From E&E News

A contract to sell electricity to Pacific Gas and Electric Co., California’s largest utility, was historically the gold standard in the renewables business.

Not anymore.

The San Francisco-based power company’s bankruptcy has thrown the Golden State’s renewable market into flux, creating uncertainty for an industry shouldering much of the burden associated with greening California’s economy.

Analysts do not expect the bankruptcy to hinder California’s ability to meet its ambitious renewable energy targets. PG&E is ahead of schedule in meeting state requirements for renewable purchases. And it is far from the only renewable buyer in the California market. Corporations and municipal community choice aggregators, which buy energy on behalf of their communities, have emerged as leading purchasers of solar in the state in recent years.

Yet the PG&E bankruptcy poses new risks for renewable developers, power-sector observers say. Firms that inked long-term power purchase agreements (PPAs) with PG&E now face the prospect of seeing their contracts renegotiated on less favorable terms in bankruptcy court. That carries substantial risk for companies that took on large amounts of debt to build projects they assumed would be paid off by high-priced contracts with PG&E.

The even greater risk may be long term. If lenders and investors believe the Golden State is a risky place to do business in the wake of the utility’s bankruptcy, financing new wind and solar projects could become more expensive.

“Our model depends on long-term, stable contracts in order to finance and realize returns from projects over the PPA,” said Matthew Crosby, policy director for Coronal Energy, a solar and storage developer with operations in California. “I’d be concerned about any chilling effect if investors had concerns about being made whole, but I think the chance they won’t be is low. I personally don’t see any impact on existing contracts as a result of the bankruptcy based on precedent.”

The utility’s overall financial health is just as concerning for renewables, he said. Even as corporations and community choice aggregators emerge as new buyers of renewables, investments in the utility’s transmission and distribution system are needed to bring more wind and solar online. PG&E’s bankruptcy raises questions about whether the company will be able to install the needed interconnection facilities and network upgrades in the short run, Crosby said.

California’s power sector has been the engine behind the state’s emission reductions. Emissions from power plants were down 42 percent between 2008 and 2016, according to state data, in large part thanks to the state’s ambitious renewable energy policies. The California Energy Commission estimates that renewables accounted for more than a third of the state’s retail electricity sales in 2018.

A state law enacted last year requires 60 percent of California’s electricity sales to come from renewables by 2030 (Climatewire, Sept. 12, 2018).

But state leaders face a tricky balancing act going forward, analysts said. On the one hand is the question of how to pay for the wildfire damages that drove PG&E into bankruptcy. The company faces up to $30 billion in wildfire liability as a result of fires allegedly started by the utility’s equipment over the last two years. That figure may decline. PG&E made that estimate before state fire officials concluded the company was not responsible for igniting a major blaze in 2017.

Renegotiating renewable deals could help cover the fire bill. More than half of PG&E’s solar contracts were signed prior to 2012, when the price of solar energy remained high, according to an analysis by Credit Suisse. The average price of PG&E’s solar contracts is $140 per megawatt-hour, compared with the $32.5 per MWh solar deals recently signed by the company. The bank estimates that PG&E could save $2.2 billion annually by renegotiating those deals.

“This bankruptcy is a way to push all parties to work together on a comprehensive solution,” said Michael Weinstein, a Credit Suisse analyst. “To the extent you can lower the cash burden on the customer to lower their cost of renewables, you open up their ability to pay for other things like lawsuits.”

PG&E has signaled it is interested in reopening the deals. In a court filing this week, the company asked for an injunction to block a Federal Energy Regulatory Commission order asserting jurisdiction over the renewable contracts (Energywire, Jan. 30). The FERC move was made at the behest of NextEra Energy Inc., America’s largest renewable developer.

There may be some room to renegotiate old renewable deals, said Michael Colvin, a senior manager at the Environmental Defense Fund and a former analyst at the California Public Utilities Commission. Contracts set to expire in the coming months, for instance, could be reconsidered.

But a wider push to open old renewable deals potentially invites other issues, Colvin noted. PG&E declared bankruptcy in 2000 following the rolling blackouts associated with the Enron scandal. The incident made Wall Street wary, driving up the price of financing for power developers interested in investing in the California power market.

“I do think we will have to monitor the situation very closely, and it will take a lot of regulatory and legislative leadership to navigate us through this time,” Colvin said.

The bigger question is whether PG&E’s bankruptcy is a harbinger of the catastrophes to come in an age of a warming climate. Renewable projects contracted to sell their power to a regulated utility have traditionally been viewed as low-risk investments, said Ben Serrurier, policy manager for Western markets at Cypress Creek Renewables, a Santa Monica-based solar developer. Developers could count on the income from the contract, and lenders could be confident the utility would fulfill the terms of the deal.

But the equation begins to change in a world where a utility like PG&E can be bankrupted by liabilities incurred in two fire seasons (Climatewire, Jan. 16).

“There is no utility in the West that does not have an increasing fire regimen and a high concentration of infrastructure in fire-prone areas,” Serrurier said. “If this happens to PG&E and PG&E’s PPAs started getting monkeyed with, then the market will start to question where this risk lies with other utilities everywhere in the West.”

The result could be higher interest rates and new insurance products meant to take climate liabilities into account, he said.

Most analysts believe the problem is limited to California for the time being. That owes itself in large part to a state law that holds utilities liable for fires started by company equipment. In other states, power companies would need to be shown negligent in order to be held liable for wildfire damages.

But the dynamic underlines the wider issue facing California. Two years of widespread wildfires have bankrupted the state’s largest utility. If California does not come up with a system for paying for climate-related catastrophes, achieving its renewable targets could become more expensive.


Legal Notice