San Juan, PR – September 14, 2023 – The Financial Oversight and Management Board for Puerto Rico today issued the following statement:
Building capacity to provide electricity from renewable sources is essential for Puerto Rico’s transformation towards more reliable, more affordable, and cleaner energy. This transformation, required by the Fiscal Plan for the Puerto Rico Electric Power Authority (PREPA) and Puerto Rico Act 17-2019, is a critical element of economic development to create sustainable growth.
The transition from expensive and dirty fuel to cleaner energy has been slow in Puerto Rico and must remain a key priority of PREPA, as it is elsewhere in the United States and around the world. The Oversight Board has supported this transition. At the same time, the Oversight Board is determined to ensure renewable power purchase and operating agreements (PPOA), just as any contract by the Puerto Rico Government and its agencies and instrumentalities, remain driven by a transparent and competitive bidding process and compliance with the respective Fiscal Plan.
The Oversight Board remains concerned about PREPA’s procurement process for renewable energy, and particularly about the amendments to the agreements for the first of PREPA’s six tranches to produce, in total, over 3,700 megawatts (MW) of renewable energy.
In March 2022, the Oversight Board conditionally approved 18 proposed PPOAs to provide 844 MW of renewable energy tranche 1. Seven of those PPOAs have since been withdrawn or were rejected by the Puerto Rico Energy Bureau (PREB); 11 were amended to adjust for inflation, supply chain pressures and sharply rising interest rates on potential loans to finance the renewable projects. The amendments increase the cost of the PPOAs by 34%. Notwithstanding this increase in contract prices these amended agreements would reduce the cost of power generation dramatically by 2035.
The Oversight Board reviewed those amendments in accordance with its contract review policy to ensure competitive bidding and compliance with the PREPA Fiscal Plan. The amendments had already received approval of PREB, the independent regulator, and had been executed in violation of the Oversight Board’s review policy.
Such increases are not unique to Puerto Rico. Renewable energy contracts are being renegotiated for the same reasons in other parts of the U.S. However, the reviewed amendments lead to renewable contract cost escalation increases in Puerto Rico that, in some cases, are above the average annual increase experienced in the U.S. overall.
Further, the amendments compromise confidence in the procurement process, creating a precedent that bids will be renegotiated, distorting market pricing, and creating litigation risk. Renegotiating bids after they have been awarded may deter new entrants, leading to less competition and less effective future procurements.
Nevertheless, requiring renewable energy providers to rebid for the PPOAs would significantly delay the transition. Such delays could further increase the cost of the projects and would hold up the significant improvements from cleaner energy to the environment and the health of the people of Puerto Rico.
That is why the Oversight Board approved the amended contracts, with conditions, so the process to begin the urgent transition to renewable energy can finally move forward. The conditions are around securing low-cost financing for the projects and are outlined in the Oversight Board’s approval letter to PREPA, which is available on the Oversight Board’s website.
The Oversight Board also understands that its concerns about the procurement are outweighed by the expectation that the PPOAs, even as amended, would reduce the cost of electricity generation in the future and are in furtherance of Puerto Rico’s public policy priority to transition to renewable energy.
In 2020, the Oversight Board had rejected 16 PPOAs to deliver 593 megawatts (MW) of renewable energy because the agreements were too expensive. The agreements had been negotiated years earlier and were never executed. The agreements did not undergo a competitive bidding process. Even then, the Oversight Board agreed to allow the development of up to 150 MW of renewable resources at the prices proposed in those PPOAs because it already recognized the importance for Puerto Rico to start increasing the share of renewable energy as soon as possible.
The Oversight Board firmly believes that competitive and transparent procurement processes result in savings for the people of Puerto Rico. All 18 PPOAs the Oversight Board conditionally approved in 2022 would have provided electricity rates below those of the lowest proposals the Oversight Board had rejected in 2020 and would have resulted in over 40% cost savings overall.
While the renegotiation of the PPOAs was allowed by PREB under exceptional circumstances, it is imperative that future tranches do not adopt this as standard practice.
The decision to conditionally approve the amendments is rooted in the Oversight Board’s commitment to advance the objectives of the Fiscal Plan and adhere to the mandates of Act 17-2019 and Act 82-2010. This approval is a vital step toward supporting a fledgling market for renewable energy and reinforces Puerto Rico’s commitment to diversifying its energy portfolio with new renewable energy sources.
For the approval letter, please visit https://oversightboard.pr.gov/contract-review/