Proximo Weekly: A slow and difficult transition for PREPA
Puerto Rico has awarded the second phase of its power sector restructuring to Genera. So is the commonwealth now on a quick path to decarbonisation?
The second phase of Puerto Rico’s power sector restructuring is nearing its conclusion with the selection of a New Fortress Energy subsidiary Genera by Puerto Rico Public-Private Partnerships Authority as winner of a 10-year operations and maintenance contract for the island’s fossil fuel-fired generating portfolio. Genera will manage, operate, maintain, and perhaps most significantly, decommission the Puerto Rico Electric Power Authority’s (PREPA) base-load and peaking power plants.
The first phase of Puerto Rico’s power restructuring comprised the awarding of an operations contract for the operation of Puerto Rico’s transmission and distribution grid. The winner of that 15-year contract was a joint venture of Quanta and ATCO called LUMA Energy.
The backdrop to the two processes has been very challenging. PREPA itself has been financially distressed since 2014, and in bankruptcy since 2017. Puerto Rico itself, a semi-detached US territory, has struggled financially since before the 2008 crisis, in the face of population loss and an economic base highly dependent on agriculture and tourism.
Then there are the natural disasters that visit the island with depressing regularity. Periodic earthquakes are only the second-largest threat to Puerto Rico’s power grid, though a swarm of earthquakes between December 2019 and January 2020 culminated in a shock that knocked the 990MW Costa Sur power plant offline.
But hurricanes and storms present the most constant threat to the commonwealth’s power infrastructure, with Hurricanes Maria, Irma, and Fiona only the most recent and damaging arrivals. Transformer and substation fires are a common occurrence.
Given this persistent instability, it is not surprising that Puerto Rico is highly unlikely to meet its goal of 40% renewables use by 2025. Renewables accounted for around 3% of production in 2022. The nine largest power projects on the island are all fossil-fired, and all but two of those nine are owned by PREPA.
PREPA’s financial weakness has made it extremely difficult to attract independent power producers. AES brought a 454MW coal-fired power plant online in 2002, and has added some solar and storage capacity. Fitch Ratings currently rates the plant’s roughly $180 million in debt at C, the lowest grade outside of default, based largely on PREPA’s bankruptcy.
Pattern Energy and Sonnedix are among the larger developers which have brought wind and solar capacity online. But the wretched state of Puerto Rico’s grid makes accommodating utility-scale generation challenging. PREPA is often described as the largest integrated utility in the US, but that says more about the fragmented state of the US electricity sector and the impact of deregulation on the mainland than the strength of PREPA.
But the succession of financial and natural disasters has raised the hope of advocates for renewables that Puerto Rico could be a proving ground for distributed generation and micro-grids. While large-scale generation assets and lengthy stretches of transmission might be more efficient than distributed assets, they do not seem to be more resilient.
New Fortress acknowledges that decarbonisation is necessary. Its mandate explicitly covers the retirement of Puerto Rico’s oldest fossil capacity, as well as supporting the transition to renewables. The Genera agreement covers, according to New Fortress, “Improved reliability and efficiency across the generation system with a focus on distributed power and microgrids.” But there are likely to be some big opportunities for New Fortress, and emerging player in LNG, while that transition takes place.
The foundation for the transition in Puerto Rico is its Integrated Resource Plan (IRP), which was completed in 2021. It calls for the retirement of the AES coal plant by 2027, and an extension to the contract of the island’s other big fossil-fired IPP, EcoEléctrica, a 510MW LNG-to-power plant sponsored by Naturgy, Engie and Mitsui.
Otherwise, the plan calls for an extensive programme of retirements of PREPA’s fossil capacity by 2025, and for those sites to be converted to synchronous condensers, which can help improve grid stability. It also calls for around $8 billion in investment in transmission and mini-grids.
The plan also features some big near-term opportunities in LNG, including conversion of the 200MW Mayaguez peaker and 302MW Yabucoa CCGT to run on ship-based LNG. In 2019 NFE signed a five-year (plus three five-year extensions) contract to supply with, and convert to, natural gas units 5 and 6 of PREPA’s San Juan plant. NFE has also developed truck-borne LNG infrastructure in Puerto Rico and elsewhere in the US, as well as small modular liquefaction facilities.
The San Juan contract has estimated total revenues of $1.5 billion, and NFE indicated in its 2022 Q3 results presentation that it was capable of making a margin of $10 per million BTU on LNG-to-power gas shipments. Given the high historical cost of power from Puerto Rico’s oil-fired generating fleet, even hefty expenditures on gas-fired power will look reasonable by comparison.
New Fortress was certainly well-placed to pick up, and to make strong returns from, the contract, but there’s no reason to doubt the assertion of the P3 Authority’s adviser, Cleary Gottlieb, that the selection followed a “robust, competitive, and transparent procurement process.”
The Proximo perspective
It has proven hard to get details of the contract – PREPA and the P3 Authority were inaccessible at the time of writing, and NFE, which is US-listed, has not given any details of the impact of the contract on its financials. It has indicated in the past that it can finance any new capex on-balance sheet while at the same time improving its credit rating towards investment grade. What little has emerged regarding the contract does not really address what capex it might require, or how the costs of upgrades or decommissioning will be allocated.
Still, opposition to the two PREPA contracts has been sustained. The debt-laden utility might have been struggling, but it was a major employer on the island, and many of its employees have shown little enthusiasm for working for private entities. New Fortress notes: “Genera will manage the operating budget, fuel contracts and federal funds for the generation fleet on behalf of PREPA”. It’s a little short of full privatisation, but still a real shake-up for PREPA’s workforce.
Proponents of quicker decarbonisation are convinced that the Genera contract amounts to a step back from a hoped-for move to distributed generation. But the IRP includes real, concrete steps towards renewables comprising all of Puerto Rico’s generation mix. In the mean time, retiring the commonwealth’s existing decrepit baseload fleet and repairing its transmission grid creates a profitable opportunity for a gas supplier like New Fortress.
Selected news articles from Proximo last week
SAASCAEM tendering road PPP concession
SAASCAEM – Mexico’s organisation for highways, airports and auxiliary services – has launched the tender for a 30-year PPP highway concession.
Germany tenders four offshore wind areas
Germany’s Federal Network Agency (Bundesnetzagentur) has launched the tender of four areas off its coast that would support 7GW of offshore wind capacity.
Pertamina nears close on Balikpapan debt
Pertamina is close to signing banks into the loan to fund the upgrade of its Balikpapan refinery in East Kalimantan.
ADIO invites qualification for Khalifa student housing
The Abu Dhabi Investment Office (ADIO) is inviting Statements of Qualifications (SOQs) for a student accommodation PPP at Khalifa University (KU) in Abu Dhabi.
SOUTH AMERICA
Peru awards two transmission PPPs
Proinversion has awarded two 30-year transmission concessions to Acciona Concesiones.
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