For the second time in a decade, California utility PG&E is declaring bankruptcy and solar producers around the country are worried. Facing more than $30 billion in potential liability costs related to years of wildfires, the company is desperately looking for ways to cut costs. As part of its bankruptcy proceedings, the utility company is hoping to get out of some expensive solar contracts signed in order to comply with California’s strict renewable energy portfolio standards. While renegotiating these contracts would help PG&E, doing so would hurt solar companies relying on these purchase agreements.
According to paperwork filed by the Federal Energy Regulatory Commission (FERC), PG&E has $34.5 billion in renewable energy contracts through 2043. Many of these power purchase agreements were in signed in the 2010s, as the utility worked to meet new state renewable portfolio standards and establish prices much higher than current projects. In fact, many of the power purchase agreements are selling power at prices three to five times higher than current renewable energy projects.
To put it in perspective, PG&E’s average solar power purchase price is about $140 per megawatt-hour. The power purchase agreements it signs for solar currently are closer to $32.50 per megawatt-hour. Renegotiating these contracts would save the utility company billions of dollars annually, but it remains unclear how much leeway they will have to do so. The Federal Energy Regulatory Committee (FERC) issued a statement just prior to the bankruptcy announcement declaring “concurrent jurisdiction” with federal bankruptcy courts in the matter of contracts. Solar producers are pushing for this interpretation, which would better secure their assets.
However, the utility company has pushed back, arguing that Bankruptcy Court should have the final say. In previous bankruptcy cases, FERC has had mixed results trying to enforce power purchase agreements. In 2003, the commission was successful in enforcing a power purchase agreement in Connecticut after the state legislature moved quickly to get the commission involved. However, a year later, in the case of Mirant v. Potomac Electric Power, the 5th Circuit U.S. Court of Appeals ruled that FERC lacked the authority to supersede bankruptcy proceedings.
These legal details will have a broad impact. Already the effects of PG&E’s bankruptcy are being felt across the solar industry and the country at large. Although the risk is highest for solar farms whose sole purchaser is PG&E, larger utility companies are not immune. The credit ratings on both Berkshire Hathaway Energy’s Topaz solar farm and NextEra Energy Genesis Solar project were cut in December.
Nor are they the only companies at risk. Con Ed, one of the largest investor-owned energy companies in the U.S., sells about 29 percent of its renewable energy portfolio to PG&E. Analysts say that as much as 10 percent of the company’s earnings could be at risk if PG&E successfully reworks existing contracts.
Investors would take the hit for Con Ed, but taxpayers could be on the hook for other projects. NextEra Energy has a total of 4 projects and $90 million contracts with the California utility. These projects were partially funded through federal government loans. If power prices are lowed and the utility is unable to turn a profit, taxpayers will eat the loss.
In the short term, the PG&E bankruptcy is causing pain for the solar industry. Even so, state laws requiring a particular mix of renewable generation remain in effect, meaning that solar power is not going away in California. Future solar projects will almost certainly be more expensive, though, as costs of PG&E’s bankruptcy are spread among generators, investors, and utility companies.
It may seem crazy that a utility company selling power in Florida, like NextEra, would feel the pain of wildfires in California. This is the reality of America’s increasingly centralized utility industry, where a handful of companies control more and more of generation supplies. What the PG&E bankruptcy shows is how this can pass costs along a much broader base. It is also a warning for what disasters in other parts of the country could look like.
