Renewable Energy Review: The Island Markets

Renewable Energy Review: The Island Markets

With islands effectively microcosms of larger markets facing similar energy crises, they can become models for success.

Ernst and Young Editors
December 29, 2014

Developers, manufacturers, investors and other renewable energy industry stakeholders need to know where the next big market is going to be so that they can adjust their business decisions accordingly.

Since 2003, global consultancy Ernst & Young has released its Country Attractiveness Indices, which ranks global renewable energy markets by analyzing investment strategies and resource availability. The indices are updated on a quarterly basis and the most recent report can be found here.

Here is the firm’s assessment of the island markets.

Solid Foundations

There are likely to be few places that represent a more suitable market for homegrown renewable energy than the world’s island nations. Almost wholly reliant on imported fuel to support diesel-based power generation, islands face some of the world’s highest energy costs, as well as greater exposure to price volatility and supply disruptions. It is estimated that the average cost of electricity in the Caribbean for example, ranges from US$0.32 to US$0.65 per kWh, around five times that of the mainland U.S.

In the Pacific Islands, the tariff can exceed US$1.00/kWh. With many governments subsidizing the cost of electricity to protect consumers, high fuel costs have also contributed to weak economic conditions, exacerbating trade deficits and driving up the price of food and other essential items, as well as reducing investment for other infrastructure. In the Pacific Islands, imported petroleum products account for 40 percent of a country’s GDP on average.

With power representing 20+ percent of operating expenses for the energy-intensive hospitality and tourism industries, often the driving force of many island economies, as well as increased vulnerability to the impacts of climate change, the stability and resiliency of energy supplies have also become critical. In the Pacific, long distances separating sparsely populated islands and the cost of supplying rural areas have resulted in approximately 70 percent of the region’s population still lacking access to electricity.

In short, domestic renewable energy, particularly in the form of distributed generation that can circumvent the aging power infrastructure, has become an economic, social and environmental imperative formost island nations.

Rocking the Boat

But if it’s so obvious, why have we not seen investors and developers flocking to these markets? Firstly, typically smaller renewables projects can result in relatively high upfront development cost on per kWh basis, and there is also some skepticism about the scale of the opportunity given the low energy demand of some islands in absolute terms compared with many mainland markets.

Secondly, the economic picture can be distorted. Venezuela’s Petro caribe initiative, for example, creates an alliance with 17 Caribbean states to purchase oil on preferential payment terms, with exports to these markets accounting for more than 40 percent of their total energy consumption in 2013. While the terms of the initiative are expected to become less attractive asVenezuela battles its own fiscal deficit, anticipated revisions have been delayed, allowing members to draw on subsidized financing for another year. Relatively weak credit ratings and limited borrowing capacity across someCaribbean states also make it vital to get organizations such as the World Bank and OPIC on board to help arrange low-cost financing for energy ventures.

Thirdly, non-economic barriers such as community landownership and spacial constraints can make permitting and build-out at scale more challenging, while a tradition of vertically integrated and state-owned utilities weakens the incentive for competition.

Help on the Horizon

In the face of such challenges, it’s tempting to write off island renewables as a niche investment for entrepreneurs and multilaterals. And yet, it’s not that easy to ignore the opportunities. Warren Smith, President of the Caribbean Development Bank, claims the region is looking to attract as much as US$30b of investment to expand and upgrade the power sector, with potential to replace 4,750MW of fossil fuel generation with renewables by 2019.

Further, the sector is not battling these challenges alone.Specific initiatives are already underway to galvanize increased investment and deployment of renewables. Co-founded by billionaire and entrepreneur Sir Richard Branson, the Carbon War Room aims to transition a group of islands to 100 percent renewable energy by accelerating commercial investment, with the Ten IslandRenewable Challenge, creating a formal framework for fast-tracking this process and aggregating energy demand. Together with the Rocky Mountain Institute,World Bank and OPIC, it has already earmarkedUS$300 million for new projects, while Branson’s home ofNecker Island will serve as a demo for the initiative, with major U.S. energy company NRG Energy lined up to develop a renewables-driven microgrid for the whole island. The Clinton Foundation’s Climate Change Initiative has also already voiced its support for Caribbean renewables.

Elsewhere, the Asian Development Bank has recently announced that it will invest US$228 million in Pacific island energy projects over the next three years, and theInternational Finance Corporation has unveiled plans to get solar generated electricity to half a million people in remote parts of Papua New Guinea.

More than Treading Water

It also should not be ignored that some islands themselves are already spurring on renewables deployment, and on a larger scale than might be anticipated.

Aruba, whose top industry is tourism, now gets 20 percent of its energy from renewable sources having investedUS$300 million in expanding its wind power capacity including a 30-MW project, and cut diesel consumption by half in only two years. Meanwhile, Cuba, the Caribbean’s largest island nation, is reportedly pushing through policy changes that could open the door for new renewable energy investors, with pending legislation expected to allow wholly owned foreign companies to exist in Cuba for the first time.

In June, the Dominican Republic approved US$150 million of new renewables projects, including a 30-MW wind farm and 25-MW biomass plant, while Germany’s Wirsol is also developing a 62-MW solar park in the country, the largest in the Caribbean. The country has already receivedUS$800 million in investment since 2007, having set legislation targeting 25 percent renewables generation by 2025,providing tax breaks for imported equipment and mandating the purchase of renewable power by distributors. In the same month, Jamaica’s Energy Minister claimed that the country will be the leading nation for gross production of renewable energy thanks to an anticipated additional capacity of 78 MW by the middle of next year.

Beyond the Caribbean, Spain’s Ence Energia y Celulosa plans to build 210 MW of biomass plants in the Canary Islands at a cost of US$730 million, while the British Channel Islands are continuing to explore the potential for marine energy, aiming to install a 300-MW tidal array off Alderney by 2020.

Stabilizing Conditions

Enablement technology is also coming to the fore as a means of facilitating the transition to renewables-led island economies. Hawaii, which plans to obtain 40 percent of its current power consumption from renewables, recently launched a request for proposals for 60MW to 200 MW of storage capacity. Meanwhile, Puerto Rico, which has committed to co-invest US$290m in renewable energy projects and other initiatives over the next 10 years via its Green Energy Fund initiative, has introduced new minimum technical requirements that mandate all new renewable energy projects to meet specific storage requirements.

Creating a Wave

Island nations are therefore already well on their way to demonstrating that an economically viable clean energy transition is possible and desirable. However, significant commercial investment and deployment activity is still required to fulfill this potential.

Further, with such islands effectively microcosms of larger markets facing similar energy crises, and their potential as living laboratories to demonstrate and scale innovative solutions as well as circumvent traditional grid infrastructure, there is much to recommend such investment as a means to establishing a template for the successful transition to a fossil-fuel free economy at a global level. Initiatives to establish greater collaboration between islands to aggregate demand, foster stakeholder engagement and reduce cost and policy barriers, will also help to make projects more bankable and attractive to a wider array of participants.

The question is therefore whether today’s investors, developers and innovators want to be at the forefront of creating an island model of energy with potentially far-reaching implications for the global energy sector, or just wait to ride the second wave as micro goes macro.

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