How Cuba's reopening could change its energy future
Since the United States and Cuba reopened their respective embassies last month, reestablishing full diplomatic relations for the first time in 54 years, foreign policy experts have focused mainly on the expected impacts on Cuba’s economy and trade.
But this geopolitical development also will affect the ambitious energy policies of the cash-strapped country. Despite the impressive results of Cuba’s ongoing energy revolution, the country will need massive foreign investment to revitalize its energy sector.
Following Fidel Castro’s communist takeover in 1959, U.S.-imposed sanctions put great strain on Cuba’s economy for more than half a century. The fall of the Soviet Union, Cuba’s closest ally and cash cow until 1991, exacerbated the situation.
For many observers, it is a miracle that the country did not go bankrupt and that the communist regime survived the many economic and political challenges that it faced.
Cuba’s almost exclusive reliance on fossil fuels — which account for as much as 96 percent of domestic electricity generation — poses a considerable economic burden, particularly as most of these fuels are imported. The heavy dependence on oil, mainly from Venezuela, has driven up public debt to nearly 40 percent of GDP.
When hurricanes devastated Cuba’s already inefficient electric grid, the country had to take drastic measures. In 2006, the government instituted a series of reforms in what came to be known popularly as “La Revolución Energetica,” or the Energy Revolution.
The Revolution is characterized by six building blocks (PDF):
- Improving efficiency in households and businesses by replacing older appliances;
- Complementing large central power plants with distributed generation and improving the transmission and distribution networks;
- Increasing the use of renewable energy technologies;
- Increasing exploration and production of local oil and gas resources;
- Increasing international cooperation; and
- Raising public awareness.
In 2014, Cuba set a target of producing 24 percent of its electricity from renewable sources by 2030.
So far, the Energy Revolution has been quite successful. Most of Cuba’s inefficient electrical appliances (PDF), including 2.5 million refrigerators, 1 million fans and 9.4 million incandescent light bulbs, have been replaced. In just the first two years of the revolution, nearly 116 million incandescent bulbs were replaced (PDF), making Cuba the first nation to entirely phase out the bulbs.
By 2008, Cuba was consuming 66 percent less kerosene, 60 percent less liquefied petroleum gas and 20 percent less gasoline than before. In addition, the country’s carbon dioxide emissions were cut by 5 million tons (PDF), equivalent to 18 percent of Cuba’s total emissions in 2002.
The government also has added nearly 3 gigawatts of capacity through decentralized systems (PDF) and has reduced transmission and distribution losses to 14.8 percent. As a result, blackouts are mostly a thing of the past. However, most of the decentralization relies on expensive and inefficient diesel and fuel oil generators, rather than on economically and environmentally sustainable domestic renewable resources.
Central to Cuba’s policy has been creating awareness about energy conservation. Broad public education on energy saving was prominent even before it became a specific pillar of the energy revolution.
From “click patrols” in the 1970s that visited homes asking families to turn off unused appliances, to exporting its energy conservation expertise to other Latin American nations such as Haiti and Venezuela, Cuban energy education has remained strong. Even when the economy tumbled post-1991, the government did not decrease its spending on education.
Since 1997, the Ministry of Education has run an energy saving program, PAEME (PDF), that creates public environmental awareness through extracurricular activities and school-based programs, such as presenting energy themes in textbooks on geography and biology. Many Cuban universities offer masters degrees in energy efficiency, photovoltaic technology and other energy issues.
Between 2006 and 2008 alone, Cuban media focused (PDF) some 1,600 newspaper articles, nearly 5,200 radio broadcasts and 17,000 television broadcasts on topics such as energy conservation, renewable energy and climate change.
Despite Cuba’s notable success in curtailing energy consumption, things are less rosy on the generation side. With renewable energy accounting for just 4 percent of production, the country has a long way to go before reaching its target of 24 percent by 2030.
Cuba needs significant foreign investment both to finance renewable energy projects and to improve its highly inefficient grid. The restoration of diplomatic ties with the United States is only the beginning, and the country needs to unleash a slew of reforms to boost investor confidence.
From crisis to opportunity
For decades, Cuba has faced a severe energy crisis. Because longstanding trade embargoes have limited the inflow of cash from the West, the country’s response has centered mainly on reductions in energy use.
Cuba is a leading exporter (PDF) of sugar and thus has great potential to produce electricity from bagasse, the fibrous matter that remains after sugar cane stalks are crushed to extract their juice. The country also has huge wind energy potential along its large coastline.
The country has seen a surge in international investors visiting since December, when U.S. President Barack Obama announced a thaw in U.S.-Cuban relations. Given that Cuba is just 90 miles from Florida and is home to 11.5 million people that have growing energy and consumer needs, it is seen as an attractive destination for investment.
Business officials from Europe are thronging to the island nation as well. Ministers and business representatives from France, Germany, Italy, the Netherlands, Spain and the United Kingdom have all visited Cuba in recent weeks.
When it comes to energy prospects, Cuba's goal of producing 24 percent of its electricity from renewable energy sources by 2030 relies on as much as 14 percent coming from biomass, primarily bagasse. The country also has identified 20 potential sites (PDF) for setting up wind turbines, from which 6 percent of electricity needs can be met. Of the remaining targeted renewable power, 3 percent is from solar and 1 percent from hydropower.
To fulfill these ambitions, Cuba needs investments worth $3.5 billion. The energy ministry recently announced that it would build seven wind farms financed by foreign investors. Obama already has pledged $20 million worth of green energy investments to other Caribbean nations, and Cuba could be the next partner to attract larger investment.
In the midst of the euphoria surrounding Cuba’s energy revolution, the government must not lose sight of the challenges that lie ahead. The country’s electricity grid remains dilapidated and fragile due to the exclusive use of hydrocarbons and to a lack of investment in grid operation and maintenance.
Yet skepticism over investment quality in Cuba remains. A country whose leaders have repeatedly used the slogan “Socialism or death” in the past must do a lot to boost investor confidence.
The Cuban government passed a foreign investment law early last year to gain access to advanced technology and to help create jobs, but progress has been slow. The new law allows foreign investment in all economic sectors, slashes the tax on profits from 30 percent to 15 percent, and eliminates the 25 percent tax on labor costs.
Yet details of the law are unclear, as foreign media were neither given a copy nor allowed into the parliament during the debate.
Cuba also has a history of meting out harsh punishment for corruption and espionage. Barely months after the new foreign investment law was passed, a Canadian businessman was sentenced to 15 years in jail on charges of bribery. Although he was released early this year, such actions worry international investors.
Meanwhile, the U.S. sanctions on Cuba are encapsulated in six separate laws, which have been in effect for the past five decades. Although Obama can wield executive power to push for better relations with Cuba, the U.S. Congress formally must overturn these sanctions.
The Republican-majority Congress is none too thrilled with Obama’s decision to normalize relations with Cuba and likely will oppose this move, regardless whether the country remains a difficult destination for foreign investors. Cuba must understand these nuances of geopolitics and pass some drastic laws to signal that it, too, means business.
Cuba boasts the highest number of engineers and Ph.Ds per capita among Latin American countries and long has exported its energy expertise to neighboring countries, such as Haiti and Venezuela.
With the restoration of diplomatic relations with the United States, Cuba now has even better opportunities to access and transfer brainpower from its northern neighbor, especially for improving its inefficient electricity grid. Cuba’s proximity to Houston, Texas, perceived as North America’s offshore energy hub, also could prove to be helpful.
Cuba’s primary oil supplier, Venezuela’s Petrocaribe alliance, has been deeply wounded by falling international oil prices. The current regime under Raul Castro has realized the necessity for Cuba to open up to foreign trade.
By reforming its political and judicial structure and by embracing international investment, Cuba can cut its red tape and speed the country’s transition to a clean energy economy.
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