By Jia Jun Lee
As Puerto Rico emerges from bankruptcy after completing the largest public debt restructuring in U.S. history, it must revitalize economic growth to mitigate future debt situations. To achieve economic competitiveness, it should address the challenges facing its energy sector, including high costs, unreliable access, and unsustainable operations. Puerto Rico’s recent solar-focused renewable energy transition presents a unique opportunity for the island to attain affordable and reliable energy. However, the transition will likely face economic and policy barriers surrounding pricing, equity, governance, and financing. The policy recommendations discussed in this paper aim to mitigate these barriers and ensure that Puerto Rico’s renewable energy transition is economically sustainable and socially equitable.
Introduction: Debt and Energy in Puerto Rico
Puerto Rico’s debt crisis reached a peak when it announced that it could not service or repay its outstanding debts in 2014. Puerto Rico faced an unsustainable burden of over $72 billion in debt with more than $55 billion in unfunded pension liabilities (FOMB 2021). Consequently, the federal government signed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in 2016, which established a Federal Oversight and Management Board (FOMB) to restructure the debt to sustainable levels and achieve a balanced fiscal budget. The debt restructuring process involved mediated negotiations to reach a compromise between creditors and the FOMB, which represented the Puerto Rican government. Through this legal process, the government would pay creditors a proportion of the defaulted debt, allowing the government to regain access to capital markets.
As Puerto Rico emerges from its debt crisis, reliable, affordable, and resilient energy can help rejuvenate economic growth.
The debt crisis was a symptom of both a shrinking population and a sustained decline in economic growth. Annual economic growth in Puerto Rico declined by around seven and a half percentage points between 2004 and 2019 (Cheatham 2020). This lack of economic growth was driven as much by a lack of investment in the economy as by declining consumption growth. Puerto Rico’s population has shrunk rapidly, dropping more than 600,000 from a peak of 3.8 million in 2004 to around 3.2 million by 2019 (Cheatham 2020). The median population age has also increased as Puerto Rico’s young residents move to the mainland United States for job opportunities (United Nations 2019). A declining youth population has caused labor productivity, income, and government revenue through taxation to fall, as the cost of welfare for an aging population rises.
As Puerto Rico emerges from its debt crisis, reliable, affordable, and resilient energy can help rejuvenate economic growth. Electricity is important not only for residential use in Puerto Rico but also for its manufacturing and commercial sectors. The current energy landscape is expensive, unreliable, and vulnerable to natural disasters. With affordable and reliable energy, industrial and commercial consumers can reduce production costs and increase profit margins. Residential users will benefit through improved energy access, which increases quality of life and labor productivity. A transition to distributed solar photovoltaic (PV) renewable energy can improve energy affordability and reliability while increasing resilience to natural disasters. Such a transition has the potential to promote economic growth, which will help mitigate future debt crises in Puerto Rico.
This paper evaluates Puerto Rico’s transition to renewable energy with a focus on solar rooftop systems. First, it outlines some of the challenges facing the island’s energy sector, including its unprofitable model, fossil fuel-dominated generation mix, and grids vulnerable to climate change, which have led to unsustainable debt for its public utility. Next, the paper highlights government policies, plans, and incentives aimed at achieving a transition to solar-focused renewable energy and analyzes the expected economic and social benefits of this transition. Finally, the paper explores possible economic and policy barriers to a shift toward renewables, with a focus on issues of financing, pricing, equity, and oversight, while offering relevant policy recommendations to address these issues.
Challenges Faced by Puerto Rico’s Existing Energy Model
Puerto Ricans have for decades suffered from expensive and unreliable electricity supply. This supply has become even more vulnerable with increasingly frequent and intense natural disasters, such as Hurricanes Maria and Irma in 2017 and the 2020 earthquake that devastated Puerto Rico’s grids. Several demand and supply-side factors characterize the island’s current energy model.
On average, Puerto Ricans pay almost twice as much for electricity as U.S. mainland customers.
The high cost of electricity and unreliable access are two main challenges faced by the energy sector in Puerto Rico. On average, Puerto Ricans pay almost twice as much for electricity as U.S. mainland customers - see Figure 1 (Acevedo 2019). In 2019, the average price of electricity for residential use was higher in Puerto Rico than in 45 of the 50 U.S. states (U.S. Energy Information Administration 2020). Furthermore, electricity costs compose up to 30 percent of commercial businesses’ operating costs (Baker 2020). To repay bondholders of Puerto Rico’s Electric Power Authority (PREPA)’s debt, residents faced a further 13 percent spike in electricity costs in 2019 (Acevedo 2019). With the concession of the electricity transmission system to a private consortium in a public-private partnership, these rates might continue to rise to repay PREPA’s outstanding debts. Energy in Puerto Rico is not only expensive, but also unreliable. In 2017, electricity consumers in Puerto Rico on average experienced a power outage duration of 850 minutes - approximately two times the average total outage duration in the mainland United States that year of 470 minutes and eight times longer than the U.S. mainland average since 2013 of 106 to 118 minutes (Siemens Industry 2019 and U.S. Energy Information Administration 2020). Unreliable power access hampers both economic activity and livelihoods.
FIGURE 1: Retail Price of Electricity in Puerto Rico Compared to the Mainland United States, August 2021
|Consumer Type||Puerto Rico (price per kWh)||Mainland United States (price kWH)|
|Residential||23.26 cents/kWh||13.99 cents/kWh|
|Commercial||25.95 cents/kWh||11.60 cents/kWh|
|Industrial||22.88 cents/kWh||7.65 cents/kWh|
Source: U.S. Energy Information Administration (EIA), August 2021
Several factors contribute to the high cost of and unreliable access to electricity in Puerto Rico. First, PREPA is not only unprofitable but has also incurred persistent losses. PREPA’s revenue base has shrunk in line with Puerto Rico’s declining population (Newkirk II 2018). By 2019, Puerto Rico’s population had declined by 16 percent from a peak of 3.8 million in 2004 (Cheatham 2020). While the fixed cost of energy supply has not changed substantially, revenue has dropped as the population has decreased. As a result, the public utility must charge consumers higher prices to make up for the loss of revenue. Poor financial management at the public utility and a uniform pricing strategy (in which electricity has an unvarying price level) have resulted in further inefficiencies that have raised the cost of supplying energy. This business model is unsustainable, and led PREPA to file for bankruptcy in 2017 after increasing operating costs overwhelmed shrinking revenues.
Second, PREPA has historically relied on an expensive fossil fuel importation scheme to power outdated and inefficient generators. More than 90 percent of electricity generation in Puerto Rico is powered by imported fossil fuels; energy production is therefore both costly and subject to volatile world commodity prices (see Figure 2). Petroleum-fired power plants generated almost half of the island’s total electricity in 2020, with the remaining sources including imported natural gas (29 percent), coal (19 percent), and renewables (less than three percent) (EIA 2020). Transportation of imported fossil fuels further increases the cost of electricity production given that Puerto Rico is subject to the Jones Act of 1920, which requires that transportation between U.S. ports be carried out by vessels built in the United States and operated primarily by Americans (Carey 2017). Furthermore, the electricity generation power plants in Puerto Rico are outdated and inefficient. Puerto Rico’s four fossil fuel-intensive power plants were built in the 1960s and 70s, and are technologically outdated and lack fuel mix diversification. The power plants are also interconnected in a single centralized grid, rendering the entire supply vulnerable to isolated system failures.
FIGURE 2: PREPA’s Rising Cost of Fossil and Purchased Power
Third, Puerto Rico’s transmission lines are vulnerable to extreme weather. In September 2017, Hurricanes Irma and Maria destroyed much of the island’s electricity transmission and distribution infrastructure (Mazzei 2021). Large parts of the grid were still unrepaired when a 6.4 magnitude earthquake struck Puerto Rico in January 2020, leaving two-thirds of its residents without power. The earthquake and its subsequent aftershocks also significantly damaged the island’s two natural gas-fired power plants (U.S. Energy Information Administration 2020).In 2017, the average outage duration in Puerto Rico was 850 minutes per year as measured by the System Average Interruption Duration Index (SAIDI), while the average outage frequency was 4.8 events per year as measured by the System Average Interruption Frequency Index (SAIFI) (Siemens Industry 2019). In contrast, mainland U.S. customers experienced average outages of 470 minutes per year and 1.4 events per year for the same year (U.S. Energy Information Administration 2020).
Altogether, decreasing revenue, the high cost and inefficiency of energy generation, and vulnerability to extreme weather events resulted in expensive and unreliable electricity supply from PREPA and deepened the public utility’s debt. By 2017, PREPA’s debt had reached $9 billion, while its obligation to repay that debt was projected to be $4.5 billion over the next five years (PREPA 2019). After Hurricane Maria further damaged its grid, PREPA filed for bankruptcy in July 2017.
Puerto Rico’s Solar-Focused Renewable Energy Transition
In the aftermath of Hurricane Maria, demand for rooftop solar photovoltaic (PV) panels rose rapidly. Households suffered from the largest blackout in U.S. history after the hurricane and the second-largest blackout in the world, with 80 percent of the island’s power lines leveled (Campbell 2018). Given that rooftop solar systems can still produce electricity when the main grid is down, renewable energy demand for solar PV panels increased dramatically. Approximately 10,000 such systems were installed within one year of the hurricane, nearly doubling the number on the island (Kern 2018). Today, there are more than 30,000 solar systems in Puerto Rico (Kern 2018).
Approximately 10,000 solar PV systems were installed within one year of Hurricane Maria, nearly doubling the number on the island. Today, there are more than 30,000 solar systems in Puerto Rico.
Given the increased demand for solar panels in the aftermath of the hurricane, the island is seeking to implement a major transition to rooftop solar energy. Several government policies, sectoral plans, and opportunities have converged to enable this transition. Under the Puerto Rico Energy Public Policy Act of 2019 (Act No. 17-2019), Puerto Rico has set ambitious net-zero emission targets. Through PREPA, Puerto Rico aims to obtain 40 percent of its electricity from renewable resources by 2025, 60 percent by 2040, and 100 percent by 2050 (Government of Puerto Rico 2019). It has also committed to phase out coal-fired generation by 2028. The law additionally empowers “prosumers” who consume and produce electricity at the same time by facilitating net metering of small-scale solar power generation, which pays solar energy system owners for the electricity they add to the grid (Government of Puerto Rico 2019).
As part of the debt restructuring, the Puerto Rican legislature also approved the privatization of certain electricity operations, including the transmission of electricity for distribution to consumers. The Puerto Rican Congress argued that a private company would reconstruct and operate transmission lines more efficiently than PREPA, particularly given the utility’s bankruptcy and the severe damage to transmission lines after Hurricane Maria. In June 2021, the government transferred responsibility of the island’s energy transmission and distribution to a private consortium known as LUMA Energy on a 15-year contract (Mazzei 2021). Electricity generation remains under PREPA.
The Puerto Rico Energy Bureau (PREB) plays a crucial role in approving the Integrated Resource Plan (IRP), which outlines Puerto Rico’s transition to renewable energy. The PREB was formed by the Puerto Rican government in 2014 as an independent and specialized body with the mandate to regulate, monitor, and enforce the energy public policy of the island, including the IRP of the public utility. The IRP outlines development plans for Puerto Rico’s electric power system over the next 20 years, including improvements in reliability, efficiency, and transparency (Puerto Rico Energy Bureau 2021). After rejecting PREPA’s initial IRP to expand natural gas-fired generation capacity, including building liquified natural gas import terminals (EIA 2020), the PREB approved a final resolution in 2020 that prioritizes generating more renewable energy (approximately 3.5 GW of solar), increasing battery storage capacity (1.36 GW of battery storage by 2025), and establishing eight mini grids across the island by 2025 (Martinez 2020).
The Puerto Rican government has established various demand- and supply-side incentives to encourage the adoption of solar energy. On the demand side, the government created a green energy fund to facilitate the adoption of rooftop solar installations by residential households. The fund provides homeowners with a rebate ranging from 40 to 50 percent of the cost of installing a solar PV system (Government of Puerto Rico 2019). On the supply side, the government established a renewable energy portfolio standard (RPS) to incentivize electricity producers to supply renewable energy. The RPS requires PREPA to supply 20 percent of retail electricity sales from eligible "green energy" resources by 2035 (Sun Metrix 2015). Finally, the government established an economic development incentive to provide a tax credit to firms that assemble equipment used to generate electricity from renewable sources. The tax credit is equivalent to 50 percent of the cost of “machinery and equipment for the generation and efficient use of energy” (Sun Metrix 2016).
Finally, the U.S. federal government has allocated unprecedented amounts of funding toward disaster response and management in Puerto Rico. The Federal Emergency Management Agency (FEMA) allocated more than $10 billion in relief funds to Puerto Rico in September 2021 to repair the island’s electrical grid (FEMA 2021). This expenditure constitutes one of the largest disaster relief funds ever issued by FEMA. However, PREPA has only received a portion of these funds so far (roughly $1.6 billion) (The Weekly Journal 2021). The disbursement of the remaining relief funds should be earmarked not just for repairs to the island’s electrical grid, but also for investment in infrastructure to support increased renewable solar energy capacity and production.
Expected Economic and Social Benefits of the Rooftop Solar Energy Transition
An increase in solar energy supply is expected to address some of the challenges outlined above: high costs, lack of resilience, reliance on fossil fuel importation, and vulnerability to extreme weather. The below analysis explores some potential economic and social benefits of greater profusion of solar energy.
First, solar generation produces electricity at a much lower marginal cost relative to fossil fuel-backed generation. Theoretically, the cost of producing a marginal unit of electricity through solar PV panels is zero, though some panel maintenance costs arise over time. The main costs come from the installation of solar panels and the transmission lines that connect the panels to the grid, which requires relatively high upfront capital investment. Despite this, the cost of solar energy consumption has declined rapidly with technological advancements that have improved the efficiency and durability of the panels. Over the past decade, the cost of solar energy production has declined by 90 percent from around $360 per MWh to less than $45 per MWh. While the Levelized Cost Of Energy (LCOE) methodology suggests that residential PV solar is still more expensive than utility-scale solar (such as solar farms) or fossil fuel-backed generation (coal, oil, and gas) in the mainland United States (MIT 2015), it does not account for positive externalities of residential PV solar in other geographies (Borenstein 2012).  Given the unique challenges faced by island territories like Puerto Rico, including the high cost of fossil fuel importation and lack of reliable sources of electricity, residential PV solar will likely be comparatively more valuable to someone in Puerto Rico than in most places in the mainland United States.
Over the past decade, the cost of solar energy production has declined by 90 percent from around $360 per MWh to less than $45 per MWh.
Second, solar energy is more resilient than non-renewables against power outages, especially when paired with solar batteries. Solar panels paired with increasingly advanced and inexpensive batteries have enormous potential to provide climate change-resilient electricity. However, a major challenge to the adoption of solar PV is the variability and intermittency of solar energy production. Solar generation is variable on a daily and seasonal basis, with greater generation available during sunny and clear days. It is also intermittent in that it exhibits unpredictable short-term variation, which requires the public utility to dispatch reserve generation to fill in unexpected drops in solar output or to reduce fuel-based electricity production when solar PV output is high (Baker, Fowlie, Lemoine, and Reynolds 2013). Energy storage has the potential to solve these issues by smoothing out intermittent generation so that electricity generated during the daytime or in sunnier seasons can be stored and discharged during periods of non-sunny weather or outages (MIT 2015). When attached with battery storage, solar PV can complement electricity produced in the main grids so that demand peaks (i.e. during a heat wave) do not cause outages or disruptions in transmission (MIT 2015). Furthermore, battery-backed solar systems can invert surplus energy back into the grid, making power consumers “prosumers” (Rua-Jovet and Torbett 2021). The distributed grid model also reduces the risk of outages, as damage to one microgrid does not affect others. As the frequency and intensity of extreme weather events increase with climate change, solar systems with batteries will likely become a critical source of resilient electricity (Environmental Defense Fund 2020).
Third, increasing solar energy capacity will reduce Puerto Rico’s fossil fuel dependence. Lower dependence is beneficial in two ways: it can mitigate future debt issues and reduce the amount of carbon emissions. Given Puerto Rico’s geography and climate, its estimated annual residential solar potential is 24.6 TWh, roughly four times the island’s residential electricity consumption (Mooney and Waechter 2020). As a result, lower levels of fossil fuel imports will reduce government spending and help balance the fiscal budget. Savings will also be made from decreased fossil fuel transportation costs. Because renewable energy does not involve the combustion of fossil fuels, the use of PV solar panels also reduces greenhouse gas emissions and local air pollution.
Analysis and Recommendations to Address Possible Economic and Policy Barriers
While offering many potential benefits, a transition to solar-focused renewable energy also faces potential economic issues and policy barriers. This section identifies four areas in which the penetration of solar energy into electricity markets may have unintended consequences if not properly regulated and managed. These include questions surrounding: (1) how to finance the transition to renewable energy-friendly infrastructure, (2) how to encourage economic and financial viability for electricity operators and utilities given the low cost of solar energy production, (3) how to address equity issues given that solar adoption can be costly for poorer households, and (4) how to enable an accountable and effective transition. To address these issues, this section offers a set of policy recommendations to help ensure that Puerto Rico’s renewable energy transition is financially feasible, economically viable, socially inclusive, and subject to the necessary oversight.
The projected financial cost of implementing the renewable energy transition and grid improvements is substantial. According to the Rocky Mountain Institute, achieving the IRP’s renewable energy generation and battery storage capacity targets will require approximately $14 billion in investments (Henchen and Torbett 2019). Given that PREPA declared bankruptcy in 2017 due to its inability to cover the cost of its operations over a sustained period, it will need new sources of financing to make the transition happen. Despite the high upfront cost of building solar energy infrastructure and the lack of liquidity given the utility’s debt, a windfall of $10 billion in federal disaster aid from FEMA may provide Puerto Rico with an opportunity to finance the transition to renewable energy.
Recommendation #1: The government should request that relief funds from FEMA be channeled into building renewable energy capacity in addition to restoring the grid. Grid restoration without strategic investment into renewable energy generation and storage will only reinforce Puerto Rico’s outdated model of generation and transmission. The government should channel the remaining $8 billion in unspent federal disaster aid into renewable energy infrastructure investments. This injection of capital investments can kickstart the island’s transition to renewable energy and help the government accelerate the financing of renewable energy projects to meet IRP targets.
Recommendation #2: PREPA should resolve its existing debt issues and improve its financial performance to regain access to capital markets. The transition to renewables will require the public utility to access capital markets, as funding from FEMA alone will be insufficient. To do this, PREPA must resolve its outstanding debt issues by concluding its ongoing debt restructuring process. Once it no longer is in bankruptcy, the public utility will regain access to capital markets. With demand for “green,” environmental, and climate finance rising among private, institutional, and retail investors, Puerto Rico can take advantage of innovative financial instruments such as green bonds, sustainability-linked bonds, and debt-for-climate-swaps to finance its renewable energy transition (United Nations 2021). Given investors’ rising desire to invest in sustainable projects, such instruments would allow PREPA to access financing consistent with the climate mitigation objectives of investors.
The low (or zero) marginal cost of solar can cause the price of electricity to decline, which can stimulate increased energy demand. While electricity demand is generally unresponsive to price changes, consumer demand for electricity may increase in the longer run as prices decrease, particularly in the daytime when solar power is more plentiful and therefore cheaper. This increase in demand due to lower prices and the intermittent availability of solar energy may require system operators to operate fossil fuel-based turbines and dispatch reserve capacity when solar output is insufficient to meet demand (MIT 2015). If unable to cope with sudden demand spikes, electricity transmission might become vulnerable to imbalances that can result in power outages. Battery-backed solar panels can help mitigate this increase in electricity demand by storing electricity when demand is lower and dispatching electricity when demand is higher.
As prices during peak-demand hours fall with greater penetration of solar-powered electricity into the market, the return to solar generators will also decline. As more solar PV panels are introduced into the electricity market, more energy is produced during peak daytime periods. As a result, the cost of electricity production might be cheaper at noon than at midnight (MIT 2015). While this initially benefits consumers, the value of an additional PV panel can drop below the optimal level required by suppliers to recover fixed costs. In the long run, more solar energy generation will become less economically viable to suppliers due to lower prices and revenue. Given that system operators must recover their fixed costs (Borenstein 2016), investment in solar PV beyond a certain point may become unprofitable to operators of electricity generation and transmission (MIT 2015).
Several pricing strategies can help PREPA ensure not only the availability of affordable and reliable energy, but also a financially sustainable electricity supply. Much like most of the United States, Puerto Rico currently employs volumetric pricing, in which the price of energy equals the average cost of production, including fixed costs. This means that there is a uniform price for all residential and industrial consumers regardless of the time of day (peak and non-peak usage). This volumetric pricing model might allocate electricity in a sub-optimal way. During peak consumption periods, for example, this price does not respond to rising demand and becomes too cheap, encouraging excessive consumption, and vice-versa. Three pricing strategies can inform decisions in Puerto Rico:
- Dynamic pricing, which involves varying the price levels of electricity to reflect the amount of demand, can provide dynamic efficiency (Joskow and Wolfram 2012). By setting a higher price at peak hours, these strategies reduce peak demand by shifting some electricity demand to nonpeak hours. Since utility companies have to ensure that supply capacity is always greater than the maximum demand at any given time, dynamic pricing also avoids capacity costs associated with installing more generation capacity in the long run (Faruqui and Palmer 2011). Because the consumer pays a price closer to the wholesale price, this strategy is more efficient than volumetric pricing, saving money for both the producers and the consumers.
- In a tiered pricing model, the consumer pays a fixed base rate for the first block of electricity consumed, with higher rates for additional kWh consumed (Borenstein 2016). The tiered pricing strategy is beneficial because it discourages higher levels of consumption and charges poorer households (who are expected to consume less) lower prices.
- Ramsey pricing employs differentiated pricing based on consumer price sensitivities (Borenstein 2016). A less price-sensitive consumer pays a higher price than a more price-sensitive consumer. The advantage of Ramsey pricing is that it can shift the load of industrial (more price-sensitive) consumers to nonpeak hours, while reducing the demand of residential (less price-sensitive) consumers during peak hours. Ramsey pricing is also more efficient than volumetric and tiered pricing but might disadvantage less price-sensitive households since those households cannot shift their electricity use to cheaper non-peak hours.
Recommendation #3: In coordination with PREPA (which controls electricity generation) and LUMA Energy (which controls electricity transmission), the PREB should employ a more efficient pricing strategy. The socially optimal price of electricity should reflect the low marginal cost of solar energy production, as well as an additional fee that recovers the fixed costs of the transmission and distribution system (Borenstein 2016). While the price of electricity will likely drop with more residential solar penetration, it is unclear how great that decrease in price might be. Puerto Rico should consider using a combination of dynamic pricing (higher rates during peak hours) that increases efficiency, Ramsey pricing that encourages more price-sensitive industrial users to consume more energy at non-peak hours, and tiered pricing that increases equity by charging lower rates for households that consume less electricity.
Puerto Rico should consider using a combination of dynamic pricing (higher rates during peak hours) that increases efficiency, Ramsey pricing that encourages more price-sensitive industrial users to consume more energy at non-peak hours, and tiered pricing that increases equity by charging lower rates for households that consume less electricity.
According to Act No. 17-2019 and PREPA’s IRP, net metering will be implemented in small-scale solar generation to incentivize solar panel adoption among households. Net metering allows consumers who pay a retail rate for electricity to be compensated by the utility at the same rate for surplus solar output that is fed back into the grid (MIT 2015). In other words, prosumers can sell excess electricity back to the utility at the retail price, which incentivizes solar panel adoption. While net metering incentivizes solar panel adoption, it does not benefit lower income households that cannot afford solar panels and are therefore unable to take advantage of the lower electricity costs.
Wealthier households stand to benefit disproportionately from a net metering approach. Battery-backed solar systems typically range in price from $10,000 to $20,000, with financing options over a 20- and 25-year period provided (Kern 2018). The median per capita income in Puerto Rico, however, is only about $20,000 per year as of 2019 (U.S. Census Bureau 2021). Many Puerto Ricans therefore cannot afford to install rooftop solar panels. Furthermore, larger homes owned by wealthier people have larger rooftops with more solar generation potential and surplus to be fed back into the grid. Wealthier households that can afford solar systems and generate more electricity would essentially receive an “implicit subsidy” through net metering (MIT 2015). Meanwhile, the public utility must purchase the surplus electricity at retail price, which is higher than the marginal cost of producing a kWh of electricity. To recover these costs, PREPA will need to further raise prices, the burden of which would disproportionately fall on households without the resources to install a solar system.
Recommendation #4: PREPA should use a net billing rather than a net metering approach. As in net metering, households can offset electricity purchases with their own rooftop solar output through a net billing model. However, with net billing the utility purchases surplus energy fed back into the grid at the wholesale price and sells it again at retail price (MIT 2015). This allows the utility to recover fixed costs and make a profit that compensates for the loss of revenue from households that increasingly consume less expensive solar-produced power. It is important to keep in mind, however, that while net billing is more equitable for households that cannot afford solar panels, it might also have an adverse effect on the uptake of solar panels, since adopters do not benefit as much from net billing as from net metering.
Recommendation #5: Government incentive programs such as the Green Energy Fund should provide higher rebates to low and middle-income households to increase the fund’s marginal impact. As mentioned above, the Green Energy Fund provides homeowners with a rebate ranging from 40 to 50 percent of cost when installing a solar PV system on their home. While such rebates incentivize solar uptake for consumers who would otherwise not install solar panels, they are not cost-effective because they also reward wealthier households that would install solar systems regardless of the rebate. In addition, the fund still does not provide assistance for households that cannot afford solar panels even with a rebate. Hence, the Green Energy Fund should provide higher rebates to low and middle-income families while possibly reducing rebates for high-income families on a sliding scale.
As an independent regulator of Puerto Rico’s energy public policy, the PREB plays an important role in holding PREPA accountable for carrying out the renewable energy transition. PREPA’s initial IRP proposed greater natural gas imports, generation, and storage facilities including liquified natural gas import terminals. This gas-focused approach would have undermined Puerto Rico’s ability to reach its renewable targets. The PREB rejected this initial proposal and recommended amendments, resulting in a more solar-focused IRP. However, in 2019, PREPA failed to achieve the Renewable Portfolio Standard (RPS) interim target to supply 12 percent of retail electricity sales from renewable sources. This failure is a reflection of PREPA’s lack of enforcement over renewable energy incentives. Meanwhile, the private consortium LUMA Energy has faced criticism for pushing electricity prices even higher and promoting the expansion of outdated natural gas plants (Sanzillo 2020). PREPA’s implementation of government policies have so far been lackluster and will be insufficient to achieve the current renewable energy transition plan. The PREB has taken steps to regulate, monitor, and enforce energy public policy implementation by PREPA by amending the IRP to be more solar-focused. However, the PREB will need greater authority and capacity to effectively monitor and regulate PREPA’s activities to ensure their consistency with the renewable energy transition.
Recommendation #6: The government should empower PREB to provide strategic guidance and regulatory oversight to ensure the effectiveness of Puerto Rico’s energy policy. To be successful, the most recent IRP targets will need strong monitoring and effective implementation. While it already has the legal mandate to regulate energy public policy, the PREB needs additional enforcement capabilities to regulate and monitor PREPA. Given PREPA’s failure to meet the Renewable Portfolio Standards requiring 20 percent of retail electricity sales from eligible "green energy" resources by 2035, the government of Puerto Rico should grant PREB enforcement powers that empower it to appropriately fine or otherwise penalize the public utility. In addition, the independent regulator needs more technical expertise and human capital to continuously monitor, adjust, and enforce the IRP in line with the energy public policy of Puerto Rico. Meanwhile, the PREB should also coordinate LUMA Energy’s control over transmission with PREPA to ensure that their roles do not overlap.
The benefits of rooftop solar energy in a small island territory like Puerto Rico are clear given the challenges the energy sector faces with shrinking revenue, expensive fossil fuel imports, inefficient energy generation infrastructure, and vulnerability to extreme weather events. Recognizing the potential of rooftop solar capacity expansion to reduce the cost of electricity production, improve energy reliability, and increase climate change resilience, the island has already established policies and incentives to promote a transition to solar-focused energy. If the economic implications of the transition are considered and the above policy recommendations properly implemented, Puerto Rico can attain a reliable, affordable, and resilient energy supply for its residents. These include the realignment of federal funds and finance toward solar rooftops, more efficient pricing strategies, equity considerations around solar adoption incentives, and greater oversight of the public utility. If affordable, reliable, and climate change-resilient electricity is achieved through the above recommendations, the transition to rooftop solar energy can not only rejuvenate economic growth, but also mitigate future debt situations.
*This article was edited by Ellen Swicord (Princeton University), Lynne Guey (Princeton University), and Lillian Aronson (Pennsylvania State University).
Jia Jun Lee is an MPA candidate at Princeton School of Public and International Affairs graduating in 2022. Prior to Princeton, he worked at the World Bank for four years on issues of sustainability economics and policy, including the cost of coastal degradation in West Africa, the health cost of air pollution in the Middle East, and the blue economy in Indonesia. Before the World Bank, he worked at the World Resources Institute and World Wildlife Fund. Last summer he interned at the Columbia Center for Sustainable Investing as an SDG-Aligned Finance Intern. His capstone policy workshop at Princeton focused on Puerto Rico's transition to distributed solar energy and its potential to rejuvenate the economy and mitigate debt. Looking forward, he hopes to work on solutions that can decarbonize the economy and catalyze the transition to net zero carbon emissions.
Acevedo, Nicole. 2019. “Puerto Ricans already pay high energy prices. They could go higher.” NBC News. https://www.nbcnews.com/news/latino/puerto-ricans-already-pay-high-ener…
Baker, Brianna. 2020. “He’s bringing solar power to Puerto Rico — and political power to its people”. Grist. https://grist.org/fix/hes-bringing-solar-power-to-puerto-rico-and-polit…
Baker, Erin; Meredith Fowlie; Derek Lemoine; Stanley S. Reynolds. 2013. “The Economics of Solar Electricity”. Annual Review of Resource Economics, 5:1, 387-426. DOI: 10.1146/annurev-resource-091912-151843.
Borenstein, Severin. 2012. "The Private and Public Economics of Renewable Electricity Generation." Journal of Economic Perspectives, 26 (1): 67-92. DOI: 10.1257/jep.26.1.67.
Borenstein, Severin. 2016. “The Economics of Fixed Cost Recovery by Utilities”. The Electricity Journal. Volume 29, Issue 7, 2016. https://doi.org/10.1016/j.tej.2016.07.013
Campbell, Alexia Fernández. 2018. “Puerto Rico Power Restored 11 Months after Hurricane Maria.” Vox. www.vox.com/identities/2018/8/15/17692414/puerto-rico-power-electricity…
Carey, Teresa. 2017. The Jones Act, explained (and what waiving it means for Puerto Rico). https://www.pbs.org/newshour/nation/jones-act-explained-waiving-means-p…
Cheatham, Amelia. 2020. “Puerto Rico: a US territory in crisis”. Council on Foreign Relations. https://www.cfr.org/backgrounder/puerto-rico-us-territory-crisis
Environmental Defense Fund. 2020. “A Plan to Strengthen Puerto Rico’s Electric Grid”. Environmental Defense Fund: Published Jan 2020. https://www.edf.org/sites/default/files/content/PuertoRicoFactSheet01.2…
Faruqui and Palmer. 2011. “Dynamic Pricing of Electricity and its Discontents,” Regulation. https://ssrn.com/abstract=1956020
Federal Emergency Management Agency, FEMA (2021). “FEMA Explains Processes for Island’s Power Grid Projects”. FEMA: Released Sept 2021. https://www.fema.gov/press-release/20210922/fema-explains-processes-isl…
Federal Oversight Management Board (FOMB). 2021. “Debt profile of Puerto Rico”. https://oversightboard.pr.gov/debt/
Government of Puerto Rico. “Puerto Rico Energy Public Policy Act,” Act. No. 17 of April 11, 2019. https://bvirtualogp.pr.gov/ogp/Bvirtual/leyesreferencia/PDF/2-ingles/17…
Henchen, Mike and Roy Torbett. 2019. “Puerto Rico’s Electricity System at a Crossroads”. Rocky Mountain Institute. https://rmi.org/puerto-ricos-electricity-system-at-a-crossroads/
Joskow and Wolfram. 2012. “Dynamic Pricing of Electricity.” American Economic Review. https://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.102.3.381
Kern, Rebecca. 2018. “Rooftop Solar Nearly Doubles in Puerto Rico One Year After Maria”. Bloomberg Law. https://news.bloomberglaw.com/environment-and-energy/rooftop-solar-near…
Martinez, Luiz. 2020. “Puerto Rico chooses clean energy after Maria”. Natural Resources Defense Council (NRDC). https://www.nrdc.org/experts/luis-martinez/puerto-rico-chooses-clean-en…
Massachusetts Institute of Technology (MIT). 2015. “The Future of Solar Energy: an interdisciplinary MIT study.” MIT Energy Institute.
Mazzei, Patricia. 2021. “‘Why Don’t We Have Electricity?’: Outages Plague Puerto Rico”. The New York Times. https://www.nytimes.com/2021/10/19/us/puerto-rico-electricity-protest.h…?
Mooney, Meghan and Katy, Waechter. 2020. “Puerto Rico Low-to-Moderate Income Rooftop PV and Solar Savings Potential”. National Renewable Energy Laboratory (NREL). https://www.nrel.gov/docs/fy21osti/78756.pdf
Newkirk, Vann R. II. 2018. “The Peril of Privatizing Prepa”. The Atlantic: Jan 2018. https://www.theatlantic.com/politics/archive/2018/01/puerto-rico-will-p…
Puerto Rico Electric Power Authority. 2019. “2019 Fiscal Plan for the Puerto Rico Electric Power Authority (PREPA)”. https://aeepr.com/es-pr/Documents/Exhibit%201%20-%202019%20Fiscal_Plan_…
Puerto Rico Energy Bureau. 2021. “Integrated Resource Plan”. https://energia.pr.gov/en/integrated-resource-plan/
Rua-Jovet, Javier and Roy, Torbett. 2021. “Time to turn on Puerto Rico’s untapped virtual power plant”. Energy Monitor. https://www.energymonitor.ai/insights/time-to-turn-on-puerto-ricos-unta…
Sanzillo, Tom. 2020. “Contract Between Puerto Rico, LUMA Energy Sets up Full Privatization, Higher Rates for Island Grid”. Institute for Energy Economics and Financial Analysis (IEEFA).
Siemens Industry. 2019. “Puerto Rico Integrated Resource Plan 2018-2019: Draft for the Review of the Puerto Rico Energy Bureau”. https://aeepr.com/es-pr/QuienesSomos/Ley57/Plan%20Integrado%20de%20Recu…
Sun Metrix. 2015. “Puerto Rico - Renewable Energy Portfolio Standard”. https://sunmetrix.com/incentives/4267/Puerto-Rico---Renewable-Energy-Po…
Sun Metrix. 2016. “Puerto Rico - Economic Development Incentives for Renewables”. https://sunmetrix.com/incentives/3185/Puerto-Rico---Economic-Developmen…
The Weekly Journal. 2021. “Oversight Board Certifies Fiscal Plans as Roadmaps for Economic Development”. https://www.theweeklyjournal.com/politics/oversight-board-certifies-fis…
United Nations. World Population Prospects 2019 Revision. https://population.un.org/wpp/
United Nations. 2021. “The trillion dollar climate finance challenge (and opportunity)”. UN News. https://news.un.org/en/story/2021/06/1094762
United States Energy Information Agency. 2018. “Average U.S. electricity customer interruptions totaled nearly 8 hours in 2017”. https://www.eia.gov/todayinenergy/detail.php?id=37652
U.S. Census Bureau. Accessed Dec 2021. https://www.census.gov/quickfacts/PR
U.S. Energy Information Administration. 2020. “Puerto Rico Territory Energy Profile”. https://www.eia.gov/state/print.php?sid=RQ
U.S. Energy Information Administration. 2020. https://www.eia.gov/todayinenergy/detail.php?id=43915#:~:text=Since%20E…