The Price of Privatization: Potential impacts for renewable technology adoption in Puerto Rico

by Jane O’Malley

Under Act 120, or the Puerto Rico Energy Policy Act, the government of Puerto Rico has made significant advances to privatize its public electric utility in a move that many fear will hamper the growth of renewable energy technologies on the island. The bill, which was signed by the governor last June, establishes the framework for sale of PREPA’s generation assets in addition to granting contracts for services of its transmission and distribution (T&D) lines. The impending passage of the bill through Puerto Rican legislature will effectively end PREPA’s monopoly in a move that Rosselló has stated will elevate Puerto Rico’s energy infrastructure to a model of green energy (Sweeney, 2018) The bill has set a goal of 100% renewable power by 2050 while promoting the use of complementary storage technologies. It also helps streamline the permitting process for community and rooftop solar which to-date has been a roadblock for citizens lacking the upfront time and capital to install household systems. [An overview of the full implications of the bill can be found on the law firm McConnell Valdés’ advisory website].

While the government’s ambitious statements have helped stir excitement about the growth of renewable energy throughout the country, they have not been well supported in practice. Several professionals we spoke to noted that executable strategies to reach aggressive policy targets are far from fully substantiated. Lionel Orama, a professor of power engineering at UPR Mayagüez, stressed the importance to first diagnose the problems of the electric power grid before jumping to fix them. Identifying a suite of actionable policy measures while incorporating the perspectives of a broad set of decision-makers is sorely needed to bolster the statements laid out by the government. PREPA has codified its current vision in its Integrated Resource Plan (IRP), developed in partnership with Siemens in 2015. The initial IRP plan was rejected by PREC, the Puerto Rican Energy Commission, due to its lack of consideration for energy efficiency measures such as demand response and distributed generation. PREC, now referred to as the Puerto Rican Energy Bureau, is an independent oversight board, established in 2014 to manage and regulate decisions made within the electric sector. Roughly analogous to a state Public Utilities Commission (PUC), the organization has helped set the vision and framework of the electric industry to provide PR citizens with universal access to affordable, reliable, and cleaner electric power.

While a revised IRP has added considerations for advanced clean energy technologies, most notably microgrids, it still heavily promotes the use of liquefied natural gas (LNG) imports as a source of future power. LNG imports are certain to be expensive as a result of the Jones Act, a century old maritime law passed to strengthen the dominance of the US shipbuilding industry. The act requires all goods shipped between US ports (including Puerto Rico) to be carried and operated by US crews and vessels, in effect increasing their prices by restricting the routes of foreign carriers. A 2010 UPR study noted that the Jones Act costs the island’s economy $537 million annually and its effectiveness has been debated especially in wake of catastrophic storms such as Maria. Energy imports were especially a large source of frustration among residents of Vieques, a small island a short ferry trip from the Puerto Rican mainland.

Diesel generator outside the Wave Hotel, home base during our three day stay

Diesel generator outside the Wave Hotel, home base during our three day stay

Formerly a US Naval bombing base, Vieques is home to a large fishing, surfing and tourism industry. As electricity has historically been provided to the island via an underwater electric cable, after Maria, a broken cable connection required diesel generators to be shipped to residents across the island. Residents not only suffered from long wait times, but a pressing demand for energy took precedent over other shipped essentials such as food and clean water. Full power from the big island of Puerto Rico via the underwater cable was restored to Vieques only two weeks prior to our visit (X months after Maria), and the need to pursue clean energy alternatives was fresh in residents’ minds. As with the Puerto Rican mainland, a continued reliance on fossil fuel imports would not only be inefficient, it would take precedent over the development of clean, economically viable energy alternatives such as solar. Solar power would provide an invaluable source of energy during power outages as PV systems can quickly come back online when disconnected from the central grid. On an island with ample direct sunlight, solar is seen as an obvious economic choice for many of its residents.

Although renewables provide roughly 2 percent of electric power for Puerto Rico today (EIA), they hold significant potential for future growth. Second to Hawaii, Puerto Rico is home to some of the highest costs of electricity in the US; at roughly 22 cents/kWh, billing rates are 10 cents/kWh above the national average. In isolation, solar power have proven to reduce prices to 7-8 cents/kWh in Hawaii, which may provide a good model for Puerto Rico. As the price of renewables has dropped and advances in storage technologies have accelerated over the past several years, these factors “provide an opportunity to vault into a new era, rather than turn back towards large central oil and coal-fired generators…”(IEEFA). Under the current utility structure, renewables adoption would undoubtedly reduce costs of the island’s staggeringly high electricity rates. Privatization, however, presents several unknowns for the success of renewable technologies which must remain economically competitive to ensure widespread adoption in coming years.  

A brief history of privatization

Privatization and its common counterpart, deregulation, took off throughout the mainland US in the 1990’s. Privatization transfers industry assets from publicly owned to investor-owned entities maintaining its monopoly structure while deregulation remove barriers to entry for the three stages of the electric grid--generation, transmission, and distribution--in which multiple buyers and sellers can compete on an open market.

While privatization is claimed to reduce operating inefficiencies associated with large monopoly electric utilities, it has often led to an increase in the cost of power for consumers . Under a private, for-profit utility model, stakeholders can set higher prices to generate steady revenue and invest in capital enhancement while holding less accountability to the consumer taxpaying base than their public counterparts (CityLab, 2015). The Institute for Energy Economics and Financial Analysis (IEEFA), a non-profit that has researched the impacts privatization holds for Puerto Rico, predicts thatunder privatization, electric prices will continue to rise to 27 cents/kWh by 2024, lock the country into long-term natural gas contracts and crowd out investments in renewable and distributed energy markets (IEEFA, 2019). Additionally, consumers will be subjected to price volatility tied to natural gas markets under a privatized structure that relies on LNG. Other analysts have expressed concerns that environmental and safety compliance will decline as eager investors could skirt around permitting requirements to roll out new projects. For example, the Windmar Group, a large renewable energy developer on the island, has been suspected of overbilling and selling faulty equipment to PREPA, in a rush to capitalize on attractive renewable power (CPI, 2018).

Beyond speculative concerns, privatization is hardly new to Puerto Rico.  The government has pursued utility-sector privatization since the administration of the current governor’s father, Pedro Rosselló, in the 1990’s. The elder Rosselló was instrumental in the privatization of the island’s telecom industry and declared a state of emergency to pave the way for the privatization of PRASA, the public water utility. PRASA has twice flirted with privatization which led to detrimental outcomes in both service and affordability (NACLA, 2018). PRASA was first sold to industry giant Veolia in the mid-90’s which resulted in a deterioration in service quality and increase in both consumer prices and operational debt. A second try at privatization with Ondeo, a subsidiary of the French company Suez, produced fewer damaging results but ultimately led to sustained company debt and failed investment toward upgrading the utility’s aging distribution assets. PRASA has since returned to a public utility structure after rescinding its contract with Ondeo. PREPA too, could consider an interim period of privatization to reduce management inefficiencies and invest in needed infrastructure. Although the government has officially taken action to privatize, some such as Orama have noted that PREPA’s aging infrastructure assets remain highly unattractive to investors. PREPA’s generation assets will require significant capital investment to upgrade outdated technology and service connections. As such, selling assets at a competitive price is a major challenge facing the company.

UPR Mayagüez Experimental Solar House

UPR Mayagüez Experimental Solar House

With so much negative talk of privatization, what are the alternatives? The functioning of PREPA as-is lacks the direction, oversight, and financial capability to provide customers with reliable services and to adequately modernize the Puerto Rican power grid. Those who support privatization argue that it will provide efficient, reliable, and cost-effective electricity in the public interest. It is assumed that a for-profit service model increases efficiency of operations and managerial leadership, which PREPA has struggled with under high personnel turnover and $9 billion debt. Some such as Marcel Castro, a professor of electrical engineering at UPR Mayagüez, believe that restructuring of utility management and ridding the company of its crippling debt are crucial steps toward long-term operational sustainability. Castro hopes the government’s preferred alternative of privatization may present a silver lining for the growth of residential and community solar power.  While he advocates for the restructuring and ultimate preservation of the public monopoly, rooftop photovoltaic (PV) systems may grow in popularity in response to expensive grid alternatives. These systems could be achieved in the form of community-based electric cooperatives, the first of which is on the verge of incorporating in the rural region of the island (see Jan 9th energy transition blog post). Governmental support for co-ops was recently backed by Senate Bill 984 which allows for the creation of community co-ops to diversify their energy sources and achieve self-sufficiency.

Rooftop solar panels atop a fire station in Vieques

Rooftop solar panels atop a fire station in Vieques

Supporters on both sides of privatization have hailed the benefits of reduced costs, increased environmental benefits, and access to decentralized energy sources that each envision under their preferred alternative. While the exact outcomes are unknown, our conversations with energy professionals and research from external analysts have unanimously raised concern that if handled poorly, privatization may inadvertently increase the costs of electricity on the island, which are already some of the highest in the US. Puerto Rico is at an optimal location to maximize the power output of solar generation which would be especially beneficial in Vieques and Culebra, areas highly vulnerable to power outages and reliance on outside commodity shipments. Through the pairing of solar generation with battery storage systems, these regions can become energy self-sufficient while reducing costs and improving public health and safety (particularly by avoiding the impacts associated with backup diesel powered generators). Nonetheless, the high cost of storage needed to reliably support large increases in solar remains the largest barrier to wide-scale renewables adoption. Community-scale solar systems and pursuit of external partnerships and funding streams will help reduce these costs and move the dial toward 100% renewable power over the coming decades. The country’s enthusiasm toward solar is apparent as rooftop solar installations have nearly doubled on the island in the year following Maria. Maintaining momentum for renewable generation is critical at this moment to move away from traditionally imported fossil fuel and sustain strong industry leadership under a newly privatized or ultimately restructured electric utility.