Jaime Sanabria Hernandez, the General Manager for Finance and Administration at EcoElectrica, the operator of a major power plant in Puerto Rico, told a congressional panel on Jan. 12 that a number of fixes need to be made before the Puerto Rico Electric Power Authority (PREPA) is a viable utility going forward.
PREPA, buried under a mountain of debt, is going through a restructuring process described at the hearing by its Chief Restructuring Officer. The hearing was held by the Subcommittee on Energy and Minerals Resources of the House Committee on Natural Resources.
Hernandez noted that EcoEléctrica was the first independent power producer to supply clean, reliable and safe energy at a competitive cost to PREPA, under a 22-year Power Purchase Agreement (PPOA). Its facility includes a 507-MW power plant and a liquified natural gas (LNG) terminal with a regasification capability of 366 million cubic feet of gas per day that could be expanded if the sector is developed properly.
The 507 MW represents approximately 9% of the total installed power capacity on the island, but supplies up to 17% of the total electricity consumed on a daily basis. The shareholders of EcoEléctrica – Gas Natural Fenosa, Engie (formerly known as GDF Suez) and Mitsui & Co. – have the combined financial resources to successfully support selected project development commitments made. The EcoEléctrica tri-fuel combined cycle power plant is one of the cleanest and lowest-cost producers of electricity in the PREPA system.
The EcoEléctrica LNG terminal provides the required infrastructure for the supply of natural gas on the island. The above-ground LNG tank contains 160,000 cubic meters of storage capacity and is capable of receiving as many as 60 LNG transport ships annually. The terminal currently provides natural gas to the EcoEléctrica power plant and to PREPA for use at Costa Sur, PREPA’s largest power plant. The natural gas imported into Puerto Rico by EcoEléctrica, for use at its power plant, has been mainly sourced from the Caribbean Basin out of Trinidad & Tobago. Some of the natural gas received at the LNG terminal destined for use by PREPA is also sourced from the Middle East and Africa.
There are a few pervasive and probably systemic problems in Puerto Rico’s energy sector, Hernandez said:
- Consumers are paying more for energy because the overall system could attract new investment in more efficient and reliable generation if it were part of a stable business environment.
- Capital spending should be focused on reducing consumers’ overall costs. An example of this opportunity is the existing LNG terminal, where untapped capacity for greater use can serve to lower the cost of new infrastructure.
- The financial crisis in Puerto Rico is real and has caused deterioration of the overall credit environment. The energy industry is going to need an improved credit environment to help get financing at reasonable costs.
- Counter parties are experiencing some erosion of their credit worthiness. This shows up in variety of ways, including late payments (now averaging around 30 days beyond contract terms). PREPA cash flow has deteriorated over time, and those in the energy sector need PREPA’s cash position to be better managed, he said. Without surety of payment, it will be difficult for anybody to justify investment in the Puerto Rican energy sector.
- The government should not undermine the commercial value of assets through the creation of government regulatory bodies. An example of this is the legislatively-created Puerto Rico Energy Commission’s regulations that prohibit the recovery of fees that are reimbursable under the PPOA terms. Counterparty efforts to meet contractual obligations should not be impeded by government actions.
- There is a “deficiency of certainty” in the legal and regulatory framework, Hernandez said. “It is pretty simple: when legal and regulatory frameworks are constantly changing, investor confidence is undermined.”
PREPA is attempting to address some of these challenges in its business planning process with a new Integrated Resources Plan. Along with PREPA’s plan, EcoElectrica thinks that part of Puerto Rico’s and PREPA’s financial recovery will include finding and relying on expertise in the following areas:
- Expansion of fuel diversification efforts, specially increasing the use of LNG;
- Investments in state of the art modern efficient power plants;
- Investments in renewable energy generation assets; and
- Professional management of power assets and/or the utility.
PREPA’s operations have been very closely linked to the agenda of the Puerto Rican government, Hernandez said. PREPA should be operated as a private business and divorced from intervention from the Puerto Rican government and its institutions.
He also said more stable and predictable leadership from people experienced in operating power grids is needed at PREPA. During the last eight years there have been six CEOs with one of them remaining at the position for no more than three days.
Long-term fuel supply, power generation and overhaul of the transmission system are business issues that need immediate attention to help PREPA overcome its financial difficulties, Hernandez noted.
He concluded: “In many respects, Puerto Rico faces the same challenges as the rest of the United States. Businesses should be run like businesses, without bureaucracies or political institutions substituting their judgment for those of the people actually trying to operate the business and, in this case, supplying the affordable, dependable electricity on which Puerto Ricans rely. At the same time, while we are fixing the current system, we need a bridge. The financial crisis in Puerto Rico is real and will require some time and assistance to be resolved. EcoElectrica is a good example – and has the potential to be an excellent example – of how private sector approaches can provide real economic, environmental and social benefits to the citizens of Puerto Rico.”
House staff memo describes outdated PREPA system
Said a Jan. 11 pre-hearing memo from subcommittee staff about PREPA’s power plant operations: “In accomplishing its initial goal of ensuring electricity for Puerto Rico, PREPA built a number of oil-fired plants, which continue to have a major role in the production of energy for the island. As of 2012, over 80% of PREPA’s capacity was ‘installed in 1977 or earlier.’ This outdated infrastructure is inefficient and costly, as well as non-compliant with environmental regulations.
“As established, PREPA has been disincentivized the past few decades from making capital improvements that would have lowered fuel costs, while promoting reliability and efficiency. The decades of neglect have led to a modernization cost estimated at $4.67 billion to $5.72 billion over the next 20 years, of which nearly $2 billion is comprised of crucial and recommended transmission upgrades.
“Additionally, PREPA’s outdated infrastructure faces two major environmental regulations: the Environmental Protection Agency’s (EPA) Mercury and Air Toxic Standards (MATS), and Puerto Rico’s Renewable Portfolio Standard (RPS).
“MATS compliance represents one of the largest hurdles PREPA currently faces in modernizing its infrastructure. Of PREPA’s 2,892 megawatts (MW) produced by steam units, only 820 MW are currently in compliance with MATS. Hence, PREPA will need to retrofit or retire nearly 2,100 MW of capacity. A key piece for PREPA’s plan to comply with MATS depends on the development of the Aguirre Offshore Liquefied Natural Gas (LNG) facility. The development of this facility would provide PREPA with 900 MW of additional MATS compliant generation, and would greatly offset the need to retrofit the remaining generation units. However, the Aguirre facility’s future is contingent on financing being made available, and therefore, tenuous because of PREPA’s financial crisis. Without approval and construction of the Aguirre facility, PREPA’s ability to comply with MATS is doubtful.
“Under Puerto Rico’s RPS, PREPA is required by 2035 to have 20% renewable generation; however, PREPA has indicated that 20% integration by 2035 is unrealistic without the necessary modernization of PREPA’s existing generation fleet due to the curtailment of renewable energy that would otherwise be produced. Curtailment is ‘energy that the renewable projects could have produced but cannot be safely accepted in the system…This [produced] energy has to be paid…and hence has a cost.’ Essentially, PREPA alleges that its outdated infrastructure cannot handle the rapid development of renewable resources over the next twenty years, and therefore compliance with RPS is improbable.
“Although PREPA’s outlook is grim, there are opportunities to help diversify PREPA’s portfolio of electricity through the utilization of Power Purchase Operating Agreements (PPOA). These agreements between PREPA and a third party allow PREPA to purchase electricity from newer generation units. Currently, PREPA has two PPOAs, one with EcoEléctrica, for the purchase of electricity generated by LNG, and one with AES, for energy produced from coal. Combined, these PPOAs provide PREPA with 961 MW. These private entities have much greater latitude to negotiate contracts with fuel suppliers, are not constrained by debilitating labor agreements, and promote efficient systems. Thus, PPOAs assist PREPA in providing reliable, and efficient energy to the island.
“Due to the disincentive to invest in infrastructure upgrades, PREPA now finds itself needing billions of dollars in order to properly comply with immediate and pending environmental requirements, as well as to develop an efficient and modern grid. However, increased use of PPOAs would encourage the development of private generation on the island, which would increase efficiency and decrease costs.”
Said the pre-hearing memo about current efforts to restructure the utility’s finances: “After months of negotiations, PREPA reached a restructuring agreement with 70% of its bondholders on December 23, 2015. This agreement provides PREPA with five-year debt service relief of over $700 million, a principal debt reduction of more than $600 million, and a refund to PREPA of $115 million of the January 1, 2016 interest payment.
“However, this plan is contingent upon a number of outside actors meeting specific deadlines. First, the legislature must pass a securitization agreement that would add an extra line item to PREPA’s customers’ bills. This legislation must be adopted by January 22, 2016. After that, PREPA must initiate a rate approval process before the Energy Commission by March 22, 2016 with said rate required to be approved by June 10, 2016. If one of these events fails to occur, the restructuring agreement is ‘terminated.’ Furthermore, it remains unclear what will occur with the remaining 30% of bondholders who did not sign onto the financial restructuring agreement.”