For the last two years, Reznick Capital Markets has been focusing on Puerto Rico with several clients that are developing wind and solar projects. After several years of PREPA (the sole utility on Puerto Rico) issuing over 1 GW of PPOAs (same as PPAs, but including operation), few developers have successfully built renewable energy projects on the islands. I will attempt to explain the current market and the potential future for renewable energy on the Commonwealth.
Like the United States, Puerto Rico benefits from the investment tax credit (ITC) that allows U.S. investors to recover a 30% tax credit against project costs. Only three renewable projects built on the island to date — two wind and one solar — have been eligible for the 1603 Grant, although there may be a few others that will use safe-harbored panels. Under current ITC rules, it’s possible for U.S. corporations — and potentially U.S. partnerships — that own projects developed in Puerto Rico to avail themselves of the ITC.
As recently as six months ago, we witnessed an influx of major U.S. solar developers, panel manufacturers and utility companies seeking to find projects in Puerto Rico. They did this through acquiring PPOAs already issued and executed, or by acquiring master PPOAs issued by PREPA that allow developers the rights to build 100 MW under an expedited process, or by acquiring land rights and hoping to secure their own PPOA from the utility.
All PPOAs issued by PREPA are the same, with the exception of tenor (20 or 25 years), and are made public. The economic terms of the PPOAs are excellent — $0.15/kWh, escalating 2% annually — especially when compared to current pricing in the United States.
In addition, the initial PPOAs were also issued with matching renewable energy credits (REC) contracts with PREPA, whereby the owner would also receive $0.035/kWh per REC for the life of the PPOA. The master PPOAs and more recent PPOAs did not include RECs. But these are crucial to making the projects economically viable because of the cost of incorporating a system that will meet PREPA’s minimum technical requirements (MTRs) that will protect Puerto Rico’s fragile electricity grid from immediate ramp-downs or ramp-ups from utility-scale solar projects.
Unlike the United States, only a few of the large tax-equity investors have demonstrated a willingness to finance projects in Puerto Rico. Some of those have stalled due the developers’ inability to secure the proper agreement with PREPA that secures interconnection rights by meeting the MTRs. The ambiguity surrounding the MTRs has caused several lenders and tax-equity investors, as well as some developers, to delay the financing of certain renewable energy projects. Consequently, many developers on Puerto Rico with viable projects have been unable to secure financing and move their projects forward.
The current roster of developers and sponsors in Puerto Rico look much like earlier-day developers in the United States’ solar market, a virtual smorgasbord made up of local developers, engineering, procurement and construction (EPC) contractors and/or panel manufacturers, private equity sponsors (U.S., European and Asian) and more sophisticated solar developers. Given the technical complexity associated with meeting the MTRs, it is critical that all projects have at least one member of the development group consist of an experienced EPC, U.S. or foreign sponsor or developer, or a utility with renewable energy experience as well as battery storage solutions.
With the election of Governor-Elect Alejandro Garcia Padilla, a green energy advocate, Puerto Rico will most certainly see a positive change in PREPA’s desire to execute renewable energy projects and to work with developers to meet the MTRs and get connected to the grid. Thanks to a lack of an ITC for U.S. wind farms, the overwhelming majority of renewables on Puerto Rico going forward will be utility-scale solar projects. The ramping up of solar projects on the island will most likely create a boom in job and technical growth in the industry, and the operating and maintenance requirements going forward will maintain a solid number of those jobs.
Consequently, starting in the first half of 2013, I would expect that we will start seeing Puerto Rico become the next hot development spot in the U.S. solar market. As more utility-scale solar projects are completed, other developers and financiers will become more comfortable with PREPA and the rest of the permitting requirements, creating a domino effect whereby more projects will be completed.
The financing of these solar projects will most likely be as varied as the current developers and sponsors with PPOAs in the market. SPW
Sternthal is president of Reznick Capital Markets Securities and has extensive experience in financing renewable energy transactions, whether they are in the wind, solar or biomass sectors. Working alongside Reznick Group and Reznick Think Energy, Reznick Capital Markets Securities offers one of the most comprehensive financial advisory platforms in the industry.
Editor’s Note: This article is the fourth in a bi-monthly series intended to help our readers understand the current states of play in the U.S. solar financing markets.
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