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Opportunities for the Caribbean to clean up energy usage

Oil dependency in the region is costly and dirty. Jeremy Martin and Alexis Arthur say the Caribbean must begin shifting fuel

For island nations in the Caribbean, the economic and environmental effects of oil dependency are well known. A heavy reliance on fuel oil for power generation means they pay some of the highest rates in the world for electricity and see relatively high levels of air pollution and carbon emissions. But efforts to break this dependency have so far been fruitless.

Abundant and cheap natural gas brought on by new shale production in the US has given policymakers in the region an opportunity to move away from this costly reliance on oil for power generation. Natural gas burns cleaner than fuel oil and can provide the power needed as countries increase renewable deployment. Add to the financial and environmental drivers an unstable geopolitical context - in particular the unrest in the region's historical oil supplier Venezuela - and the impetus for change has never been stronger.

Technological advances have made it easier and cheaper to transport and distribute natural gas, be it as liquefied natural gas (LNG) or compressed natural gas (CNG). The region has a number of potential supply sources nearby. The US, which is planning to start exporting LNG in the coming years, is the largest but not the only potential supplier. Trinidad and Tobago, already an established natural gas producer, and Colombia are other potential options.

Gas alternative

A recent study by power company AES found that Caribbean countries rely on fuel oil or diesel for 85% of their electricity generation. High oil prices are another reason to pursue natural gas as an alternative power generation fuel. According to an estimate from Galway Energy Advisors, a consultancy, there is roughly a $10 to $15 per million British thermal units price spread between fuel oil and natural gas (based upon US reference prices).

The introduction of natural gas has the potential to cut electricity prices and lower economic and environmental costs for countries across the region. After Trinidad and Tobago, the Dominican Republic has made the most progress in building a natural gas sector. Since the opening of the AES Andres re-gasification terminal in 2003, imported LNG has helped gas-fired power generation reach about one-third of the country's installed capacity. Still, 40% of the Dominican Republic's electricity is generated from fuel oil. Despite the obvious benefits and admirable goals of the region's policymakers, Caribbean countries still have a long way to go. Market size, credit guarantees, pricing and supply issues must first be addressed before natural gas can truly alter the region's oil dependency.

Historically, the small market size of individual countries has kept suppliers from focusing on the region; the power generation demand in most Caribbean nations does not reach the threshold for LNG imports. And smaller scale LNG or CNG supply options, while possible, are yet to be commercially viable in the region.

Countries could try to pool their natural gas purchasing in order to build scale and attract the attention of potential LNG suppliers. However, the difficulty in coordinating the Caribbean nations as a whole - or even as smaller sub-groups - will likely keep this solution off the table, at least in the short term.

Accessing the credit needed to fund the substantial investment in new gas-related infrastructure has also been a problem. In the global market, credit worthiness is crucial, and the lack of its has stalled natural gas development in the Caribbean.

Devising a way to address the lack of access to credit or reasonably priced credit options is critical, as is understanding the take-or-pay contract language and clauses involved in LNG deals. There is a role for multilateral development banks such as the Inter-American Development Bank and CAF, another regional development bank, in supporting credit enhancement across the Caribbean.

Another problem is pricing. Today's focus on the US Henry Hub benchmark price does not adequately reflect the cost of landing natural gas in the Caribbean. Instead, a Caribbean basin index derived from a Henry Hub reference price would add clarity and transparency to discussions over the potential for natural gas and LNG in the broader Caribbean basin, and better inform the decisions of the region's policymakers.

In terms of suppliers, Trinidad and Tobago has significant advantages, including distance and cost. Liquefaction infrastructure in Trinidad and Tobago has the added benefit of being largely depreciated and so less costly for new contracts. However, issues of scale would need to be addressed. Colombia's Caribbean coast could also see it emerge as a potential regional supplier, with Mexico another longer-term option. 

Much optimism surrounds the natural gas boom in the US, and cheaper LNG imports from the US Gulf Coast may seem a natural fit for the Caribbean. But as well as the problems of price and credit, legal clarity over possible LNG exports to the region is lacking.

A Caribbean natural gas market requires an efficient and scaled delivery mechanism. A hub-and-spoke system entails a main, large-scale terminal that would receive LNG and then re-distribute smaller cargoes to other destinations. But a potential legal snag exists when onward destinations do not have a free trade agreement (FTA) with the US. (The US will only ship LNG to countries with which it has an FTA.)

Clarification of this issue and potential relaxation of the restrictions already in place merits further review by the US Department of Energy.

The Caribbean's dependence on oil-derived products for the bulk of its energy needs has increasingly come at a cost. Despite diversification efforts, as well as cut-rate oil imports through the PetroCaribe agreement with Venezuela, the volatility of oil prices continues to hurt the economies of most Caribbean nations.

The potential and opportunity provided by incorporating (or in the case of the Dominican Republic, increasing) potentially cheaper and cleaner burning natural gas supplies has led to the hope for a new chapter for the Caribbean's energy outlook. The challenge is matching this opportunity with the reality in the region.

Jeremy  Martin is the director of the energy programme at the Institute of the Americas at the University of California, San Diego.
Alexis Arthur is energy policy associate at the Institute of the Americas. 

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