CNE publishes 25-page policy brief on Genera PR contract with Puerto Rico
The Center for a New Economy (CNE) published a 25 paged policy brief that analyzes the 10-year Operation and Maintenance Public-Private Partnership Agreement between the government of Puerto Rico and Genera PR to further explain the transition to renewable energy that is to happen.
The parties to the Generation O&M Agreement are the Puerto Rico Electric Power Authority (PREPA) which owns the assets, the Puerto Rico Public-Private Partnerships Authority as the contract administrator, and Genera PR as the operator.
The more than 300-page contract lays out the terms and conditions pursuant to which Genera will operate, maintain, and eventually decommission certain power plants, as well as lay out the blueprint to transition to renewable energy generation, which could provide a significant reduction in the cost of energy in the long term.
“A novel feature for Puerto Rico of the Generation O&M Agreement is that it requires Genera to use commercially reasonable efforts to ensure that local companies, or foreign companies with a significant presence in Puerto Rico, are included in the procurement process for materials and services under the agreement,” said Sergio M. Marxuach, CNE’s Policy Director.
Genera was hired to provide, directly or through subcontractors, four types of services: Mobilization Services, Operation and Maintenance Services, Decommissioning Services and Demobilization Services.
In exchange for providing these services, the Operator is entitled to receive an annual O&M Fixed Fee in the amount of $22.5 million, adjusted for inflation, subject to a 3% annual cap, during the term of the Generation O&M Agreement, as explained in the policy.
Additionally, during each contract year the Operator is eligible to receive additional financial compensation that should not exceed $100 million, in the form of an Incentive Payment and subject to the payment of potential penalties, in each case based on the Operator’s performance in providing the O&M Services.
“The savings estimated by Genera will be insufficient to provide any savings to consumers even if the PREPA’s debt is cut approximately by 50% to $5 billion and pays 6% interest, which means consumers will need to pay $300 million annually to service the restructured debt,” said Marxuach.
“Genera estimates, as set forth in a report by FTI Consulting, that the combined estimated savings from O&M and fuel range from $100 million to $200 million annually, including conversion savings if approved by PREB,” said Marxuach.
Under the terms of the Generation O&M Agreement those “savings would be shared 50% and 50% between Genera and the consumers of Puerto Rico, that would result in $50 million to $100 million per year to Puerto Rico electric system customers.”
The methodology used by Genera to calculate those expected savings is not provided in the FTI report, so it cannot be properly evaluated, the think-tank explained.
Genera insists on pointing to potential savings to be extracted from the conversion of oil-burning plants to facilities that burn natural gas, and such conversions would generate approximately 50% of total expected savings from the agreement.
The policy states that it remains to be seen how thoroughly that policy will be enforced and implemented, and the agreement does not identify who would pay for the capital expenditures necessary for such conversions nor does it explain how expected savings will be affected once the cost of capital is considered.
“If we set a higher bar, if we ask whether this transaction will really help Puerto Rico achieve its long-standing goals of generating affordable, cleaner, and reliable electricity, then the answer is not quite as clear, for the good is indeed mingled with the ill,” said Marxuach.
“The fact is that there is a lot of uncertainty surrounding this transaction and it is hard to avoid the unsettling feeling we are being presented with a fait-accompli on a take it or leave it basis,” said Marxuach.
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