April 18, 2019, T+6, Part 4 -- PG&E Collapses

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PG&E.

Wow.

PCG (PG&E):

• pays no dividend
• from a recent high of ~ $50/share, now trading at $20/share

From The Financial Times: (most of this will be deleted later today) --

Californians like to think they show the rest of the country the way to a clean energy future.

Inconveniently, utility power purchase agreements (PPAs), which have been the principal economic model for renewable energy in the state, face legal collapse within two weeks.

The PPA crisis is one of the consequences of the bankruptcy of Pacific Gas & Electric, the state’s largest utility. The immediate cause of PG&E’s filing on January 29 was the weight of its prospective liabilities for billions in wildfire damages allegedly caused by its transmission equipment.

The company took the opportunity afforded by the bankruptcy court’s protection to “reject” more than $30bn of its high-cost, long-term PPAs for renewable energy. With the support of the Federal Energy Regulatory Commission (FERC), PG&E’s renewables suppliers are fighting the company’s attempt to default on its obligations. So far PG&E appears to have the support of the judge, Dennis Montali.

On April 10, he announced that he would give PG&E and its PPA counterparties until May 3 to agree a resolution. Judge Montali stressed his concern about the practical effects of PPA rejection. These will not include any sudden termination of electricity supply, or of payments that would cover operations and maintenance costs. But the “morning after” will be a world-class hangover for investors in wind and solar. No one seems to believe a compromise will be reached: there is too much precedent and financial leverage at stake. Almost certainly, the case will wend its way through the courts for years.

Quite possibly it will reach the Supreme Court. There, the conservative majority is known to be sceptical of the powers of regulatory agencies such as FERC. That is probably not good for the renewables people, since in this case FERC is their friend. Until now, the apparent certainty provided by PPAs, made with consumer-facing electric utilities, has given the independent renewable energy industry its financial basis. 

The high fixed costs of wind and solar generation could be amortised with 15 or 20 years of secure revenue flows from state-regulated monopolies. As clean-energy mandates became more demanding, unit costs of wind and solar declined with improving technology and economies of scale. While that progress turned wind and solar into mainstream industries, it made older contracts less attractive. In PG&E’s case, though, the rapid lowering of the cost of renewables contributed to the undoing of its financial model.

PG&E and the other California utilities lost much of their profitable peak-demand revenue to rooftop solar installations. Their answer was to increase charges to remaining customers, who responded by subscribing to “direct access” and “community choice aggregation” programmes — allowing them to bypass at least part of the utilities’ rising rates. As more power supplies came from mandated renewables with low-to-zero marginal costs, gas-fired power producers were unable to cover their cost of capital. But PG&E and the other California utilities still relied on the gas-fired plants, along with hydro and imports from other states, to maintain reliable power.

With PG&E’s revenue squeezed, the company skimped on maintaining and improving its transmission grid. This may have contributed to the risk of wildfires, which eventually led to the bankruptcy. PG&E’s renewables counterparties felt the financial squeeze even before the company indicated its willingness to reject their contracts. Once the company formally rejects its old renewables PPAs, it is generally believed that it will be unable to back up new renewables contracts during or after the bankruptcy. Southern California Edison, the second-largest utility in the state, is also at risk of becoming an unreliable counterparty for long-term contracts due to its own potential liability for wildfire damages.

The state has recognised that its clean energy progress is seriously at risk.

Governor Gavin Newsom formed an advisory “strike force” to propose solutions to deal with wildfires and clean energy finance. On April 12 it came out with support for “new procurement support models, including a new state procurement entity that could enter into long-term (electricity) contracts”.

There is a history of state involvement in power purchases in California, and it is not an entirely happy one. PG&E filed for bankruptcy once before, in 2001. Out-of-state generators refused to give it commercial credit terms, and the state government had to step in to finance $6bn of hastily negotiated and expensive contracts.

Gray Davis, the governor at the time, lost his re-election bid, partly because of what was seen as his poor management of the energy crisis. So if, as seems likely, the PPA-based financing model has failed in California, it is not going to be easy to make the political case for direct state support. At the very moment there is increasing political pressure for 100 per cent renewable power, it is unclear how it can be paid for.