects (from combined tables): - Antigua and Barbuda — Implied reduction in oil imports 20% — Implied reduction in the national electricity bill 10% — Implied impact on long-term GDP level 6% (table combined context) - Jamaica — Implied reduction in oil imports 20% — Implied reduction in the national electricity bill 5% — Implied impact on long-term GDP level 4% - Barbados — Implied reduction in oil imports 29% — Implied reduction in the national electricity bill 13% — Implied impact on long-term GDP level 6% - The Bahamas — Implied reduction in oil imports 30% — Implied reduction in the national electricity bill 17% — Implied impact on long-term GDP level 11% - Guyana — Implied reduction in oil imports 90% — Implied reduction in the national electricity bill 28% — Implied impact on long-term GDP level 21% - Dominica — Implied reduction in oil imports 100% — Implied reduction in the national electricity bill 45% — Implied impact on long-term GDP level 16% - Grenada — Implied reduction in oil imports 100% — Implied reduction in the national electricity bill 49% — Implied impact on long-term GDP level 31% ### Investment needs and fiscal implications (introductory) - Energy sector transformation requires significant upfront investments to implement renewable energy and energy-efficiency technologies. - With IDB support, staff estimated the investment envelope needed to implement the energy strategies specified by Caribbean countries. - Public sector financing constraints noted: limited fiscal space and high debt burden in many Caribbean economies. - Subsequent analysis (section V) examines implications for public debt sustainability under different financing scenarios, including formalizing public sector financing of energy investments in a debt-dynamics equation. *Italic: Source — Excerpt from the IMF working paper content unit provided in the input.* ### 44. National and regional energy strategies imply a need for investments to achieve ### National and regional energy strategies imply a need for investments to achieve their announced targets ### Energy investment needs and scope - National and regional energy strategies identify significant upfront capital investments but do not quantify their cost. - Most renewable and energy efficiency initiatives in the C-SERMS framework involve significant upfront capital investments beyond the financing capabilities of most electric utilities in the region. - Significant investment is needed to upgrade existing power infrastructure, reduce technical losses and ensure system integrity amid growing electricity demand. - IDB-based estimates suggest that total energy sector investment requirements amount to about 7 percent of regional GDP. - IDB-costed investments cover: - expanding and upgrading existing power plants to meet growing demand, improve generation efficiency and reduce system losses; - introducing renewable energy sources like geothermal, solar, wind and hydro power where viable; - implementing energy efficiency initiatives, including solar water heating systems and smart street lighting. - Specific project sizing and country examples: - Antigua and Barbuda: cost estimates based on existing plans for installing 10MW of solar PV panels and staff estimates for 11MW of wind power technology, consistent with achieving the country’s 2020 target of 20 percent renewable power penetration. - In the ECCU, where introducing natural gas is less feasible, IDB estimates focus on developing geothermal power, including preliminary testing, full exploration and 10MW geothermal plant development. ### Investment needs as a share of GDP and regional variation - As a share of GDP, energy investment needs are highest in Eastern Caribbean countries: the cost of required investments represents on average of about 9.8 percent of GDP in ECCU countries (driven largely by geothermal development costs). - Efficiency gains from geothermal power are expected to be substantial, providing long-term energy security and considerable cost savings compared to conventional fuel oil generation. - Introduction of natural gas facilities is significant in Western Caribbean countries; the bulk of future installed capacity there is expected to be run by natural gas after converting existing plants. - Barbados is the only Eastern Caribbean country expected to have significant natural gas-related investment. ### Self-financing potential and required cost reductions - Well-planned and executed energy investments ought to be self-financing in the long run; IDB-costed plans target technologies that can generate cost savings for utilities and commercial users. - Table 7 (described in source) shows minimum cost reductions required for proposed investments to be economically viable under different cost-recovery scenarios (15 to 30 years), presented in US$ cents per kWh and as percent of average operating expense (2012-2015). - Example aggregate metrics and requirements: - Minimum cost reductions required vary by country and amortization period; staff’s base case reflects a 20-year amortization schedule for a loan with a 5 percent interest rate. - Average minimum cost reductions (reported in source) across countries: projected per-country and average values are provided in Table 7 (source). ### Public versus private financing: scenarios and assumptions - Feasibility of public financing depends on investment magnitude, financing cost, and fiscal space; for countries with solid public finances, the envelope could be financeable publicly without undermining debt sustainability. - Two financing scenarios assessed versus a baseline: - Scenario 1: public sector finances 100 percent of investment. - Assumptions: 20-year commercial loan, disbursed over three years (2016-2018), 3-year grace period, average interest rate of 5 percent. - Projects are assumed eventually self-financing; public sector primary balance is projected to improve to cover debt service over the loan life, consistent with a 20-year cost recovery schedule. - Impact on debt sustainability modeled through 2030; staff’s projections of central government primary balance are capped at 3.0 percent for Antigua and Barbuda and Jamaica for post-2020 dynamics. - Scenario 2: private sector undertakes 80 percent of the investment. - Assumptions: private sector finances the bulk of infrastructure projects (e.g., renewables, natural gas-fired plants) via private-public partnership arrangements; public sector contributes equity tranche and some infrastructure investment including grid interconnection. - Public sector share financed on same terms as Scenario 1; the public sector primary balance is improved to cover associated debt service from its share of recouped cost savings. - Staff incorporates projected improvements in output growth from investments and efficiency gains into growth outlooks used for debt dynamics. ### Growth, efficiency gains and macroeconomic impact - Energy investments can improve growth, which ameliorates debt pressures from financing them. - Econometric result: a 10 percent improvement in energy efficiency across the economy could increase the level of GDP by 2 percent in the long run. - Short-run impact: public investment multiplier estimated at about 0.37 after four quarters (from earlier Fund work on Caribbean countries). - Estimated operational efficiency improvements: - Net of debt service, estimated average cost savings from planned energy investments could improve operational efficiency in the region by more than 25 percent through 2038. - For ECCU countries, under baseline energy price projections (2019-2038), efficiency gains average 19 percent. - The largest cost savings accrue to countries where introducing natural gas is viable—these average about 35 percent of recent utilities’ operating costs under baseline U.S. EIA projections for natural gas and distillate fuel oil prices. - Countries with significant hydroelectric capacity (e.g., Belize and Suriname) will enjoy overall lower energy costs. - Cost-savings analysis is performed net of debt service using projected oil and gas price outlooks over 2019-2038 and assumes a 20-year cost-recovery schedule (see Annex II in source for methodology). *Source: IMF staff summary of IDB-based estimates and IMF analysis as presented in the provided content unit.* ### 52. The efficiency gains are expected to translate into long-run growth benefits. The ### _wp1653 - 52. The efficiency gains are expected to translate into long-run growth benefits. ### Efficiency gains and long-run growth impacts - Growth rate assumptions for the long-run debt dynamics of scenarios 1 and 2 were augmented to reflect improved power sector efficiency from investments and resulting cost savings. - Modeling approach: - Based on the GDP elasticity to energy efficiency derived in Section III.B. - Assumed pass-through of cost savings to end-users of about 50-60 percent to accommodate required return on capital to the investor. - Regional assumptions and implied long-run growth effects: - ECCU countries: efficiency gains under baseline assumptions averaged 19 percent; modeled growth enhancement reflects a 10 percent efficiency gain passed on to end-users. - Rest of the Caribbean: natural gas expected to provide higher cost savings of 35 percent on average; modeled growth enhancement reflects at least 20 percent efficiency gain passed on to end-users. - Note: Higher pass-through of cost savings could imply higher growth dividends in the long-run. - Illustrative conversion (from footnote): - A 10 percent improvement in the efficiency of the power sector is equivalent to a 5 percent improvement in energy efficiency in the entire economy given the 50 percent share of electric power generation in the energy sector in the Caribbean. - Based on long-run GDP elasticity to energy efficiency, this translates to a potential increase of 1 percent in the level of GDP over the long run. - A 20 percent efficiency gain implies a potential increase of 2 percent in the level of GDP over the long run. ### Debt dynamics framework augmented for energy investments - Public debt trajectory governed by a debt dynamics equation augmented for impacts of energy investments on: - debt service costs, - growth, - public sector primary balance. - Key variables in the augmented debt equation (as defined in the source): - d: public sector debt - ī: weighted average nominal interest rate on the debt stock excluding the energy loan - i*: interest rate on the energy loan - α: share of the energy loan in the public debt portfolio - θ: impact of the energy investment on GDP growth in period t - φ: impact of higher energy efficiency on GDP growth over the long-run - π: inflation rate - s: public sector primary balance - μ: recouped cost savings to cover for the energy loan debt service - ρ: share of the public sector in financing the energy investment - ζ: other debt related flows - Financing scenarios: - Under the private sector financing scenario, λ is 0.2 reflecting the share of the public sector in the energy investment and its recouped cost savings. - Under the public sector financing scenario, λ is equal to 1. ### Results of the Debt Sustainability Analysis (DSA) — general findings - Magnitude of proposed energy investments did not materially alter the trajectory of public debt in most countries. - Public-sector undertaken investments increased public debt ratio over the medium term, but modeled cost recovery for debt service and positive growth impacts (from investment and lower energy costs) offset this increase in the long-run. - Private sector financing of energy projects moderately improves the debt-to-GDP ratio compared to baseline. - Scenario 2 (private financing) yields a lower debt-to-GDP path compared to baseline in all countries modeled, conditional on the private developer passing a measurable share of cost savings to end users. - If the private partner retains bulk of cost savings as returns, transmission of benefits to the wider economy could be limited and growth dividends reduced. - Power Purchase Agreements that provide for limited reductions in consumer tariff rates are unlikely to generate anticipated improvements in cost competitiveness. - Outcomes are sensitive to investment efficiency and cost of capital. - If public investment efficiency is low (e.g., cost overruns), rates of return to the public sector would be lower and debt accumulation higher than modeled. - If private-sector cost of financing is high (e.g., high perceived project risk, special purpose vehicle without guarantees), required rate of return rises, reducing share of cost savings passed to consumers and lowering growth dividends. - Fiscal risks increase if the power utility’s income stream cannot be safeguarded. - Tariff rates should fully cover operating expenses, including elevated debt service from new borrowing. - Administrative limits on tariff adjustment or low collection rates (due to customer delinquency or barriers to enforcing power cuts) can prevent projects from being self-financing, lowering the public sector primary balance and increasing public debt trajectory. - Balance-of-payments benefit: - Even when private financing retains benefits fiscally, countries may still accrue balance of payments benefits through reducing cost of imports of expensive fuel oil. ### Country groupings and policy implications - Countries fall into three categories regarding capacity to undertake large-scale energy investments: 1. Lower initial debt load and sustainable debt dynamics — can reduce energy costs without weakening fiscal or debt sustainability. - Examples and projections: - Bahamas and St. Kitts and Nevis: debt-to-GDP ratio projected to remain below 70 percent through 2030 under both baseline and public investment scenarios (70 percent is threshold for triggering IMF DSA heat map for Market Access Countries). - Guyana and St. Vincent and the Grenadines: largely sustainable debt trajectories, but public financing would keep debt-to-GDP above 70 percent till 2021 in Guyana and 2023 in St. Vincent and the Grenadines (St. Vincent would reach the ECCU’s 60 percent target by 2026). - Suriname: low initial public debt of 37 percent in 2015 may allow it to sustain energy investments estimated at 7.5 percent of GDP over the medium term, particularly if the investment allows elimination of energy subsidies estimated at 2.7 percent of GDP in 2013. 2. High public debt load and unsustainable debt dynamics — not well-positioned to undertake such investments using public financing. - Examples and implications: - Dominica and St. Lucia: high probability of debt distress given high debt-to-GDP ratio and unsustainable trajectories. - Barbados: public debt ratio projected to remain above 100 percent till 2026 if energy investments are financed through public resources (note: Barbados’s public sector debt ratio is being revised to include debt of state-owned enterprises). - Policy implication: private sector should undertake bulk of investments to ease financing constraints and provide risk sharing, especially where renewable resource potential or energy market outlook is uncertain. 3. Countries undertaking significant adjustment to restore sustainability — may finance high-yielding investments under conditions. - Conditions required: - Strong structural conditions: high returns on public capital, high public investment efficiency, high collection rates. - Investment must not create transition problems. - Example: - Jamaica: energy investments estimated at 6.2 percent of GDP do not materially alter the debt path but may strain fiscal resources if projected cost savings fall short of financing costs or if financing terms are unfavorable or crowd out other investments. - Transition risks: - In countries with high commercial losses or large unpaid utility receivables, fiscal adjustment to cover financing costs could produce transition problems and aggravate fiscal challenges, especially where baseline required fiscal adjustment is already high (examples: Antigua and Barbuda, Grenada, Jamaica). - Note on figures: - Figures referenced (Figure 7, Figure 8) reflect staff macroeconomic assumptions as of end-October 2015. - Figure 8 footnote: Does not fully reflect debt of state-owned enterprises for the Bahamas, Barbados and Jamaica. ### Towards a sustainable private investment framework in the energy sector (PPPs) - Rationale: - Given public financing constraints, private investment may be pivotal for energy sector reform. - PPPs, if managed properly, can reduce public-sector cost of infrastructure and improve investment efficiency. - PPP advantages: allows needed infrastructure investment without directly increasing public debt, potential efficiency gains from profit incentives and private-sector expertise, sometimes reduced cost overruns and improved timeliness. - Current status: - PPP development in the Caribbean is uneven. - Belize: private sector actively involved in electricity infrastructure investments. - Guyana and Grenada: size of energy sector PPPs is quite limited. - Key risks of PPPs and Power Purchase Agreements (PPAs) that require management: - Lax selection standards if PPPs perceived as low-cost to budget. - Lack of transparency and/or insufficient competition in bidding. - Inadequate risk sharing and risk transfer: public sector bearing bulk of downside risk via explicit guarantees while private sector retains upside. - Private partner required to bear risks it cannot manage, reducing project appeal or raising financing cost. - Unforeseen risks to effective generation capacity, especially for renewable weather-linked technologies vulnerable to climate change (wind, solar, hydro). - Risks from evolution of energy demand if committed MW purchases exceed realized consumption growth. - Poor project execution or time and cost overruns related to structural factors (e.g., labor bargaining power) or delayed government actions (e.g., necessary public infrastructure). - Insufficient incentives to invest in asset maintenance, particularly for contracts with short concession horizons relative to technology usable life. - Fiscal contingent liabilities and hidden costs: - Even without explicit government liabilities, hidden fiscal costs (government guarantees on minimum user demand and/or project borrowing) can create fiscal burdens. - Failure to honor contract obligations can lead to termination payments or government takeover with higher fiscal costs. - Fiscal contingencies are more likely when: - Institutional framework for PPPs is weak. - Projects are of poor quality or not competitively procured. - Accounting and reporting systems for PPPs do not transparently disclose fiscal implications. *Italic: Source: _wp1653 - 52. The efficiency gains are expected to translate into long-run growth benefits.* ### 60. For successful power sector PPPs, governments need to establish appropriate ### _wp1653 - 60. For successful power sector PPPs, governments need to establish appropriate ### Institutional arrangements for power sector PPPs - Key elements of successful institutional frameworks for PPPs: - A predictable, low-risk policy and regulatory environment that ensures a level playing field across all energy sector investors and participants, including state-owned utilities, and provides long-term clarity on the future of power sector regulation, without providing undue concessions to the private sector players. - A clearly-defined energy sector strategy: a long-term vision for the direction of the power sector, including targets for energy source diversification and the scope and process for private sector participation, backed up by specific policies such the announcement of standard guidelines on Power Purchase Agreements (PPAs), to assure the private sector of the government’s commitment to a transparent process and to facilitate project financing. - An accommodating legal framework: drafting a dedicated energy sector law where legislative frameworks are absent or deficient, potentially with technical assistance from IFIs; recognition of renewable energy resource as a national resource; definition of terms and restrictions of permits, licenses and concessions to private sector developers; clarity on tariff-setting mechanisms and powers granted to the energy sector regulating body. - Sufficient institutional capacity and human resources within government, noting that PPP projects tend to be larger and more complex than traditional procurement and require significant resources and expertise for establishing PPP policies, identifying and evaluating projects, negotiating with private partners, and monitoring project execution. ### Regional experience and institutional examples - Jamaica and Trinidad & Tobago have established PPP policy frameworks: - Both countries created criteria for PPP project selection and an institutional process for project identification, approval, and execution. - Trinidad and Tobago: a high-level ministerial committee provides strategic guidance, including developing PPP policies, reviewing and selecting projects, supervising PPP execution teams, and managing changes during PPP lifetime. - Jamaica: strategic oversight carried out by a privatization committee under Cabinet, supported by a strategy committee of senior officials; operational PPP units regulate PPP programs and manage the PPP process. - Both frameworks specify a project team to develop the business case and implement the PPP transaction; Jamaica’s policy also requires an enterprise team appointed by Cabinet for high-level guidance and monitoring. ### Lenders’ core requirements to finance energy PPPs - Core requirements likely to include: - (i) a creditworthy private partner; - (ii) the backing of the project by some equity; - (iii) an experienced and committed management team; - (iv) the use of proven technology; - (v) a creditworthy executing contractor with a strong track record; - (vi) in the case of renewables, ample availability of the renewable resource; - (vii) financial projections demonstrating strong cash flows and attainment of required returns. ### Case study — Renewable Energy Procurement in Jamaica (Box 3) - OUR of Jamaica issued a public tender in 2013 to procure 80 MW renewable energy capacity—the only competitive procurement of renewable energy capacity in the Caribbean to date. - Tender interest and outcomes: - 28 bids were submitted. - Three winners selected to build, own and operate renewable energy facilities and supply to the grid: - Blue Mountain Renewables, for 36 MW wind capacity; - WRB Enterprises, for 20 MW solar capacity; - Wigton Wind Farm, for 24 MW wind capacity. - Positive process features reported by participants: - The bidding process was fair and transparent. - Evaluation to sift out unqualified bidders was meticulous and well-organized. - Lessons learned for future renewable energy PPPs: - The design of the Power Purchase Agreement needs to be well thought out and cognizant of the private partner’s need to secure bank financing. - After contract award, a clearly laid-out process is needed for the private partner to obtain various government permits. - Coordination among relevant government agencies should be streamlined to reduce transaction costs in the approval process. - Responsibilities of the power generator and distributor in getting new capacity to the grid need to be clearly allocated and communicated. ### Policy recommendations and next steps (selected) - Cutting Caribbean energy costs could materially improve the region’s macroeconomic performance; oil price movements influence real growth and the real exchange rate. - Strategies to reduce exposure to oil price movements can help improve growth and competitiveness over the short and medium term; energy efficiency improvements support higher sustainable growth in the long run. - Recent oil price declines do not remove the need for energy sector reform; most Caribbean power plants are reaching the end of their life span, presenting a necessity and opportunity to invest in diversification and energy efficiency. - Implementing national and regional renewable energy and energy efficiency targets could generate significant cost savings through lowering electricity tariffs and fuel import costs, but announced targets remain ambitious and often lack specified investment magnitudes and financing sources. - Strengthening regulatory frameworks is needed to remove obstacles to private sector participation: - Establish clear licensing and operational procedures for independent power producers. - Introduce feed-in tariffs and net billing schemes where appropriate. - Establish independent energy regulators with appropriate institutional capacity to provide a low-risk predictable environment for private investors. - Set national energy efficiency standards (e.g., energy labeling and energy efficient building codes) and provide incentives to encourage adoption of energy efficient technologies by businesses and households. - Fiscal considerations: - Countries with unsustainable debt dynamics and/or a high initial debt load are not in a position to pursue large energy investments that may worsen sustainability. - Augmenting IMF Debt Sustainability Analysis with IDB-based estimates of energy investment needs would not materially alter public debt trajectories for most countries, but countries with unsustainable baseline debt paths or acute fiscal vulnerabilities are not well-positioned to finance significant investments through public resources. - Private sector financing of investments can significantly improve the public debt path over the long run through potential growth-enhancing impacts, if a measurable share of cost savings are passed on to the rest of the economy. - Recommendation: Caribbean authorities are encouraged to pursue private financing of energy investments, particularly projects with significant upfront capital needs; strong institutional arrangements and appropriate legislative frameworks are crucial to limit contingent liability risks to the fiscal sector, including risks related to specific terms of Power Purchase Agreements. ### International coordination and IMF engagement - IFIs and partners: - Greater coordination of IFIs’ engagement is expected to catalyze regional energy sector investments via the Caribbean Sustainable Energy Roadmap and (C-SERMS) Platform, established after the January 2015 Caribbean Energy Security Initiative (CESI) Summit. - The C-SERMS Platform will provide a framework to develop, track and meet national and regional renewable energy and energy efficiency targets, promote a sound regulatory framework, and secure inputs from development/donor community, financial services sector, educational institutions, regional utilities and civil society; subsequent stages will support mobilization of financing for bankable projects by public and private investors. - IMF role: - The IMF will provide greater attention to energy policy in regular Article IV surveillance, evaluating impacts of energy costs on growth, investment costs for energy infrastructure, and implications for public debt sustainability. - Country teams will collaborate with authorities and other IFIs to monitor implementation of country strategies and encourage authorities to improve the overall business environment to facilitate private sector investment in the economy, including the energy sector. *Source: _wp1653 - 60. For successful power sector PPPs, governments need to establish appropriate* ### ANNEX I. COMPONENTS OF THE QUANTITATIVE ASSESSMENT OF ### ANNEX I. COMPONENTS OF THE QUANTITATIVE ASSESSMENT OF MACROECONOMIC EFFECTS OF OIL PRICES AND ENERGY CONSUMPTION IN THE CARIBBEAN ### A. Short-term Analysis of the Macro-Effects of Oil Price Shocks in the Caribbean - Model specification and purpose: - Country-specific vector autoregressive (VAR) model with block exogeneity restrictions based on Cashin and Sosa (2013). - Domestic block: growth rates of real GDP and the real effective exchange rate (REER). - External block: real oil price growth rate, advanced economies’ real GDP growth rates, and the advanced economies’ real interest rate. - Natural disaster shocks assumed completely exogenous. - Tools: forecast error variance decompositions and impulse response functions to quantify contributions of oil price changes and other external factors to variance of real GDP growth and REER; impulse responses illustrate dynamic reactions. - Estimated using annual data 1976-2013. - Data sources used in the VAR: - Real GDP growth rate (GDP): IMF World Economic Outlook database, Gross domestic product, constant prices, National Currency, year-on-year percent change. - Real Effective Exchange Rate (REER): IMF Information Notice System (INS), Consumer Price Index, Index 2010=100, year-on-year percent change. - Real oil price growth rate (OIL_R): IMF Primary Commodity Prices, Crude Oil (petroleum) spot price, deflated by U.S. commodity exporters’ producer price, year-on-year percent change. - Advanced economies real GDP growth rate (WD): Gross domestic product, constant prices, year-on-year percent change. - Advanced economies real interest rate (WRIR): Interest rate, 6-month London interbank offered rate (LIBOR), period average. - Natural disaster: dummy variable constructed as in Acevedo (2014) including storms, floods, earthquakes, volcanic activity, and droughts. - Sample and grouping: - Sample economies: Antigua and Barbuda*, the Bahamas, Barbados, Belize, Dominica*, Grenada*, Guyana, Jamaica, St. Kitts and Nevis*, St. Lucia*, St. Vincent and the Grenadines*, Suriname, and Trinidad and Tobago. - Group 1 (tourism-dependent): the ECCU, the Bahamas and Barbados. - Group 2 (commodity producers): the rest of the sample. - Key empirical findings: - A positive shock to the real oil price is contractionary in most countries. - Real oil shocks explain on average 7 percent of business cycle fluctuations in the Caribbean sample; average variance is 7 percent for Group 1 and Group 2. - Impulse response timing and magnitudes: - Output growth decreases, with effects lasting one to two years; largest response typically within one year after the shock. - Elasticities from impulse responses: - A 1 percentage point increase in real oil price leads to a decrease of real GDP growth of 0.02 percentage points on average the first year in Group 1. - A 1 percentage point increase in real oil price leads to a decrease of real GDP growth of 0.005 percentage points on average the first year in Group 2. - Notable exceptions: Suriname and Trinidad and Tobago show a positive impact from higher oil prices. - After three years, average cumulative decrease in real GDP growth: - Group 1: 0.1 percentage point. - Group 2: 0.01 percentage point. - REER responses: - A positive shock to the real oil price appreciates the REER in all countries; REER effects last one to three years. - Elasticity: a 1 percentage point increase in real oil price appreciates the REER by 0.02 percentage points on average the first year over the sample. - After three years, average appreciation of the REER: - Group 1: 0.03 percentage points. - Group 2: 0.04 percentage points. - Relative importance of external shocks: - Oil prices are not the main explanation for business cycle fluctuations; shocks to the external block account, on average, for 30 percent of GDP variation. - Country range: 11 percent for Guyana to 48 percent for Barbados. - External shocks as a whole (including oil shocks) account for about 35 percent of business cycle fluctuations in tourist dependent economies (ECCU, the Bahamas and Barbados, Group 1). - External shocks account for 20 percent or less in commodity-dependent economies (Group 2). - Additional notes: - Negative effect of oil price shocks materializes with a one year lag in Antigua and Barbuda, St. Kitts and Nevis, Bahamas, Barbados, Belize and Jamaica. - Delay explanations include large oil storage facilities in some countries. - VAR estimated also with nominal oil prices produced very similar results. ### B. The IMF’s WHDMOD Module of FSGM - Model overview: - WHDMOD is an annual, multi-economy, forward-looking model of the global economy; a module of the IMF’s Flexible System of Global Models (FSGM). - Contains individual blocks for large economies and largest world economies and economies in Americas, plus 6 additional regions to cover remaining countries. - Countries included explicitly: ARG, BRA, CHL, COL, CRI, DOM, GTM, MEX, PAN, PER, TTO, URY, CAN, CHN, IND, JPN, RUS, USA. - Regions include: euro area, “Other central America”, “Other Latin America”, other Advanced Economies, and the Remaining countries. - Key structural features: - Consumption and investment microfoundations: - Consumption: overlapping-generations households (can save and smooth consumption) and liquidity-constrained households (consume all current income every period). - Investment: Tobin’s Q model; firms are net borrowers with risk premia that vary with the output gap. - Trade specification: - Semi-structural equations as functions of a competitiveness indicator and domestic or foreign demand. - Competitiveness indicator improves one-for-one with domestic prices; no local-market pricing. - Potential output: - Endogenous via Cobb-Douglas production function with exogenous trend TFP, endogenous capital and labor. - TFP level also affected by the real price of oil. - Inflation and monetary policy: - Consumer price and wage inflation modeled by Phillips’ curves with lag and lead of inflation and weight on the output gap. - Consumer price inflation includes weight on REER and second-round effects from food and oil prices. - Monetary policy: interest rate reaction function, typically an inflation-forecast-based rule targeting long-run inflation. - Commodities: - Three commodities: oil, metals, and food to distinguish headline and core CPI and analyze commodity-exporting vs importing regions. - Commodity demand driven by world demand; demand and supply relatively price inelastic in short run. - Global real commodity prices determined by global output gap (short-run effect), overall global demand, and global production. - Country heterogeneity: - Economies structurally identical except for commodities but parameterized differently by steady-state ratios and behavioral parameters (e.g., existence of oil production, energy-intensity of production). ### C. Long-term Analysis of the Energy Consumption-GDP Nexus - Methodology and purpose: - Empirical approach based on Pesaran, Shin and Smith (1998), Giraud and Kahraman (2014), and Stern and Kander (2012). - Uses panel co-integration and the Augmented Mean Group (AMG) estimator to account for cross-section dependence and time-varying heterogeneity due to unobserved common shocks. - Objective: estimate GDP elasticity to energy consumption (per capita), capital formation (per capita), and a parameter for energy efficiency. - Data sources: - Real GDP: IMF World Economic Outlook database, Gross domestic product, constant prices, National Currency, divided by population. - Energy Consumption: U.S. Energy Information Administration (EIA), total primary energy consumption (Quadrillion Btu). - Energy Efficiency: Authors’ calculation, energy consumption per unit of GDP. - Gross Capital Formation: Penn World Table (PWT80), capital stock at constant 2005 national prices (in mil. 2005US$). - Population: World Bank, World Development Indicators. - Sample: - Economies: Antigua and Barbuda*, Barbados, Belize, Dominica*, Grenada*, Guyana, Jamaica, St. Kitts and Nevis*, St. Lucia*, St. Vincent and the Grenadines*, and Suriname. - Note: (*) denotes ECCU members with a peg to the USD for 2.7 XCD. - Empirical results (long-run elasticities and diagnostics): - Long-run elasticities (average): - Energy Consumption Per Capita: 0.14 ** [0.046] - Energy Efficiency: 0.20 *** [0.044] - Gross Capital Formation Per Capita: 0.15 ** [0.068] - Common dynamic process coefficient: 0.34 *** [0.122] - Constant: 4.54 *** [0.484] - Observations: 389 - Countries: 11 - Wald test: 29.05 *** - Significance notation: *** indicates significance at the 1 percent level, ** at 5 percent. - Interpretation and implications: - Energy consumption and gross capital formation play a significant role in determining GDP in the long run; energy efficiency matters to a lesser extent but is highly significant. - Quantitative magnitudes: - A 1 percent increase in energy use per capita increases GDP per capita by about 0.14 percent on average. - A 1 percent increase in gross capital formation increases GDP per capita by about 0.15 percent on average. - Long-run elasticity for energy efficiency is about 0.20 percent on average and significant at the 99 percent confidence interval. - The estimated common dynamic process coefficient is 0.34 and significant. - Short-term gross capital formation elasticities are always significant and large, consistent with related analysis on small island states. - Sample period and coverage note: - Source: Fund staff estimates. Sample: 1980-2011 as available for sample countries except Bahamas and Trinidad and Tobago. - Energy efficiency is defined as real GDP divided by total consumption of energy. *Prepared by IMF staff as contained in the cited annex.* ### ANNEX II. ASSESSMENT OF POTENTIAL COST SAVINGS FROM INTRODUCING ### ANNEX II. ASSESSMENT OF POTENTIAL COST SAVINGS FROM INTRODUCING NATURAL GAS AND RENEWABLE ENERGY TECHNOLOGIES IN THE CARIBBEAN ### Objective - Support the Debt-Sustainability Analysis (DSA) exercise by gauging potential cost savings from proposed energy investments in Caribbean countries to: - Ensure projects are likely to be self-financing in the long-run. - Assess likely growth impact if the bulk of cost savings are passed on to end-users. - New power plants assumed financed through a 20-year loan at 5 percent interest rate with a 3-year grace period. - New power plants expected to be operational by 2019 and cost savings calculated through 2038, consistent with a 20-year cost recovery schedule. - Cost savings also calculated over a ten-year horizon (2019-2030) to test early debt-service coverage. ### Methodology for Assessing Cost Savings from Introducing Natural Gas - Viability determined by comparing Levelized Cost of Electricity (LCOE) of technologies and estimating potential cost savings over the forecast horizon. - IDB provided cost estimates for: - Building regasification facilities at port terminals to receive LNG. - Converting existing installed capacity run by fuel oil to natural gas-fired stations. - Building additional capacity through 2023 to meet growth in electricity demand. - Natural gas considered viable in: the Bahamas, Belize, Guyana, Jamaica, Suriname, and Barbados. Not considered optimal in Eastern Caribbean countries due to lack of economies of scale and geothermal potential. - Key procedural steps: - Project total annual net generation (GWh) through 2038 using U.S. EIA net generation data and guided by recent growth rates and peak-load projections from C-SERMS Baseline Report and Assessment. - Constrain net generation so it does not exceed what could be produced by planned capacity expansions adjusted by capacity factors for each technology. - In countries without IDB-costed expansions (e.g., Belize), net generation projections reflect maximum capacity of existing plants through 2038. - In Belize, note that Belize currently imports 40 percent of its generation from Mexico at an estimated price of US$0.12/kWh. - Estimate net generation expected from conventional sources after accounting for existing renewable technologies (large hydro in Belize and Suriname; biomass in Belize and Guyana; small solar capacity per Worldwatch Institute/C-SERMS). - Exclude purchases from Independent Power Producers (IPPs) to arrive at utility net generation (example: Jamaica purchases about 40 percent of electricity from IPPs). - Update IDB Pre-feasibility Study natural gas fuel cost per kWh using Henry Hub benchmark and IDB base-case of US$4.00/MMBTU; update for 2015 average price and projected 2019-2030 prices using the 2015 U.S. EIA Energy Market Outlook Report. Preserve estimated average LNG transportation cost from the U.S Sabine Pass supply point as used in the IDB study. - Calculate Gross Savings per kWh by comparing natural gas fuel cost per kWh against average fuel cost per kWh of distillate fuel oil in 2015 and under U.S. EIA projections through 2038. Gross savings in US$ million are calculated by multiplying savings per kWh by projected net generation from natural gas-fired facilities. - Deduct annual cost of debt service (20-year amortization) from gross savings using total investment cost for each country. - Calculate Net Savings (net of debt service) and present as percent of estimated operating expense for each utility (per kWh) to estimate potential gains in operating efficiency. - Capacity factor and generation cost notes: - Net capacity factor sources: U.S. EIA monthly data. - Conventional fossil-fuel based power plants have capacity factors in excess of 80 percent; Solar PV panels capacity factor may be as low as 25 percent. - The cost of generation for conventional fuel oil-fired turbines includes an average of 4.4 cents/kWh of non-fuel costs (operating and maintenance and equipment depreciation) consistent with IDB estimates. - IDB investment cost aggregates (as presented in annex tables): - Investment Costs for Regasification Facilities and Infrastructure — TOTAL US$661.7 million, additional capital US$128.4 million, other US$0.0 million, Total US$870.1 million. (Table A2.2) - Table A2.1 presents country-level investment costs to convert existing plants to natural gas-fired plants and to add capacity (2018 and 2019-2023), as provided by the IDB (country-level line items and totals are reported in the original annex tables). - Pricing scenarios and horizons: - Benchmark natural gas price in the IDB study: US$4.00/MMBTU (Henry Hub). - Natural gas and distillate fuel oil price scenarios updated using 2015 U.S. EIA projections through 2038. - Average savings per kWh also materialize over shorter horizons (2019-2030) under a lower period average for the baseline oil price scenario. ### Methodology for Estimating Cost Savings from Introducing Geothermal Power in the ECCU - IDB cost estimates (Table A2.3) used for geothermal plant development in the ECCU. - Estimated cost of a 10MW geothermal plant: US$45 million for all countries; completed pre-investment/testing stages are discounted from total project cost. - Cost development staged as: Stage 1a Pre-Investment (studies), Stage 1b Pre-Investment (slim hole drillings), Stage 2 Exploration (full scale drillings), Stage 3 Field Development (production/re-injection wells), plus Plant Cost. (Detailed stage costs are provided in Table A2.3 in the annex.) - Steps to estimate savings: - Determine “current” weighted average cost of generation based on existing generation mix, per-kWh cost by technology, installed capacities, and capacity factors. - Calculate weighted average cost of generation for the “new generation mix” with geothermal used as base load; assumed plant size 10MW; fuel oil-fired plants cover peak after other renewables accounted for. - Use geothermal generation cost benchmarks from the 2014 California Public Utilities Commission Report for small-scale operating plants; apply a small-scale premium to geothermal generation costs (10 cents/kWh vs. reported 7.3 cents/kWh). - Hydroelectric generation costs based on VINLEC data. - Gross savings = reduction in weighted average cost of generation × kWh generated for each country, under alternative distillate fuel oil price scenarios through 2030. - Net savings after debt service calculated based on individual amortization schedules; presented in US cent/kWh and as percent of average operating expense for each utility. ### Methodology for Estimating Cost Savings from Antigua and Barbuda’s Announced 20 Percent Renewable Target - IDB did not cost investments for Antigua and Barbuda (no geothermal resource). - Authorities plan a mix of wind and solar PV to achieve 20% renewables by 2020. - Authority announcements: - Develop 10 MW of solar PV panels; 2 MW solar farm currently operational near the airport. - Estimated cost for 10 MW solar PV: US$20.5 million. - Minimum 11 MW of wind power needed to reach 20 percent; IRENA cost estimates suggest upfront capital cost of about US$22 million for 11MW wind farm. - Savings calculation: - Reduction in weighted average cost of generation under alternative distillate fuel oil price scenarios (fuel oil currently used for 99 percent of electric power generation in Antigua and Barbuda). - Net savings after debt service presented in US cent/kWh and percent of average operating expense for the utility. ### Key quantitative assumptions and parameters preserved from the annex - Financing: 20-year loan at 5 percent interest rate with a 3-year grace period. - Operational timeline: new power plants operational by 2019; savings calculated through 2038; alternative horizon 2019-2030. - Benchmark natural gas price in IDB study: US$4.00/MMBTU (Henry Hub). - Belize imports: 40 percent of generation from Mexico at an estimated price of US$0.12/kWh. - Fuel oil non-fuel costs (conventional turbines): 4.4 cents/kWh. - Geothermal: cost of a 10MW plant estimated at US$45 million. - Geothermal small-scale generation cost applied: 10 cents/kWh (premium vs. reported 7.3 cents/kWh). - Antigua and Barbuda: 10 MW solar PV cost US$20.5 million; 11 MW wind farm upfront capital cost about US$22 million; currently 99 percent generation from distillate fuel oil. *Prepared by Ahmed El-Ashram. Source: Inter-American Development Bank and U.S. EIA data as presented in the annex.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1653.pdf_