The island’s electricity costs — significantly high in comparison to most competitive economies — could be solved by making a series of difficult choices to fix the Puerto Rico Electric Power Authority’s escalating problems and take advantage of a new energy order that is driving down prices around the globe.
Such is the conclusion of local economist firm H. Calero Consulting Group, which suggests that global shifts in energy markets will lead to more competition, which could bode well for Puerto Rico. However, to benefit from that, conditions on the island must change while the rapidly closing window of opportunity is still there.
“PREPA’s woes, until recently mostly operational, have been known for years. Even in the midst of negative outlook and downgrading, credit rating agencies repeatedly stated their belief in PREPA’s strategic plans.
Puerto Rico’s economic downsizing and the shrinking population have put severe financial strains on PREPA, leading it to an almost technical default. A shrinking resident population, 22 percent fewer jobs since mid-2006, and an annual average economic growth of -1.7 percent since 2007, have led to a drastic reduction in demand for electricity. Add to that, outdated distribution networks and pressing financial liabilities and the result is an agency that is shifting the debt burden to its creditors.
“During this period, the high cost of electricity generation created significant competitive disadvantages. To put it in context, the cost of electricity in the Dominican Republic, which competes with Puerto Rico to attract foreign investment to the region, is 21¢ per kilowatt-hour whereas PR’s cost is 24¢ per Kwh and the average cost in the U.S. mainland is 12¢,” the group noted.
“To alleviate this, the Commonwealth has long provided subsidies to a select group of capital-intensive companies. The rest, however, has no choice but to pay the prevailing electricity costs.”
PREPA offers challenge and opportunity
“PREPA…is currently the island’s biggest challenge and opportunity for change,” the firm says in the most recent edition of its “Economic Pulse” newsletter, in which it suggests PREPA must carry out several difficult choices, headed by efforts to become financially viable once more.
The first step toward that is acknowledging and adjusting the island’s energy monopoly to Puerto Rico’s new reality that includes including a reduced population and an ongoing weak industrial demand for electricity.
“Its existing capital infrastructure and employment level will have to be scaled down. Pay cuts will have to be implemented and non-essential expenditures eliminated as well,” the firm says.
“PREPA’s management will have to renegotiate collective bargaining agreements to reflect the company’s current situation. Back-office personnel will have to be stripped to a minimum through increased system automatization.
PREPA will need to restructure its networks to increase distribution efficiency and implement a system of performance indicators, while pursuing federal funding to remove aerial distribution network throughout the island.
Furthermore, the agency needs to continue with its transition plans toward full gas-based electricity generation, the firm noted.
Electricity generation based on renewable energies in the United States remains elusive. Hydropower, wind, wood, waste, geothermal, and solar sources accounted for a combined 14 percent of all electricity generated in June 2014.
“The relatively high costs associated with some of these sources and the low cost of natural gas have so far eschewed their use as a financially viable alternative,” the firm says.
The agency could also benefit from engaging in public-private partnerships in areas such as power generation, as well as maintenance and operations.
“The privatization of certain management operation would also contribute to raise efficiency in the company’s daily operations. Moreover, the possibility of exporting domestically generated electricity to neighboring jurisdictions might just turn out to be attractive enough for the private sector,” the firm notes.
“The solution to Puerto Rico’s electricity costs conundrum is feasible, albeit full of difficult choices but, once made, world energy markets will do the rest,” H. Calero Consulting said.