Four Reasons Why Natural Gas is the Wrong Choice for Electricity in the Caribbean
Caribbean island residents pay some of the highest retail electricity prices in the world. Most islands generate 90–100 percent of their electricity by burning expensive imported diesel or heavy fuel oil in large generators. Thus Caribbean electricity users pay between $0.20 and $0.50/kWh. By comparison, the average for mainland U.S. residential customers is $0.13/kWh; in Hawaii, where they burn oil for much of their electricity, the average is $0.39/kWh.
Naturally, Caribbean islands are in the market for more affordable alternatives. Some islands are seriously pursuing renewables—witness Jamaica’s 20-MW-and-growing wind farm and the Dominican Republic installing one of the largest solar arrays in the Caribbean. Some other islands such as the U.S. Virgin Islands are experimenting with different fossil fuels that don’t require major capital investments, like propane.
But another option looms on the horizon: natural gas. A recent U.S. Energy Information Administration article and a soon-to-be-released International Development Bank study note liquefied natural gas (LNG) is increasingly being touted as a cost-effective solution for the Caribbean.
This is more than unfortunate. Switching from one imported fossil fuel (diesel/oil) to another (LNG)—the latter of which is currently slightly less expensive but much more price-volatile—overlooks the Caribbean’s abundant, domestic supply of cost-effective energy efficiency and renewable energy.
One Colombian island in the western Caribbean, San Andres, is grappling now with the future of its electricity generation, including the relative merits of LNG compared to efficiency and renewables. It becomes quickly clear that there are at least four important reasons LNG is the wrong choice for the Caribbean’s electricity.
1: Efficiency and Renewables are Cheaper than LNG and Diesel
Perhaps the most powerful argument against LNG in the Caribbean is fundamental economics. Both wind and solar undercut the prevailing levelized cost of natural-gas-based electricity in the Caribbean and elsewhere. And the Caribbean is blessed with world-class amounts of renewable resources.
For example, Caribbean wind resources are excellent, measuring an average 7.5–9.0 meters per second throughout the year. The wind resources of Colombia’s San Andres exceeds even that of world wind leader Denmark, where wind generated 33 percent of the country’s electricity in 2013, 54 percent for the entire month of December, and more than 100 percent for briefer times. A utility-scale wind turbine in the Caribbean can produce 50–100 percent more energy than it would under typical European wind conditions.
Sunshine is also bountiful in the Caribbean, with insolation similar to the sunny Southwestern United States. This again is significantly higher than places like Germany, which recently generated over half its electricity from solar PV on a single day in June this summer.
Figure 1 below illustrates San Andre’s excellent renewable energy potential, comparing its solar and wind resources to other leading renewable energy countries and U.S. states around the world.
Couple these abundant resources with dramatic, ongoing cost reductions for solar and wind, plus the expensive nature of most Caribbean islands’ diesel-powered electricity grids, and renewable electricity is simply cheaper to generate than fossil fuel-based electricity in most places throughout the Caribbean (see Figure 2).
For LNG, three increasing price estimates illustrate how sensitive gas is to market price volatility. Under high LNG prices, switching from diesel to LNG barely makes a dent. Meanwhile, switching to wind could cut the LCOE of electricity on San Andres almost in half. Also unaccounted for here are additional benefits of distributed resources, such as reduced line losses, deferred new distribution system investment, and renewables’ hedge value.
Even more compelling than renewables, however, is energy efficiency. Utilities throughout the Caribbean should make deep investments in energy efficiency first. The payoff is profound. On San Andres, most refrigerators and home air conditioning units are 40–60 percent less efficient than similarly priced, more-efficient units currently available on the market. By spending about $8 million up front (which equates to a very modest $0.04/kWh) to replace the island’s existing refrigerators and air conditioning units with newer, more-reliable, and more-efficient ones, the island could save over $65 million dollars net present value on a 15-year basis. In other words, such an investment would pay back in less than two years.
2: LNG Infrastructure Isn’t Cheap
At first glance, switching to LNG may seem inexpensive because islands’ existing diesel generators can be converted to run on natural gas at a “relatively” low cost. However, LNG retrofits for diesel generators can cost $4.8 million for a 14 MW diesel generator, plus there are also additional capital costs, including tanks to store LNG after delivery to the island and the need to upgrade ports to be able to accept shipments of LNG. San Andres, for example, will need an estimated 250 LNG storage tanks at a cost of $170,000–200,000 per tank. Each tank is about the size of a shipping container, so a significant amount of land would be required to house them—a serious challenge for an island half the land area of Manhattan.
Additionally, LNG must be transported from the port where it is received to the generators that will use it, which are not located near the island’s shore. Even on a small island like San Andres, this requires additional infrastructure for transporting LNG, either by truck after the tanks are filled or by using a new pipeline. After arriving at the power plant, LNG also needs to be re-gasified—in an additional multi-million dollar LNG plant—in order to finally generate electricity.
Finally, Caribbean islands are small; they don’t need bigger, more-efficient LNG plants that benefit from economies of scale. San Andres would thus spend a disproportionately large amount of capital to build a small LNG plant and fuel delivery system at a very high levelized cost. That LNG infrastructure is not useful in any other capacity, so if an island migrated away from LNG—such as to renewables—those tanks and pipes would sit largely unused. Investing in renewable technologies now, while also improving energy efficiency, would be a much better use of capital.
3: LNG = Energy Price Volatility
Swapping out a fossil fuel whose price escalates slowly (diesel) for a marginally lower-cost resource (liquefied natural gas) injects a new kind of risk into the electricity system: extreme price volatility. The price of natural gas itself, as well as the export price of LNG from the U.S., has varied greatly and been especially volatile in recent years. In other parts of the world, there is similar natural gas price volatility, as well as large variations in price between different regions. Given natural gas price uncertainty, it is difficult to estimate the costs of importing LNG from the U.S. or other countries over time. More volatility means less predictability in future energy prices for Caribbean island nations like San Andres, and in a region where 15 percent of total GDP is spent on electricity (in the U.S. that percentage is closer to 8 percent), such dramatic exposure to price volatility from natural-gas-fired electricity generation can be a serious hindrance on economic growth.
When talking about liquefied natural gas at small scale like we are in the Caribbean, a different kind of volatility also comes into play: capital cost uncertainty. For example, shipping costs for LNG are notoriously difficult to predict. Such costs include chartering fees, brokerage, fuel consumption, port costs, canal costs, and insurance costs, all of which vary based on where the LNG is shipped from. Along with shipping, liquefaction costs vary dramatically, as do re-gasification costs at the final location.
Each of these cost components include uncertainty, which makes estimates for LNG electricity generation for islands like San Andres extremely wide, from $10 to $30 or more per MMBTU. Given a heat rate for LNG of 7,203 BTU/kWh, the cost of LNG fuel is between $0.07 and $0.22 per kWh. While this does provide an improvement over diesel fuel, which currently costs $0.28/kWh on San Andres, this major uncertainty makes it difficult for islands to understand the true cost of switching to LNG.
Finally, LNG facilities across the globe are significantly larger than what’s needed on a Caribbean island. While there are examples of small-scale LNG in places such as Norway and Japan, these nations are moving LNG short distances within their own region, not shipping the fuel over long distances. Islands the size of San Andres would likely need only one terminal to receive LNG shipments. This may seem beneficial, but it also creates a single source of potential failure for the islands’ electricity system. Installing various distributed and varied energy resources, including renewables, mitigates this concern.
4: Small-Scale LNG Faces Serious Contractual Challenges
The LNG prices we estimated are only valid if there is a seller willing to provide LNG at that price to an island.
Currently, LNG prices are set regionally and are hugely sensitive to the volume of LNG under contract. The world’s main LNG customers, like post-Fukushima Japan, are truly massive customers and can command a lower overall LNG price: Japan alone imported 11.5 cubic billion feet per day of LNG in 2011. By comparison, San Andres would need less than one-tenth of one percent of Japan’s annual import volume. And since natural gas is a regional commodity (as opposed to a truly global one like petroleum where prices are largely uniform regardless of volume purchased), this leads to an important question: Can small islands like San Andres secure contracts for (globally) miniscule amounts of LNG at competitive prices?
Plus, under current natural gas prices, agreements can be reached before natural gas export facilities have been fully approved and constructed—resulting in an uncertain timeframe for when LNG might actually available for import to an island like San Andres.
Furthermore, if LNG is a “bridge fuel” to future alternatives, such as renewables, the amount of LNG needed over time to generate electricity would go down as more renewables come online. As renewables and energy efficiency decrease the needed amount of electricity from LNG plants, the volume of LNG purchased goes down dramatically, further increasing the per-unit price of LNG and making long-term contractual LNG even more difficult.
A Bridge to Nowhere
Given the abundant wind and solar resources available in the Caribbean, and the still-falling costs of installing renewable generation compared with converting existing diesel resources to LNG, choosing renewables over LNG now is a smart economic decision. As the case of San Andres illustrates, sinking capital into LNG would be a poor decision for most Caribbean islands facing similar challenges. There’s simply no reason to build this expensive, unnecessary natural gas bridge when the cost-saving benefits of renewables and efficiency can be captured here and now.
Images courtesy of Shutterstock.