How Would Tesla Get Paid To Rebuild Puerto Rico’s Electrical Grid?

By Will Driscoll

Oct. 9, 2017 2:02 PM ET

Tesla has an opening to rebuild Puerto Rico’s electrical grid, possibly starting with a pilot project in the island municipality of Vieques (population 9,300 in 2010), according to USA Today.

Tesla has the technology—solar and storage—but how can they get paid? Unlike Kauai, where the electric utility is buying electricity from Tesla’s solar-plus-storage project, or South Australia, whose government is buying Tesla’s batteries, Puerto Rico has no solvent counterparty to purchase either electricity or hardware from Tesla. Puerto Rico’s government-owned utility, and the government itself, have both filed for bankruptcy.

Perhaps Tesla could provide solar plus storage to just the 9,300 people of Vieques at a loss, without putting a wrinkle in its financials. But the big prize is restoring the grid for all of Puerto Rico’s 3.4 million people, and that would require earning profits. So it’s worth exploring the endgame.

Who Should Own the Grid?

Let’s start from first principles. Any firm seeking to install lots of solar in Puerto Rico would need capital. To obtain capital at a reasonable cost, there must be confidence that the customers for the solar power will pay for it. Given that Puerto Rico’s electric utility has filed for bankruptcy, this is a salient concern. A Reuters analysis concluded that the utility’s “poor collection of utility bills” contributed to deferred maintenance, which led to the collapse of the grid with Hurricane Maria.

The best way to ensure that customers pay for electricity is to have the ability to shut off power for non-payment, subject to legal protections. Because Puerto Rico’s government-owned utility did not manage that process well, it’s time for Puerto Rico to try letting an investor-owned utility run the grid.

As Tesla negotiates a potential pilot project to repower Vieques, Tesla could request the authority to create an independent utility on Vieques, which could shut off power to customers for nonpayment. In return, Tesla could purchase the existing distribution grid assets on Vieques—such as they are—and pledge to deliver electricity on Vieques for a specified price for the next 20 years. If Tesla’s price were well under Puerto Rico’s current 20 cents per kilowatt-hour, how could the government of Puerto Rico, or the residents of Vieques, say no?

The Size of the Prize

Puerto Rico’s electric utility had revenues of $4.5 billion in fiscal 2014 (the most recent year available). That amount would significantly boost Tesla’s revenues, which were $7 billion in 2016. Yet because regulators limit utilities to a modest rate of return on equity—ranging from about 9 percent to 14 percent—Tesla would become a much slower-growth company if it used its access to capital to take over Puerto Rico’s grid. Tesla may instead hope that some other firm gets Puerto Rico’s grid up and running, and then buys Tesla’s high-margin batteries and solar farms.

If Puerto Rico’s Governor Rosselló is Smart, He’s Starting a Race

Puerto Rico’s Governor Ricardo Rosselló, whose Twitter conversation with Elon Musk got this ball rolling, may be hoping for a similar outcome.

Mr. Rosselló, by showing the world that he’s open to new options for rebuilding Puerto Rico’s grid, may be hoping to start a race among firms in the electric utility business to compete for that job. Here are some firms that appear to be qualified to launch an investor-owned utility in Puerto Rico, hopefully with a focus on renewables that will cost less than generation with imported fossil fuels:

  • NextEra Energy, a utility conglomerate based in Florida, with $16 billion in annual revenues and a large portfolio of wind and solar assets;
  • AES, an engineering firm that runs seven electric utilities serving major metropolitan areas, and that manufactures utility-scale batteries; and
  • Avangrid, a utility conglomerate with 3.1 million customers and a focus on renewables.

Conclusion

Puerto Rico could be the next high-profile customer for Tesla’s energy solutions, although Tesla would do well to structure any deal in a way that helps ensure payment for the electricity it will generate. Other firms appear to be better suited to restore Puerto Rico’s grid, yet they too could become customers for Tesla’s solar and storage offerings.

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