Puerto Rico: Energy Transition & Sector Reform

Policy to Action, Emergency Declaration, Renewable Energy

Since declaring bankruptcy in 2017, the Puerto Rico Electric Power Authority (PREPA) began what can only be described as a radical transformation - from a vertically integrated electric monopoly serving over 1.5 million customers to a disaggregated structure with regulated private management of operation and maintenance (O&M) services for transmission and distribution (T&D) infrastructure and its legacy thermal generation (Generation) fleet. The T&D and Generation privatizations of O&M services began officially in earnest on June 1, 2021, and July 1, 2023, respectively. 

Puerto Rico now faces the urgency and criticality of reconstructing its electric grid, modernizing its power generation fleet, and integrating huge amounts of new renewable energy and battery energy storage systems – all essentially at the same time and to comply with the island’s energy policy, regulatory requirements, and fiscal plan objectives.  

This transformation faces formidable challenges, not unlike those being experienced in other U.S. jurisdictions, which include land use siting, NIMBY¹ opposition, environmental review, financing, and project execution delays. Yet, in the case of Puerto Rico, with an isolated islanded grid, the urgency of energy sector transformation requires particularly pressing – and historic – alignment and commitment from and between policymakers, regulators, state and federal agencies, and the public. 

The following discussion summarizes (a) the islands’ current context and challenges in transitioning its energy sector, (b) some near-term objectives for energy sector transformation, and (c) policy and statutory mechanisms that support enhanced critical energy project approvals and execution. 

Context and Challenges 

According to Puerto Rico's energy public policy, PREPA’s certified fiscal (business) plan, and the U.S. Department of Energy (DOE), there is no single, higher priority than transforming and modernizing Puerto Rico’s electric grid to provide reliable, efficient, and resilient electricity to residents, commerce, and industry. 

• Puerto Rico Act 17-2019 mandates the retirement of coal-based generation (~450MW) by December 31, 2027, and the achievement of energy efficiency and renewable and energy storage targets and related Renewable Portfolio Standards (RPS) pursuant to Act 82-2010. Puerto Rico energy public policy under Acts 17-2019 and 82-2010, among others, also calls for: 

1. Universal access to electric power service, by guaranteeing that cost is affordable, just, reasonable, and nondiscriminatory for all consumers, and guaranteeing the availability of energy materials and supply to all customers. 
2. Compliance with applicable environmental law to preserve the ecosystems of Puerto Rico and improve quality of life. 
3. Aggressive reduction of the use of fossil fuels, minimizing greenhouse gas emissions, and supporting initiatives that focus on climate change, specifically on mitigation, adaptation, and resilience. 
4. Existing and future units that generate power from fossil fuels to be capable of operating with at least two (2) types of fossil fuels, one of which shall be natural gas, to reduce greenhouse gas emissions and increase the capacity of the electric power grid to integrate renewable energy and distributed generation. 
5. Reducing Puerto Rico’s reliance on energy sources from fossil fuels and the development of short, medium, and long-term plans to establish a well-balanced and optimum portfolio standard based on renewable energy.
6. Ensuring the security and reliability of our electric power infrastructure by using modern technologies that promote inexpensive and efficient operations and allow for the integration and dissemination of renewable sources; and 
7. Ensuring continuous improvements for the electric power grid, to promote resilience and diversification by combining generation capacity with the demand by region, thus facilitating the effective transition to new technologies and renewable energy sources.

• The 2020 Integrated Resource Plan (IRP) ² was based on Puerto Rico energy public policy and required (a) development of renewable energy sources to meet RPS objectives in the following timetable and rate: 20% by 2022, 40% by 2025, 60% by 2040 and 100% by 2050; and (b) retirement of certain oil-fired resources over a five-year term in the San Juan, Palo Seco, and Aguirre power plants. These oil-fired plants and other PREPA generation assets are to be retired as sufficient solar photovoltaic (PV) and battery energy storage systems (BESS) become available. 
   

• Puerto Rico’s governor activated emergency procedures under Act 76-2000 on March 25, 2021 (EO-2021-024) for purposes of all infrastructure (including energy infrastructure) impacted by hurricanes Irma, Maria, and the earthquakes. For energy matters, the declaration includes all infrastructure directly or indirectly related to the generation, transmission, distribution, and storage of energy, as well as auxiliary services related to the generation of electricity in Puerto Rico. Act 76-2000 specifically provides for declaring an emergency where…there is “any serious abnormality such as hurricane, …earthquake, fire, explosion or any other kind of catastrophe… in any part of the territory of …Puerto Rico, which warrants the mobilization and use of extraordinary human and economic resources to remedy, avoid, prevent or reduce the severity or magnitude of the damages caused or that may be caused. Likewise, the term emergency includes any event or serious problems of deterioration in the physical infrastructure that provides essential services to the people or that puts the life, public health or safety of the population or a sensitive ecosystem at risk.” ³
   
• PREPA’s certified fiscal plan for Fiscal Year 2024 requires the same and additional transformational initiatives for the island’s legacy Generation and T&D systems, now privately operated and maintained under long-term Public Private Partnership contracts. PREPA’s legacy generation fleet⁴, privately operated since July of 2023 is (i) highly aged; (ii) inefficient; (iii) unreliable; (iv) environmentally noncompliant; (v) dependent on frequent planned and unplanned maintenance; and (vi) heavily reliant on petroleum, namely bunker and diesel fuel. The overall electric grid (Generation + T&D) was further impacted by natural disasters, including hurricanes and earthquakes from 2017 to 2022. Further, the islands’ two largest private Independent Power Producers (IPPs) also face operational and resiliency challenges. 

• The Generation Resource Adequacy Assessment (GRAA) ⁵ prepared by the T&D private operator confirmed that the insufficiency of reliable generation is a serious problem given that Puerto Rico is an isolated grid, unable to import electricity, and that the generation portfolio is uneven and dominated by large generation units, which increases system risk due to outages. The GRAA’s conclusions were, and continue to be, of the highest importance because they highlight the issue of expected instability and reliability of Puerto Rico’s energy system. Current generation capacity does not meet expected demand in the immediate term and is not sufficient to bridge the gap until new compliant and dependable renewable power generation is developed. 

• New generation project development timelines to attain commercial operation date (COD) for sufficient renewable energy and BESS projects to reliably substitute PREPA’s legacy generation units (and the 450 MW generated with coal as fuel, which must be retired by December 31, 2027) is forecasted to take ~ another decade. This is mostly due to Puerto Rico’s permitting history, financing challenges, PREPA’s bankruptcy, federal funding requirements, and the many concurrent energy sector transformation initiatives. Opposition to utility-scale renewable project siting, for example, is already active, with resulting delays in financing and construction commencement. 
• T&D system reconstruction and modernization are also critical to improve system reliability and support the integration of new power (renewable/BESS in particular) generation. Overall T&D system reconstruction and transformation will also take at least a decade to complete based on forecasts by the T&D operator. Grid modernization and reconstruction are critical to ensure the adequate and reliable integration of large amounts of utility-scale renewable energy and BESS infrastructure, expected electric vehicle (EV) surge, and growing rooftop solar systems. 
• Inherent permitting complexity and coordination – with and between local (PREB⁶, FOMB⁷, DNER⁸, OGPe⁹, Puerto Rico Planning Board, COR3¹⁰, etc.) and federal regulatory entities (FEMA¹¹, USCOE¹², DOE¹³, EPA¹⁴, FWS¹⁵, etc.) is a challenge and reality that is part of Puerto Rico energy sector restructuring and transition process.  

Near Term Objectives 

PREPA is expected to emerge from bankruptcy during the calendar year 2024. Its current fiscal and financial governance is subject to oversight and approvals from the PREB, FOMB, the Puerto Rico Fiscal Agency and Financial Advisory Authority (PRASA) (AAFAF by its Spanish acronyms), and FEMA, among others.¹⁶

Within this complex and bureaucratic governance structure, all key stakeholders are focused on:

• Continually improving the review and approval process for energy infrastructure projects that address the island’s energy emergency. 
• Ensuring the most expedited commencement and construction of large amounts of renewable energy / BESS projects required by the IRP and fiscal plan – the current and upcoming rounds of renewable procurement are the responsibility of a procurement expert designated by PREB as the Independent Coordinator for soliciting bids and supporting price evaluation and contract awards.
• Stabilizing the generation fleet (short term) through procurement of temporary emergency generation to allow for completion of critical maintenance projects.
• The deployment of 430 MW of four-hour utility-scale BESS projects, 1,720 MWh of storage duration, at various PREPA generation sites to provide grid stability through enhanced ancillary services including spinning reserve, frequency regulation, and voltage control as renewable generation is developed and integrated. 
• New projects and initiatives have been proposed, including fuel conversion to liquefied natural gas (LNG) at select PREPA legacy generation units and a request for proposal (RFP) that is currently underway to procure a combined cycle power plant with approximately 300MW of capacity to provide sustainable compliant base load power with multiple fuel capability, including LNG, oil and hydrogen blended fuel (short/mid-term),¹⁷ and 
• Increase coordination and support to accelerate overall electric grid (T&D) reconstruction and modernization.¹⁸

The resulting benefits of these objectives include: 

• Increased renewable energy and BESS project approvals, funding, and construction. 
• Increased overall generation and T&D system resiliency and availability.
• Compliance with EPA health / environmental and climate change policies under Act 17-2019. 
• Faster and responsible integration of utility-scale renewable energy and BESS to the grid (while the grid is under reconstruction), to mitigate instability and load shed events, and
• Improved energy reliability and availability while Puerto Rico advances to meet the 3,500 MW of renewable energy and BESS required under local law – as those projects are authorized (contractually and technically), financed, permitted, constructed, and commissioned.

Pathways For Enhanced Permitting / Critical Project Execution

Leveraging energy policy (local and federal) to effectuate action and to advance Puerto Rico’s energy transition to clean energy, renewables, and BESS is a critical element of the government’s plan and strategy. 

Leveraging Act 76-2000

• The governor of Puerto Rico has broad and specific authority, under the referenced statute, to declare an emergency via executive order for the specific purpose and objective of addressing the declared emergency, expediting critical permitting for projects designed to address the emergency, and also undertaking the mentioned fuel conversion projects. Act 76-2000 was legislated precisely for the type of situation Puerto Rico is experiencing today with its energy grid and the obvious urgency, risk factors, overall sector transformation under PREPA’s applicable fiscal plan, safety, and security concerns given the highly fragile T&D and energy generation infrastructure. 
• Puerto Rico’s governor recently renewed/extended the emergency declaration via EO-2024-001 on March 8, 2024. The emergency declaration includes the continuation of an Interagency Environmental Subcommittee. Notedly, and to avoid duplicity and delays, the Executive Order establishes that any permits, endorsements, concessions, or authorizations approved by federal agencies have reciprocity with the relevant state agency. Additional Administrative Orders and Resolutions have been issued by OGPe and the Planning Board to help implement the emergency declaration. The Executive Order also establishes as a priority the use of brownfields (e.g., landfills, formerly impacted sites, etc.) for renewable energy and battery storage projects. 
• The legal effect of an executive order pursuant to Act 76-2000 for these strategic emergency projects is immediate and helps accelerate local permitting and thus financing and related funding and pre-construction (design, modeling, procurement) work. 

• This approach is independent of the Title V Critical Project designation (discussed below) but is strengthened if the relevant energy project is also designated as a Critical Project under Title V of PROMESA. 
• As a Critical Project, Section 504(b) of PROMESA’s Title V provides that Article 12 of Act 76-2000 (which (i) allows for the Legislature to amend the scope of the declared emergency and (ii) limits the term of the emergency to six months, subject to renewals), is inapplicable. Thus, energy projects designated as critical projects would be protected from any potential legislative interference and would benefit from the emergency declaration through commercial operation date (COD). 

Enhancing Act 76-2000 through Title V of PROMESA (Critical Projects) 

Title V of PROMESA adopts key provisions of Act 76-2000 and defines what a Critical Project means. The term ‘‘Critical Project’’ means a project identified under the provisions of Title V and intimately related to addressing an emergency whose approval, consideration, permitting, and implementation shall be expedited and streamlined according to the statutory process provided by Act 76, or otherwise adopted pursuant to Title V. The expedited permitting process applies only to Puerto Rico permitting agencies and not to federal agencies.

• Section 503 of Title V establishes the project submission requirements for Project Sponsors, and in the case of energy-specific projects, has additional criteria related to fuel mix diversification, privatized generation, renewable energy, improved reliance, and performance. This language was specifically added by the U.S. Congress in 2016 knowing, even before hurricanes Irma and Maria in 2017, that the island’s grid and generation assets were in dire need of transformation and modernization.
• Similarly, Title V establishes requirements for Puerto Rico agencies, the governor and the Revitalization Coordinator (FOMB), to evaluate and permit Critical Project designations.
• Section 504 of Title V also calls for the creation of an Interagency Environmental Subcommittee – which was created pursuant to the governor of Puerto Rico’s executive orders (referenced above). The Subcommittee is mandated to evaluate environmental documents required under Puerto Rico law for any Critical Project within the Expedited Permitting Process. If a project is designated as a Critical Project, the existing Interagency Environmental Subcommittee has to include the FOMB’s Revitalization Coordinator. The Subcommittee created by the governor includes the listed members and also members from the Highway and Transportation Authority, PREPA, and PRASA.
• As a Critical Project, the FOMB’s Revitalization Coordinator has the authority (and mandate) to identify Points of Contact at each relevant federal permitting agency, to help prioritize the evaluation and permitting process for such project.
• Support from the FOMB/Title V designation and overall efforts to expedite energy projects is also further enhanced by Secretary Jennifer Granholm’s Puerto Rico Grid Recovery Modernization Team, for support across federal resources, technical assistance, and additional support to help repair and reconstruct the island’s grid and to drive decisive progress on Puerto Rico’s clean energy transformation.¹⁹

Conclusion

Act 76-2000: The emergency declaration by the governor of Puerto Rico - activated expedited permitting related to projects that address the energy emergency, with respect to Puerto Rico agencies. More recently, in October of 2023, there were additional interagency agreements with the Puerto Rico Institute of Culture and the DNER to enhance delegated authority and review and comment processes at the OGPe permitting office.  

Title V: Critical Project designation for energy projects under Title V of PROMESA – strengthen the procedures under Act 76-2000 for local (PR) permitting purposes + identify Points of Contact at federal agencies to serve as liaison with the Revitalization Coordinator + protect from future potential legislative meddling + assign emergency status until project completion. 

PR Grid Recovery Modernization Team: Sec. Granholm’s leadership is helping cement, align, and provide additional authority for the collective efforts – state and federal – to prioritize, expedite, and authorize the critical energy infrastructure projects that must be undertaken immediately to accelerate transition. 

Renewable Acceleration: PREB’s assignment of responsibility for renewable procurement to an independent expert coordinator was a good step in principle but the overall procurement has been mired in financing challenges. The DOE Loan Program Office could serve as a key lender to renewable projects to overcome these challenges, but significant financing risks remain. The Generation private operator has proposed and PREB has conditionally approved scope-of-works to acquire and install BESS capacity at PREPA-owned generation facilities using federal funds, which would be a meaningful and positive step. These and other ongoing efforts to expedite the renewable energy transition in Puerto Rico must continue and new, creative, and rational approaches must be identified and implemented.

Full Alignment: PREPA, the government of Puerto Rico, PREB, and FOMB, together with other key stakeholders that include the private T&D and Generation operators, and project proponents are supporting the energy sector transition, accelerated permitting, and related coordination efforts, under relevant policy and regulatory requirements, together with the U.S. DOE and the Puerto Rico Grid Recovery Modernization Team led by Secretary Granholm. Together, these agencies, public corporations, regulators, and stakeholders are working to further advance energy transition, and facilitate financing and construction works for the critically urgent energy projects that are urgently needed. 

About the Authors

The authors have been deeply involved in PREPA’s bankruptcy and energy sector restructuring since 2017, leading the development of PREPA’s annual fiscal plans, budgets, stakeholder reporting, cashflow and liquidity, privatization initiatives, and regulatory compliance matters.

^{1 Acronym for “not in my backyard”.}

^{2 Late in 2023, the PREB opened a regulatory docket to begin a new IRP proceeding to incorporate the impacts and effects, among others, of hurricanes Irma and Maria (Sept. 2017), earthquakes (2019-20), Fiona (Sept. 2022), and updated economic projections resulting from Puerto Rico’s emergence from bankruptcy. The new IRP will also be updated to reflect current status in the approval, development and integration of utility scale renewable energy projects.}

^{3 See Act 76-2000, Art. 1(a) (unofficial translation)} 

^{4 PREPA’s thermal generation efficiency has deteriorated over the past 10 years, as evidenced by an increasing heat rate, which means that more fuel is required per unit of electricity generated. PREPA power plants rely on petroleum-based fuels that are traded in global markets and have been historically highly volatile and expensive to use for electricity production.} 

^{5 The GRAA was issued in August 2022.} 

^{6 Puerto Rico Energy Bureau} 

^{7 Financial Oversight & Management Board for Puerto Rico} 

^{8 Puerto Rico Department of Natural and Environmental Resources} 

^{9 Puerto Rico Office of Permits Management} 

^{10 Central Office for Recovery, Reconstruction and Resiliency} 

^{11 Federal Emergency Management Administration} 

^{12 U.S. Corps of Engineers} 

^{13 U.S. Department of Energy} 

^{14 U.S. Environmental Protection Agency} 

^{15 U.S. Fish & Wildlife Service} 

^{16 T&D and Generation private operators, as PREPA’s agents under the respective Operation & Maintenance Agreements, are equally subject to the mentioned governance and approval structures.} 

^{17 All power generation-related initiatives involving PREPA’s legacy generation assets are the responsibility and purview of the Generation private operator.} 

^{18 Similarly, all T&D related initiatives are the responsibility and purview of the T&D private operator.}

^{19 See, Pres. Biden, press conference on October 3, 2022, Ponce, PR.} 

^{© Copyright 2024. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.}