Facing more than $30 billion in potential liability claims for wildfires sparked by its electric system, Pacific Gas and Electric (PG&E), the largest utility in California, plans to file for bankruptcy by the end of the month. Consumers' lights will stay on regardless of what happens in court, but the future of California’s energy policy might be a bit dimmer.
Why it matters: To meet California’s ambitious climate goals, PG&E has entered into dozens of power purchase agreements (PPAs) with wind and solar farms, for thousands of megawatts, all over the West Coast. If PG&E enters into bankruptcy court, it might not have to pay those contracts, some of which extend past 2040, in full. While that might help PG&E’s balance sheets, it could hurt renewable suppliers that own the assets.
Background: Wind and solar project developers usually are required to have a PPA in place before they can obtain financing. These PPAs, usually contracts for differences — whereby project owners get paid a certain rate regardless of the market clearing price for electricity — are often long term and act as hedges against fluctuating wholesale electricity prices.
California aims to attain 60% renewable energy by 2030 and 100% carbon-free energy by 2045. While solar and wind are some of the cheapest sources of electricity today, some of the earlier renewable PPAs, entered into over a decade ago, are priced much higher than ones entered into more recently.
- The stronger the credit rating of the project developers buying the PPA, the better the financing terms they are able to obtain from banks. But at this point, PG&E’s credit rating has been lowered to junk status.
The bottom line: If an entity as large as PG&E cannot make good on 30-year contracts, lenders’ faith in such projects might be shaken. As a result, banks might offer developers worse terms on the financing of future projects, which could put upward pressure on future PPAs. On the other hand, if these contracts are able to survive, as they have in the past — and California still has its climate and energy goals on the books — they might still prove a good investment.
Joshua Rhodes is a research associate in the Webber Energy Group and the Energy Institute at the University of Texas at Austin.
