Editor’s Note: The following is an analysis by Tom Sanzillo (email@example.com), IEEFA’s
director of finance and Cathy Kunkel (firstname.lastname@example.org), an IEEFA energy analyst. It is
being reprinted as it originally appeared in IEEFA’s website.
The government of Puerto Rico
is moving forward with plans to convert two units at the San Juan power plant
from oil to natural gas.
The Puerto Rico Electric Power
Authority (PREPA) plans to contract with a third party that will make the
necessary upgrades to the power plant to convert it and invest in the fuel
delivery and storage infrastructure needed to bring natural gas to the plant.
PREPA would repay
infrastructure costs, as well as delivery of natural gas, under a five-year
contract, with the possibility of extension.
New contractor with little experience
At the end of November, PREPA announced that it had awarded the contract to New Fortress Energy and would be
signing a final contract this month.
While IEEFA has frequently
objected to Puerto Rico’s current rush to build natural gas infrastructure
projects, since it will crowd out renewable energy investments and leave the
island dependent on fossil fuel imports, the San Juan project is more
reasonable than other natural gas proposals that we have seen. It reinforces
electricity generation in the north of the island (where most of the population
is located), and it only obligates PREPA for a five-year supply of natural gas.
Nevertheless, the way this
contract has been awarded raises numerous red flags, as the Puerto Rico
government attempts to move forward with large-scale contracts for the
privatization of PREPA this year.
First, the Puerto Rico Energy
Bureau allowed PREPA to move forward with the contracting process outside of
PREPA’s long-term integrated resource planning process. The project was not
included in PREPA’s last integrated resource plan and the bureau allowed it to
move forward before the release of the next plan this month.
Thus, PREPA has done no
analysis of how the conversion of the San Juan units will affect the dispatch
of other units on the system and no evaluation of alternative generation
Second, publicly available
information on the savings that will result to PREPA from the project is
confusing and contradictory. In a filing with the Puerto Rico Energy Bureau, PREPA projected
fuel savings of $150 million per year from converting from diesel to gas.
In a filing with the Securities and Exchange Commission, New
Fortress Energy announced that the project is expected to save PREPA $285
million per year. There is no information available on how much infrastructure
investment will be required to bring natural gas to the San Juan plant, or how
the recovery of this investment through electric rates will reduce the
projected fuel savings numbers.
Third, PREPA has chosen to
award the contract to a small company established in 2018. The parent company, NFE Holdings, has
been in the LNG business since 2014. The company currently has one principal
shareholder who is a substantial contributor to the Democratic Party.
According to one analyst: “The company is currently
unprofitable, with major projects still in the works and full utilization of
its facilities are several years away.”
The company has no history of
doing business in Puerto Rico. Selling 25 million MMBTU per year of natural gas
to PREPA at an approximate price of $10 per MMBTU will generate revenues of
$250 million per year, more than tripling New Fortress’s current revenues,
according to its SEC filing.
According to published reports,
New Fortress Energy was selected from a group of other companies that includes
ones more established, with reasonable credit ratings, operational facilities
and a history of doing business in Puerto Rico.
Any investment in Puerto Rico
at this time is quite risky. That PREPA was able to attract several companies
with track records and credit ratings is impressive. Those who claimed
investment would stop due to Puerto Rico’s fiscal distress are plainly wrong.
PREPA cannot finance its own
upgrades so it is using third party sources to front the capital. The choice of
New Fortress Energy may however add another unnecessary dimension to this
already fraught risk profile.
In short, however meritorious
the project, the process for the award of this contract does not indicate that
much has changed from PREPA’s recent history of awarding politically driven
contracts with limited or superficial analysis of the benefits to Puerto Rico’s
This does not bode well for the
privatization contracts that are expected to be signed this year.