Solar power’s tremendous potential in the Caribbean has long been recognized. Based on recent reports, realization of that promise may finally be on the horizon.
More than a dozen island nations in the Caribbean rely on imported oil and coal for electricity generation. Rates for electricity are off the charts – as much as four to eight times rates in the U.S., and increasing. The price of solar power has declined sharply, while performance, output, and reliability continue to improve.
Recent reports highlighting compelling economics of solar investment in the Caribbean have brought renewed attention to the potential of the market. With an estimated capital cost of at least $30 billion over the next decade to modernize and upgrade infrastructure in the Caribbean, the market opportunity for clean generation reducing these investments is huge.
Even with the compelling economic story, a variety of sources of government incentives are being introduced to further accelerate adoption of renewables in the islands. A recent BusinessGreen post discussed Caribbean Development Bank’s (CDB) announcement of a £50 million program for solar and geothermal finance. The White House recently announced a new U.S. policy on Promoting Energy Security in the Caribbean, incentivizing private sector loans through credit support by the Overseas Private Investment Corp. (OPIC). OPIC and the World Bank also have joined forces with the Carbon War Room and Richard Branson, earmarking $300 million for new renewable energy projects in the islands.
With a marked uptick in recent projects, we have seen first hand the promise and challenges that building solar in the Caribbean presents. While there are many pieces that must be done well to build or finance a solar facility in the Caribbean, here are several key issues that are vital to success in this market:
Interconnection and PPA Negotiation with State Energy Companies
With a few notable exceptions, utilities and utility regulators have been slow to facilitate physical grid interconnection and policies for offtake of solar power back to the grid. The overall potential will depend heavily on whether entrenched utility and regulatory interests can be influenced to move to new models for grid interconnection and payment, such as net metering and feed-in tariffs, and effectively address the need for bankable transaction documents.
The Caribbean presents unique insurance risks. Managing risk for solar projects in an environment with regular hurricanes and other tropical weather, combined with government risk, is daunting. Limits on the availability of viable insurance products continues to limit the number of willing investors in the market.
Caribbean Solar Deals Must Sweat the Details
The economics of solar proposals in the Caribbean are enticing. But at the end of the day, projects that look great based on planning models must be implemented in a timely and cost-effective way. Based on our experience in these deals, we see six important keys to success in executing solar development transactions in this region:
- Conduct an early and thorough assessment of local policy, regulatory and licensing issues, particularly with respect to interconnection, project siting and contractor permits.
- Carefully evaluate standard Power Purchase Agreement and Interconnection Agreement terms to assess feasibility and ability to modify in negotiations.
- Engage local agencies and officials early and effectively to prevent delays.
- Ensure legal documents will meet requirements of all anticipated financing sources and partners.
- Confirm quality of equipment suppliers, installers and warrantees.
- Minimize transaction costs by utilizing experienced service providers with flexible fee structures.
The Caribbean unquestionably will present major solar investment and project development opportunities in the coming decade. Investors and developers who can effectively sort projects that meet the key regulatory and licensing variables in the early stages, and then execute to keep transaction costs down, will see large upside profits.