Puerto Rico Energy Security 1

“How does Climate Change affect Energy Security and Development in Contemporary Puerto Rico?

Federico SotomayorClark University

International Development, Community, and Environment950 Main Street

Worcester, Massachusetts 01610© 2013

IDCE 30205 Climate Change, Energy, and DevelopmentFinal Research Paper

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Abstract“As climate change continues to destabilize energy markets around the globe, it will become

increasingly significant for small island nation-states to deploy initiatives which facilitate the proliferation of mechanisms that promote future energy security. The Caribbean region in particular is ripe for an energy revolution akin to the independence from fossil fuels; an idealized sustainable configuration of natural resources and public policy that will provide these countries with a greater degree of autonomy while simultaneously spurring innovation and economic development. An island in this region that is currently undergoing such a transformation through the promotion of renewable resources, improved technical innovation, and environmental sustainability is Puerto Rico. Induced by international financial institutions’ growing subsidization of clean energy projects and the collaborated efforts of the scientific and political communities, Puerto Rico’s market for utility-scale wind and solar power have grown tremendously and thus their capacities to adapt to the effects of global warming have also increased by diversifying their energy portfolio which displaces carbon emissions. Although there appears to be an upward trend of support towards energy security through the utilization of renewable resources, it is crucial to study the anticipated challenges and barriers to clean energy implementation through a nuanced analysis of the political economy and socio-technical landscape of contemporary Puerto Rico.”

IntroductionThe Caribbean region is comprised of numerous small island autonomous nations

categorized by the UN as Small Island Developing States (SIDS), which are especially vulnerable to the negative effects of climate change (UN, 2013). SIDS are often characterized by their small nature which plagues them with specific challenges such as those arising from economies of scale, limited exports market, dependence on international trade, climate vulnerabilities, high population densities, and limited resources such as fresh water, food, and energy (UN, 2013). The Caribbean lies just southeast of the Gulf of Mexico and forms an integral part of the environmental structure that supports the Gulf Stream. These islands in particular have a very limited supply of commodifiable natural resources and a near inexistence of domestic hydrocarbon fuel sources, or fossil fuels. This has dual significance for these nation states in the sense that not only do they depend on foreign sources of fuel for their energy supply, but this lack of natural resources also tends to limit the growth of their economies. A lack of economic development coupled with disproportionate negative effects occurring from climate change will be the biggest challenges the Caribbean SIDS will have to overcome in the 21 st

century in order to achieve sustainability. According to the UN, Latin America and the Caribbean have taken appropriate action, albeit small in scale, towards combating these issues and especially climate change which these regions have collectively decided to address as one of their top priorities (Lopez, 2013). One such Caribbean nation that is at the forefront of the revolution towards sustainable development and economic growth as they rebound from recession is Puerto Rico.

Puerto Rico’s influence in the region is very unique. It is one of the most Westernized Caribbean states and holds a certain power dynamic through its relationship with the United

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States that is unparalleled in the region. It is a commonwealth nation that at the same time remains a territory of the United States, providing citizenship to any who are born on the Caribbean island. There are communities within Puerto Rico that are sensationally modernized and developed with extensive bourgeois elegance while also simultaneously supporting impoverished, alienated, marginalized, and disenfranchised populations. Puerto Rico has the highest GINI coefficient in the U.S. and one of the highest in world with 0.54 (Boundless Economics, 2013), while also having one of the world’s highest population densities with 1,072 persons per square mile (UN, 2013). There are 3.7M inhabitants that populate the 3,400mi² island. Whether you are rich or poor one thing is for certain, the energy costs in Puerto Rico are twice the national average, hovering in between 26-30¢/kWh and act as a huge barrier for Puerto Rico’s overall development (PREPA, 2012). A possible solution to their energy crisis is the implementation of utility scale clean energy projects. “The Caribbean islands provide a unique opportunity for renewable energy; it can help to diversify electrical generation while stabilizing electrical prices and supply for islands (Fellmeth, 2013).”

Foreign Energy DependencyThe regional high cost of electricity is due to its large dependence and inelastic demand

on foreign oil to produce power and also the significant institutional inefficiency that lies within the structure of Puerto Rico’s national utility company, PREPA. The island’s main source of power comes from the import of petroleum which currently provides 70% of the energy that is used in Puerto Rico, down from about 98% in 2000 (PREPA, 2012). The global demand for oil continues to rise which has led to increases in price where now a barrel of crude oil costs almost $100, compared to just $25 back in 2000 (Charles, 2012). The price increases that are ultimately passed onto the consumer is just one aspect of the challenge that comes from relying on oil, the other piece is that the market has shown tremendous volatility, especially when oil is needed the most, i.e. after a natural disaster or large scale emergency. These fluctuations in price make it extremely difficult to predict or anticipate the costs of national energy supply for policy makers. Puerto Rico and the rest of the Caribbean acquire most of their petroleum from Venezuela under the Petrocaribe alliance. This pact has been quite reliable yet is unsustainable due to the fact that the financial structure of the agreement favors deferred payments, and this has ultimately led to increases in interest and further debt dependency. When analyzing global oil markets and decreasing energy return on investment (EROI), one can rationally come to the conclusion that trends in market volatility will only become more prevalent as climate change progresses. Economic stability and the global warming pandemic will have to be addressed if these Caribbean SIDS plan on achieving future sustainability and energy security. “Energy security refers to what extent energy sources are affordable and available to be used by consumers (Charles, 2012).”

Potential for Renewables

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Although it is difficult to quantify just how much wind or solar power the island is capable of producing, it is clear that there is tremendous potential for these two resources to supply much of the energy demand in Puerto Rico. “Renewable energy technologies such as solar and wind energy systems could have a multiplicative effect in reducing the greenhouse gases and in empowering vulnerable regions with a clean, independent energy resource to mitigate the effects of climate change and energy costs (Angeles et al., 2010).” Charles, Headley, and Angeles et al. suggest that the commonwealth has solar potential of >1kW/m² on sunny days in the dry season and wind speed of >4m/s all year round, which indicate that this area has significant potential for clean energy development. Now that potential has been established it is important to focus our attention on the future need for clean energy, primarily in the context of climate change and its capacities to assist with mitigation and adaptation strategies. In order for this region to transition towards a more secure energy future, they must first understand that there is an overwhelming need to so. Historically, one of the most influential facilitators of innovation and technology has been necessity. “A regional climate change is expected in the Caribbean that may result in higher energy demands (Angeles et al., 2010).” Through a nuanced interpretation of environmental research and regional climate change predictions, it is evident that there must be a push towards diversifying energy sources and utilizing renewable resources for Puerto Rico, especially wind and solar.

Climate Change“While the Caribbean islands do not have any obligation to reduce their greenhouse emissions under the

Kyoto Protocol, climate change will have more than disproportionate negative impact upon these small island developing states. Beaches will be eroded, more coral reefs will be bleached, tropical storm intensity will increase, floods will be more severe, communicable diseases will increase, and much more adverse environmental effects will befall the Caribbean islands if climate change is not adverted. The utilization of renewable energy and the reduction of greenhouse gas emissions are policies that should be pursued to mitigate or avert the negative effects of climate change (Charles, 2012).”

Puerto Rico has specific vulnerabilities to climate change that include increased sea level rise, intensified tropical storms, and financial instability which could also hinder its capacity to appropriately respond to national emergencies. The rise in sea level will have multiple effects on the country’s ecology. The salt water can potentially contaminate ground water sources of drinking water, thus affecting the water security of these Caribbean nations that have very limited supplies to begin with. The rise in seal level, along with acidification, has been correlated to the erosion of coral reefs and barriers that act as natural levees to protect against flooding from tropical storms and hurricanes. The associated changes in precipitation, air temperature, and air pressure will likely be responsible for the intensification of tropical storms. As mentioned earlier, flooding will also be an area of concern as the sea rises and disperses around river plains, dramatically altering the agricultural landscape. 70% of the Caribbean population lives near the coast which can be alarming when you consider that sea level rise will likely affect these communities and produce certain hardships such as displacement (World Bank: Can you

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Imagine…, 2013). The intensification of tropical storms and sea level rise will only serve to increase the demand for energy and unless there are diverse sources of fuel, Puerto Rico will have to endure continued costly dependence on oil to support the infrastructure of emergency management and relief efforts, only exacerbating greenhouse gas emissions that ironically could have led to the disasters in the first place. Reducing the reliance on fossil fuels and supporting cleaner, more efficient energy production is critical to helping island economies grow sustainably; it also produces surplus capital from the displacement of imported energy and its associated costs (Bauza, 2013).

Co-production & Cultural CircuitsThe mitigation and adaptation strategies that Puerto Rico needs to develop lie primarily

in its transition away from fossil fuels for energy production and also in its ability to finance this transition. Since the Caribbean nations have such limited economies, they are usually forced to prioritize societal issues such as crime, health care, education, and utilities. These sectors often compete with each other for government assistance or subsidization. Recently though, it has become apparent that with the anticipation of climate change effects and an increased participatory process between stakeholders, Latin America and the Caribbean have been demonstrating an increased demand for and investment in renewable resources and clean energy (Houston, 2013). “Demand for solar photovoltaic (PV) energy across Latin America and the Caribbean is poised for explosive growth through 2017, with a forecasted compound annual growth rate (CAGR) of 45% (Sunsong, 2013).” As the clean energy markets continue to grow, it will allow for a cultural liberalization of private funding from investors due to the increased confidence that these socio-technical systems will produce by successfully fostering pilot programs and their increased scalability of future developments. “As more utility scale solar projects are completed, other developers and financiers will become more comfortable with PREPA and the rest of the permitting requirements, creating a domino effect whereby more projects will be completed (Andorka, 2012).” Now that we see the relationship between fossil fuel dependency, economic development or lack thereof, and climate change, we are better able comprehend and understand the recent slate of sustainable developments that have been formulating within Puerto Rico while essentially addressing the issue of future energy security.

While analyzing the contemporary interconnectivity between various sectors of Puerto Rican society on the issues of climate change, economic development, and energy security, I was able to infer that the relative success of many of these symbiotic relationships and their developments were reciprocal examples of policy implementation and risk management models that Mike Hulme described as Co-production and Cultural circuits, respectively (Hulme, 2009). The co-production model of policy implementation finds the appropriate and equitable relationship between politicians and STEM (Science, Technology, Engineering, and Mathematics) experts in order to produce the most efficient and sustainable developments. “In this co-production model of knowledge and policy there is recognition that both the goals of policy and the means of securing those goals emerge out of joint scientific and non-scientific

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considerations (Hulme, 2009).” We have seen that although Puerto Rico is limited in commodifiable natural resources, the country has a vast and rich history of biodiversity and an abundance of flourishing ecosystems and wildlife which has led to the production of large scientific and environmental communities or organizations in Puerto Rico, strongly supported by the national University system.

The spread and influence of the country’s scientific community has been semi absorbed into its legislation, thus embodying the connection between the scientific and non-scientific communities. We have observed these collaborations through community events and participatory inclusions such as the ‘Green Energy Business Conference’ in 2012. “The event sought to present to the public the creation of a partnership between the federal and local government, academia and the renewable energy industry, to create more agile and cost effective permits and construction processes that open possibilities for a greater number of projects (Kantrow: $23M in green…, 2012).” This has also affected the discourse on risk management and information communication by taking the legitimate concerns of all stakeholders offering a forum in which all parties have a voice or presence in policy formation. “To increase their resilience to climate change, the Caribbean needs to link risk management with the social, economic, and environmental initiatives (World Bank: Can you Imagine…, 2013)”, which is what we are beginning to see in Puerto Rico. “A cultural circuits conception of this relationship maintains that both the senders and receivers are jointly engaged in shaping and changing the meaning of messages about climate change (Hulme, 2009).” These two models of policy implementation and risk communication have led to moderate advancements for Puerto Rico in terms of addressing climate change and their capacities to develop future clean energy for the country. “Utilities often need to be provided with the security of government support to explore the risky realm of renewables and creating a supportive legislative and policy backbone, which is a crucial step for energizing the local market (Shirley et al., 2013).” An analysis of the modern political economy in Puerto Rico will reveal that there have been significant steps taken within the last 1-2 years to dramatically deal with these issues.

Political EconomyThe last year has been crucial for Independent Power Producers (IPP’s) that want to

develop clean energy projects on the island of Puerto Rico. Even though the island is still currently fighting the recession that continues to linger in the wake of the 2007/8 US financial crisis, most indicators signal that the economy will produce growth and gradually stabilize over the next 3-5 years. The major politicians of Puerto Rico, including its governor Alejandro Garcia Padilla and former governor Luis Fortuño, saw the potential for renewable energy market development to help pull the country out of its recession by creating jobs, facilitating growth in foreign direct investment (FDI), a liberalization of international trade, and by ultimately reducing the price of electricity for consumers. The government has been able to foster these qualities by implementing a set of policies surrounding clean energy production that have been responsible for considerable growth and interest in this market. The first set of initiatives has come from the

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national energy regulator AEE (Autoridad de Energia Electrica) that oversees the domestic utility company PREPA (Puerto Rico Electric Power Authority).

PREPA, alongside recommendations from AEE have put in place certain incentives to assist the growth of clean energy; those incentives include lucrative power purchase and operation agreements (PPOA’s) with 2% annual escalation clauses to adjust for inflation (Sternthal, 2013), renewable energy credits or certificates (REC’s), the allocation and distribution of state subsidies known as the Green Energy Fund (GEF), and the implementation of Renewable Energy Portfolio Standards (REPS’s) that will take effect in 2015 (See Figures 1.A and 1.B). The REC’s act in congruence with the REPS’s and are earned for each Megawatt hour (MWh) of clean energy that is produced and can then be used as a tax credit or can be sold to companies that are not eligible to receive them, strikingly similar to a cap and trade structure for carbon emissions (Dept. of Energy, 2013). The REPS is a mandate that serves to legally bind PREPA to the diversification of its energy portfolio, principally concerned with the progression of renewables. It sets a benchmark for PREPA to develop its renewable resources and the percentages of total energy produced by clean sources. From 2015-19 - 12% electricity will come from renewables, 2020-27 - 15%, and finally 2028-2035 - we will see an increase to 20% overall supply of renewable electricity. (Dept. of Energy, 2013). The GEF is primarily controlled by AEE and has allocated $290M of national funds towards the subsidization of clean energy projects. The funding gradually increases from $25M/year in 2013, to $40M/year in 2020 until the funds are completely utilized (Marino: DDEC chief…, 2013; Kantrow: Energy Affairs…, 2013). “The purpose of this fund is to encourage the development of renewable energy systems that promote the use of natural sources like the sun and reduce energy bills (Kantrow: Gov’t opens…, 2013).”

These incentives are all mechanisms that have led to green growth for Puerto Rico. To supplement these new developments, the public administrators have also earmarked a huge area of land that stretches 35 miles wide and 110 miles long for the sole purpose of developing sustainable projects (Costa: Land-use Plan…, 2013). “The future need for renewable energy projects is also the number one criterion driving the development of a new master land-use and zoning plan for Puerto Rico (Marino: Puerto Rico sparks…, 2012).” We also see a massive example of the co-production model here due to the projects vast participation from developers, industrial and business sectors, environmental groups, landowners, and municipalities (Ferraiuoli, 2013). Earlier this year, Governor Padilla also introduced three pieces of legislative framework that promote green energy; those were the 1) executive orders that established a procedure giving priority to renewable energy projects, 2) an order calling for the creation of an Energy Autonomy Council that will be responsible for enabling the development of clean energy policy, and lastly 3) an order that calls for the creation of an Energy Reliability Council that will be responsible for offering recommendations on how to address technical issues associated with clean energy and grid connectivity (Kantrow: Gov signs…, 2013).

These policy mandates have been met with equal support from the economic community. Major private banks are also heavily investing in clean energy development projects. Those banks include, but are not limited to BBVA, Santander, and Banco Popular. In 2011, Santander

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“approved $2.6B in funding for 56 alternative energy projects in the US and Puerto Rico (Kantrow: renewable…, 2012).” Corporate magnate John Paulson, the CEO billionaire and majority shareholder of Banco Popular, has also recently been the subject of media attention due to his decision to move to Puerto Rico and try to develop the private sector. The government has likewise been introducing policy measures that will attract grandiose investors to help catalyze the economy. Those measures include laws 20, 22, and 273 that act to promote export services, encourage the transfer of investors to Puerto Rico, and broaden the scope of banking activities for international financiers, respectively (Costa: Investment…, 2013). “Efforts to attract wealthy individuals and hedge funds to the island are a centerpiece of Governor Padilla’s effort to turn around a contracting economy (Foley, 2013).” The revitalization of private sector investment has also been coupled with an overall international trend of increased clean energy financing from development banks. “The World Bank Group approved a total of $3.6B in financing for renewable energy projects in fiscal year 2012, a record 44% of its annual energy lending portfolio (World Bank: Financing…, 2012).” Evidence has shown itself that the political environment of Puerto Rico has conscientiously been working towards the growth of clean energy, but can the socio-technical dynamic within the country sustain the increased demand for renewable projects?

Socio-technical Response“Central to this framework is the notion that large technical systems co-evolve with

associated social, cultural, and political institutions. Socio-technical transition occurs when a niche technology gains enough traction to compete with, and then to a significant degree replace, the entrenched socio-technical regime (Stephens et al., 2009).” We see here that the traditional regime has been the country’s reliance on foreign oil for electrical generation, and the new system is of course the clean energy technologies. The transition of technological systems is not only a matter of engineering and applied mathematics; it also has much to do with culture and the ways in which the new technology is presented to and accepted by any given society. If this dynamic is not evaluated and taken into consideration, energy technology transitions will be unsuccessful. This was observed with the planned $800M natural gas development project referred to as ‘Via Verde’, or ‘Gasoducto del Norte’. A significant portion of oil was to be displaced by an updated and modernized system of natural gas distribution that would have cut reliance on foreign oil and likely reduced energy bills. Yet this project faced unprecedented opposition from various stakeholders, so much in fact, that the project’s proposal for construction was ultimately rescinded. Natural gas is not exactly the cleanest source of fuel, but it is environmentally friendlier than oil or coal, and also holds the potential, if installed correctly, to constitute a major proportion of supplemental fuel while renewables increase in scale and efficiency. “We need to be very careful when setting up renewable energy systems to ensure that bad experiences do not make people reject the technology (Headley, 1997).” The logistical intricacies and specifications of this energy system transition were not properly communicated and thus faced devastating opposition and ultimate project failure.

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“History shows that socio-technical transitions take time and involve systemic changes (Shirley et al., 2013).” There already exist breakthroughs in technology that will make solar and wind power more efficient, such as Nanowire technology for PV cells (Montgomery, 2013), turbines with the absence of gearboxes or moving mechanical parts (Jackson, 2013), FloDesign turbines that are supposed to increase air flows up to 50%, and smart grid and meter capabilities. If accurate cost benefit analyses of these new innovations are not communicated properly they could very well go underutilized. Interestingly enough though, we see much more positive examples of socio-technical systems being accepted in Puerto Rico, albeit with minor distrust, than we do negative examples of these systems being completely delegitimized. Recent successful utility scale projects have been the wind farms in Santa Isabel by Pattern Energy and in Naguabo by Gestamp, as well as the PV farms in Guayanilla by AES and in Ponce by Windmar (PR Newswire, 2011; RE News, 2012; Gestamp Wind, 2013). If further technologies like these increase in demand, it will be crucial for Puerto Rico to continue with its recent trend of public and private, scientific and non-scientific collaborations and information sharing to realize the macro level need for the transition away from petroleum fuel for power production and thus increasing its overall capacities to deal with domestic electricity issues and global climate change.

ConclusionPuerto Rico is quietly advancing towards the forefront of the Caribbean effort to

transition away from foreign hydrocarbon sources of fuel. Bill Clinton stated after his visit to the commonwealth in July of this year (2013) that if Puerto Rico “plays its cards right, the US territory could lead the entire Caribbean toward a green future (Caribbean Journal, 2013).” Puerto Rico’s westernized circumstance and geopolitical relationship with the United States has helped with the implementation of renewable energy systems through political and economic support networks. The transition has been coupled with accommodating Co-Production and Cultural Circuit models of policy implementation and risk communication, respectively, which have allowed many clean energy projects in the country to become socially acceptable and marginally successful. The future implications of Puerto Rico’s advancements toward sustainable developments should not go undermined. “High oil prices as well as the negative effects of climate change upon small island states, act as a strong motivation for the Caribbean region to develop renewable energy industries for their electricity generation (Charles, 2012)”, thus working to secure the future energy demands of its citizens. The potential for Puerto Rico to lead the way for cultural and technical energy system changes are huge. Research shows that a trend in development of clean energy projects has been increasing in the Caribbean, as has been the case for Puerto Rico in particular. This will also increase the growth of the economy, essentially helping to combat the two major regional challenges of economic development and climate change. “Combined, the measures are expected to create 10,000 green jobs over the next five years and achieve an estimated investment of $4B over the next 10 years (Caribbean Business, 2012).”

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http://www.prnewswire.com/news-releases/pattern-energy-completes-financing-on-puerto-ricos-first-commercial-wind-power-project-131788698.html

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(Figure 1.A) PREPA Power Purchase and Operation Agreements

Source: PREPA. 2012. Strategic Plan for a Stronger PREPA

(Figure 1.B) PREPA Portfolio Diversification

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Source: PREPA. 2012. Strategic Plan for a Stronger PREPA