Bankrupt California utility Pacific Gas & Electric won a victory Friday in the legal battle over whether it can shed billions of dollars’ worth of renewable energy contracts. Nevertheless, the ultimate fate of those contracts remains up for appeal.
PG&E, that filed for bankruptcy protection in January using a projected $30 billion in liabilities from wildfires in 2017 and 2018 believed to be caused by its electricity lines and equipment, has argued that it needs the freedom to renegotiate these contracts to return to solvency.
At most risk are PG&E’s elderly PPAs, signed in the first days of the state’s renewable portfolio standard when solar and wind proved far more expensive than today. In particular, the renewable energy units of Consolidated Edison, Berkshire Hathaway and NextEra Energy face significant risk.
PG&E is the largest offtaker for Con Ed’s renewable energy portfolio, at about 29 percent of contracts. And the average PPA rate for those projects is about $197 per megawatt-hour,”significantly above market rates for new solar” which are closer to $25-$30 per megawatt-hour, according to analysts at Credit Suisse.
Last year, Berkshire Hathaway Energy’s 550-megawatt Topaz solar farm, that serves PG&E, saw its credit rating cut to junk status by S&P Global, while NextEra Energy’s 250-megawatt Genesis Solar job, additionally serving PG&E, has been downgraded by Fitch.
According to Credit Suisse, renegotiating PG&E’s greater than 7 megawatts of pre-2012 solar PPAs could save PG&E roughly $2.2 billion annually, a significant portion of the company’s billions of dollars in outstanding liabilities.
The Wall Street Journal reported Monday that PG&E has $34.5 billion value of renewable-energy contracts for electricity deliveries between now and 2043, according to a filing with FERC. Rejecting contracts with above-market prices can save the company $1.4 billion annually, according to Moody’s Investors Service.
But shredding these long-term claims to buy clean energy under state mandate could also lead to considerable problems for California’s ongoing attempts to cultivate its share of clean energy and reduce carbon emissions, according to analysts.
Most of all, it might damage the finances of the companies which hold the PPAs subject to cancellation. But as a secondary effect, it might have a chilling effect on future solar project financing, adding the threat that future PPAs could be forced into renegotiation as well.
California Gov. Gavin Newsom and the California Public Utilities Commission have joined FERC and the solar farm companies in demanding that PG&E honor its contracts and the underlying state laws that led to them. These opponents to PG&E’s plan are likely to appeal the decision, and face an uncertain legal outcome. Different federal courts have ruled on similar matters in different ways within the last two decades, but these decisions do not necessarily hold in California’s federal courts, according to Rob Rains, analyst for Washington Analysis.
Montali’s Friday ruling rejected a claim from FERC that it has”concurrent jurisdiction” with federal bankruptcy courts over whether utilities in bankruptcy can breach their contracts, saying that it undermines the authority of the bankruptcy court. FERC’s authority would extend to examining whether canceling a PPA serves the”public interest,” a determination that could take into account the role that these PPAs play in California’s clean energy and carbon coverages.
Bankruptcy courts utilize a not as stringent”business judgment” rule, which generally allows contracts to be breached if it might help the company to satisfy its creditors’ claims and complete its reorganization.
However, Montali also wrote that he intends to exercise oversight over any effort by PG&E to reject any of its PPAs:”Nothing will happen here until either of the Debtors [PG&E and its parent company PG&E Corp.] moves to reject an executory PPA and the affected counterparty opposes that motion. At the point the court will consider the merits of any such motion and should consideration implicates public policy interests as well as reorganization goals, those interests can be considered as a member of the greater standard for the rejection decision”
As for balancing public interest and bankruptcy resolution,”the court will not ignore what others have said about public interest and the need to bring it into account while at the same time paying careful attention on the reorganization goals,” Montali wrote.
“The business judgment standard in regular rejection is more deferential than that given to contracts which are in the’public interest.’ But public interest might need to be considered in the context of a particular rejection of a specific PPA. That result will likely be fact-driven based on the specific motion to reject and the responses of the opposing party. That is for another day”
