Seizing the Opportunities to Accelerate Our Renewable Energy Transition: Financing the Infrastructure Deficit for Climate-Resilient Development in the
- The longstanding challenge of resilient infrastructure financing is inextricably linked to the extreme case and increasingly high cost of climate vulnerability in the Eastern Caribbean Currency Union (ECCU).
- About 90.0 per cent of our region’s electricity generation is powered by expensive fossil fuels, giving rise to some of the highest electricity prices in the world, nearly three times the global average and that of our major trading partners. Alas, only about 10 per cent of energy in the ECCU is powered by renewables.
- The Eastern Caribbean Central Bank (ECCB) is helping with the buildout of critical development finance architecture to mobilise climate finance for a sustainable energy transition in the ECCU while also addressing some fiscal vulnerabilities.
Climate change is the gravest threat to the viability of member states in the ECCU. Studies dating as far back as the mid-twentieth century conclude that Small Island Developing States (SIDS) in the ECCU are among the world’s most vulnerable to the negative impacts of climate change and natural disasters (Box 1.0).
So, how have we endured the longstanding crippling effects of increasingly relentless hurricanes and natural disasters amid various external economic shocks? The region’s climatic, economic and fiscal vulnerabilities have never been in sharper relief than in current health and economic crises; and now the looming, global energy crisis. Globally, as we all try to navigate the uncertainty surrounding the COVID-19 pandemic, this once-in-a-century public health crisis has exposed the difficulty of our economic survival going forward and the imperative of urgent collective action to secure a viable future.
High and continued exposure to natural disasters means our region has become stuck in a recovery loop with huge rehabilitation and reconstruction needs that translate into expanding budget deficits and vicious cycles of unsustainable debt levels. Additionally, the high risk perception of renewable energy projects in climate-vulnerable SIDS has cooled the ambition of member countries attempting to forge ahead.
Did you Know?
Annually, an estimated EC$1.2 billion (US$444.4 million) is spent regionally on expensive imported fossil fuels, which generates high operating costs for public utilities and ties up fiscal resources (Box 2.0).
All year round, we are blessed with abundant access to renewable energy sources. Yet, despite the decreasing cost of renewable energy technologies within the past decade, renewable sources remain underexploited. On average, 90.0 per cent of the region’s electricity generation is powered by petroleum products, despite the high price volatility. What does overreliance on foreign fuel markets mean for the average household?
ECCU electricity prices are among the highest, globally - nearly three times the global average (Box 3.0). Currently, households in the ECCU pay on average about 18 times that of some countries with the cheapest electric rates, which include some of the largest carbon emitters. At an average electric rate of US 36 cents per hour, residents can end up spending from 11.0 to 34.0 per cent of their wages on electricity bills. This is based on a range of minimum hourly wage rates of EC$2.84 to EC$9.00 across the ECCU. Whether it be due to higher wages or lower tariffs, electricity is more affordable for residents of the United States, UK, Canada, who spend less than 3.0 per cent of their income.
Our region has a very narrow window to change the devastating economic consequences of the increasing physical risks of climate change to a green and resilient recovery. But, does the transition merely rest on political will or, perhaps, more or to a lesser extent, on financial and technical capability? A closer look at the region’s 2030 climate ambitions and renewable energy (RE) sector realities may help shed additional light on the enormity of these challenges.
Our region currently has a total RE generation installed capacity of 34 megawatts (Box 4.0). The International Energy Agency expects global renewable electricity generation to reach 8,300 terawatt-hours (TWh) in 2021. All ECCU countries are trying to secure some traction to scale up RE deployment; for example, the Saint Christopher (St Kitts) and Nevis solar energy plus storage project and geothermal explorations in the Commonwealth of Dominica and Saint Lucia.
As Parties to the United Nations Framework Convention on Climate Change (UNFCCC) and the landmark 2015 Paris Agreement, member states laid out ambitious targets of installed RE capacity of 227MW to be achieved by 2030 as per their Nationally Determined Contributions (NDC). In total, the indicative financing need of the ECCU for the 2030 NDC targets is EC$2.2 billion (US$807.0 million) (Box 2.0). However, the ECCU RE infrastructure financing gap is expected to widen considerably beyond this estimate in the global race to net zero by 2050.
ACCESS TO CLIMATE FINANCE AND THE GREEN WINDOW TO 2030 AND BEYOND
Member states have developed a range of renewable energy and energy efficiency policies and programmes to advance clean energy goals. They have made strong commitments on climate action that relate to the enabling environment, however, implementation has been weak and uneven both nationally and regionally. Development partner support for RE, though active, has been fragmented and not yet very effective at accelerating deployment of RE projects. The clean energy transition has been agonizingly slow despite several initiatives in the past decades. Limited scale, private investment frameworks, and fiscal and regulatory incentives deter private sector participation leading to underinvestment in green and resilient infrastructure.
The OECD 2021 report on climate finance provided and mobilised by developed countries reveals that annual climate finance flows to developing countries increased in all beneficiary regions except for SIDS. Less than 2.0 per cent (US$1.5 billion) of the estimated US$79.6 billion provided in 2019 was accessed by SIDS. Above all this, member states face some unique challenges which can trigger increased borrowing:
- Dwindling availability of concessional finance as more member states are considered ineligible for Official Development Assistance (ODA), despite their fragile economies due to extreme climate vulnerabilities.
- Multilateral finance shifting towards country-matched co-financing requirements and more loans as opposed to non-reimbursable grant funding.
On reflection, some may render it as simply boiling down to having ‘some skin in the game’. But, can ECCU countries afford to? At the 7th Annual Sustainable Energy Forum held in observance of Caribbean Energy Month in November 2021, Mia Mottley, Prime Minister of Barbados, asserted ‘…Enough talking; we need action now’, as she continued to admonish developed countries to increase support for Caribbean SIDS, who are at the front line in the fight against climate change. The Least Developed Countries’ July 2021 position paper titled: ‘COP26 Delivering the Paris Agreement - a Five-Point Plan for Solidarity, Fairness and Prosperity,’ elaborates on these challenges.
COP26 Delivering the Paris Agreement - a Five-Point Plan for Solidarity, Fairness and Prosperity
There is a global re-ordering of capital flows afoot. This is due to the mainstreaming of Environmental, Social and Governance (ESG) investing as financial markets become more aligned with financing sustainable development goals. However, the ECCU has not yet been able to tap into the explosive growth in green bond markets, as cumulative issuance to date exceeds US$1.5 trillion globally (Climate Bonds Initiative, 2021).
What is missing in the ecosystem to unlock barriers to mobilising climate finance?
Accelerating the transition to clean and affordable energy in the ECCU remains crucial for climate-resilient development. But, without finance, there will be no transition. Two areas of major concern for the ECCU transition are: (i) how to obtain enough finance to steer investments into the direction of RE; and (ii) how it can be structured for multiple SIDS to promote scale and speed of access. The ECCB is championing the development of a regional renewable energy financing facility (Box 5.0), complemented with the development of frameworks for green finance, climate stress testing and mainstreaming of ESG with the financial sector, as part of the ECCU’s Programme of Action for Recovery, Resilience and Transformation.
CALL TO ACTION
Defying the steep odds against climate resilience will require member countries to:
- Prioritise the development and establishment of the regional financing facility to optimise and catalyse multiple sources of funding and lower the risk of investing in green infrastructure in the ECCU.
- In parallel, undertake swift policy interventions in the short term to enable rapid renewable energy deployment to increase energy security and independence, with a focus on:
Regulatory and pricing policies for distributed generation, decentralised renewables for electricity access and large-scale installations;
Integrated resource planning;
Financial, fiscal and regulatory incentives; and
National and regional energy transmission strategies.
- Deepen capital markets and implement a green financing strategy framework towards creating sustainability and ESG investment markets in the ECCU and wider CARICOM area.
- Pursue an integrated economy-wide approach and bring together RE project developers, investors, governments, and regional and international finance institutions and development partners to infuse sharper focus on the clean energy transition.
- At a minimum, spare no effort to triple the RE mix by 2030 to help reduce energy production and supply cost, improve fiscal health and create green jobs.
The ECCB acknowledges the contribution of Ms Kieran St Omer, Senior Project Officer (Ag.), Governor’s Immediate Office, in the preparation of content for this blog.
About the Author
Timothy N. J. Antoine has been the Governor of the ECCB since February 2016. He is passionate about the socio-economic transformation of the Eastern Caribbean Currency Union (ECCU) and is a strong advocate for regional cooperation and collective action. Indeed, he regards them as critical in the quest for shared prosperity for the people of the ECCU.
About the Eastern Caribbean Central Bank
The Eastern Caribbean Central Bank (ECCB) was established in October 1983. The ECCB is the Monetary Authority for: Anguilla, Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, Saint Christopher (St Kitts) and Nevis, Saint Lucia and Saint Vincent and the Grenadines.