Winds of up to 240 kilometres per hour flattened entire neighbourhoods and toppled power and communication lines, causing damage equivalent to a third of the country’s annual economic output, according to early government estimates.

Many Grenadians cast their minds back 20 years when a similarly powerful storm – Hurricane Ivan – brought the island state to its knees, triggering a vicious circle of financial distress that eventually led to a debt default.

But, unlike in 2004, officials this time could deploy a tool that has been widely discussed in climate circles to provide financial help in the wake of fierce storms: hurricane clauses built into its agreements with international creditors.

Grenada last week became the first country in the world to use such a provision in a government bond which will allow it to postpone debt repayments to private investors, including US investment firms Franklin Templeton and T. Rowe Price.

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The move will save the Caribbean island nation a total of around $30 million in payments due this November and in May next year. While the money owed will be added to future bills, in the meantime the cash injection will help fund immediate recovery efforts and keep essential services like healthcare and education running, a senior official in Grenada’s Ministry of Finance told Climate Home.

The government is now “in talks” about triggering similar clauses with other creditors.

Fighting the debt trap

Grenada’s use of debt suspension clauses will be seen as a litmus test for their effectiveness in shoring up disaster-hit economies, as major international financial institutions like the World Bank promise to offer them more widely to climate-vulnerable countries.

Mike Sylvester, permanent secretary at Grenada’s Ministry of Finance, told Climate Home the debt repayment pause can have a “significant” impact in the short term, giving “some breathing space to the government to be able to properly and adequately respond to the crisis”.

Without this option and other relief measures, the government may have struggled to meet basic needs without making painful cuts to services, he added.

Simon Stiell, the head of the UN Climate Change body (UNFCCC), told Climate Home that “mechanisms such as this will be increasingly important as the scale, frequency and impacts of climate disasters continue to worsen”. Last month Stiell saw first hand the scale the devastation Hurricane Beryl inflicted on his home island of Carriacou – part of Grenada – where 98% of homes and buildings had been destroyed or severely damaged.

Like Grenada, many developing nations are finding it hard to deal with the combined effect of rising debt and worsening climate impacts.

Nearly half of low-income countries currently experiencing or at high risk of debt distress are also highly vulnerable to the effects of climate change, according to a March 2023 report by the UN Trade and Development agency (UNCTAD).

A separate analysis by charity Debt Justice found that debt payments for the most climate-vulnerable countries have reached their highest level in at least 30 years.

Emily Wilkinson, a senior research fellow at think-tank ODI, said that when a natural disaster hits a highly debt-distressed country, the impact on the economy is likely to prompt a default unless there are safeguards in place or the debt can be renegotiated quickly.

Disaster clauses in spotlight

Debt suspension clauses have risen to the top of the agenda since they were featured among the key recommendations put forward by Barbados Prime Minister Mia Mottley in her Bridgetown Agenda, a vision for reforming the global financial architecture and making it fit for a world grappling with rising climate pressures.

The World Bank expanded the scope of its climate-resilient debt clauses last year. Pauses on repayments of all new and existing loans, and related interest payments, are now being offered to 45 states it classes as “small” including island nations.

Other international development lenders, like the African Development Bank, the Inter American Development Bank and the UK Export Finance, have introduced similar options.

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For Marina Zucker-Marques, an economist and senior researcher with the Boston University Global Development Policy Center, temporary debt suspensions are an important tool that gives disaster-hit countries “some breathing space, allowing them to prioritise social spending, which is critical in the immediate aftermath of a natural disaster”.

But while these clauses have become more popular, they are still “a tiny fraction of debt contracts,” she added.

The lesson of 2004

Grenada is among a handful of countries that have pioneered the inclusion of hurricane clauses in their loan agreements dating back nearly a decade.

After the devastating experience of Hurricane Ivan in 2004 and a subsequent default, the island nation insisted on including such provisions in 2015 when it restructured debt with its main creditors, international private bondholders and the Exim Bank of the Republic of China (Taiwan).

One of the main challenges during the extended negotiations was to settle on specific parameters that would allow Grenada to trigger the clause in the event of a severe storm. These could be the wind-speed or the size of the economic losses caused by the disaster.

In the end, Grenada and its creditors agreed that a payout from the Caribbean Catastrophe Risk Insurance Facility (CCRIF), a regional disaster insurance fund Grenada is part of, for losses over $15 million would be the trigger.

After the passage of Hurricane Beryl, CCRIF has made a record $44 million insurance payout to Grenada as a result of the extensive damages to the islands. This enabled the government to activate its debt suspension clauses.

The aftermath of the devastating passage of Hurricane Beryl on the island of Petite Martinique, Grenada in July 2024. REUTERS/Arthur Daniel

Sylvester from Grenada’s Ministry of Finance said the country is now much better prepared to deal with the financial aftershocks of a hurricane, having learned the lesson of the events in 2004 – but more needs to be done.

“The money that we’ve received so far is still a drop in the bucket, given our significant needs,” he added. “We need to continue to build our resilience with the right financial tools, because we don’t want to pile up our debt just to reconstruct damaged infrastructure.”

Grants and debt relief

To that end, the government has set up a disaster relief fund, while looking to repurpose some of its loans and obtain new financial help from multilateral banks.

Boston University’s Zucker-Marques said support from rich countries, which are major contributors to climate change through their historically high greenhouse gas emissions, is fundamental to prevent financial crisis in developing countries on the frontline of extreme weather.

“Climate vulnerable countries need access to more grants and affordable long-term finance to invest in resilient infrastructure and economies,” she said. “Otherwise, the vicious cycle of natural disasters and financial instability will only worsen in the years to come.”

ODI’s Wilkinson said pausing countries’ debt is helpful, but she called for further action from creditors. “In the case of a qualifying disaster, they should offer some form of debt relief on repayments rather than just delaying them – which only kicks the can down the road,” she added.

The article was updated on 23/8 to add a comment from UNFCCC chief Simon Stiell received after publication.

(Reporting by Matteo Civillini; editing by Megan Rowling)

The post In a world first, Grenada activates debt pause after Hurricane Beryl destruction appeared first on Climate Home News.

Speaking to Climate Home News, Grenada’s finance minister Gregory Bowen said successive governments were desperate to change this but had their hands tied by a privatisation deal made nearly 30 years ago.

On advice funded by the World Bank, the current government pursued reforms to support renewables – only to be ordered to renationalise the electric utility by a World Bank tribunal, for $58 million plus legal costs.

As the government seeks to recoup some of the costs by selling shares in the utility, Bowen held up the three decade-long struggle as a cautionary tale. “It has significantly prevented us from going into renewables and we do not believe any country, any small country, should enter any such agreement,” he said.

In the 1980s, almost all developing countries had nationally owned electric utility companies. The only major exception was Chile, then run by free-market dictator General Augusto Pinochet. In the 1990s, they started to sell them to private companies, cheered on by institutions like the World Bank.

One of those countries was Grenada. In 1994, on advice from the World Bank, it privatised its electric utility, Grenlec. The then government sold a controlling interest to a small family firm in Florida called WRB Enterprises, which made its money primarily by selling Caterpillar construction machinery and whose only electricity experience was in part of the Turks and Caicos.

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Bowen, who ran Grenlec when it was state-owned, described the privatisation contract as one-sided and “the worst deal that could ever have passed” for Grenadians.

Bob Blanchard, chief executive of WRB, disputed that characterisation, telling Climate Home News the company shouldered its fair share of risk. “Every decision we made if it backfired came on the stockholders not the rate-payers,” he said.

Among the deal’s conditions was that, if the country’s currency collapsed, there was civil unrest or its power supply was wrecked by a hurricane, flood or fire then the government would have to buy Grenlec back. Any change to the law that impaired the value of Grenlec’s assets could trigger a “repurchase event”. The price would be determined by a formula in the contract which Bowen says “had nothing to do with fair value”.

Meanwhile the rate-setting framework allowed Grenlec to pass on any increase in the oil price to consumers.

Between 2011 and 2015, Grenada’s energy costs per kilowatt hour were between four and ten times more expensive than those in the USA, although similar to some Caribbean neighbours’. In a recent press conference, Grenadian foreign minister Oliver Joseph described high electricity costs as “stifling economic growth” by putting off manufacturing companies from investing.

Gas prices are going up again today. Grenlec also said that their fees are increasing because of the rise in the cost of fuel.

— Ashleigh (@_Ashess_) July 17, 2018

As solar power costs dropped, rooftop panels could have been a cheap and clean alternative for Grenadians. But they had to get a licence from Grenlec and sell any excess electricity to them, or face up to six months in prison. The number of licences available was limited – to avoid overloading the grid at particular locations, according to WRB.

Originally, surplus electricity from rooftop solar was sold to Grenlec through a “net metering” scheme, with a ten-year fixed price of $0.17 per kWh. But, Blanchard said, this was “very costly to the company”. It was replaced with “net billing” system, under which Grenlec deducted the cost of the fuel it would otherwise have used to supply the property. According to the International Renewable Energy Agency (Irena), this “resulted in limited installation of installed capacity, as consumers perceive the payback period as too risky”.

The only problem I have with WRB and Grenlec is the monopoly on electricity. If I wanna get off the grid I should be able to

— Grenadian Christian Soldier (@nickyb_zero3) March 13, 2019

In this monopolistic system, Grenlec would have to drive any large-scale transition to renewables. This transition did not take place. Grenada achieved barely a tenth of its target to get 20% of its electricity from renewables by 2020.

The government blames the 1994 deal which it says gave Grenlec no incentive to invest in renewables. The Inter-American Development Bank agreed, saying the deal “enabled a monopolistic, fossil fuel biased development of the electricity sector, severely hampering the development of renewable energy technologies”.

WRB’s Blanchard insisted the lack of progress was “not through lack of trying” on the company’s part. He blamed Bowen’s conservative New National Party, complaining the government had not supported attempts to purchase land from the state or absent private landowners for solar and wind farms.

What’s not clicking for Grenada? Truly. We just have our renewable resources going to waste. Talk, talk, talk bit no action https://t.co/HeScr8xqBd

— 谢奈尔 (@itsShay_nell) October 22, 2020

In 2016, a World Bank-financed project led to reforms which shortened Grenlec’s 80-year license, opened up electricity generation, changed the way electricity prices were set and took away its tax concessions.

This draft law was overseen by a consultant who was paid $115,000 by the World Bank to advise on the implications of the reforms on the 1994 deal and “strategies to avert arbitration”. Two more World Bank-financed consultants then reviewed the law.

After all that, WRB argued the law was a “repurchase event” and took Grenada to the World Bank’s International Centre for Settlement of Investment Disputes (Icsid) to try and force a sale.

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Following a two-year court case and nearly $15 million in legal costs, the three Icsid arbitrators ruled in WRB’s favour. They ordered Grenada to pay the company $58m plus costs – nearly a tenth of the country’s $786m projected 2020 revenue – to buy back a share in Grenlec.

According to Bowen, the case caused such embarrassment for the World Bank that its president asked Grenada’s prime minister to make it go away with a settlement. “It was not looking pretty at all,” Bowen said, “you get the World Bank loan to change the legal framework and then it was the court arm of the World Bank who imposed such a ruling. I think there was embarrassment at the highest level of the World Bank… their programme caused us to be in this position and I think they are very very conscious of that.”

Blanchard also criticised the World Bank. “They were funding an effort that was ill-conceived and was going to potentially run down the risk of where we ended up with an Icsid case and an arbitration. Their position was that all they are doing is providing the funding. What the government does with that funding is up to the government.”

This case could have consequences for other nations. While there is no concept of “precedent” in international law, Icsid arbitrators can take “inspiration” from past rulings.

The tribunal ruled that WRB was under no legal obligation to share the government’s view of Grenada’s best interest. Martin Brauch, a legal researcher from the Columbia Center on Sustainable Investment, told Climate Home this ruling ran “dangerously close” to denying the government’s right, which is enshrined in international law, to determine the public interest and regulate accordingly. “Its decision may have that detrimental effect,” he added.

Gus Van Harten, a lecturer in international investment law at Osgood Hall law school, said that investor-state dispute settlement law is “full of these failed privatisation deals – these terribly negotiated deals”. He added that the ruling “shows how energy privatisation contracts can bind governments for generations”.

Having been forced to nationalise Grenlec, the government is now trying to sell shares in Grenlec – but does not expect to get what it paid for them. This time, Bowen said they only want to sell to Grenadians. The plan is to install a “competent management company to take it into the 21st century”.

So when things settle a bit more, we buying shares with Grenlec awa? Or we don’t trust? pic.twitter.com/hPEff4AGO1

— Krissy (@KrissyLionz) December 30, 2020

With control of energy policy, the government is aiming for at least 30% (and up to 100%) of electricity to be generated renewably by 2030. The US National Renewable Energy Laboratory estimates it has the potential for 20 MW of wind power, 25-50 MW of solar power and more than 50 MW of geothermal. The country’s electricity generation capacity is currently around 50 MW. 

Despite the bad experience, Bowen said, the government is still looking to the World Bank for support, along with other multilateral development banks and the Green Climate Fund (GCF).

Most climate finance from rich countries is in the form of loans, many of them on not so generous terms. Bowen called for grant funding. “If we get grants we can make the price come down significantly and maybe over 30 or 40 years we could cover the $63m we paid due to this whole scenario between the World Bank and ourselves,” he said.

The World Bank declined to comment.

This article was updated to clarify that the government was planning to divest shares in Grenlec, not find a new private buyer.

The post Why Grenada had to nationalise its electricity for $60m to pursue renewables appeared first on Climate Home News.