Puerto Rico Aims for Green Power

bb072610trend-250px.jpg

Puerto Rico gets nearly 70% of its electricity from oil, and residents there confront energy bills that are about twice what consumers pay on the U.S. mainland. The territory is trying to change that.

Gov. Luis Fortuño last week signed into law legislation that aims to increase the island’s renewable energy sources and establishes a fund that will help residents pay for energy upgrades for their homes and businesses.

But some say the legislation doesn’t do enough to ensure that Puerto Rico gets a real foothold in the green energy businesses of the future.

Fuel diversification is a key issue for the commonwealth’s sole energy provider, the Puerto Rico Electric Power Authority, which has $6 billion of outstanding municipal debt. Along with alternative-energy options, the agency is working on transforming oil-fired facilities to enable them to use natural gas, which has exhibited less price volatility than petroleum. The maintenance costs for natural-gas plants are cheaper than oil-fired facilities. Natural gas is also cleaner than oil.

“We’re working with a program that has two phases,” said Carlos Garcia, president of the Government Development Bank for Puerto Rico, the island’s fiscal adviser. “In order to be able to achieve savings in the cost of energy immediately, we’re moving very fast from oil to natural gas. But at the same time, we have approved a renewable portfolio standard that should take us to a 12% from a 1% currently of renewable energy by 2015 and to 20% by 2020.”

All three rating agencies have pointed to PREPA’s heavy reliance on oil for energy production as a credit challenge. In May, Fitch Ratings said that the agency needs to incorporate other fuel sources and strengthen operations, or raise rates to keep its current credit rating.

Fitch and Standard & Poor’s rate the authority’s outstanding revenue debt BBB-plus. Moody’s Investors Service rates the credit A3.

“In order to maintain the current rating level, PREPA must show continued results from its stabilization plan efforts, particularly system efficiencies and additional fuel diversity that result in long-term cost reductions, or approve sufficient base rate increases that result in solid operating margins and financial metrics that are in line with other similarly rated systems,” the May 14 Fitch report said.

Currently, 69% of Puerto Rico’s energy comes from oil, while coal and natural gas account for 16% and 14%, respectively, according to a presentation to bondholders during a conference call that the GDB held last week. About 1% comes from hydroelectric power.

In an aggressive change, the commonwealth aims to change that mix by 2012, with natural gas taking up 72%, petroleum accounting for 9%, and coal and renewable energy supplying 16% and 3%, respectively.

Along with converting existing plants to become facilities fired with natural gas, officials are looking to build a new natural gas plant in southern Puerto Rico through a public-private partnership.

The GDB anticipates releasing a request for proposals for the project on Aug. 27 and gathering the best and final offers by the end of the year.

Construction of the facility could take three to five years, depending upon permitting, Garcia said.

In looking at its plans for renewable energy, the reform bills that the governor signed into law last week include guidelines that call for 15% of renewable energy production by 2020, with that amount to grow to 20% by 2028.

“We must change our antiquated and obsolete energy infrastructure and move rapidly towards the use of sources that are not derived from the oil and are cleaner and renewable. This will allow us to reduce our dependency on oil; to limit the cost of energy to consumers; to protect the environment; and to make Puerto Rico more competitive globally,” Fortuño said in a statement.

According to the governor, for every $100 that residents earn, $12 goes towards electricity payments.

Along with its plans for natural gas, PREPA last month entered into a 20-year power purchase agreement for wind energy.

The authority will buy 75 megawatts of wind energy from a proposed wind project that Pattern Energy Group LP is constructing.

The energy reform bills create a new Renewable Energy Certificates program. The initiative allows renewable energy producers to sell renewable energy certificates to business that are releasing fuel emissions in order for those companies to meet certain environmental compliance measures.

“You can buy a certificate and it would be something that can compensate — by buying this green energy certificate — from the fuel emissions that you may be having.”

Garcia said that there are no plans, as of now, to implement a cap and trade program on the island, which would limit corporations’ fuel emissions and impose fines for exceeding certain caps or require emitters to invest in renewable energy sources. But the certificate program could generate more revenue for alternative energy sources if Puerto Rico were to begin placing limits on corporate fuel emissions.

“This is something that may become more valuable if a cap and trade is instituted,” Garcia said.

The Center for the New Economy, a nonpartisan think tank located in San Juan, believes the administration should move forward with a cap-and-trade system. In an analysis of PREPA that the CNE released in June, the organization stressed that the energy-reform bills don’t do enough to significantly change the island’s dependency on fuel.

“If Puerto Rico is to become a leader in the green-energy field and to generate significant economic activity and ­employment in this sector, then it needs to think big and out of the box,” according to the report.

“Every country wants to get into the green energy game; everybody is offering incentives of every kind. If Puerto Rico wants to attract big investments in this sector it will have to differentiate from everyone else.”

In addition to the certificate program, the bills establish a Green Energy Fund that will grow to a projected $290 million during the next 10 years, with $20 million included in the fiscal 2011 budget. The fund will enable the government to reimburse residents and companies for energy-efficient alterations they make to their homes and businesses.

Residents will receive reimbursements of up to 60% while industrial projects will gain 50% back on projects not exceeding one megawatt.

The CNE believes the $290 million fund is “a timid first step” in comparison to other alternative energy programs in California and Europe.

The bills also provide tax breaks and super-depreciation of buildings, structures, machinery, and equipment in order to assist the development of renewable energy producers and researchers.

The administration anticipates the energy-reform initiative will generate $4 billion of investment during the next 10 years and create more than 10,000 green jobs.

“Diversification of our energy sources cannot wait any longer,” Fortuño said in a statement. “The cost of electricity is undoubtedly the number one obstacle to Puerto Rico’s competitiveness and one of the main concerns of our people. We will be relentless in our efforts to reduce the cost of electricity for all and we are confident that our energy reform legislation will have a profound influence across the board.”

For reprint and licensing requests for this article, click here.
Puerto Rico
MORE FROM BOND BUYER