Market Outlook - Puerto Rico

The US commonwealth of Puerto Rico (PR) is a small group of islands in the Greater Antilles with a population of approximately 3.7 million people. According to the Energy Information Administration (EIA) survey from 2011, almost all of the electricity produced is generated by petroleum (68%), natural gas (16%), or coal (15%). Since 2011, most notably there have been two large wind projects including Pattern Energy’s 95MW, Finca de Viento Santa Isabel, the largest wind project in the Caribbean, and one 24MW solar farm developed by AES Solar in Guayama, a municipality on the south central coast of the main island.

Even though Puerto Rican’s consume two fifths of the electricity than that of the US per capita, the cost of energy is two or three times as expensive. High energy costs are not atypical of a Caribbean nation. Barring Trinidad and Cuba, domestic supply of natural gas and oil in the Caribbean is too low to satisfy the needs of various industries resulting in a price of energy at the mercy of volatile, rising fuel prices. For manufacturing intensive islands like Puerto Rico, this poses a real threat to the economy. As a result, Puerto Rico has developed strong legislation and policies in its efforts to wane the island’s dependence on foreign imports for energy by promoting the deployment of renewable energy.

In July of 2010, Puerto Rico established a Renewable Energy Portfolio Standard (RPS) and created the Puerto Rican Energy Affairs Administration (PREAA, in Spanish -AEEPR). Not only is PREAA responsible for implementing the RPS, but they are also the governing agency for the Green Energy Fund (GEF). GEF is a two tiered incentive program designed to subsidize the initial costs of installing renewable energy by up to 40% of a reference cost which is currently starts at $4.25/Watt for solar energy projects (or $1.70/Watt).

The two tiers of the incentive are identical except for two key features; size and competitiveness. Tier I projects are less than 100kW and the full incentive will be granted for any projects that meet the technical requirements and have an interconnection agreement signed by PREPA, the islands sole utility. Tier II projects are between 100kW and 1MW, but the funds are competitive. In other words, projects asking for less money will be more likely to receive funding than a project that is requiring 100% of the funding to be viable.

On top of GEF’s rebate, project developers can also sell RECs to PREPA for a fixed long term agreement currently priced around $35/MWh.  This is an extra 3.5 cents for every kWh generated. Because Puerto Rico is still a US territory, the Federal Income Tax Credit (ITC) is still applicable. Between the GEF grants and Federal ITC, roughly $3.00/Watt can be totally written off making returns very attractive with a high Power Purchase Agreement (PPA) from high starting electricity prices and an extra boost from the RECs.

The biggest issue with Caribbean islands is the electrical utilities. Not only is the actual infrastructure poor, the providers are often monopolies, sometimes foreign owned, with a lack of inertia to deviate from the current paradigm. There is no competition so the utility does not mind passing along the fuel costs to the end-user. Not to mention, many utilities stock pile or have long term contracts negotiated for fixed oil prices, but still adjust the “fuel cost clause” on the end-users electric bill as if their supply was still tied to the market price.

PREPA seems to be onboard, but Puerto Rico’s existing electrical grid is granting them an excuse to be very picky about who connects where. PREPA has issued Minimum Technical Requirements (MTRs) for connecting to the grid and requires a storage element of the system to smooth out the “ramp rate” of power coming on and off with changes in sunlight or wind speeds and to maintain a constant frequency of 60hz.

Consequentially, PREPA is having a lot of trouble getting utility scale projects safely connected to the grid. Even developers who have already signed long term PPOAs with PREPA are having trouble getting the project financed due to the looming threat of some power being curtailed and not sold to the grid if compliance with the MTRs is not satisfied.

Most of this year was a stalemate for PR’s renewable energy market, but fortuitously PREPA finally lowered and clarified the requirements to restore faith in frustrated project developers and apprehensive investors. As of December 12, 2013, there must be enough storage so that 45% of the project’s capacity can be provided over the course of one minute to regulate the ramp rate. On the other hand, to regulate frequency, storage is also required to meet 30% of its rated capacity for 10 minutes or less. If MTR compliance is not met, PREPA still considers this “Unstable Operating Conditions” reserves the right to curtail all of the energy from the facility without written notice- Solid system design is thus critical for success.

The barrier to entry for a market like Puerto Rico will keep out impatient developers who do not have the capacity to engineer solutions to satisfy MTRs nor the working and human capital to develop multiple projects simultaneously.

As long as they are in compliance with grid capacity requirements, projects less than or equal to 200kW have a “Simplified Interconnection Procedure” while projects larger that 200kW require a costly supplemental study by PREPA to further assess the design and safety of the proposed system.

PR has developed GEF to encourage the deployment of Distributed Generation (DG) applications of renewables. Projects of 100kW in size could have solid returns, non-competitive Tier I rebates, and a simplified interconnection process while still abating a large chunk of electricity bills for medium sized business and Global Enterprises with locations in PR.