LUMA rejects mounting criticism of Puerto Rico grid operating contract, sees $100M annual savings

Dive Brief:

A new report from the Institute for Energy Economics and Financial Analysis (IEEFA) concludes the service contract LUMA Energy signed to operate Puerto Rico's fragile utility grid will likely result in electricity prices that fail to meet legislative goals and could keep the island from reaching its 100% renewable energy target by 2050.
LUMA on Monday also faced criticism from Puerto Rico gubernatorial candidate Charlie Delgado Altieri, who joined a growing number of candidates saying they would cancel the contract because it does not benefit the island.
LUMA, owned by ATCO and Quanta Services, was awarded the Puerto Rico grid contract in June. The company responded to the criticism, saying it is "committed to finding efficiencies in the current system" and expects reductions in operating and maintenance costs to save $100 million annually by 2026.

Dive Insight:

The Puerto Rico Electric Power Authority (PREPA) has said it expects the LUMA operating deal to cut costs by hundreds of millions, and is optimistic the public-private partnership can help capture operating savings and system efficiencies.

But since the contract was signed, observers have had doubts. LUMA will be paid through a mix of fixed fees and incentive payments for meeting or exceeding certain metrics that will be developed over a one-year transition period.

Tom Sanzillo, IEEFA’s director of finance and author of the report, said there is little accountability written into the LUMA-PREPA agreement.

"The largest part of LUMA Energy’s fee for running the grid must be paid whether or not the company is performing well," Sanzillo wrote. "The LUMA contract is objectionable on a mix of policy and procedural grounds that are so extensive that its execution is unlikely to achieve critical resiliency, affordability, renewable energy, workforce and budgetary goals."

“This contract surrenders rights and responsibilities for the electricity system that are currently housed in a public authority — PREPA,” said Sanzillo.

PREPA declined to comment for this story.

Sanzillo's report concludes the LUMA contract will create electricity prices of around $0.30/kWh compared with the island's goal of $0.20/kWh. "One of the first contract tasks for LUMA Energy will be to file for an increase in electricity prices," the report said, pointing to "hundreds of millions of dollars that annually go to debt service, fuel costs, political patronage and bad contracting."

Island electricity prices are now about $0.225/kWh, according to IEEFA, which cited a PREPA monthly report filed in May.

LUMA CEO and President Wayne Stensby rejected Sanzillo's price analysis. In an emailed statement, Stensby said "none of the information regarding the costs savings LUMA is expected to create was taken into account when the IEEFA report projected a rate increase. Their reasoning on why a rate increase could occur is exactly the reason a private operator is necessary for the system transformation."

IEEFA's report also concludes the contract doesn't incentivize LUMA to turn away from natural gas generation and instead increases reliance on liquefied natural gas as a transition fuel.

The Puerto Rico Energy Bureau in August ruled on PREPA's Integrated Resource Plan, partially rejecting the utility's grid modernization plan and gas-heavy approach while directing the procurement of at least 3.5 GW of solar and 1.36 GW of battery storage by 2025.

"We put together this report very reluctantly because we wanted to see this work," Sanzillo said. But the contract includes a range of "problems" including eliminating labor protections, how debt is handled, and oversight for compliance with the island's energy mandate, he added.

The contract is not "complying with the law, but also is not complying with sound utility policy," said Sanzillo. "We were hoping for something better."

At least three gubernatorial candidates have indicated they agree. Popular Democratic Party candidate Charlie Delgado Altieri said he will cancel the LUMA contract if elected, citing potential rate increases noted by a committee he formed. He also said the cost of canceling the contract can be minimized by moving quickly.

"We are happy to meet with candidate Charlie Delgado Altieri and his committee to fully explain the merits of the contract – and how it will benefit Puerto Rico," Stensby said.

LUMA estimates show the partnership can reduce operating and maintenance costs relative to PREPA’s 2019 Fiscal Plan by approximately 20% by fiscal year 2026 — or a net reduction in those costs of approximately $100 million per year.

"We look forward to continuing an open and transparent dialogue with all government and political stakeholders to ensure accurate information informs their analysis and decision-making process," Stensby said.