WASHINGTON, CMC -The Bahamas is taking bold steps to transform its electricity sector and build resilience to climate change. Modernizing electricity grids and increasing the shares of solar energy and liquified natural gas (LNG) in electricity production can yield significant macroeconomic benefits in The Bahamas.
Over the medium term, such transformations could reduce fossil fuel imports, decrease the country’s vulnerability to volatile global fuel prices, significantly reduce CO2 emissions, and substantially boost national output (eventually increasing long-run growth potential from 1.5 percent to two percent).
These intriguing findings were based on the IMF’s new Renewable Energy Balance of Payments tool, which estimates the impact of a shift in the mix of energy production on a country’s transactions with the rest of the world.
An ambitious energy transformation
For years, Bahamians have suffered from frequent power outages. Their reliance on imported fossil fuels—one of the highest in the Caribbean—for electricity generation leaves consumers and businesses vulnerable to high and volatile energy prices.
To address these hardships, the government announced plans in June 2024 to invest in a modern electricity transmission and distribution infrastructure in partnership with the private sector and increase the share of renewable energy in its electricity generation mix. Specifically, the government is taking advantage of the abundance and intensity of solar energy available to The Bahamas all year round by increasing the share of solar energy to 30 percent by 2030.
Investing in solar also minimizes the adverse environmental impact and logistical challenges associated with other forms of energy. A small share of electricity will still be produced using diesel, but much will be replaced with cleaner LNG.
While a transformation of this magnitude can be expensive, the government’s partnerships with private power producers and investors can help The Bahamas achieve its mitigation goals.
The transition to a greener electricity mix while meeting growing electricity demand requires multi-year investments, which are expected to be financed by the private sector. However, carefully managing fiscal risks will be necessary to avoid adding to the government’s already high public debt.
Investing in resilience
Unfortunately, even with these investments, the threat of climate change is here to stay. IMF analysis suggests that rising sea levels could place up to 41 percent of the land in The Bahamas and 22 percent of its population below sea level by the end of this century. Moreover, the country is positioned within the Atlantic hurricane belt, leaving it at high risk of hurricane damage.
Left unaddressed, more severe natural disasters and slow-moving impacts from climate change could reduce The Bahamas’ national output by up to 11 percent by 2100, with more significant losses in the islands whose economies rely most on hospitality and real estate.
Given these risks, investing in The Bahamas’ capacity to adapt to climate change and preserve its natural capital could increase national output by up to nine percent over the long term, including through sustainable tourism.
Building resilience to climate change would require diversifying away from vulnerable activities and undertaking investments to protect physical assets and natural capital (for example, breakwater construction, coral reef and mangrove protection, and beach nourishment programs).
Investing in climate resilience can be expensive, with financing needs exceeding those of the energy transformation. Fortunately, the ongoing electricity sector reform, if executed successfully, can serve as a blueprint for countries to partner with private businesses to finance climate adaptation.
Moreover, innovative financing solutions, including refinancing expensive debt with cheaper funding, could free additional public resources to preserve the country’s natural habitats. The private sector can be vital in financing climate resilience, working with the public sector, and supporting the international community (including grants).
By working together, this trio of partners can help small states like The Bahamas secure a prosperous future for their citizens and protect their natural beauty and capital for future generations.
*Zamid Aligishiev and Shane Lowe are economists in the IMF’s Western Hemisphere Department, while Beatriz Garcia-Nunes is a research analyst in the IMF’s Western Hemisphere Department.
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