Castalia’s blog
Castalia recently finalized a report to analyze the development impact of Energía del Pacífico (EdP), the 380MW liquid natural gas (LNG) regasification facility and gas-fired power plant, in El Salvador. The project has delivered significant value to El Salvador’s energy sector by by displacing generation from dirtier and more expensive thermal plants. Also, introducing LNG in El Salvador’s energy matrix has resulted in reduced generation costs, increased energy security, and flexibility and reliability of the system.
Overall, using LNG has strengthened the sector’s ability to bear the impacts of the changing climate, building much needed resilience into a previously vulnerable sector. EdP currently meets 30 percent of total demand. EdP has enabled El Salvador to keep the lights on despite the reduction in rainfalls caused by “El Niño”, which started in June 2023 and has reduced water levels at hydropower facilities by 26 percent compared to the previous year.
Introducing LNG has reduced greenhouse gas emissions (GHGs). On average, EdP emits about half of the GHG emissions per MWh compared to power plants running on HFO. By displacing domestic oil generation, EdP reduces GHG emissions by nearly 400,000tCO2e annually for the next 20 years, significantly contributing to the Government’s pledge to reduce its annual energy sector emissions by 640,000tCO2e by 2030 as part of its National Determined Contributions (NDCs).
Access the report here: Development Impact Study for Energía del Pacífico EdP
Sources:
D. Marcelo, S. House, C. Mandri-Perrott, J. Schwartz. 2017. “Do Countries Learn from Experience in Infrastructure PPP?” Washington, D.C., World Bank. https://ppi.worldbank.org/content/dam/PPI/resources/ppi_publication/web_publication/WPS8054.pdf
El Salvador. UNDP Climate Promise. (n.d.). https://climatepromise.undp.org/what-we-do/where-we-work/el-salvador
Climate funds have great potential to improve the efficiency of underperforming water utilities. Castalia developed a concept for a Climate Fund for Water and Energy Efficiency Performance-based Contracts (PBCs).
Globally, water utilities lose 126 billion cubic meters of water every year, totaling a loss of US$ 39 billion per year. The cost of pumping and treating lost water plus the lost profit of water that is not sold generates huge financial losses for utilities. Non-revenue water (NRW) is the measure of water lost due to leaks, theft, or inaccurate metering. High NRW levels deplete valuable water resources, increase the climate footprint, reduce the financial sustainability of water utilities, and result in poor water service provision. Additionally, pumping water that is lost in the sanitation and distribution process results in wasted energy. Addressing NRW reduces greenhouse gas emissions in the form of saved water and energy and enables utilities to provide reliable water services.
PBCs are 68 percent more effective at addressing utility’s water losses and inefficient use of energy compared to NRW initiatives undertaken by utilities alone. PBCs allow utilities to engage specialized private sector firms to provide NRW reduction services while enabling utilities to retain control of ownership and operations. Developed as a results-driven framework, PBCs link payments to the achievement of specific targets such as reducing water losses and enhancing revenue collection. They also include financial penalties for not meeting targets, transferring project risk from the utility to the contractor. PBCs also foster transparency and accountability by establishing clear performance benchmarks, thereby ensuring that service providers remain accountable for their progress.
Even though PBCs are a demonstrated solution to saving water and energy globally, the wide-spread implementation of PBCs has been limited, particularly in some regions. Some challenges of implementing PBCs include high transaction costs for individual projects, lack of technical capacity in utilities, and lack of fiscal space to finance project preparation and implementation. In the Caribbean, for example, the geography of the countries leads to small-sized projects. Therefore, transaction costs for developing PBCs in the Caribbean are high, making projects financially unviable before they even start.
A climate fund for water and energy can support the uptake of NRW and energy efficiency PBCs. A fund designed to bring together development finance institutions and the private sector would support the creation of standard PBC contracts for water utilities, provide technical support for implementation, aggregate multiple projects, and mobilize climate finance more efficiently for aggregated PBCs.
Involving multilateral organizations to create and manage funds for the widespread adoption of PBCs for non-revenue water reduction increases the chances of effective implementation. Development finance institutions have the capacity, connections, and trustworthiness to guarantee effective collaboration with government, utilities, public and private investors, and service providers. Additionally, their reach enables the adoption of PBC’s in multiple countries, reducing the cost of project implementation.
A fund like this would also be eligible to attract climate finance due to the nature of the work which results in saving water and energy. Climate finance is also more attractive to utilities because it is easier to access and cheaper than commercial finance.
For more information about the Fund concept developed by Castalia, download the following document available in English and Spanish.
Sources:
https://ppi.worldbank.org/content/dam/PPI/resources/ppi_publication/web_publication/WPS8054.pdf
Kingdom, Bill, Jemima Sy, and Gerhardus Soppe. 2018. “The Use of Performance-Based Contracts for Nonrevenue Water Reduction: Output of the Global Program on Developing Good PBC Practices for Managing NRW.” Washington, D.C., World Bank.
R. Liemberger, A. Wyatt; Quantifying the global non-revenue water problem. Water Supply 1 May 2019; 19 (3): 831–837. doi: https://doi.org/10.2166/ws.2018.129
The Caribbean Region needs to increase renewable energy uptake to reduce high energy costs and reduce greenhouse gas emissions. Energy costs in the Caribbean are four times more than the average price in many developed countries. According to the Caribbean Development Bank (CDB), 19 countries in the region import more than 80% of their energy supply, about seven percent of their overall pre-COVID GDP, making the Caribbean particularly vulnerable to oil market shocks. Also, the energy sector accounts for 42% of the region’s greenhouse gas emissions1. Switching to renewable energy in the Caribbean is essential for improved fiscal management, long-term economic and social stability, and climate change adaptation.
To advance the energy transition, the Caribbean Development Bank (CDB) developed the Accelerated Sustainable Energy and Resilience Transformation Framework (ASERT) 2030. As part of the ASERT program, CDB engaged Castalia to identify barriers to renewable energy investments in the region. We identified the lack of regulation for renewable energy in the region holds back economically viable energy resiliency projects from being implemented. A clear set of regulations creates confidence among investors and utilities to implement renewable energy projects.
To address the barriers to renewable energy investments, with the support of the CDB, Castalia developed a Minimum Regulatory Framework. The framework proposes a minimum set of regulations that, if put in place, would enable private and public investors to implement renewable energy projects. The MRF’s regulations give investors and utilities certainty of access to sites and resources needed to develop projects. Also, the proposed regulations provide certainty to investors for the costs of their investment, including earning a return in capital.
The MRF is recognized by experts as an excellent option to scale renewable energy in the Caribbean. Castalia presented the Minimum Regulatory Framework as a potential solution to financing resilience at the Island Resiliency Action Challenge (IRAC) during the 15th Annual Caribbean Renewable Energy Forum (CREF) on April 26th of 2023. The challenge asks Caribbean stakeholders to identify the region’s most pressing challenges, pitch solutions, agree on the best solution, and act on an immediate action plan to implement it. This year’s challenge question was, “What is preventing the development of resilient energy systems in the Caribbean?”. The audience voted for the MRF as the best solution to enable renewable energy and energy efficiency projects.
The MRF is a set of components needed to enable large-scale deployment of renewable electricity generation (both grid-scale and distributed generation). The MRF helps countries to identify gaps in enabling environments for RE financing and deployment and provides the components in a form that can be easily adapted for and implemented in each country. The MRF components include regulations and frameworks for:
- Integrated resource and resilience plan that tells countries what resources to procure.
- Procurement and financing mechanisms to facilitate the selection, solicitation, and payment of projects.
- Access to the site, resources, and environmental permits to enable the development of projects.
- Distributed generation framework mechanism that allows customers to develop renewable energy plans at their homes and businesses and sell excess electricity into the grid.
- Revenue mechanisms component that allows project investors to recover the cost of investment through the provision of services by applying cost-recovery tariffs. The tariffs also allow utility companies to build their creditworthiness. Creditworthy utilities can finance projects on their own and procure private investors to develop and finance projects with.
Of course, implementing the MRF will be a challenge. Many Caribbean nations have limited financial, human, and technological resources to roll out development projects. Additionally, each country has its own unique political, economic, and social systems. MRF implementors must consider the unique needs and circumstances of each nation. Countries will also require technical assistance to implement each component. Country governments, the CDB, and donors must coordinate quick and sustained action to effectively implement the framework.
To support the efforts to implement the MRF, Andrew Sprott, Practice Leader at Castalia, developed the action plan and will lead an implementation task force comprised of representatives from Caribbean governments and banks, development agencies, and other Caribbean energy sector stakeholders. During the next twelve months, the task force will work closely with four Caribbean countries that have agreed to start implementing the MRF: Montserrat, Dominica, Saint Kitts and Nevis, and Saint Lucia.
The task force will help each implementing country overcome the challenges with support from the Caribbean Development Bank. MRF components can be adapted to the context of each country, facilitating the regional implementation of the framework. The first step will be to help each country identify gaps in enabling environments for renewable energy financing and deployment. The task force will then move on to implement the MRF and reach procurement for renewable energy projects in implementing countries.
Ultimately, the MRF will help Caribbean countries establish regulations that attract investment to implement renewable energy projects. Implementing such projects enable the region to change its energy profile into a resilient sustainable one by cutting back dependency on imported fuel. We are excited to see the MRF implemented in support of the Caribbean region’s energy system transformation.
Chris Straughn (Caribbean Development Bank), Clive Hosten (Grenada Electricity Services), David Ehrhardt (Castalia Advisors), Devon Gardner (Caribbean Centre for Renewable Energy and Energy Efficiency), Eric Salamanca (Turks, and Caicos Islands Government), Faith Corneille (U.S. Department of State), Gillian Charles-Gollop (CIBC First Caribbean International Bank), Haniff Woods (St. Kitts Electricity Company Ltd.), Hon. Otis Morris (Turks and Caicos Islands Government), Jonathon Kelly (St. Kitts Electricity Company Ltd), Marcus Cyrus (Weatherford Trinidad), Marsha Atherley-Ikechi (Fair Trading Commission, Barbados), Shonette Harrison (Regulatory Authority of Bermuda), Veronica Lizzio (Castalia Advisors), Jeane Nikolai (The Government of Bermuda), Tisha Marajh (Republic Bank), John Selby (Graph Energy), Lyndon Francis (Antigua Public Utilities Authorities), Bertill Browne (Skelec), Kimberly Lewis (AEG).
References
USAID Data Services, Bureau for Management, Office of the Chief Information Officer. (2021, October). Greenhouse Gas Emissions in the Eastern and Southern Caribbean Region. Climatelinks. Available at: https://www.climatelinks.org/sites/default/files/asset/document/2021-10/Greenhouse%20Gas%20Emissions%20in%20the%20Eastern%20and%20Southern%20Caribbean%20Region%20%28Final%29.pdf
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