St. Vincent’s geothermal development approach
St. Vincent and the Grenadines (SVG) with a population of approximately 104,000 people is 150 square miles and lies 60o 56’ West longitude and 13o 15’ North latitude, approximately 100 miles west of Barbados, 68 miles north of Grenada and 24 miles south of St. Lucia. From a morphological point of view St. Vincent shares similarity to the other Windward Islands, consisting of a central axial range of mountains starting from La Soufriere (1,234m) in the north, to Mt St Andrew in the south. The island is entirely volcanic with six main volcanic centres located along its central axis.
Like most of the CARICOM member states, with the exception of Trinidad and Tobago and to a lesser extent Barbados, SVG is heavily dependent on imported oil for commercial energy need, particularly in electricity generation. The all-time high electricity rate of USD 0.43/kWh in 2014 was attributed to a 56% fuel surcharge. In response to the high electricity cost and oil dependency, the exploration of indigenous sources of energy became a top priority for the Government. A geothermal project became the preferred option given the limited baseload power alternatives and the already exhausted exploitation of hydro energy.
Geothermal energy development, as stated by Prime Minister Ralph E. Gonsalves, “will become the game changer for economic development in SVG”. The Prime Minister considers the reliance on imported oil for power generation a driver for high and volatile power prices, and has been a huge drain on foreign exchange.
The interest in geothermal development in SVG was however not a new venture as an earlier study by Geotermica Italiana was carried out in 1991. This study was part of a larger Eastern Caribbean geothermal reconnaissance project funded by the United Nations and the Caribbean Community Secretariat. The results of this study revealed that St. Vincent was not a primary geothermal development area and further suggested the islands of Nevis, Montserrat and Dominica as most favourable for geothermal development. A number of studies were carried out since and have found that SVG has a promising geothermal resource. The most optimistic studies found that this potential could be as great as 890 MW. While encouraging, these studies were insufficient to give certainty about the nature, size and economic potential of SVG’s resource. This problem is common to geothermal projects. Geothermal Projects require the investment of millions of dollars to do scientific exploration and technical work, with no guarantees of positive results.
In addition to the high upfront cost associated with geothermal development, St. Vincent’s challenging terrain was an added deterrent to investors. The deeply incised valley-ridge topography on the flanks of La Soufriere offered significant challenges to geological field work, drilling rigs and equipment mobilization, plant location, and the requisite electricity transmission upgrade. The challenges were further compounded with other existing geo-hazards such as slope instability, flash flooding and other seismic events. These challenges, when weighed against a small electricity load demand of just 21 MW, proved to be a very expensive option and did not appear to offer enough financial return to attract private investors. In countries like SVG with limited fiscal resources, this economic risk and the high upfront costs of geothermal projects in general mean that such projects often go undeveloped. Geothermal Development in SVG therefore would require an innovative approach.
Dominica our sister Windward Island that shares similar terrain, low load demand and hence similar challenges has successfully drilled three exploration wells and one production well. Their approach is certainly one that could be replicated, or used as a model for CARICOM, as one may suggest. The proving of the commercial viability of Dominica’s geothermal reservoir was successfully achieved through public financing with grant aid from the French Government and the European Union, at an approximate cost of USD27 million. Dominica’s approach bridges the crucial gap between the earlier and riskier start-up phases that are unlikely to attract debt financing and the more mature and less risky phases of the project when financiers begin to see the project as increasingly bankable and attractive. It should be noted that countries that exhibit rigid fiscal budgets or are burdened with high national debts will therefore require grants and concessional loans at earlier start-up phases due to the high and risky capital cost associated with geothermal development. The ability to replicate this model therefore lies in the ability to attract donor funding. Dominica’s rich geothermal resource and its geographical proximity to the French colonies of Martinique and Guadeloupe captured the attention of France. The interest shown from France was driven by the fact that the Government of France subsidizes the electricity rates of its colonies, and Dominica’s potential to supply energy via underwater cabling to these colonies at better electricity rates was a more lucrative option. It is also pertinent to note that test drilling can account for up to 15% of the overall capital cost of the project and is usually required at a point where the risk of project failure is still high. Logically, for countries that have small fiscal flexibility, it may be irresponsible of the Government to wholly absorb this risk without the assistance of grants.
SVG’s failure to attract grants to aid in developing its geothermal resource beyond the prefeasibility phase has led to the adoption of a ‘public private partnership’ (PPP) approach. In entering into the memorandum of understanding (MOU), the government felt it was very important to seek out partner companies with substantial technical, development and operating experience and with credible financial capacity to develop the project. Having found the ideal partners for this venture, a MOU was signed in January 2013 between the Government of Saint Vincent and the Grenadines (SVG) on one hand, and Reykjavik Geothermal (RG) and Light & Power Holdings (LPH) on the other hand. The MOU evidenced a mutual intention to proceed with additional good faith negotiations designed to develop the Geothermal Project in the manner outlined in the agreement.
The dilemma that faced the consortium and the government in signing this MOU was that, without completing the expensive upfront scientific work, the actual cost of power from the project was highly uncertain. The consortium required some assurance that, if it invested in doing this scientific work and the results were favourable, it would be able to earn a sufficient rate of return to justify the investment. On the other hand the government’s objective was keeping the cost to supply power from the project as low as possible. In addressing this dilemma the terms of the MOU were addressed so that the project can move forward. Under the guidance of competent lawyers of the Proskauer law firm and the negotiating experience of the Clinton Climate Initiative the general terms of the MOU were mutually agreed and finalised. In this agreement the consortium will fund the upfront work which will result in a detailed business plan establishing the promise of the geothermal resource, the costs to develop it, and an action plan for development. In exchange for making this investment, the consortium gets the exclusive right to negotiate with the government to develop the project under an Independent Power Producer(IPP) framework. Under this framework, the geothermal consortium (RG& LPH) and the Government will form a company (Company X) for the development of the project under a shared equity arrangement. The Government’s equity portion will be financed through concessionary loans, available grants, land provision and tax concessions. Company X will then negotiate with VINLEC (the utility) a power purchasing price (PPA) prior to the final investment decision.The cost of power in the PPA will be based on the actual costs of the project and a pre-agreed rate of return for the project. If these costs and the pre-agreed rate of return do not result in a cost of power below current costs and favourable to consumers, the government is under no obligation to move forward with the project.
SVG’s Geothermal Development Project throughout its various stages will employ a competitive bidding process in line with World Bank guidelines and standards to ensure cost-effectiveness and transparency. The project is using best practice project management methods and control processes, including the decision gate process typically deployed for large engineering projects. Using this decision gate process, LPH’s Board and its parent company’s (Emera’s) Boards, RG’s Board and both the Government’s Energy Committee and Cabinet assess progress and technical and economic feasibility at key project milestones before proceeding. The Clinton Climate Initiative under a signed MOU is advising the Government and providing legal, financial, negotiation and strategy support to ensure agreements are reasonable for all parties. Technical assistance from the government of New Zealand and Japan will all become a collective strategy for lowering project costs.
Recognizing that financing of this project would be a challenge, the government is working with the consortium to access as many grants and other forms of concessional finance as possible to further reduce the costs of the project. In their efforts, the government of St. Vincent and the Grenadines has recently been awarded a concessional loan of US $15 M from IRENA via the Abu Dhabi Fund which will serve as government’s equity towards the project.
The project partners also recognize that community sensitisation, environmental and social impact assessments and the legal framework are amongst the key elements for its success. As such, town hall community meetings, and the early engagement of the University of the West Indies Seismic Unit are all part of the overall strategy adopted. Early baseline Environmental Impact Assessment has already been accomplished and a Geothermal Bill will be brought to a Parliament soon to address matters of ownership, royalties and land and environmental protection among others matters.
The preliminary phase was concluded with a very optimistic outlook for the project. The positive outlook was largely due to the advanced technology utilized, a meticulous data analysis, and the credibility of the development team. Currently the business model is being finalized and the government is confident that this project will transform the energy sector in St. Vincent and the Grenadines by reducing dependency on imported diesel and transitioning to a low-carbon economy based on indigenous renewable resources. Once operational, the 10 MW plant will supply substantially all of the country’s baseload power and bring renewable energy sources to approximately 73 percent of total power generation, well in excess of SVG’s Energy Action Plan target of sixty percent by 2020.
Director of Energy
St. Vincent and the Grenadines