by Brian Eckhouse, Bloomberg
California’s ambitious drive to combat climate change may hinge on the fate of its biggest utility owner.
The embattled PG&E Corp. would face higher borrowing costs if its credit rating falls to junk following California’s deadliest and most destructive wildfire. That could affect the state’s green-energy strategy, potentially making solar farms more expensive and threatening investment needed to support wider use of electric vehicles, said Michael Wara, a senior research scholar at Stanford University.
Climate change has made wildfires the new abnormal in the region, but now the fires themselves may make it harder to fight climate change. California has approved a series of measures to rein in carbon emissions, and will need PG&E’s help to achieve many of its goals. The legislature passed a bill this year that would require all of its electricity to come from carbon-free sources by 2045, and became the first state to require solar panels on almost all new homes. This follows a big push about a decade ago by the state and utilities including PG&E to help make solar power a mainstream electrical source.
“California has big ambitions,” James Berger, a Los Angeles-based lawyer at Norton Rose Fulbright LLP, said in an interview. “PG&E obviously has a big role to play. That’s one of the reasons the legislature will want to make sure they don’t file for bankruptcy.”
On Thursday, Moody’s Investors Service lowered PG&E’s rating to Baa3 from Baa2, the second-lowest level of investment grade, with the possibility of further downgrade. However, the head of the California Public Utilities Commission said Thursday he can’t imagine letting the utility go bankrupt.
PG&E helped some big solar farms get off the ground. The San Francisco-based company signed long-term contracts to buy electricity from projects that may not have been viable without its backing. Lenders relied on PG&E’s underlying credit rating to size and price debt financings for the projects. So a PG&E downgrade could have ripple effects, prompting other downgrades for its clean-energy suppliers.
That could make the projects less valuable if their “owners want to sell them into what is the frothiest project M&A market in recent memory,” said Nathan Serota, an MBA student focusing on infrastructure and project finance at MIT’s Sloan School of Management.
It’s happened before. Fitch Ratings in September cut the ratings of a Berkshire Hathaway Inc. solar facility’s senior notes after PG&E received a downgrade. On Friday, Moody’s said it had downgraded that facility’s senior secured debt. The reason was “driven entirely” by the further weakening of PG&E’s credit quality, according to a note. A Berkshire Hathaway Energy spokeswoman said in an email before that downgrade that the company doesn’t speculate on the financial condition of businesses.
Why California Wildfires Put Heat on Power Companies: QuickTake
PG&E has argued that if the state wants the utility to help it meet its climate goals, the company needs to be financially viable.
Because of potentially higher financing costs due to fire risk, “we may need to pull back on some of the clean-energy projects that are so critical to our state’s ability to meet its bold clean-energy goals,” Chief Executive Officer Geisha Williams said during a July conference call with analysts.
While wildfire legislation passed this year addresses “many urgent needs, more work remains to combat the devastating threat that extreme weather and climate change pose to our state’s shared energy future,” PG&E spokeswoman Melissa Subbotin said in a statement.
PG&E said this week that it had exhausted its revolving credit lines, signaling that it was shoring up its cash as it prepares for a potential credit downgrade.
“How this situation is resolved is material to whether California achieves its clean energy and climate goals,” Wara said.