CNE Review – October 2024

Published on October 10, 2024 / Leer en español

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CNE Review

In This Issue

To understand the current energy dilemma Puerto Rico faces and make policy recommendations while safeguarding the interests of families and businesses, CNE has analyzed the status of each of the multiple processes involved in Puerto Rico’s energy transformation. Today, we publish our updates in a Policy Brief, summarize the analysis below, and launch a webpage highlighting all our work on the energy sector including answers to some FAQs.

Insights + Analysis from CNE

By Sergio M. Marxuach, Policy Director

The performance of Puerto Rico’s electric power system has been deficient for many years now. For decades, the electric service provided by the Puerto Rico Electric Power Authority (“PREPA”) was inefficient, unreliable, and expensive, due to serial mismanagement, chronic corruption, rampant partisan politics, and the deferral of required maintenance and capital expenditures. The poor performance of the electric system intensified after PREPA’s bankruptcy and the widespread damage inflicted on the transmission and distribution network by Hurricane Maria, both in 2017.

During the last seven years the government of Puerto Rico has undertaken a massive effort to rebuild and modernize the system; privatize the operation and management of both the transmission and distribution grid and PREPA’s legacy generation assets; begin the twenty-five-year transition to generate 100% of the island’s electricity from renewable sources; and restructure PREPA’s financial obligations. Yet during the summer of 2024, most of these efforts to transform the electric power system appear to have been derailed, as the island was hit by rolling blackouts in the middle of one of the hottest summers in recent memory. Indeed, progress has slowed down almost to a standstill in some areas and, perhaps more worrisome, the government appears to be unable to discern a way to get out of the current quagmire.

Part of the problem is due to the sheer number of actors that have jurisdiction over at least one area of Puerto Rico’s energy system. As shown below, and in further detail in this webpage, we have identified at least 14 entities at the federal and state government levels and from the private sector that have some influence or control over at least a part of the transformation process. The coordination and synchronization of work efforts among and between these entities has proven difficult and continues to be a challenge, even seven years after PREPA’s bankruptcy and Hurricane Maria.

 

Another factor that has contributed to the slowdown of the system’s transformation is that such transformation consists in reality of several, complex, in many cases multi-billion dollar projects, each with many moving parts and which, in many cases, partially interlock and overlap with the others.

After analyzing each ongoing process, the Brief provides context, guidance, and assessments of frequently asked questions by the general public such as:

1. How much will electricity costs increase if the PREPA debt is not restructured? To what extent are the bondholders’ claims secured?
2. What were LUMA’s forecasted savings and improvements and have they materialized? How can the government terminate the agreement with LUMA?
3. What savings does the government of Puerto Rico expect to achieve with the Genera contract? What are the conflicts of interest in the Genera contract?
4. How much money is still missing to finish the reconstruction of the grid and the transition to 100% renewable generation?

As we delve into each topic, we provide details on the following conclusions to which we have arrived:

• First Priority: The stabilization of the electric system should be the number one priority in the short term.
• Risk of a Cascading Power System Failure: given the current state of the system, the occurrence of a catastrophic event cannot be ruled out in the short term (2-3 years) unless drastic corrective measures are implemented soon.
• LUMA O&M Agreement: it appears that the objectives the Government of Puerto Rico wanted to achieve with the LUMA O&M Agreement are not being realized.
• It is Complicated: We are facing a cluster of complex multi-year, multi-billion dollar projects, each with many moving parts. Successful completion is probably beyond the current execution capability of the Puerto Rico government.
• Who is in Charge?: Coordination and execution problems remain with no real solution in sight.
• There are Many Tradeoffs: But it is unclear who makes the decisions and the criteria upon which they should be made to address these tradeoffs.
• Cost: All of these processes are very expensive and we are still missing about $5 billion to finish the reconstruction of the grid and an additional $8 to $10 billion for the transition to 100% renewable generation.
• Risk of Grid Defection/Death Spiral: Under several of the scenarios modeled by the DOE, the volume of electricity sales declines faster than the total cost required to serve customers. This cycle is called a “utility death spiral” and while a complete utility death spiral has yet to be experienced in the U.S. electricity sector, in the case of Puerto Rico this risk cannot be ruled out.
• The DOE vaguely hinted as much when it stated that “PR100 analyzed a highly centralized utility in a future that was increasingly comprised of distributed and decentralized electricity resources which were neither owned nor controlled by the utility. Our analysis illustrates the implications of this seemingly dichotomous future: utility costs could not be reduced as quickly as retail sales resulting in higher retail rates.” (PR100 Final Report, p. 446)

The most likely scenario, in our view, is the following:

• Slow progress on grid reconstruction limits progress on the transition to renewables.
• Dependency on fossil fuels, mostly natural gas, increases just to keep the lights on.
• The combination of those factors creates a chain of delays in the transition to 100% renewable generation, followed by failed and expensive efforts to catch up, followed by more delays and more spending on failed efforts to catch up. The transition to renewable generation languishes.
• PREPA’s debt restructuring results in a rate increase of 3 to 4 cents per kWh to pay legacy debts.
• Savings from LUMA and Genera O&M Agreements are not realized to the full extent of the original forecast, if at all.
• Grid defection increases due to higher rates and an unreliable grid.
• An increase in net metering customers further destabilizes the grid in certain areas of the island and leads to even higher rates.
• By 2027/28 average rates exceed 35 cents/kWh.
• Puerto Rico is far behind the milestones to reach the 100% goal by 2050.