by Liam Denning, Bloomberg Opinion
Utilities and renewable-energy advocates have long had a complicated relationship. Yet the prospect of PG&E Corp. tipping into bankruptcy by the end of January has sent shivers through the solar-and-wind sector.
California has ambitious clean-energy targets, codified in SB 100, the law passed last year committing the state to reach 100 percent zero-carbon power by 2045. As such, PG&E has a large portfolio of long-term agreements to buy power from third-party renewable-energy projects; commitments totaled $36.7 billion at the end of 2017.
On the face of it, these power-purchase agreements (PPAs) look like a juicy target in a bankruptcy court. The falling cost of solar and wind power means contracts signed even just a few years ago can look very expensive compared with terms on offer today. For example, Californian utility-scale solar contracts were struck in 2017 at long-term power prices of between $25-$50 per megawatt-hour, according to Bloomberg NEF’s PPA Price Dashboard. In 2012, the range was more like $75-$125. In a report published last week, Bloomberg NEF analysts examined 18 of PG&E’s agreements. They estimated the remaining value (or obligation) on these PPAs at more than $2 billion, but also estimated these would be worth only around $800 million at current market rates.
Hence, it could be tempting to tear up those contracts, or gain concessions by threatening to, in bankruptcy court. Doing so could, in theory, free up more of a reorganized PG&E’s cash flow to fund payments to wildfire victims or just to mitigate increases in customer rates. Such fears have hit shares of exposed renewable project developers this week, such as Atlantica Yield Plc and Clearway Energy Inc.
But we’re talking about bankruptcy court, utilities and the state of California here. Nothing is straightforward.
Wholesale power prices fall under the jurisdiction of the Federal Energy Regulatory Commission. And precedent on the powers of a bankruptcy judge to impinge on this turf is muddled, with conflicting outcomes in cases involving merchant generators such as NRG Energy Inc. and Mirant Corp. (a real blast from the past). The latest ruling, arising from last year’s bankruptcy of FirstEnergy Solutions Corp., is currently under appeal and closely watched by the very select group of people who closely watch such things.
For this reason alone, a judge would likely be wary of taking such a step unless it was absolutely necessary. And despite the clear disparity of PPA pricing today versus yesterday, that necessity is debatable. Andrew DeVries of CreditSights points out that PG&E merely passes the cost of the power it takes from these projects through to its customers. Such pass-through items don’t add or subtract a penny from PG&E’s coffers, even if a cut could ultimately help California ratepayers facing the daunting costs of remaking the state’s grid to withstand the ravages of climate change.
But would a cut even help the ratepayers? I spoke with Luckey McDowell, a partner at Baker Botts LLP who specializes in restructurings (and has perhaps the most marketing-friendly name in the law business). He raises a self-defeating aspect to tearing up the contracts: The project owners would promptly turn around and file their own demand for some of PG&E’s pot of money to cover their losses. As McDowell puts it: “The resulting damages to the PPA project would round-trip back to the court as a claim. It’s not a net win.” CreditSights’ DeVries concurs with this view in a report out Wednesday.
Compounding this would be the long-term cost to ratepayers. Having torn up the contracts in bankruptcy court, whatever entity emerges on the other end would ultimately have to sign new ones. It’s a safe bet those project developers would put a little something extra into their risk premium and, therefore, price. Ultimately, California’s ratepayers would pay that, and the state’s renewable targets could also suffer.
The pace of utility-scale renewable project development in California has slowed already, with capacity added this year expected to be roughly a third of what it was in 2016, according to Bloomberg NEF. While the targets set under SB100 mean the pace should pick up in coming years, ask any project developer (or financier) how they feel about even a small risk that one of the biggest power-buyers in the state might renege on its obligations. I would guess it doesn’t exactly help them get a project across the finish line.
As California contemplates the risks arising from PG&E’s impending stint in Chapter 11, shoring up renewable-power targets should be a priority, given the role of climate change in creating this crisis. That’s a point that shouldn’t be lost on a bankruptcy judge either, while considering these PPAs. A clear affirmation from the Californian Public Utilities Commission that the current PPAs would remain embedded in the rates paid to whatever entity emerges from Chapter 11 could help in this regard. As should be clear by now, sorting out the multi-dimensional, and multi-decade, issues exposed by PG&E’s crisis will be a job not just for a judge but the regulators and legislators, too.