Guyana’s Petroleum Road Map Part 2, Guidepost 5: Wrapping-up the appraisal of renewable energy investment as a public spending priority

Introduction

Today’s column concludes the discussion on my Road Map recommendation that “sustained Government of Guyana (GoG) investment in renewable energy becomes a declared priority for optimising the use of its expected petroleum wealth. The ultimate rationale for this recommendation lies in Guyana’s extant commitments at global (United Nations Development Goals, SDGs), regional (CARICOM Sustainable Energy Road Map, C-SERMS), and national (Green State Development Strategy, GSDS); fora. I readily acknowledge that this can be interpreted as an “outsidethe-box proposal”. Fundamentally, however, it reflects my deep concern that a petroleum-dependent path of economic growth could run afoul of the pursuit of a “green state sustainable development path”, with its deep environmental ethos.

Operationally, this spending recommendation rests on two foundations. One is my deeply held belief that only a Government Ministry, which is dedicated to this goal, would be positioned to deliver this outcome. Second, to achieve this goal also requires the stature of a Government Ministry in order to contend with the fierce competition this will encounter, and, despite this, to meet the requirement of intense cooperation so as to ensure the best use of Guyana’s oil wealth.

Drivers

Worldwide experiences have shown that, in environments like Guyana’s, there are several drivers which favour a leading role of a Government Ministry, as recommended. One of these is developmental. Guyana is a small weak poor open economy and consequently has a weak private sector and limited domestic markets for energy. At this juncture, only foreign investors are in a position to provide the requisite capital if our renewable energy resources are to be produced for export. This reality is reinforced by the circumstance that historically, even in large developed economies with strong private sectors (for example the United States), government leadership in energy development has been observed! Consider:

“Over time, virtually all sources of energy have received some form of US government support. As far back as 1916 the government introduced tax incentives to encourage companies and individuals to drill for oil. In the 1930’s, the government focus shifted to federal finance for dam and hydroelectric power. From the 1950’s onward the government financed research in nuclear power and in recent years the government has provided finance for alternative and renewable energy.” - Bedzek and Wendling (2007), International Journal of Global Energy Issues.

A second driver is that the potential abundance of Guyana’s overall energy resources already recognised, at this stage, requires a long-term multi-generational perspective to strategically pursue their realisation. My conviction is private gain (profit) cannot be reasonably expected to incentivise the required long-term investments, given the huge externalities. Private profitability is the only sure way to incentivise private firms in market-based systems.

A third driver derives from Guyana’s specific admixture of historical/political/cultural elements. The country’s geo-strategic imperatives and its development predicament (weak, small markets), make goals such as energy security; energy affordability; the strategic positioning of Guyana in the Region and Hemisphere (given its border challenges); environmental vulnerabilities; and, ultimately, its’ aspirational option to develop a “green state” cannot be mainly left to market outcomes.

To emphasise, it is very noteworthy that worldwide research supports the following observation: “renewable energy policy highlights how important government’s policy structure and growth measures are for the renewable energy industry as a whole” (Hill, 2015). Such statements acknowledge the success of Europe’s renewable energy policies (see Global/Data Report on Renewable Energy Policy, 2015).

Economic Theory and Development

Widely tested economic theories/theorems also give strong support to my recommendation. I refer to two of these. First, economists generally acknowledge the price of energy (similar to other major traded products in world markets) does not capture negative environmental (for example, pollution) and social costs. These costs are defined as “externalities”. Readers of my columns should be aware from my treatment of these public debates that fossil fuels are “dirty” and generate negative externalities, for which the sellers of fossil fuels do not have to pay! Typically, government and/or citizens, take up such costs. In similar vein, renewable energy is considered as “clean/green”, because it does not generate significant negative externalities. To the contrary, their use generates savings/benefits (positive externalities). Where positive externalities arise, economists encourage government intervention to secure these for the broader society.

A second economic theory/theorem is that for most growth (development) models, increases in per person real value added GDP is almost entirely dependent on the growth of productive factors (like labour, capital) plus the growth of what is broadly termed “technology”. Here technology refers to all increases in per person real GDP that cannot be adduced to the productive factors. This residual is overwhelmingly generated by improvements in techniques, spending on research and development in the fields of science, and, innovation over all areas of systematic human endeavour.

Therefore, the successful development of renewable energy in Guyana must draw heavily on science and technology (S&T), as well as Research and Development (R&D). In this request, I had noted in my last column that Guyana needs to inventory, monitor, and oversight its renewable energy resources. Such activities are S&T and R&D intensive.

Finally, it is reported: “more money is invested in renewable energy than ever before”. (Science in the News (SITN), Harvard University, 2012.) The report reveals that such investment focuses on projects that “need finance to develop and commercialise”. From the standpoint of development logic, investment in Guyana’s renewable energy potential offers great development spillover and linkages.

Conclusion

Next week I begin extended consideration of the final topic – the Buxton Proposal.