Building grid solidarity in Puerto Rico
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It took nearly a year after Hurricane Maria struck the island of Puerto Rico and devastated its electric grid for power be restored to all households on the island. For those who reconnected to the island’s struggling system, frequent service interruptions have remained the norm and continue to generate economic losses and social discontent. The damage to the island’s power infrastructure compounds the decades-long challenges faced by Puerto Rico’s Electric Power Authority (PREPA), a bankrupt electric utility which has struggled to provide clean, affordable and reliable energy. Despite charging the second highest electric rates in the United States, the loosely regulated public monopoly has amassed $9 billion in debt and another $2 billion in unfunded pension liabilities. The dreadful sum of powerful hurricane winds, years of bad management decisions, corrupt practices, and lack of transparency have earned PREPA the dubious distinction of operating a failed system that has led to the second largest recorded power outage in the world.

To rescue the failed power utility, Puerto Rico’s governor has signed a law that aggressively seeks to privatize PREPA. By selling off the island’s aging power generation plants with attractive long-term power purchase agreements, he hopes to generate $2 billion - $4 billion in revenue that could offset at least some of the utility’s existing obligations. A concessionaire would operate the transmission and distribution infrastructure, overseen by a new regulatory body that would also watch over the transportation and telecommunications sectors and be appointed by the governor.

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The proposal has caused heated debates, primarily over the merits of privatization. There is indeed much to criticize in the privatization proposal, not least the lack of transparency in the process, the aggressive timeline to implement the plans, the possible weakening of much-needed independent regulatory oversight, and a history of failed privatization attempts in other sectors. Yet the ongoing discussion over the merits of privatization misses a far larger problem that is looming over Puerto Rico’s power sector: a rapidly deteriorating sense of “grid solidarity” on the island, which poses a fundamental threat to the utility business model, privatized or not.

At its core, the economic feasibility of the utility relies on the participation of large numbers of ratepayers. The larger the community of customers connected to the electric grid, the greater the ability to distribute the cost of building and maintaining the necessary infrastructure to generate and delivery affordable and reliable energy. As such, the power sector bears much similarity to health insurance markets, where a greater number of participants can increase efficiencies and lower the cost of the services provided.

Such “grid solidarity” – the collective involvement, oversight and investment in building and maintaining the island’s electric power infrastructure – has come under threat. PREPA’s abysmal track record and catastrophic performance in the disaster aftermath have pushed customers to search for alternatives. Increasingly cheaper battery storage and solar photovoltaic (PV) technologies, in addition to traditional generators, allow some in the island to invest in “private resilience” by disconnecting from PREPA’s failing infrastructure altogether. Advertisements from local solar PV and battery installers touting the benefits of such off-grid systems are all over traditional and social media platforms. Industrial consumers ranging from manufacturing enterprises to shopping malls are installing or bolstering their own power infrastructure, and some are generating off-grid power for roughly half of what PREPA currently charges on the grid. As technology advances and costs continue to come down, “private resilience” is only becoming more attractive for a growing number of people.

Waning grid solidarity and the search for private solutions can lead to a utility death spiral. As fewer customers buy less electricity from the system, the costs of building and maintaining the power infrastructure are borne by a declining number of ratepayers. This pernicious cycle raises costs and creates further incentives to invest in individual solutions. Left behind are those living in apartment buildings, public housing developments and densely populated areas where large arrays of panels and batteries cannot be installed, and poor families who lack the means to invest in “private resilience.” Ratepayers without other options will have to shoulder a growing share of the cost of maintaining the public power infrastructure.

The good news is that Puerto Rico is not alone in dealing with this problem. Electric utilities everywhere are trying to figure out new business models to keep ratepayers connected, as residential and commercial customers invest in solar power and generate a growing share of electricity themselves. But the problem posed by these structural changes in the power sector is particularly acute in Puerto Rico, where power prices are high, there is abundant sunshine, and large future investments are required to improve performance of public system burdened with enormous debt.

The bad news is that the current debates on how to transform PREPA have not offered a positive vision for the power sector that is focused on addressing the fundamental problem of grid solidarity. The governor has suggested a “solar tax” for those seeking to invest in private resilience, which is unlikely to prevent current customers from taking matters into their own hands. Instead of improving reliability by integrating privately-owned storage batteries and rewarding grassroots efforts that invest in resilience for services they provide for the community, the existing system punishes those who are looking for alternatives. Unfortunately, PREPA’s successor organization(s) would probably behave the same way under the current privatization proposals.

What is urgently needed in Puerto Rico is a vision and a detailed plan of action for the long-term future of the island’s power sector at a time of great technological change. A strong, independent regulator for the power sector that has the technical and regulatory capacity to offer impartial oversight of an industry undergoing tremendous change, should bring the requisite stakeholders to the table and facilitate the discussions that will lead to a series of shared policy goals. Without a collective proposal for the future, Puerto Rico’s power sector is likely to remain in crisis, whether it is privatized or remains in government hands.

Jonas Nahm is Assistant Professor of Energy, Resources and Environment at John Hopkins’ School of Advanced International Studies and Deepak Lamba-Nieves is the Research Director at the Center for a New Economy in San Juan, Puerto Rico.