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Energy Finance Report

Is Renewable Energy in Puerto Rico Back On Your Radar?

Posted by Joshua L. Sturtevant on 9/1/16 5:30 PM

Puerto_Rico.jpg

Renewable energy deal discussions centered on projects in Puerto Rico have been difficult – particularly for project owners – over the past few years. The foundations of most of the projects on the island were power purchase agreements (PPAs) with PREPA, the utility which, as an organ of the government was capable of issuing its own bonds and faced the same credit issues as the island itself. Therefore most projects have teetered along on life support for some time as financiers were unwilling to even open discussions with such a poor credit offtaker in the mix. However, interest in the island seems to have been heating up lately.

Proposals for behind-the-meter projects with private offtakers and wheeling scenarios have been popping up. Even old PREPA deals, many of which had died slow deaths in the wake of missed debt payments, may be in the process of resurrection. Why? Some may have missed it during the dog days of summer, but the main reason is the passage of PROMESA – the Puerto Rico Oversight, Management and Economic Stability Act. Among other things, the legislation: 1) created a fiscal control board; 2) granted the control board the power to force a debt restructuring; and, 3) allowed for the minimum wage to be lowered.

The Democrats on the Obama-appointed board are: Arthur Gonzalez, a senior fellow at New York University’s School of Law; Jose Ramon Gonzalez, president and chief executive officer of the Federal Home Loan Bank of New York; and Anna Matosantos, a financial and budget consultant at the Public Policy Institute of California. The Republicans are: Carlos Garcia, founder and chief executive officer of Bay Boston, a minority owned private equity firm; Andrew Biggs, a resident scholar at the American Enterprise Institute; and David Skeel, a University of Pennsylvania law professor; and Jose Carrion III.

While many – including some lawmakers who voted on the bill – have criticized PROMESA, and while it does not directly address solar deals on the island, it has seemingly given the island – and the solar industry along with it – a lifeline. If it hasn’t already, don’t be surprised if Puerto Rico shows back up on your radar very soon . . . .

NREL Report: Wind and Solar Could Supply 30% of the Eastern Grid without Increasing Reliability Concerns

Posted by Joshua L. Sturtevant on 9/1/16 12:39 PM

East_Coast.jpgA recent National Renewable Energy Laboratory (NREL) report noted that wind and solar, despite being intermittent sources, could supply 30% of the annual power for the Eastern grid without increasing reliability concerns. Noting that wind and photovoltaic are the fastest growing electricity sources in the U.S., the authors determined that “under the study assumptions, generation from approximately 400 GW of combined wind and PV capacity can be balanced on the transmission system at a 5-minute level.”  However, despite what many renewable energy advocates would consider to be good news, it was also clear that to do so would mean much more frequent start-ups and shut downs of fossil fuel plants – activities that can put stress – and increase maintenance costs – on these facilities. That said, the authors also left demand response and storage solutions out of their assumptions, which could increasingly counterbalance potential negatives of an increasingly green energy supply mix. The study itself can be found here.

Utility Merger Goals in a Decentralized Energy Future

Posted by Joshua L. Sturtevant on 8/25/16 4:36 PM

Iceberg.jpgAccording to Investopedia, mergers are typically undertaken to meet one of three major goals; 1) expand a company’s reach; 2) expand into new segments; or, 3) gain market share. While some of the $43.5 billion of utility deal activity in Q2’16 is undoubtedly linked to those goals, there is also a key question underlying recent deals from around the globe: how do utilities prepare for a cleaner, decentralized future?

If you believe that the answer to that question will remain a moving target for some time, it would seem likely that recent merger activity is only just the tip of the iceberg…

Solar Roofing Captures the Imagination – But is that Enough?

Posted by Joshua L. Sturtevant on 8/24/16 2:36 PM

"What if we can offer you a roof that looks way better than a normal roof? What if we could offer you a roof that lasts far longer than a normal roof? Now, it's a different ballgame." – Elon Musk on solar roofing.

Rooftop_Solar.jpg

While the development of building-integrated photovoltaic (BIPV), and specifically solar roofing, technologies is a natural evolutionary step in an increasingly solar-centric world—and while such technologies hold a wow factor for many—whether they are commercially viable remains an open question. While it is hard to bet against a man who is simultaneously involved in sports car, advanced battery and spaceship companies, Eric Wesoff makes a pretty compelling argument that the history of solar roofing might have a few more pitfalls than the always aspirational Mr. Musk would like to publicly admit. For an interesting take on the challenges facing solar roofing manufacturers, see Wesoff’s piece on Greentech Media.

New York Unveils Details of its Clean Energy Program

Posted by Merrill Kramer on 8/9/16 11:46 AM

Co-author Morgan M. Gerard

New_York_Clean_Energy_Standard_Solar-1.jpgThe New York Department of Public Service (DPS or Commission) on August 1, 2016 issued its long-awaited Clean Energy Standard order (“Order”). The Order sets forth the means by which the Empire State intends to achieve its ambitious goal of supplying 50% of the State’s electricity needs with clean energy by 2030 (50x30). By attaining this target the State will reduce its overall carbon emissions by 40%.

The Clean Energy Standard (CES) Order is a companion to a State initiative already underway called Reforming the Energy Vision, or REV. REV creates a transformative competitive framework for increasing the use of locally-sited or “distributed” energy, energy efficiency, energy storage, and customer load controls, collectively referred to as Distributed Energy Resources or DER. REV is seeking to establish a locational market-based platform through which DER resources are priced and may be bought, sold and traded. REV also includes an initiative to promote development of large-scale renewable projects to be integrated into the State’s electricity grid.

The CES order primarily focuses on three large-scale resources to supply the bulk of electrical supply needed for the State to achieve its ambitious 50x30 goal:

  • Large scale solar, wind and other renewables which the DPS expects to contribute approximately 29,000,000 MWh toward the goal;
  • Off-shore wind resources, which the DPS praises as a significant resource of potential value;
  • Existing uneconomic nuclear facilities that, while not renewables, constitute low carbon resources. Without ensuring that these plants continue to operate, DPS concludes that their output would be replaced by fossil fuel power plants whose emissions would undermine the State’s carbon emissions reduction goals. The program thus announces subsidies that it will provide to several nuclear facilities.

The plan to subsidize nuclear power plant operations is sure to be the most controversial aspect of the CES program.

To maximize the reach and uniform application of the clean energy program, the DPS establishes a renewables mandate not merely for utilities subject to its rate jurisdiction such as investor-owned utilities, but also retail energy service providers (ESCO’s). In addition, the CES Order applies to the Long Island Power Authority (LIPA), the New York Power Authority (NYPA), municipalities, and companies that purchase power from the New York Independent System Operator (NYISO).

The DPS solicits public comment on certain aspects of the Order and directs NYSERDA to implement other portions of the Order. Notably, the Commission solicits comments to seek to ensure that its clean energy standards are designed to “expand energy development by retaining and creating investor confidence” by “providing clarity and certainty to investors in implementing the Program.” The highlights of the CES program are as follows:

The New Renewable Energy Standard

The CES program is centered on a Renewable Energy Standard (RES). The RES is effectively a compliance obligation placed upon Load Serving Entities (LSEs) such as investor-owned utilities and retail energy service providers (ESCOs) to procure a target percentage of their generation mix from renewable resources. The procurement can be accomplished in three ways: (1) building new renewable facilities, (2) entering into power purchase agreements with third party renewable developers and (3) purchasing Renewable Energy Certificates (RECs), including from NYSERDA. The Order allows LSEs to choose to meet its renewable obligations by making an “Alterative Compliance Payment” or ACP. The ACP effectively acts as a ceiling on the price entities will pay for RECs.

NYSERDA will continue its program of providing cash incentives to third party renewable developers through solicitations and Statewide procurement in exchange for receiving the project’s RECs (which NYSERDA will in turn sell to LSEs and others to meet their respective RES obligations). A New York Generation Attribute Tracking System (NYGATS) operated by NYSERDA will provide a liquid trading platform for RECs in New York. Renewable resources may register their project’s environmental attributes to qualify them for RECs eligible for sale to LSEs and others.

The DPS divides eligible technologies for REC generation into three tiers: (1) Tier 1, which includes solar, fuel cell, wind, ocean/tidal, biogas, biomass and liquid biofuel; (2) Tier 2, a maintenance program to provide incentives to certain capital intensive existing technologies such as small-hydro; and (3) Tier 3—a special credit generated by nuclear energy called Zero Emission Credits, or ZECs. ZECs are specially priced certificates designed to preserve the ailing nuclear industry in New York. LSEs will be required to purchase a certain percentage of ZECs. 

In addition to RES requirements, the DPS envisions the development of a thriving “voluntary” green market, and encourages market participants to go above and beyond the mandatory thresholds to create and participate in a green energy products market that achieves additional greenhouse gas reductions.

Annual Renewable Targets and the Voluntary REC Market

The 2030 target of 50% renewable resources is allocated to individual LSEs and others based on an allocation formula tied in part to the LSE customer’s percentage contribution to the total System Benefits Charge (a DPS mandated charge to customers that is levied by distribution utilities and used to fund renewable energy incentives among other programs). The actual target of MWh in any period may be adjusted based on a number of factors. Among other things, LSE targets may be impacted by other market activity that includes retail, end-user participation in opt-in or other voluntary programs, energy efficiency, behind the meter third party renewable investments, conservation and other variations in demand and supply. Creation of a voluntary REC market that generates “additionality” is hoped to have an impact that will result in renewables consumption above and beyond the CES goal.

New Breath for Offshore Wind

The CES Order focuses on large-scale resources that can help the State meet its goals. Offshore wind is viewed as a potentially abundant energy resource in New York. The CES Order therefore sets a path for “steel in water” development.  Depending upon the distance from the shoreline, offshore wind projects will either be in state or federal waters.  The jurisdictional complexity inherent in offshore wind project development therefore requires coordination of clear state and federal programs and policies. 

With support from the State, the Deepwater Wind Project, a 90 MW project off the coast of Montauk, Long Island, has been going through the regulatory review and approval process. A coalition including NYPA, LIPA and Con Edison has also submitted a proposal for an additional project off the coast of the Rockaway Peninsula of Long Island.  Both project areas are far-enough off the coast to qualify as the “Outer Continental Shelf” (OCS), which is under the jurisdiction of the federal government and the Bureau of Ocean Energy Management (BOEM). 

NYPA, LIPA and Con Edison’s unsolicited project was denied by BOEM, and BOEM will now seek proposals in a competitive bidding process. The bidding process for the identified wind area is just under way. A Proposed Sale Notice (PSN) issued by BOEM, which is open to public comment, provides detailed information concerning the area available for leasing and proposed leasing terms. The PSN comment period also serves as the timeframe during which any company wishing to participate in the final lease auction may submit a qualification package.  Currently, there are seven companies that are already qualified to participate in the potential auction for the New York Wind Area.

State action will be necessary to implement the Deepwater and other offshore wind projects to run new transmission and distribution lines to the site, as well as provide for a stable offtaker to provide the required assurances for a financeable energy project. The CES Order includes a “program to maximize the value potential of new offshore wind resources,” and DPS directs NYSERDA to “identify the appropriate mechanisms the Commission and the State may wish to consider to achieve this objective.”

Warming up to Nuclear Power

Nuclear generation has a long history in New York. Several State plants are nearing the end of their useful life and are planned for retirement. Many nuclear plants, such as Entergy’s Fitzpatrick nuclear plant in upstate New York, have high operation and maintenance costs and are no longer economic. These plants generate a tremendous amount of energy - around 16% of the State’s overall energy. However, due to high operation and maintenance (O&M) expenses and low natural gas prices, coupled with their inability to quickly ramp up and down to respond to demand, these plants are not competitive in the NYISO market.

DPS has expressed concern that shuttering these plants could lead to their replacement by fossil fuel resources. This in turn would threaten the emissions reductions achieved through low-carbon programs. Therefore, the CES Order provides nuclear plants with a separate tier that includes a premium payment to avoid this result.

Nuclear electric generation will have its own designated emissions allowances called zero emissions credits, or ZECs. LSEs will be required to purchase a certain percentage of ZECs, and the required level will be set by NYSERDA.  To procure and allocate ZECs, NYSERDA will enter long-term contracts with nuclear facilities that are considered “at-risk.”  Plants within the Tier 3 category include Entergy's Fitzpatrick, Exelon’s Nine-Mile Point and Ginna nuclear facilities, but not Entergy’s Indian Point nuclear plant. The 43-year old Indian Point nuclear reactor has faced a series of safety and operational problems, and Governor Cuomo has called for the plant to be permanently shut down.

Shortly following issuance of the CES Order, Exelon agreed to purchase Entergy’s Fitzpatrick nuclear plant for approximately $110 million. Following the purchase Exelon will own all three nuclear plants in the State eligible for ZECs.

The effect of the ZECs is to create a price floor for nuclear energy. Providing these base load plants with a price subsidy is a legally uncertain area as it raises Constitutional questions under the Supremacy Clause regarding the authority of a State agency to set rates in an area that may be preempted under federal law, in this case, FERC jurisdictional authority. Only recently, in 2016, the U.S. Supreme Court in Hughes v. Talen Energy Marketing struck down a plan in Maryland to incentivize the installation of a new in-state power plant by providing it with a price floor that would allow the plant to competitively bid its power into the PJM power pool. The Supreme Court found that the rate incentive interfered with the FERC’s exclusive jurisdiction to set prices for the wholesale sale of power into PJM.

DPS anticipates these potential challenges. The DPS distinguishes its actions by arguing, among other things, that: (1) the Supreme Court has not directly barred bilateral power purchase agreements outside of the ISO competitive process; (2) the ZEC payment is not for electric power but, rather, for the environmental attributes or REC’s from the plants, an area that the FERC has stated is outside the purview of its rate authority; (3) the ZECs quantify the environmental benefits to New York caused by lowering carbon emissions and thus have an independent rational basis; and (4) the State has clear authority over the health, welfare and environmental protection of the State and its citizens. While the ZECs may have an impact on wholesale rates, the Supreme Court has recognized that such incidental impact on wholesale rates is a permissible exercise of state authority.

Conclusion

The CES Order lays out additional details on how the State plans to achieve its clean energy goals, and in what areas it intends to rely upon the private market to help it meet those targets. The order emphasizes the need for its rules to not only attract outside capital, but to insure that the program is sufficiently competitive with clean energy programs in neighboring states to attract these projects to New York.

The Commission has solicited comments on various aspects of the clean energy program with an eye toward having LSEs implement the program and commence their obligations by the beginning of 2017. The Order lays out an ambitious program that pushes the boundaries for new renewable generation, including paving the way for offshore wind, while announcing a major policy turn in deciding to preserve and maintain portions of the State’s nuclear fleet in operation. The DPS has sought to carefully balance its desire for utility financial stability with its commitment to attracting competitive renewable energy development to the State, on-shore and off-shore.  Only the future will tell if the State has struck the right balance.

Topics: NY REV, Renewable Energy, Reforming the Energy Vision, New York Solar, clean energy standard

The Brownfield Gold Rush: Municipalities Give Contaminated Properties New Life- Published by Cleantechnica

Posted by Administrator on 7/26/16 10:05 AM

Solar_Brownfield.jpgInnovative local government leaders throughout the country are taking advantage of state and federal incentives to transform former landfills and contaminated industrial properties and waste sites into energy-producing wind and solar projects. Two examples of municipalities giving such contaminated properties new life are discussed in this article – redeveloping once polluted properties into solar installations in New Bedford, Massachusetts and revitalizing a former Bethlehem Steel plant into renewable energy projects in Lackawanna, New York.

In a recent article published by CleantechnicaJeffrey Karp, Jerry Muys, and Van Hilderbrand demonstrate how corporate property owners can revitalize brownfields into a useful asset and revenue generator.

Topics: Solar Energy, solar brownfield, contaminated property, brownfield

Opening the Floodgates for U.S. Clean Energy Deployment- Published by Power Finance & Risk

Posted by Administrator on 7/22/16 2:25 PM
"The biggest obstacle to renewable energy growth in the U.S. is the availability of tax equity investment supporting project construction.  There is not nearly as much tax equity investment as is needed to support financing and building all of the renewable projects in development.  As a result, the pace of project financing and construction is being severely constrained."
 
In a recent Industry Current published by Power Finance & Risk, Elias Hinckley, partner and leader of the energy group at Sullivan & Worcester in its Washington, D.C., office, argues that a swath of new investors in the tax equity market could herald a period of unprecedented growth in renewable project development.
 

The New Gold Standard for Building Performance - PEER

Posted by Van Hilderbrand on 7/19/16 10:20 AM

Co-authors Jeffrey M. Karp and Morgan M. Gerard 

PEER.jpgElectricity-grid vulnerabilities were deeply exposed in the wake of Superstorm Sandy and its associated storm surge, as a single outage at a substation caused a sweeping black-out across downtown Manhattan, New York. Making matters worse, climate change science anticipates that future storms will be both stronger and more frequent.  To facilitate and improve the security, resiliency, and reliability of the macrogrid system, the U.S. Green Building Council (USGBC) has developed PEER, Performance Excellence in Electricity Renewal, the nation’s first comprehensive, consumer-centric, data-driven tool for evaluating power system performance. 

Modeled after the Leadership in Energy and Environmental Design (LEED) certification program, PEER seeks to incentivize the development of smarter buildings and communities by adopting a rating system that addresses power quality and supply availability, ability to manage interruptions and mitigate risk, and increase restoration, redundancy, and microgrid capabilities.

The expectation is that as a critical mass of buildings and developments achieve PEER certification, the electricity-grid system will become stronger and more resilient, thus preventing disasters caused by extreme-weather events.

PEER Will Help Create a Market to Capture the Benefits of Smart Grid Capabilities

Today, there are no adequate markets and metrics to capture the benefits that smart grid capabilities and smarter buildings provide to the larger electrical system, although proceedings like Reforming the Energy Vision (REV) in New York are attempting to tackle this challenge. PEER helps fill this major market gap by providing an opportunity for power technologies, systems, and other innovations to gain competitive advantage. 

The PEER program also may serve to assist in the creation of monetization pathways for service providers seeking to enable grid secure benefits.  For example, once the PEER rating system is used more broadly, commercial tenants and buyers may demand resiliency benefits for which they may be willing to pay a premium to reduce exposure to power-outages, business interruptions, and other grid losses.  For instance, a Whole Foods may be willing to pay an energy premium for the security that its refrigerators and air-conditioning will not lose power in a storm event, hedging the risk of spoiled stock.  Similarly, an investment bank with on-site servers may also be willing to pay the premium for the security that their servers will not stop trading—preventing potential losses from reconciliation events.  Thus, PEER may bring new participants into the energy mix such as main street corporates and traditional real estate firms as they learn about the benefits of and opportunities provided by expanded demand response capabilities, distributed renewable generation, and smart grid readiness.

Projects eligible for PEER certification may involve everything from retrofits to existing buildings and infrastructure, to a newly developed business campus. Projects first must be registered with the Green Business Certification Inc. (GBCI), which administers the LEED certification program, as well as several other performance standards rating certifications.  GBCI provides a toolkit for developers to self-screen projects and prepare their application for certification.  To achieve certification, projects are considered against four metrics: (1) reliability and resiliency; (2) energy efficiency and environment; (3) operational effectiveness; and (4) customer contribution.  The PEER process is relatively new, with only a few projects working their way through the new program, but once the new standard catches on certifications are expected to increase.

Microgrids, the Nation’s Capital, and PEER

A particular concern for national security is the susceptibility of the District of Columbia to flooding and black-outs due to its close proximity to several rivers. This concern has prompted the White House to announce significant targets for federal buildings to combat grid vulnerabilities and the D.C. Public Service Commission to further examine grid modernization through an open case, Formal Case 1130.

Earlier this month, USGBC and GBCI, in partnership with Urban Ingenuity, sponsored a meeting to support the District of Columbia’s efforts to encourage the development of microgrids, generally a localized, self-contained, contiguous power generation system within close proximity to demand. Microgrids provide grid efficiencies and resilience because they can “island” themselves off from larger macrogrid disturbances.  Thus, during a stress event on the macrogrid, microgrids can help service the larger system, isolate the event and prevent it from causing sweeping outages, and serve as a “power oasis” to the affected public.  

The development of microgrids are the kind of project that will be supported by a PEER evaluation and certification. The availability and widespread acceptance of PEER’s metrics will serve as a tool to incentivize the development of microgrids and other types of energy innovations that help facilitate movement of the electrical system towards a smarter-grid marketplace.  

 

The Energy Finance Report will continue to monitor PEER as the program matures.

Topics: Distributed Energy, Renewable Energy, United States Green Building Council, USGBC, LEED, Resiliency, Performance Excellence in Electricity Renewal, PEER

Update: Confluence of Emissions Regulations Favor Renewable Energy Development

Posted by Van Hilderbrand on 7/1/16 12:29 PM


This posts continues our discussion regarding the status of several major recent regulations by the U.S. Environmental Protection Agency (EPA) that target reductions in emissions from the oil, natural gas, and coal industries, and how these regulations will drive increased investment in cleaner and renewable energy. In particular it provides updates to Part 1 in this series on EPA’s Carbon Pollution Standards for New, Modified, and Reconstructed Power Plants and Part 2 on EPA’s Mercury and Air Toxics Standards (MATS).

Carbon Pollution Standards for New, Modified, and Reconstructed Power Plants

Confluence_of_Emissions_Standards.jpgAs previously discussed, EPA’s October 23, 2015 final rule, Standards of Performance for Greenhouse Gases From New, Modified, and Reconstructed Stationary Sources: Electric Utility Generating Units (80 Fed. Reg. 64,510), has been challenged in the U.S. Court of Appeals for the District of Columbia Circuit. State of North Dakota v. EPA (Consolidated Case No. 15-1381). Responding to a request from several states and industry groups challenging the final rule, the Court recently suspended the briefing schedule and allowed additional parties until July 12 to file petitions for review. During the administrative process, EPA denied several petitions for reconsideration of the final rule. It is expected that many of the parties who had their petitions rejected will file again and their petitions will be consolidated with the current litigation.

Mercury and Air Toxics Standards

On April 25, EPA issued a Supplemental Finding that it is Appropriate and Necessary to Regulate Hazardous Air Pollutants from Coal- and Oil-Fired Electric Utility Steam Generating Units, 81 Fed. Reg. 24,420, and affirmed that the MATS rule was appropriate and necessary to regulate air toxics after including a consideration of costs. EPA conducted the cost-benefit analysis and published the Supplemental Finding at the direction of the U.S. Supreme Court. Michigan v. EPA, 135 S. Ct. 2699 (2015). The MATS rule remained in place while EPA considered the associated costs and prepared its findings. The decision to keep the MATS rule in place was appealed to the U.S. Supreme Court by a coalition of 20 states, led by Michigan. Michigan v. EPA, C.A. No. 15-1152. Earlier this month, the Obama Administration and EPA scored a key win when the Supreme Court refused to hear the appeal, thus leaving the rule in place as the Supplemental Finding is challenged in the U.S. Court of Appeals for the District of Columbia Circuit.

The first challenge to the Supplemental Finding was filed on April 25 by Murray Energy Corporation. Murray Energy v. EPA, C.A. No. 16-1127. On June 24, as the window to file petitions for review closed, fifteen states, again led my Michigan, joined Murray Energy and filed a challenge. Michigan v. EPA, D.C. Cir., No. 16-1204.  Several additional utilities also filed challenges. The addition of the states and utilities was expected as many of the opponents participated in prior challenges of the MATS rule.

Future posts on the Energy Finance Report will provide updates, so please check back.

PROMESA—Energy in Puerto Rico amidst the Debt Crisis

Posted by Joshua L. Sturtevant on 6/29/16 1:56 PM

Co-author Morgan M. Gerard

Renewable energy industry participants are hungrily eyeing the tiny U.S. commonwealth of Puerto Rico, trying to determine whether the island’s debt crisis-driven troubles – which recently put a halt on development activities on the island - are at an end. Until recent issues arose, the island was a hotbed of renewable energy activity. High energy prices, high insolation and the promise of 20 MW-plus deals with a government-backed utility generated excitement throughout the solar community. However, the widely reported debt crisis on the island, which has seen the government default on debt obligations, has caught the nascent solar industry up in its wake.

Despite Puerto Rico’s financial crisis, unreliable electric grid and overwhelming poverty, early movers are contemplating a return to the island betting on the idea that, when push comes to shove, the United States wouldn’t allow the island – and 3.5 million American citizens along with it – to sink into the financial sea. A bill that would provide some relief, the Puerto Rico Oversight, Management, and Economic Stability Act or “PROMESA” (House Bill H.R. 5278 / Senate Bill S. 2328), is currently on the table.  PROMESA is in the stage of reconciling the different drafts passed by the House and Senate for presentation to President Obama, and its implementation could have far-reaching ramifications for the debt-ridden island and help drive renewed activity in the development of badly needed renewable energy resources. 

Puerto Rico and PREPA’s Debt Crisis—A Primer

Puerto_Rico_Debt.jpgThe purpose of PROMESA is to establish an Oversight Board as a method for Puerto Rico “to achieve fiscal responsibility and access to the capital markets.” In recent years Puerto Rico borrowed money through the issuance of $70 billion worth of municipal bonds to combat declining government revenues and finance the operations of the territory.  More than $9 billion of the Commonwealth’s climbing debt is owed by the government-owned public utility company, the Puerto Rico Electric Power Authority (PREPA).

Established in 1941, PREPA is government-instrumentality and the island’s monopoly energy utility with approximately 1.5 million citizens in its service territory—one of the largest operating areas in the United States. However, until 2014 PREPA was an unregulated entity with very little fiscal or operational oversight which some complained was used for political purposes.  Poor financial decisions were made by the utility and politicians, including the incentivization of large corporate customers by providing essentially “free” power and turning a blind-eye toward widespread electricity theft by citizens.  Thus, according to Reuters, PREPA’s 2014 operating income was just $223 million against $1.6 billion in accounts receivable.

Given the circumstances surrounding the island’s revenue versus debt payments, Governor Alejandro García Padilla acknowledged in a statement last year that the debt was “not repayable.”  As it became clear that PREPA would similarly be unable to meet its obligations, the local legislature established a utility regulatory, the Puerto Rico Energy Commission (PREC) and passed the Puerto Rico Corporation Debt Enforcement and Recovery Act (Recovery Act), which sought to allow PREPA to restructure its debt.  While PREC is actively trying to reign in PREPA and establish new norms for the utility, the Supreme Court struck down the Commonwealth’s attempt to modify its debt obligations ruling that Puerto Rico, as a territory, is not entitled to Chapter 9 bankruptcy protection, which is reserved exclusively for use by States.

Although the ruling disallowed Puerto Rico from authoring its own bankruptcy plan, the government developed a plan to transfer PREPA’s debt to a new entity. Under the Puerto Rico Electric Power Revitalization Act (Revitalization Act), the government created the PREPA Revitalization Corporation, which issued its own bonds and exchanged these new bonds for outstanding PREPA bonds.  Uninsured bondholders wishing to participate in this exchange agree that “Revitalization Debt” issued by the revitalization corporation will have a lower interest rate and a five year delay on the payment of principal.  This bond issuance and exchange will provide some relief for PREPA and enable a securitization to help finance $400 million worth of the new Aguirre liquefied natural gas facility. 

To further this end, the Revitalization Corporation filed a petition with PREC to create a new structure of raising revenue in lieu of taxes for cities though a hike in utility rates. On June 21, 2016, PREC ordered the creation of a “transition charge” that will provide security to bondholders that PREPA will pay its outstanding obligations, and hopefully provide enough stability to allow some liquidity into the starved utility market.  This “transition charge” will not in-and-of-itself raise rates on customers, but rather signifies which monies are being set aside by PREPA for bond repayment.  A separate rate case will weigh the wisdom of raising utility rates—it is anticipated that PREPA will raise rates for the first time since 1989.

The Revitalization plan is seen as something of a stop-gap to calm investors; however, more work needs to be done to shore up the Commonwealth’s credit. Notably, since Puerto Rico is not a country, it cannot access assistance from the International Monetary Fund (IMF).  With no true independent long-term means of debt relief, the responsibility over Puerto Rico’s fate shifted to the U.S. Congress.

PREPA and PROMESA—Renewable Energy on the Island

Puerto_Rico_Wind_Farm-2.jpgPuerto Rico has few conventional energy resources and, due to PREPA’s heavy investment, shipped in petroleum products are the dominant energy sources for the island. In 2012, 65% of Puerto Rico’s electricity came from petroleum, 18% from natural gas, 16% from coal, and 1% from renewable energy.  Given the island’s high insolation rates, Puerto Rico enacted a Renewable Energy Portfolio Standard (RPS), offering generators Renewable Energy Credits (RECs) and requiring PREPA to obtain 12% of its electricity from renewable sources starting in 2015, scaling up to 15% by 2020 and 20% by 2035.  To achieve this objective, PREPA signed a number of large scale Power Purchase Agreements (PPAs) with solar developers, which largely fell apart or expired amidst the debt crisis.  As the utility’s credit-rating fell so too did the financeability of PREPA offtake agreements.  Relevant to developers and investors, PREC has wide latitude over future PPAs signed with PREPA and the Commission may be able to push through new generation through pre-approved or existing agreements.

PROMESA and PREPA Assets

PROMESA, the solution under discussion in the U.S. Congress, is an attempt to quell bondholders and facilitate the long-term financial reliability of the island and its government instrumentalities, which includes PREPA. The focus of the bill is an Oversight Board that will pass its own bylaws to help Puerto Rico implement responsible fiscal policies.  The bill may also help facilitate long-term investment in renewable energy projects, potentially stabilizing the utility and providing opportunities to investors and developers. Key components of the plan include:

Oversight Board: PROMESA, as written, seeks to establish an Oversight Board that would have the authority to “enforce fiscal reforms, negotiate and enforce debt restructuring agreements with owners of Puerto Rican debt, force the sale of government assets, establish efficiencies that consolidates (sic) agencies and reduce workforce levels, prevent the execution of legislative acts, executive orders, regulations, rules, the issuance of new debt, and contracts that undercut economic growth or violate [the] Act.”  Thus, PROMESA could allow for a forced sale of PREPA assets.  Under the bill, it appears that creditors would be the recipient of funds from a forced sale; however, there may be opportunities for developers to purchase and privatize energy assets if such an event occurs.

Debt Restructuring: The Oversight Board may be able initiate a proceeding for debt restructuring of an entity, including PREPA, if the Oversight Board determines that certain criteria have been achieved; specifically: “1) the debtor must have engaged in good-faith debt negotiations; 2) the debtor must be on the path towards producing audited financials, and must have public draft financial statements available that would allow the Oversight Board to be able to make an informed decision in regards to restructuring; and 3) the debtor must have an Oversight Board approved five-year fiscal plan in place.”  A debtor would be able to access restructuring in the instance that the debtor meets these criteria, and has not reached a consensual negotiation with its creditors.  Five of the seven Oversight Board members must vote in favor of the restructuring. Thus, the Oversight Board could allow PREPA to restructure its debt obligations, likely freeing up capital in the short term to commit to offtake from new renewable energy projects.

Puerto Rico Infrastructure Revitalization: Under the Oversight Board there would be a Revitalization Coordinator that may expedite “critical energy projects” when responding to an “emergency” need for infrastructure.  The draft bill’s framework would have a developer identify a project and submit it to the Revitalization Coordinator.  The application for expedited permitting services must include: “1) the impact the project will have on an emergency; 2) the availability of immediate private capital or other funds, including loan guarantees, loans, or grants to implement, operate, or maintain the project; 3) the cost of the project and amount of Puerto Rico government funds, if any, necessary to complete and maintain the project; 4) the environmental and economic benefits provided by the project, including the number of jobs to be created that will be held by residents of Puerto Rico and the expected economic impact, including the impact on ratepayers, if applicable; and 5) the status of the project if it is existing or ongoing.  In addition to these requirements, the Revitalization Coordinator may require a submission to outline how the project will reduce reliance on foreign oil, improve performance of energy infrastructure and overall energy efficiency, diversify energy resources, support PREC in achieving its goals, contribute to transitioning to privatized generation capabilities in Puerto Rico and promote the development and utilization of energy sources found on the island.

This last provision could provide a foothold for renewable energy advocates to grasp onto, though it remains to be seen how quickly development of financeable projects can be undertaken in the face of ongoing financial issues.

Conclusion

It appears under the most recent draft of PROMESA that the Oversight Board will have considerable weight in determining the future financial position of PREPA, either stabilizing the utility or selling off its assets. Notably, although there are multiple independent generators in Puerto Rico, PREPA is the sole distribution and transmission entity; therefore, its financial health and ability to transmit uninterrupted electricity as well as develop a wheeling tariff are vital to project development.  As Congress moves closer to recess, the fate of Puerto Rico could be either determined quickly or delayed until fall.  Within the current drafts, much is still uncertain concerning the debt restructuring process. For example, whether or not renewable energy PPAs will be considered imputed debt that falls under the control of the Oversight Board is unclear.  Also, it is yet to be determined how the Oversight Board and PREC will cooperate together since much of their authority over PREPA may overlap.

In short, the opportunity may be large for an investor or developer to participate in providing electric service to PREPA’s expansive territory, and PROMESA could offer a fast track to a more renewable future for Puerto Rico if its execution does not become a bureaucratic quagmire. However, much is yet to be determined, and even bullish developers and investors will be watching developments with a wary eye.

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