Net metering and the independence of the independent regulator
Law students Carlos G. Cabrera-Rivera and Emmanuel Alvarado-Nazario discuss the impact of energy policy on Puerto Rico’s transition to renewables.
In Puerto Rico, for over 15 years, a net metering program has been crucial to the development of renewable energy. The program began in 2007 with the enactment of the Net Metering Program Law, Act 114, on August 16, 2007.
This law promotes a distributed generation system in which participants receive compensation for the excess electricity they produce and contribute to the grid.
Although the program was established in 2007, it wasn’t until after Hurricane Maria in 2017 that distributed generation systems gained more traction due to constant interruptions in the electrical grid. Driven by an unstable service and governmental and philanthropic incentives, Puerto Rico’s net metering program reported a distributed generation capacity of 1,000 megawatts by 2022.
This increase in interconnectedness raises the challenge of how the net metering program will continue and how the costs of the electrical infrastructure will be distributed among all system participants. While the economic load distribution issue in net metering systems occurs in other jurisdictions, the legal and financial challenge in Puerto Rico is compounded by the ongoing transformation of its electrical system during one of the largest municipal bond bankruptcies, which includes both the power company and the government of Puerto Rico.
Background on the transformation of the electrical system
Puerto Rico’s electrical system reached its peak development with the creation of the Puerto Rico Electric Power Authority (PREPA), the national company that electrified Puerto Rico, primarily funded by bond issuance. PREPA controlled the production, distribution and regulation of the energy market.
By the early 2000s, its solvency had reached a critical point, accumulating a debt of nearly $9 billion. After several attempts at restructuring and fiscal adjustments, which included the appointment of a restructuring officer in 2014, PREPA defaulted on nearly $400 million in obligations in 2016.
That same year, the U.S. Congress passed the Puerto Rico Oversight, Management and Economic Stability Act (Promesa), 130 Stat. 549 (2016), which established a debt restructuring mechanism overseen by a Financial Oversight and Management Board (FOMB) appointed by Congress and nominated by the U.S. president. Under this mechanism, PREPA filed for bankruptcy under Title III of Promesa in 2017.
As PREPA faced these financial challenges, the governance and scope of the electrical system also transformed. In 2014, Act 57-2014 created the Puerto Rico Energy Bureau (PREB), which has since acted as the energy regulator. This agency has the authority to establish and implement guidelines, standards and processes to ensure the safety and efficiency of the electrical system.
Later, in 2018, the Act to Transform the Electrical System of Puerto Rico, Act 120 of June 20, 2018, was passed, allowing for the privatization of transmission and distribution operations, in addition to the private management of energy production plants under PREPA.
Through this legislation, the transmission and distribution of electricity were eventually transferred to LUMA Energy, a joint venture of Quanta Services and Artco, with the contract announced in June 2020, and full control beginning in June 2021.
Additionally, electricity generation was transferred to Genera PR, a subsidiary of New Fortress Energy, which manages PREPA’s fossil fuel energy production plants.
In 2019, another major change in energy policy occurred when the Legislative Assembly passed the Public Energy Policy Act, Act 17 of April 11, 2019. This law sets objectives for achieving 100 percent renewable energy. Puerto Rico currently produces 12 percent of its energy from renewable sources, with a goal of 40 percent by 2025 under Act 17-2019.
Power struggle over net metering
Against the backdrop of these structural changes to the electrical system and renewable energy production goals, the recent controversy over net metering has arisen. This year, Act 10-2024 was passed, amending the 2007 Net Metering Program Law (Act 114-2007), which instructed PREB to evaluate the benefits and costs associated with Puerto Rico’s net metering program. Act 10-2024 delays PREB’s authority to conduct the net metering study until 2030.
Under this amendment, only after the study is conducted can PREB make recommendations and set a new tariff applicable to net metering customers for the years following 2030.
Before Act 10-2024, PREB had until April 14, 2024, five years after the enactment of the Public Energy Policy Act (Act 17-2019), to complete the study with recommendations for the net metering program.
This study must consider factors such as energy generation costs, capacity value, transmission and distribution costs, avoided system losses, and environmental compliance savings, among other factors deemed relevant by PREB.
On July 26, 2024, the FOMB sued the government of Puerto Rico to nullify Act 10-2024, arguing that it hinders PREB’s regulatory authority by postponing its ability to conduct the net metering study and make changes to the net metering tariff until 2031. (Adv. Proc. No. 24-00062- LTS.)
The government of Puerto Rico responded by asserting that the lawsuit does not justify granting a remedy.
Discussion
Puerto Rico finds itself at the crossroads of three competing priorities: 1) debt restructuring, 2) the transition to renewable energy, and 3) ensuring a stable, equitable electrical system for all stakeholders. On the one hand, the FOMB seeks to ensure the reliability of PREPA’s debt restructuring, which largely depends on generating sufficient revenue to support energy operations and pay bondholders.
If the net metering program remains unchanged until 2030, PREPA may not generate enough revenue to operate or pay its bondholders under its current structure. Therefore, it is no surprise that the FOMB wants to intervene in PREB’s ability to devalue net metering, with the aim of increasing revenue to pay the debt and forcing PREB to conduct the net metering study to amend and restructure the tariff.
On the other hand, net metering incentivizes customers to purchase solar equipment for energy stability and reduced electricity bills. More customers are finding it accessible to install units to generate electricity in their homes, thus supporting the goal of increasing renewable energy production.
However, solar energy production has little impact on peak demand, which generally occurs after sunset when solar generation is not viable. This increases the load factor, as there is less revenue from the net metering credit without affecting the fixed cost of electricity production.
One solution developed in other jurisdictions is the devaluation of net metering. Under this approach, instead of offering a 1:1 credit for energy produced, the credit would be less than the energy tariff. Devaluing net metering could negatively affect the adoption of renewable energy in Puerto Rico, the economy that supports it (jobs, installations, credits, etc.), and reduce solar equipment sales, hindering the efforts set out in Act 17-2019.
For example, in April 2023, California passed a law devaluing net metering by 75 percent, which led to a decrease in solar sales and installations in 2023. Efforts are now underway to reinstate the previous net metering program.
Ultimately, the controversy over the net metering law has become a key point of intersection in Puerto Rico, involving the independence of PREB, the powers of the Legislative Assembly, and the authority of the FOMB in restructuring the debt.
Authors Carlos G. Cabrera-Rivera and Emmanuel Alvarado-Nazario are students at the University of Puerto Rico School of Law and co-founders of the Right to Energy Pro Bono.
