Boy, Was I Mistaken — Solar In Puerto Rico? Definitely Maybe

By Robert SternthalSpecial To Solar Power World

RobS300X180On Nov. 16, 2012, I presented a case for Puerto Rico to become one of the United States’ hot markets in 2013.  I was clearly mistaken. Nearly a year later, the Puerto Rico renewable energy market has only added 100MW of wind energy and a nominal amount of solar despite the fact that there are more than 60 executed contracts with the Puerto Rico Electric Power Authority (PREPA) for renewable projects. Nevertheless, we continue to receive queries on a weekly basis regarding Puerto Rico and our ability to finance or sell projects located there.

So, what do financial advisors tell clients looking to invest in Puerto Rico or who continue to develop projects there today? The following are some of the major hurdles currently facing developers in Puerto Rico.

Market Noise: There continues to be a constant flow of information across most communications platforms, most of it wrong, regarding the Puerto Rican market. Developers need to ignore the noise and focus on what they can actually control — namely, their own deals.

Many developers working in Puerto Rico have joined the Renewable Energy Producers Association (known by its initials in Spanish as APER), an organization started by a few local developers and consultants that currently represents more than 30 U.S. and internationally-recognized companies working on renewable energy projects on the island.  APER has not only given these developers a voice with PREPA, but has also provided PREPA with clear answers on what operating procedures and minimum technical requirements (primarily dealt with through battery storage) are needed for the projects to be financeable.

Minimum Technical Requirements (MTRs): Currently, PREPA has provided specific guidance on what technical requirements developers will need to meet in order to connect their renewable projects to the electricity grid, but have yet to provide clear guidance on what happens if you falter after connecting. As it currently stands, if you cannot meet the MTRs on a given day, PREPA may completely curtail your electricity output for an unspecified amount of time with no clear guidance on when a project can come back online. It is especially concerning to financing parties when you consider that PREPA has consistently stated that it will require 100% compliance with MTRs.  Complying with MTRs at 100% is a near impossibility unless the project has an extremely large battery storage component, which, in itself, would make nearly all of the projects uneconomic to build.

As previously stated, APER has remained in constant negotiations with PREPA, as well as a council of three members that were appointed by the Governor of Puerto Rico, to resolve the MTRs and the mandated operating procedures that accompany them. The new operating procedures were meant to be delivered to developers by Oct. 31, 2013, but have continued to face delays. Accordingly, it still remains unclear as to when developers will receive finalized operating procedures, and, once received, whether they will be financeable.

Financing: Without clear guidance on MTRs and the associated operating procedures, financing any project is untenable. No lender will finance a project if PREPA has the summary authority to connect or curtail it at any given moment.

Assuming that the MTRs are resolved in a positive manner, debt financing for projects in Puerto Rico is not as abundant as it would have been a year ago or even more so, two years ago. With the recent downgrade of PREPA and the increase in its bond yields, fewer lenders are willing to enter the Puerto Rico market, and those that will are being very cautious. Lenders that are willing to provide permanent debt for projects are generally talking about seven-year mini-perms with 15- to 18-year amortization, subjecting long-term owners to considerable refinancing and interest rate risk.

Contract Negotiation: Whether it is legal or not under contract law, PREPA has openly stated its desire to renegotiate the outstanding Power Purchase and Operating Agreements (PPOAs) that all have materially the same terms with the exception of the pricing of the renewable energy credits (RECs). Given recent activity in Spain where tariffs have been retroactively reduced, this sends a very scary message to both developers and lenders.

It is clear that some developers will be willing to renegotiate some of the economics in exchange for a lesser storage requirement, but most developers realize that any change in the economics has a materially negative effect on the economics of a project. Some examples:

  • A reduction of $.01/kWh on the PPOA taking the pricing to $.14/kWh from $.15/kWh can have an impact of up to $5 million in value to a project.
  • Elimination of the escalation clause of 2% annually on the PPOA price will reduce a project’s value by $6 to $7 million on an unlevered basis, but much more on a levered basis.
  • While reducing the MTR percentage will have a positive impact, it will not be as accretive to a project due to the loss in investment tax credit that you would have otherwise received from the cost.
  • The failure to obtain long-term debt will also continue to weigh-down the value of renewable energy projects in Puerto Rico. In fact, given the current state of the debt market, any material change to the PPOA described above may make certain renewable projects on Puerto Rico unfeasible.

It remains unclear whether Puerto Rico and/or PREPA really want renewable energy, which is troubling because if renewable energy in Puerto Rico doesn’t make sense, it doesn’t make sense anywhere. Given that the cost of electricity is more than 50% higher to PREPA itself and potentially more than 100% higher to retail customers than these renewable energy projects, you would think that all Puerto Ricans would wholeheartedly support renewable energy.  Given all of the above, many of the U.S.’ top renewable players have decided to opt out of developing projects in Puerto Rico. At RCMS, however, we remain committed to our clients there as ultimately, the clear-cut, long-term benefits of renewable energy remain viable, nationally productive and economically feasible.

In short, it just makes too much sense.

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 CohnReznick and CohnReznick Think Energy, Reznick Capital Markets Securities offers one of the most comprehensive financial advisory platforms in the industry.

  • bluraven7

    The problem with PR is the same problem that plagues all the Caribbean. Simple put “Corruption”. To many fingers in the pie. Simple as that. You think Texas has a good ole boy network? Nothing compared to them.

  • Ross, L

    This is a very interesting article. I have long wondered what is the hold back on solar in PR. The solar movement is there in Puerto Rico, I know this because I have family there. From what I am learning is that the public needs to apply more pressure onto PREPA! It seems that they do not want to give up anything, and they do not have to! Also I think that the public needs to be better educated not on Solar but the negotiations which is delaying the ability to move forward.

    With Puerto Rico having an unemployment rate of 13.7% (April,2013) and the average income of $27,190 annual (May 2011) that would be a strong argument to help its citizen on the cost of energy. Or have in place programs that are going on throught the states to help low income family obtain solar installation.