A New Energy Crisis Brews In The Caribbean: The U.S. Virgin Islands

After years of bureaucratic dithering and foot-dragging, Puerto Rico appears to finally be on a path towards rebuilding and reorganizing its power grid and generating system after 2017’s Hurricane Maria—and Irma—laid waste to much of the island’s infrastructure. The Commonwealth’s sclerotic energy authority, PREPA, has been laid to rest and the transmission and distribution of energy have been privatized. Negotiations are ongoing to privatize the power generation as well, and negotiations have finally begun to address PREPA’s debt.

Now, another U.S. territory in the Caribbean is on the brink of financial calamity. The U.S. Virgin Islands has yet to begin resolving its own problems with energy production and distribution, and this delay is constraining its economic growth.

A New Caribbean Crisis

Just as they did in Puerto Rico, Hurricanes Maria and Irma destroyed much of the USVI’s energy infrastructure and weakened an already unreliable and inefficient power grid. The federal government provided the USVI Water and Power Authority (WAPA), the islands’ utility provider, with nearly $1.5 billion to rebuild the electrical infrastructure. Nearly $360 million remains unspent.

Despite the massive infusion of taxpayer assistance, WAPA is drowning in debt and plagued by mismanagement. Andy Smith, the new CEO of WAPA, recently admitted that WAPA is “cash constrained.” WAPA also disclosed that to meet its recurring expenses, it has been misusing employee retirement contributions, which Smith said “were inappropriately utilized to help the Authority offset and manage operational expenses.”

WAPA’s debt is approaching $400 million, which is a considerable amount for a utility serving a community with just 100,000 residents, and the bond-ratings agency Fitch is skeptical that WAPA has the funds available to make upcoming payments on this debt. In a recent note, Fitch opined that WAPA will undoubtedly need external financing to meet its bond payments due next month. In recent months, WAPA brought on Ernst and Young—at FEMA’s expense—to help it with cash management.

WAPA owes a large portion of its long-term debt—at least $160 million—to Vitol, a Houston-based energy company that constructed a liquid propane gas facility on the island. The facility constitutes a big improvement for the island’s energy sector: Not only does it have the potential to generate enough megawatts to reliably power the entire island, but the propane fuel is cheaper and much cleaner than the heavy oil that the island—and many other Caribbean islands—had relied upon. The EIA has highlighted the benefits of the Vitol LPG facility, noting that its use would reduce CO2 emissions by 35 percent and help the USVI meet clean air standards.

However, WAPA has not been making its debt payments to Vitol, and USVI’s Governor Albert Bryan and WAPA CEO Andy Smith are now requesting millions in federal tax dollars to build out a costly solar network. Naturally, they both want someone else to pay for the energy gambit and have identified the U.S. Department of Energy as the one that could provide the financial assistance. Since another government entity would be footing the bill, Smith maintains that the project will be “effectively free,” he said in an interview.

A direct federal subsidy for solar energy generation that goes well beyond current incentives in place would make little sense for the island. Creating a new facility to be managed by the island’s government makes little administrative sense, and the net benefits would be slight—especially compared to the costs to federal taxpayers.

Strikingly, WAPA is taking a page out of PREPA’s playbook that eventually pushed it to insolvency: running up debt, refusing to pay creditors, and asking for more federal dollars.

After numerous false starts, Puerto Rico established a path for reforming its energy infrastructure by relying on the private sector and eschewing the publicly-run model that ran up billions of dollars of debt. The U.S. Virgin Islands should emulate Puerto Rico’s model and rely on the private sector to produce its energy rather than relying on the federal government to invest more funds to build unnecessary energy production.