Relmagina in the Media

Solving the Maze of Puerto Rico’s Grid

By March 2, 2020 March 6th, 2020 No Comments

Puerto Rico is still recovering from the 6.4-magnitude quake that set off massive blackouts, and hurricane season is closing in. One thing is clear—the island needs a resilient grid, now.

Grid resiliency is top of mind, but at the same time, island stakeholders are exploring the pathway to 100% renewables by 2050 (per Act 17). Understanding the landscape is crucial: What are the implications of the IRP? Is the RSA viable? Will federal funds come through? How does Puerto Rico’s industrial base remain competitive? And where are the biggest opportunities for innovation and investment?

We asked several thought leaders to guide us through the wilderness of policy shifts and regulatory roadblocks, of economic challenges and ambitious initiatives, and to show us the path toward a resilient and sustainably powered Puerto Rico.

We began by asking Tomás Torres-Placa, Executive Director of the Institute of Competitiveness and Economic Sustainability (ICSE-PR), about current challenges to Puerto Rico’s energy transformation—and the impact of the latest disaster to strike the grid.

Recent earthquakes meant more setbacks for Puerto Rico’s grid, including the destruction of the Costa Sur Plant. In your view, what needs to happen now to move the grid forward?

“If we don’t solve the Costa Sur Plant issue, there may be some selective power interruptions in summer, because of the additional heat load. But that is only part of the problem. Our aged electrical grid needs to be transformed into a modern system. But we cannot address that with the proposed agreement between PREPA and its bondholders. PREPA’s financial restructuring needs to include an agreement that returns the utility to solvency, results in reasonable rates for all consumers, and propels economic development in Puerto Rico. That cannot be done with the current restructuring agreement, for three main reasons.

“First, it does not address the insolvency of PREPA (around US$17.7 billion in total liabilities) in a comprehensive manner.

“Secondly, the present agreement immediately raises electricity rates by 4.3 cents per kWh, but it does not end there. Under the fiscal plan approved by FOMB, the electrical rate could increase by 3 cents more per kWh if we only get 45 percent of funding from FEMA to rebuild the grid. Also, PREPA’s Fiscal Plan says that if the utility doesn’t get aggressive fuel and energy contracts (per the IRP), it will increase the rate another 2 cents per kWh. So that adds up to more than 30 cents per kWh from 21 cents—a 45-percent rate increase. In a study done by Dr. Ramón Cao García, it shows that those added energy costs over five years may decrease GNP by 22%, lead to a loss of 170,000 jobs, and triple the inflation rate.

“Third, the IRP needs to be in compliance with Act 17, which established renewable energy goals for 2022 (20%), 2025 (40%), 2040 (60%), and 2050 (100%). However, the IRP includes the construction of four gas terminals and four new 300-MW combined-cycle plants. It also includes 1,800 MW of solar and 900 MW of batteries, which might fall short in terms of the requirements of Act 17.”

NEE: How do we ensure that the goals laid out in Act 17 don’t get sidelined? Is the goal of 100% renewables by 2050 realistic, and if so, how do we get there?

For Malu Blázquez, Executive Director of ReImagina Puerto Rico, the energy transformation represented by the passing of Act 17 will require a herculean effort to coordinate multiple moving parts across multiple agencies. A stable political landscape will also be essential: “Now we’re in an election year, and Puerto Rico has been changing governments every 4 years in the last 16-20 years,” she said. “That’s made it hard to provide continuity to a plan. I just hope Act 17 will guide the way forward, even if there’s a change in government.”

“There’s so many pieces to this puzzle. I think it’s up to the Puerto Rico Energy Bureau to enforce PREPA’s compliance with Act 17, and we need an approved IRP as soon as possible. But for the 2025 goal to be met, PREPA needs to move on big renewable energy projects—and they have a lot of possible projects (e.g., solar farms) that have been presented or negotiated, but they haven’t given the go-ahead—and small residential interconnections. For residential projects, one of the biggest issues is PREPA’s lack of sufficient resources and a very long and tedious interconnection process. In the past, we also had certain incentives like the Green Energy Fund, so we need to find more funds and more incentives to promote renewable projects. PREPA has been moving on gas infrastructure projects, but not the renewable energy ones. I’m a big believer that until we have a final IRP, no long-term PREPA commitment or project should be signed.

On the role of Washington, Blázquez conceded that, “Puerto Rico is very dependent on federal funding for grid investment. The cost to repair the grid after Hurricane Maria is estimated at US$20 billion and Puerto Rico is counting on at least US$13 billion to come from federal funds. But we’re having a lot of difficulties with the current president and administration to release those funds. As of today, there is US$2 billion assigned from CDBG-DR for the grid. And here we are, 2-½ years later, and the electrical grid is one of the most important things we need to deal with, and federal agencies have not even published the guidelines to use that money. Regarding CDBG-DR funds, we’ve only had US$1.5 billion dispersed. Puerto Rico prepared an action plan that was presented and approved by HUD. A process was followed, months of preparation and review of an action plan which HUD approved, which included a program for resilient homes. The idea was to do renewable energy projects in either new or repaired homes. And yet the agreements that Vivienda just received for the second batch of funds now requires that none of that money can be used for energy-related projects. HUD had approved the plan that included that program, they dispersed the money, and now they come back and impose this requirement.”

Do the terms of the proposed RSA jeopardize the success of Act 17?

At every point, money is the roadblock—whether it’s stymied federal funding or the question of how to pay for PREPA’s debt burden. José Román Morales, a consultant and the former President of the Puerto Rico Energy Commission (PREC), said that debt burden must be dealt with, even before the island starts to enforce Act 17: “The question that hasn’t been properly addressed is how much is the ratepayer responsible for the debt service? There are a lot of parties—insurance companies, bondholders, the investors, and the people that actually issued the bonds—and I do not believe responsibilities have been properly allocated.”

“When you have the imposition of 100% of the responsibility of the RSA to the ratepayers, then the better-off ones will look for an alternative, whether combined heat & power (CHP), disconnection from the grid, or remaining interconnected just as a backup. The ratepayers who have less financial capability to disconnect will end up with the biggest burden. And then you have Act 17’s requirement of 100% renewable by 2050 of all retail sales of energy. That’s interesting, that it doesn’t say 100% of all energy produced in Puerto Rico—it’s 100% of all retail sales. So that means that if you put a diesel generator in your house and you decide to live with a diesel gen set, you could disconnect from the grid if you have that capability. But the spirit of Act 17 won’t be complied with, because of how those details are written.

“We also have PREPA betting heavily on natural gas. Something that drives me insane is the framing of natural gas as a transition fuel. It doesn’t make sense. Transition for how long? But even before that, why? Are you sure you have explored all renewable energy sources and storage capabilities before committing to natural gas? Or is it just a 20th-century mentality still trying to grasp for relevance in the 21st century?”

Does investment in natural gas undermine the renewables objectives (40% renewables by 2025, 100% by 2050) of Act 17?

The role of natural gas in Puerto Rico’s energy transition is viewed as problematic by many, including RMI Islands Energy Program Principal Roy Torbert, who’s concerned that further LNG investment will leave a legacy of debt: “With investment in natural gas—especially in places like Puerto Rico, where we have limited capital overall to remake the electric system—and the high costs for LNG infrastructure, you don’t typically find a way to pay off those big capital investments quickly.

“When we look at the renewable pathway set out by Act 17—a bipartisan bill with unanimous support in the legislature—it does require a rapid ramp up in renewables, which today are roughly 2% of electricity generation. So a simple equation would say if you invest more in gas, you would expect to be paying that off (as we’re paying off the current gas infrastructure) for decades. The room to go quickly to 100% renewables becomes highly constrained. But gas-based power generation has been one of the investments that Puerto Rico has historically pursued. Compared to diesel or heavy fuel oil generation, gas is a better option. But in the last five years, a package of renewables—solar and battery storage, wind in the right places, hydropower potential—all became significantly cheaper than the natural gas option. And many stakeholders aren’t up-to-speed on how cost effective a renewable pathway can be, one that helps address the climate crisis and prioritizes Puerto Rico-owned and controlled resources. And there are lobbying activities at many levels by natural gas interests, and a public utility that has had a preference for these sorts of big investments that they can control.

“In a 5-year plan, first, start with things that are relatively proven. Rapidly procure the resources needed, but use competition to get there—go to the market and say, “Give me your best bid for power.” It will likely be solar and storage-heavy, because international and Caribbean examples show them to be the cheapest. The faster you get some of those projects moving, the sooner you can start to realize the initial cost benefit. I would say get storage on the system first. That seems counterintuitive, but it will make the grid more stable and reliable, and allow these other renewables to effectively pair with other resources in the system. Second, Puerto Rico remains an untapped goldmine of energy efficiency. We haven’t had the relatively standard programs to encourage energy efficiency that almost every other U.S. utility has. When you’re becoming a more efficient system, the overall cost you need to make this renewable transition starts shrinking very quickly. The third thing I would do is critically think about the tariff and other regulatory structures. You need the regulator to unlock this huge, customer-driven movement to become more resilient and clean. If you put these three pieces together, there are gigawatts of renewables that can be unlocked, at prices that are a fraction of what’s being paid today, or for other investments like natural gas. But this requires leadership and capital, and capital doesn’t usually show up until there’s clarity on policy and leadership and regulatory structure.”

To remain competitive, are we going to see all of Puerto Rico’s big industrials and corporates invest in self-generation systems?

In the absence of clarity, Puerto Rico’s industrial base has been considering its options when it comes to self-generation. The recent earthquakes only reinforced the notion, and the island’s booming pharmaceuticals industry had to respond. Pharmaceutical Industry Association of Puerto Rico President Wendy Perry said those assessments are already underway for many of her members. “The investment our industry already has in the country—it’s estimated up to US$10 billion—is a strong footprint,” she explained. “Energy is one of the critical infrastructures, and companies are looking at ways to create quality and sustainable energy sources. As an example, IPR, the manufacturing plant for Astrazeneca, has already moved out of the grid.”

“We can assume that industry will continue to look for ways to move off the grid, but this also relates to how PREPA will manage stability within the system. The issue is not that we have power from PREPA, and then tomorrow we run on generators. We have the capability to do that. But if you have that interruption and variances in terms of the quality of the supply, you put an entire facility at risk. So, it’s very difficult for some of our manufacturing plants to maintain continued operations. For example, when we came out of the earthquakes, many of our manufacturing plants ran on generators for a couple of weeks, although they already had electricity from PREPA, because the quality wasn’t stabilized. When your manufacturing plant is so sensitive to any changes in voltage, in the type of energy that you’re receiving, you have to look at and assess other options.

“This is also a matter of public security. Eleven out of the 20 best-selling pharmaceutical products in the world are manufactured in Puerto Rico, and when you look specifically at biological products, it’s 5 out of the top 10 produced in Puerto Rico. So we have a responsibility for global human health. Our operations [at Merck] tend to track daily the energy coming in and out, and you can see right after the earthquake, inconsistency in voltages that our site was receiving. This is why we worked with local government immediately after the emergency to obtain a waiver for extended use of generators, at least during the emergency. But moving forward—and this is a discussion we’re already having with the EPA—how do we look at emergency situations in a different way, how do we take necessary precautions during an emergency state in this critical area of manufacturing medicine and vaccines for around the world?”

What are some of the factors that are leading industrial and manufacturing operations and corporates in Puerto Rico to invest in self-generation systems?

The manufacturing sector is also looking toward self-generation to keep operations stable. But Carlos Rodríguez, President of the Puerto Rico Manufacturers Association (PRMA), said that while energy cost and quality are driving the trend, it may have unintended consequences.

“We have members that have been suffering for years from a lack of stability. One case in point is in the south region last year, which had about 400-plus energy events in seven months. The cost of staying efficient and productive is burdened by these energy events. In that case, they will generate their own energy using natural gas, and they’re going to be disconnecting 100% from the grid. And similar members will follow the same path. The second reason is energy cost. They will be able to generate their own energy at 10.2 cents per kWh, rather than the 21 cents average that they’re paying right now. It’s going to happen slowly over the years. The delay getting infrastructure funds from PREPA is actually speeding up some of this. There are reports that indicate consumption will probably fall by 55-60% in the next 40 years. High consumers will convert to other available sources—some will go with natural gas and some will go with renewables. But for us, as regular consumers, it’s a negative because we’ll end up paying off PREPA’s debt at a higher level. The more people disconnect from the grid, the less people we’ll have to pay for the total debt. The variable we have is how fast we can stabilize or improve the grid. It has to do with a lot of federal funds being received at a very slow pace. So that’s probably the biggest concern that we have right now.”

Are microgrids economically viable for the majority of municipalities and communities across PR? And if not, how do we change that?

If there is an exodus, what about those who are left on the grid? AES Next President Chris Shelton emphasized that a possible solution is to create generation solutions at the community level.

“The key cost is in burning oil, and it’s the most important factor in any of this. So when we ask a question about economic viability and we know that what you’re trying to resolve is burning oil in inefficient power plants, then any number of solutions can beat the cost. The goal is not just to be better than something that’s not good, it’s actually to be good—to be low-cost and to stop taxing the economy of Puerto Rico with the commitment to burning oil indefinitely. This problem is just not focused on enough. Puerto Rico is so far above what other people pay for electricity, it’s important to focus on it first because it helps you solve the second issue of resiliency. When you look at microgrids—and we actually use the term mini-grid—these are really big microgrids that leverage the existing electric network and make it segmentable, to build on what’s there. They can be viable for the majority of the population. The key advantage of a mini-grid is that it depends less on a transmission system than big power plants, so it can work when the transmission system has been damaged and is offline. We’ve modeled it at a high level and showed that it could be highly effective.

“There’s a lot of solar resource capability in Puerto Rico—actually twice as much as you need to serve the load of the island. But the solar needs to be hardened and made more resilient than what you would have in other areas, and also needs to be spread around the island strategically, which allows you to run the grid after some catastrophic event occurs. But there’s an idea that if all this works, we should just put rooftop solar everywhere. The challenge with that is that it’s markedly more expensive—it can be as much as twice as expensive to install. And the other issue is that if you have a horrible hurricane, then you have to go to every house to make repairs. That’s an enormous amount of time and cost. A better idea is to locate the sources regionally, then take the money and make sure they’re really hardened.”

There’s more to know—and much more to be done—to bring Puerto Rico’s grid into the 21st century. Join us at the 3rd Puerto Rico Grid Revitalization Forum, March 24-25 in San Juan, where these and other panelists will explain how we get there.

This story was written by New Energy Events

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