Elías R. Gutiérrez, Ph.D.*
Walter Ruíz, Ph.D.*** Professor UPR, ** Consultant Engineer.
Puerto Rico’s economy today is not viable. That’s because electricity is produced primarily by burning oil byproducts. The price of oil has skyrocketed and it seeps through the economy through the cost of electricity. It has a lethal effect on the economy.
The price at which the state monopoly supplies electric energy puts both producers and consumers in an unsustainable situation. As a result, there’s a clash between two interests. On the one hand, there’s the question whether the state monopoly should survive. On the other, there’s the question of what’s needed for Puerto Rico’s economy to recover its viability.
The Puerto Rico Electric Power Authority (PREPA) sells energy at a price that for the last four years has averaged 27 cents per kilowatt-hour. Politicians demand a reduction on the electric energy bill. But in order to recover the economy’s viability, it is not enough merely to reduce the price of electricity. Puerto Rico’s economy requires that electric energy be supplied at a price that is competitive worldwide, somewhere in the range of 12 to 15 cents per kilowatt-hour.
Political intervention from both the government and political parties has resulted in a tragic waste of time, financial and other resources. As a result of that intervention, the initiatives to reduce the cost at which PREPA produces electric energy have failed. The time available to make the adjustment has slipped away and the resources available are now severely limited.
The subsidies that PREPA is required by law to pay for or provide are just salt in the wound, but their elimination doesn’t go to the crux of the problem. The crux of the problem is the price of the fuel PREPA primarily uses. During the past four years, the combined cost of the price of distilled crude oil and its byproducts, including locally legislated surtaxes, averaged more than $108 per barrel. The price of oil has gone up since 1998 to levels that today are, in real terms, close to the top prices registered in 1980. At those prices for fuel, PREPA’s production cost and selling price of electric energy is simply unsustainable.
From the point of view of strategic planning, there is no possible conclusion other than the economy of Puerto Rico is not viable, unless it reduces dramatically its vulnerability to the shocks coming from the oil market. This reality became evident in the mid-70s. Still, we have not been able to clearly define our objective. On the contrary, to-date we have avoided it. It is no longer possible to avoid it.
The solution to the problem requires the substitution of natural gas for oil byproducts as the fuel used for electricity generation. The alternative is natural gas. To make that solution a reality we need the infrastructure to transport natural gas from the entry ports to the electric generation plants. More importantly, that infrastructure must provide PREPA the ability to transport natural gas to the generation units distributed around the island. That way, gas may be used in the most cost-effective proportion, depending on the changes in demand and the needs of the system. The engineering solution to this problem is the gas pipeline.
In the past, PREPA undertook the development of two such pipeline systems: one on the island’s southern coast; and a second one from the south to the north and northeast. Both projects encountered organized opposition and were cancelled for political reasons. The cry of “not in my backyard” won the day. The cancellation of these infrastructure projects constituted the gravest error in public policy in Puerto Rico’s modern history.
Taking into account the time still available and the extremely limited financial resources, the public policy error made by cancelling the gas pipelines that were already in advanced stages of construction or about to start it, must be corrected. In order to convert the generation system to one that uses natural gas in an optimal fashion, it is necessary to complete those gas pipelines.
The “gasification” of electric energy production requires adapting the generation plants in both the southern and northern coasts of the island. This is the easiest piece in the puzzle. The development and operation of the Aguirre gas port will allow the importation and handling of natural gas in both liquefied and gas states and, of course, its use in the Aguirre generation units.
But that critical component of the change to a fuel that may return viability to our economy will not be enough unless a way is implemented to transport natural gas to the generation plants on the island’s north coast. Those components are indispensable for the operation of PREPA’s systems. Using gas at Aguirre only will contribute to supply only 25 to 30 percent of electric energy.
We repeat, changing electric energy production in the plants in the north from oil to gas, will require that the natural gas be transported to those plants.
As explained in the first part of this article, the Aguirre gas port is an indispensable element in the modernization of the electric energy production system in Puerto Rico, which requires the change from oil to natural gas as its primary fuel source. Correcting the error made by cancelling the planned gas pipelines is the second piece needed to complete within the short term the “gasification” of generation plants on the north coast. Energy prices in the range of 12 to 15 cents per kilowatt-hour are the key to Puerto Rico’s economy’s potential recovery of its lost competitiveness.
In view of time lost and the added pressure imposed by new federal limits on contaminating emissions, the infrastructures projects necessary to “gasify” electric energy production must be completed within the next two and a half years. To achieve this objective within the period of time still available, the gas pipelines must be built concurrently with the Aguirre gas port. The latter is scheduled to be completed and start operations by the end of 2016.
The irresponsible cancellation of the gas pipelines, construction of which was either advanced or about to commence, cost millions in losses to PREPA, as reflected in the Authority’s financial statements. Graver still has been the consequences of not having them. Without the gas pipelines, complete “gasification” of the system will not be possible. At best, a partial and ineffective change in the system might be accomplished. Puerto Rico cannot afford to continue on with its current energy production and distribution system.
To make matters worse, the prevailing financial environment has turned hostile. PREPA’s current financial position can be summarized in one word: bankruptcy. This reality is no longer debatable. The Government Development Bank’s financial condition, together with the policy set forth by the governor and the central government’s incompetence force us to conclude that financing is a crucial hurdle. The public corporation simply doesn’t have the capacity to undertake the projects required to shift production from oil to gas, attain the sought-after reduction of electric energy costs and meet at the same time the new federal pollution standards.
The solution to this dilemma requires a radical change in organization and financing through the influx of private capital.
The projects required to modernize the production system to one that uses natural gas will have to be conceived such that they may be financed with private capital. That will have to be the case with the gas pipelines ($700M), the Aguirre gas port ($300) and the conversion of PREPA’s generation plants ($100M). All former governors agree on this.
The decisions and the strategic projects described above will have to be undertaken in the midst of very weak conditions at PREPA. The corporation is insolvent, and indeed has already defaulted on some short term obligations. By postponing the exercise of their legal rights, creditors have decided to impose upon it a limited form of receivership. In other words, it’s not a court supervised receivership. However, soon a Chief Restructuring Officer (CRO) will by appointed. The restructuring officer shall, among other things, produce a business plan for the corporation. It is to that business plan that the elements we propose in this article should be incorporated.
The connection of Puerto Rico’s system with that of the Virgin Islands via underwater cables, as proposed by the Presidential Task Force, will provide an additional market to PREPA. The connection of Puerto Rico’s system with that of the U.S. mainland via underwater cable to Florida, as has been proposed by Caribbean Business, will make possible a significant reduction in the production and reserves that today are necessary because Puerto Rico is an island not connected to the continental transmission and distribution grid. Both initiatives are already technologically and economically feasible.
A system of natural gas distribution, put in operation within two and a half years, opens the doors to other projects capable of reinvigorating the economy like, for example, supplying gas to industries looking to reduce costs by generating their own electric power and the development of a gas distribution system for use in motor vehicles to reduce the cost of transportation mile.
Finally, a recovered economy would allow continued investment in renewable energy projects meant to improve environmental quality, the health of the population and the eventual Independence from fossil fuels in a more distant future.
The adoption of this plan will improve future prospects in such a way as to return the attractiveness and the financing capacity to a system of energy production and distribution that is indispensable for the economy of Puerto Rico to regain its lost viability.