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What happens to a bankrupt PG&E’s solar contracts?

As soon as this morning’s news hit the wires, one of the first questions asked around energy twitter was what was going to happen to the gigawatts of wind and solar projects that hold contracts with Pacific Gas & Electric Company (PG&E), now that it has announced plans to file for bankruptcy.

As usual there were a variety of views, with Tyler Norris of Cypress Creek Renewables and Jigar Shah expressing the opinion that these contracts were unlikely to be vacated.

However, Ben Serrurier of Cypress Creek warned that there could be “haircuts” to older power purchase agreements (PPAs).

 

Any perception that these contracts are safe was further undermined by both Fitch and S&P downgrading the credit rating of the Topaz Solar project before the bankruptcy.

So what is it? Are these contracts safe, or not? The truth is that no one we talked to was willing to make too strong a statement one way or the other, but we did get some insights into what might happen.

 

Unprecedented

PG&E has announced that it will file a voluntary petition for Chapter 11, which is a financial move that allows it to reorganize its debts, and does not involve liquidation. Along with this, the utility is expected to continue normal operations including supplying power to its customers.

And while we have had utility bankruptcies – PG&E has even gone bankrupt before – what we have not had is a utility bankruptcy in the era of strong renewable energy mandates. This was noted by Elias Hinckley, an energy lawyer at firm K&L Gates.

“California consumers are still going to need power,” Hinckley told pv magazine USA. “That power is still going to have to provided under the regulatory framework that California has created, which sets a high bar for renewable energy inclusion.”

Solar Energy Industries Association (SEIA) has also expressed that the California government may play a role. “We are confident that California’s leaders will work to ensure that existing contractual obligations for solar projects are honored and that the state lives up to its climate commitments,” stated SEIA CEO Abigail Ross Hopper. “SEIA is monitoring this issue closely and engaging with the Governor’s office, legislators, and the PUC to protect the state’s investments in current and future renewable energy.”

And while exactly what happens from here is unclear, legal precedent suggests that it will be the bankruptcy court that is the final arbiter. In fact, in September a bankruptcy court in Ohio asserted that even though wholesale power contracts are governed by the Federal Energy Regulatory Commission, it had primacy in deciding the fate of power contracts signed by Ohio utility FirstEnergy.

In terms of how the court could decide, another factor could be how contracts are structured.

 

Uncertainty

In the meantime, another impact of this development is that it is likely to throw any pending contracts with PG&E into chaos. This is less of a concern for solar. PG&E, like California’s other two large investor-owned utilities, over-procured renewable energy in advance of state’s 2020 renewable energy mandate, leading to a lull in large-scale procurement.

However for batteries this could be a bigger deal, and Hinckley of K&L Gates says this uncertainty is actually the biggest issue for California’s large-scale energy storage market.One factor is that the bankruptcy process may last years, and until it is concluded solar and storage projects seeking to sell power to PG&E may be prohibitively difficult to finance.

 

The future of utilities

But by far the biggest question is what will happen after the Chapter 11 process. California regulators have already suggested that they may break up PG&E or make it public, and there is no guarantee that the post-bankruptcy utility will look anything like it does today.

But it is not only PG&E that is in danger.

“I don’t think people have fully realized how big of a thing this is, and it isn’t just PG&E that has exposure here,” notes Hinckley. He observes that with climate change intensifying wildfires, utilities in fire-prone regions could see an increase in their basic cost to operate.

Someone is going to have to foot the bill for this, and if this involves a big increase in the price of retail electricity, this could drive greater adoption of rooftop solar and storage.

There are many unanswered questions here, and we at pv magazine USA will be exploring these in the coming weeks and months as this story plays out.

 

What happens to a bankrupt PG&E’s solar contracts?, by Christian Roselund, PV Magazine, January 14, 2019.

Who Could Get Hurt by PG&E’s Fire-Driven Bankruptcy

PG&E Corp., owner of California’s largest electric utility, warned Monday that it plans to file for bankruptcy protection on Jan. 29, pushed to the brink by wildfire lawsuits that could cost the company $30 billion. It’s the latest fallout from two years of massive blazes that have killed more than 130 Californians and destroyed tens of thousands of properties. The move could trigger big changes for PG&E, its 20,000 employees and the roughly 16 million people it serves. It raises the question of whether people who blame PG&E for burning down their homes will receive the compensation they want. And could bankruptcy derail California’s fight against global warming?

1. Will the lights stay on?

Yes. When utilities file for bankruptcy, they don’t cease operations. PG&E’s utility unit — Pacific Gas and Electric Co. — filed for bankruptcy in 2001 during the California electricity crisis without interrupting service. PG&E said Monday it expects to have $5.5 billion in “debtor in possession” financing lined up to carry it through the bankruptcy process.

2. Will customer bills go up?

Probably, but it’s impossible to say until the bankruptcy process is well underway. And for once, the decision to raise rates won’t rest solely with regulators at the California Public Utilities Commission. Rate increases will be tied to whatever reorganization plan the bankruptcy court judge overseeing the proceeding approves. California passed a law last year allowing PG&E to pass on to ratepayers some of the costs of wildfires for which it had been blamed in 2017, but it’s not clear how the law’s provisions will apply to a company that’s already in bankruptcy. Indeed, some of those provisions were designed to prevent utilities from going bankrupt.

3. What about the employees?

They will continue to work, responding to outages and maintaining the company’s vast web of wires and natural gas pipelines. They will still get paid, and the company will continue to fund their health care, a senior executive with the company’s Pacific Gas and Electric utility said Monday.

4. What happens to all the wildfire victims suing PG&E?

Filing for bankruptcy puts those lawsuits — total estimated liability: $30 billion — on hold and wraps them into the bankruptcy proceedings. That’s part of bankruptcy’s appeal to PG&E. The company would be able to bring all those cases into a single forum for resolving its financial problems, including wildfire suits. Bankruptcy filings also can force litigants to accept smaller settlements than they would have been able to negotiate otherwise.

5. How about the shareholders?

Don’t expect to see your dividends again anytime soon. PG&E stopped issuing dividends after the 2017 fires, and a bankruptcy proceeding would likely put off the resumption of issuing dividends by several years. But analysts don’t expect shareholders to be wiped out.

6. What role is the state taking?

The legislature last year gave PG&E the ability to issue bonds to pay off its 2017 wildfire lawsuit costs. A key state politician has drafted — but not yet introduced — a bill that would do the same for 2018. But PG&E argues the bond process set up by the legislature will take too long to help. Meanwhile, California politicians seem to be losing patience with PG&E. Governor Gavin Newsom’s response Monday morning didn’t indicate he would try to prevent the bankruptcy.

7. Could this interfere with California’s climate change goals?

California is requiring all its utilities to increase their use of renewable power, and PG&E has already lined up enough power purchase contracts to meet the state’s targets for the next few years. But the state’s climate fight very much relies on healthy electric utilities in multiple ways, such as deploying electric vehicle charging stations and making homes more efficient. Newsom is expected to make climate one of his signature issues and has already said that he wants California’s utilities to be strong enough to invest in the state’s energy transition. Meanwhile, analysts are waiting to see if PG&E will use bankruptcy proceedings to get out of some of the most expensive renewable contracts it signed years ago, before the costs of wind and solar power plunged.

 

Who Could Get Hurt by PG&E’s Fire-Driven Bankruptcy: QuickTake, by David R. Baker, Bloomberg, January 14, 2019.