Updated: Jan 26, 2021
Within the Integrated Resource Plan (IRP) promulgated by the Puerto Rico Energy Bureau (PREB – the regulator) last year was a Mandatory Procurement Order for renewable energy. This requires the Puerto Rico Electric Power Authority (PREPA) to solicit proposals and procure 3.75 GW of renewable power and 1.5 GW of energy storage, and further, provides a schedule to complete this procurement over the next three years so that it may be in commercial operation by 2025. This is an intelligent and useful statement to the market.
Unfortunately, the order does not require that the procurement be done effectively, transparently, or competently. The proposed Request for Proposals (RFP) was submitted to the regulator early in January and a hearing was held on the 11th. What is currently being proposed in terms of the process and the RFP itself can only be described as a rolling dumpster fire. If this RFP were to go out as proposed, Puerto Rico would solidify its place somewhere between Burkina Faso and North Korea in the rankings of attractive places for utility scale renewable energy investment.
Skeptics have been saying that this is the work of reactionary forces in PREPA deliberately undermining the process because PREB did not approve their preferred IRP that included two thousand megawatts of gas-fired power plants. If you combine this with the plan submitted for the use of the $10.7 billion FEMA funds - that includes $850 million for new gas-fired generation not in the approved IRP that came as a surprise to PREB - it begins to raise question. I cannot say whether this is deliberate sabotage, incompetence, or some measure of both. What I can say is that I would be hard-pressed to find a better way to undermine the procurement order, the regulator, and the IRP than the current proposed RFP.
The list of deficiencies it’s too long to adequately catalog, but here are a few that stand out.
Bankruptcy: The status of PREPA as the contract counter party has not been addressed. PREPA must be upfront and descriptive of its situation and stipulate what steps it is prepared to take to mitigate it’s risk as purchaser. No quality project developer (who isn’t already sunk into Puerto Rico already) will approach any solicitation without at least being able to evaluate what steps PREPA is committed to in order to alleviate the risk it poses as a counter party.
Lack of transparency on interconnection and system upgrade costs.: Identifying points of interconnection and potential system upgrade costs required to accommodate the generation proposed by the respondents is critical. Without at least the ability to put bounds on the time and cost required, respondents must make heroic assumptions and this leads to significantly higher cost proposals.
Lack of specific bidding criteria and fixed assumptions: PRECAP must greatly narrow the requirements for valid bid submission and ensure all are responding based on identical information and baseline assumptions. It’s OK to allow respondents to be creative and offer proposals that vary but it’s important to have simple, transparent, and verifiable criteria so that offers may be evaluated and ranked efficiently and fairly. Moreover, given PREPA’s checkered history there is widespread expectation of favoritism and corruption. Leaving too much to discretion and interpretation is a recipe for disaster.
No form Power Purchase Agreement (PPA): Last but not least a form of power purchase agreement must be included in the RFP and respondents must be required to market up. This is procurement 101. Force the respondent to make decisions on the terms they can live with while they are still in a competitive situation. Moreover, failure to include a Form of PPA will keep any developer of quality away. Only the incompetent, or the desperate, will respond to the RFP burning valuable resources without having confidence that if successful they will be able to enter into an agreement that will support capital investment.
Prohibitive Bid Deposits: It is rational to require any party submitting a Proposal to pay a token amount in good faith. It generally clears out the time-wasters and pranksters and leaves Proposals only from those with a genuine level of interest. However, those being asked by PREPA are too high and given the adverse nature of multiple issues surrounding the RFP will drive even serious developers away. (In a just world PREPA would be paying groups to make proposals.) The time to increase the bid deposit is when an Offer is accepted for PPA negotiation.
It is abundantly clear that PREPA has not employed the services of an experienced financial advisor – preferably one with emerging market experience. If they had, the items above would have been addressed in the draft RFP. They have retained the services of technical advisors Sergeant & Lundy and legal advisors King & Spalding but they are not capable of filling the gap. Even so, they should be embarrassed to be associated with the draft RFP that was presented to the PREB.
The good news here is that PREB does not appear to be buying any of it and in the public hearing pushed back steadfastly along with the participants. On the other hand, PREB does not have any more experience with this set of circumstances than PREPA.
I have a few recommendations for PREB to help them along:
Hire a financial advisor - Instruct them to review and recommend to PREB any modifications to the RFP and process with the objective of maximizing the utility to potential Respondents including mechanisms to address the credit position of PREPA. Require PREPA to adopt and incorporate the recommendations approved. This will vastly improve the quality of the Respondents and the competitiveness of submissions and potentially offer responses of value.
Limit this first procurement to 250 MW of new utility scale projects (greater than 20 MW) plus any of the original projects approved last year that were declined by the FOMB for political reasons - I understand that seeing 1000 MW upfront makes people smile but it’s wrongheaded. The total size of the procurement over the next three years will get developers and investors to a level of interest. Developers of the first order, however, will need to see a track record of success and have transparency into the process before they will commit themselves to participate in any renewable energy procurement in Puerto Rico. Quality of respondents and competitiveness of offers will improve as the procurement establishes its track record. It is illogical to procure the largest amount of power when the terms and prices will be the most disadvantageous.
Order a separate procurement for virtual power plants - VPP‘s are a completely different animal – more like a peaking unit and the contract is likely look more like a tolling agreement than a power purchase agreement.
Require PREPA to provide at least 120 days between announcement of a procurement tranche and Proposal submission date for the first two tranches - The time frame can be shortened to 90 days thereafter.
Limit refundable bid deposits to $100/MW per site but allow them to increase to $500/MW upon acceptance for negotiation - We are fortunate that the PREB is growing in confidence and finding its independent voice. I am cautiously optimistic that this will be sorted out before any lasting damage is done. But if I am wrong, give this one a pass.