Wed, Jan 16, 2019

The time is right for energy transformation in Puerto Rico

EnergySource by Joe Bryan

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Energy Markets & Governance Energy Transitions Latin America United States and Canada

San Juan, Puerto Rico from above (Photo by ethorson/Flickr).

Late last year, a group of us from the Atlantic Council’s Global Energy Center had the opportunity to travel to San Juan, Puerto Rico for a series of meetings on hurricane recovery and the future of the island’s electric grid.  It was an interesting time for a visit. While the remnants of the storm were visible if you looked hard, the clear message from our hosts was that Puerto Rico is open for business—an amazing fact given what the island confronted just over a year earlier.

On September 20, 2017, Hurricane Maria made landfall in Puerto Rico as a Category 4 storm with sustained winds of 155 mph. The storm ripped through the island, severing power lines, inundating power plants and leaving the island largely without electricity.

Maria’s impact on Puerto Rico’s would have been devastating in any case, but the storm’s fallout was exacerbated by the island’s fragile electric grid, which was both overly reliant on a troubled fleet of large power plants concentrated in the south far from energy demand centers in San Juan and weakened by underinvestment, a lack of maintenance, poor management by the Puerto Rico Electric Power Authority (PREPA), and politics. Even before Maria hit, PREPA experienced a rate of power plant outages twelve times the average rate for utilities in the mainland United States. Meanwhile PREPA’s electric rates are among the highest in the country. Compounding the pain for the utility’s customers, the island ranks near the bottom when compared to US states for promoting improvements in energy efficiency, which is critical to helping customers lower their utility bills.

If there is any silver lining in the devastation wrought by Maria, it could be that Puerto Rico now has an opportunity to rethink what its grid should look like, how it should be managed and regulated, and how it can better serve its customers. The timing for that rethinking couldn’t be better. 

The electricity industry is undergoing fundamental change. Prices for clean, distributed energy technologies like solar energy have dropped precipitously over the past decade. In fact, Lazard reports that the price of simply operating and maintaining existing coal and nuclear power plants is, in some scenarios, more expensive than building brand new solar fields and wind farms. While that analysis wasn’t specifically applied against power plants in Puerto Rico, the fact that PREPA’s power plants are old, in poor condition, and rely on expensive, imported fuel to produce electricity suggests the Lazard analysis is probably on the mark for the island. 

Puerto Rico has a unique opportunity to take advantage of falling prices for clean energy as well as energy storage, microgrid and advanced control technologies to create a modern, more decentralized, efficient and resilient electric grid. However, even if one ignores the immediate challenge of restructuring PREPA’s massive debt, the Commonwealth’s success in achieving those goals depends on it getting a number of things right, including the structure and regulation of the electricity market.

An effort is already underway to restructure PREPA, with the goal being to privatize generation while allowing a private company to come in and run the transmission and distribution (T&D) system as a concession.  The hope is that a private company will better manage and operate the grid while also improving customer service and lowering utility bills. 

Success in attracting private sector investment will depend on a number of factors, including an independent regulator and a fair, predicable rate setting process. The regulatory rules of the road will also significantly impact resource choices and customer outcomes. For example, modernizing the energy system depends on structuring regulations to encourage any future T&D utility to meet demand for energy services like lighting and air conditioning at least cost to the customer, whether that be through energy efficiency, distributed solar or storage, or traditional supply. Attaching a utility’s financial success to the services it provides rather than the number of kilowatt hours it sells encourages efficiency, helps lower customer utility bills, and promotes the adoption of new technologies that could strengthen grid resilience. Those same goals should also be the objective of infrastructure investments being made right now on the island.

As Puerto Rico considers decisions about the future structure of its electricity market, the Federal Emergency Management Agency (FEMA) is spending billions of US taxpayer dollars to rebuild infrastructure wiped out by Maria. From housing assistance to school construction to rebuilding the grid, FEMA is playing a crucial role in the island’s recovery. While providing basic electricity, water, and medical care as quickly as possible was the priority in the immediate aftermath of the storm, FEMA’s longer-term plans for rebuilding infrastructure should take into account the long term costs.  The opportunity to reimagine Puerto Rico’s grid and the resources to actually rebuild it aren’t likely to come around again any time soon. Simply doing things the way they’ve been done in the past would be a big mistake. 

For instance, maximizing the energy performance of a new building may increase the up-front cost of construction. However, investing in energy efficiency, distributed solar and even energy storage can improve resilience and lower the cost of operating and maintaining those buildings over the long term.  Not only that, but funding to rebuild the electric grid itself will come, in significant measure, from FEMA.  Reducing the amount of electricity that customers demand from the grid, including through investments in efficiency, distributed solar and storage, can help reduce the amount spent on grid infrastructure to serve those customers. The bottom line is that it’s a smart use of taxpayer money to make sure that what gets built today is not only efficient but also in line with the long-term vision for the electric grid.

Fifteen months after the storm, Puerto Rico’s recovery from Hurricane Maria doesn’t make the news as much as it used to. But while the lights may be on (at least most of the time) that doesn’t mean the job is finished. In fact, the choices Puerto Rico makes over the next year about its electricity market will impact the Commonwealth for decades to come. A confluence of market forces, technology, and, ironically, Hurricane Maria, has created a unique opportunity for Puerto Rico to lead the way on what the future grid could look like for all of us. Let’s hope they take that opportunity.   

Joe Bryan is a senior fellow with the Atlantic Council Global Energy Center.