Puerto Rico’s Energy Transformation: A Critical Need

Puerto Rico’s Energy Transformation: A Critical Need

“Resolving the debt is important not only to reduce electricity rates from what they would have otherwise been under the contracted debt, but also to enable PREPA to exit bankruptcy, which reduces uncertainty, important to any potential private operator and investors in new generation.” – Puerto Rico Oversight Board Executive Director Natalie Jaresko

In June, the Government of Puerto Rico and the Oversight Board announced a deal to hire a private consortium to operate the Puerto Rico Electric Power Authority’s (PREPA’s) transmission and distribution system. While this potentially may be a first step in helping the island transform and modernize its energy system, executing the PREPA restructuring support agreement is a prerequisite to ensuring PREPA’s long-term future is on solid ground.

  • Announced over a year ago, the PREPA restructuring support agreement
    (which saves the island over $3 billion dollars in debt and represents a haircut of more than 30% to bondholders) has essentially remained frozen in time as the Oversight Board and the current administration keep indefinitely delaying its finalization. In the meantime, the island’s energy infrastructure remains in need of investment and repair. PREPA cannot be modernized without significant investment, in this case a projected minimum of $20 billion dollars over ten years.
  • Before Hurricanes Irma and Maria and before PROMESA became law, a similar PREPA agreement was in place back in 2015-2016, accomplished prior to the Oversight Board forming. One of the Oversight Board’s first major acts was to strike down the agreement and instead send the Puerto Rico government into bankruptcy proceedings, now in its fourth year. This move undoubtedly delayed the island’s energy transformation efforts and set the tone for the Oversight Board’s interpretation of their mandate under the PROMESA law.
  • Looking past the execution of this agreement with its bondholders, PREPA’s eventual return to the bond markets – along with the rest of the Puerto Rico government – is key to funding future municipal and infrastructure projects on the island and attracting future investment, something the leaders of the Oversight Board have themselves voiced, calling it “a watershed moment in PREPA’s transformation from a bankrupt entity to an efficient, modern power provider and in the overall restructuring of Puerto Rico” and “the foundation for a new PREPA, as a privately operated, financially healthy electricity company able to attract investors.”

Without a solid energy transformation plan and demonstrable actions to move it forward, the island’s hurricane preparedness and federal funding is at risk; this also impacts the island’s economic revitalization efforts. It is crucial to have safe, reliable energy to help spur business development, attract investors and bolster more pharmaceutical and medical equipment manufacturing as the US looks to safeguard its medical supply chain.

PREPA’s Fiscal Plan

The Puerto Rico Oversight Board in June also issued its latest Fiscal Plans for the island’s utilities, including PREPA. In its latest Fiscal Plan for PREPA, the Oversight Board identified a number of key goals and priorities to modernize PREPA (see the Related Information section for more information) and ensure “more reliable, more affordable, and cleaner” delivery of energy to Puerto Rico residents and businesses.

  • Since the formation of the Oversight Board in 2016 under PROMESA, the Oversight Board has released a number of long-term Fiscal Plans for the Government of Puerto Rico and its agencies. While long-term financial planning is crucial for the island, as is successful restructuring of its debt on its way to better economic success, the island’s energy needs face short- and medium-term issues that can only be addressed through concrete action. 2020 is on track to be the hottest year on record and that can contribute to an active hurricane season, so resilient infrastructure for the island is key.

Related Information

In its PREPA Fiscal Plan, the Oversight Board identified a few key factors to transforming and modernizing PREPA including:

  • “[U]pgrading power generation to include more renewable sources of energy”; “investment in new generation to reduce generation costs and achieve greater reliability”; maintaining rates that are “sufficient for long-run fiscal sustainability” and renewed efforts to procure “maximum federal funding for PREPA’s recovery and modernization”.
  • The Oversight Board also stated that “Puerto Rico’s aging, inefficient, and unreliable generation fleet must be urgently replaced and modernized in order to reduce outages and generation costs” while also maintaining that exiting Title III proceedings and debt restructuring are “imperative” if PREPA is to “begin building the infrastructure for a modern, resilient, and reliable energy system”. Moreover, the Oversight Board noted that “as long as PREPA remains in Title III, the utility will not have effective access to capital markets to fund critical grid modernization and improvement plans.”
  • In the Oversight Board Press Release in late June, Natalie Jaresko was quoted as saying: “Electricity, roads, and water are essential for every resident, and neglect of those essential elements has negatively affected everyday life in Puerto Rico for years, if not decades. All three elements require major improvements, all three areas need substantial new investments to reflect the needs of the people and businesses of Puerto Rico today, and all three authorities need to ensure that their finances are stable. To succeed in these goals, all three entities need to make major changes to the way they do business.”