California’s crusade to turn its electricity grid green is running into an increasingly serious obstacle: PG&E Corp.’s bankruptcy.
The utility last week won a key court ruling when a bankruptcy judge said federal regulators can’t stop PG&E from unraveling billions of dollars worth of pricey contracts to buy electricity from solar and wind farms and other renewable energy sources.
Although PG&E said it hasn’t decided whether to walk away from those deals, it fought for the legal right to do so. Green-energy advocates say PG&E’s efforts are casting a cloud over their entire industry and will make it harder to borrow money for future projects, whether it’s PG&E or some other utility buying the power.
That, in turn, would imperil California’s plans — mandated by the Legislature — to phase out fossil fuels in electricity generation in the coming years.
“Our state is talking about getting to 100 percent clean energy,” said Jan Smutny-Jones of the Independent Energy Producers Association, an advocacy group based in Sacramento. “Who in the world is going to be investing in new battery technologies and other things that people say are needed? We have to have a stable environment.”
A fight with state leaders — already irate with PG&E over its safety record and other issues — could be in the offing. The California Public Utilities Commission’s general counsel, Arocles Aguilar, told lawmakers in March that her agency has the authority to prevent PG&E from walking away from its green-energy contracts.
Asked about last week’s court ruling, Gov. Gavin Newsom spokesman Nathan Click said: “Our office is closely monitoring and will not allow bankruptcy to interfere with the state’s renewable energy goals.”
But can the state force PG&E to keep its energy contracts? Probably not, says one expert.
The Public Utilities Commission probably would fare no better than federal regulators who tried to block PG&E from unwinding its power deals, said Jared Ellias, a bankruptcy expert at the UC Hastings College of Law in San Francisco. “The PUC can’t block PG&E from tearing up those contracts,” Ellias said.
Already, California utilities get 34 percent of their power from renewables, making the state a leader in turning the grid green. But California wants to go much further in the fight against climate change. The Legislature last year enacted SB 100, which says utilities must be 50 percent green by 2026 and 60 percent by 2030.
The crisis arose when PG&E filed for bankruptcy in January under the weight of an estimated $30 billion in liabilities from the wine country fires of 2017 and last November’s Camp Fire, the deadliest in California history.
Generally speaking, a company that goes bankrupt has the right to cancel existing contracts, if the judge believes cancellation is a reasonable business decision.
Traditionally, utilities don’t build their own renewable plants but buy the power on contract from others. California’s ambitious clean-energy targets have prompted solar and wind companies from all over the country to build facilities in the state.
PG&E entered bankruptcy with more than $40 billion worth of contracts on the books, and has been hinting that it might want to dump some of them.
In particular, the price of solar electricity has plummeted in recent years, and PG&E’s lawyers complained in court papers that the utility is now paying “above-market rates” for much of its electricity. At the same time, the utility said it has plenty of power in its portfolio and could easily live without some of the contracts.
Wall Street analysts from Credit Suisse, Standard & Poor’s and others have estimated that PG&E could save more than $2 billion by shedding some of the deals made years ago. The savings could be used “to satisfy wildfire-related claims and recover wildfire prevention costs while minimizing consumer energy rate increases,” Moody’s Investors Service said in an April report.
Green-energy advocates insist the savings wouldn’t actually free up cash for wildfire victims. That’s because the solar and wind companies that lose their contracts would become creditors of PG&E, just like fire victims, lenders and others. “It dilutes the amount of money available to the wildfire victims,” Smutny-Jones said.
Shannon Eddy, director of a trade group called the Large Scale Solar Association, added: “We are in uncharted territory here .... This is not the time to be (canceling) any of these contracts.”
PG&E’s hints have given the green-energy industry the jitters. Fitch Ratings downgraded the credit rating of Topaz Solar Farm in San Luis Obispo County — a subsidiary of financier Warren Buffet’s Berkshire Hathaway conglomerate and one of the largest solar projects in the world — to junk-bond status. That makes it much harder to finance new facilities.
The Topaz farm sells all of its power, enough to light up more than 400,000 homes, to PG&E. It made its deal with PG&E in 2008, when solar power was about five times more expensive than it is now, according to Moody’s.
Another renewable developer that does business with PG&E, Clearway Energy Inc. of Princeton, N.J., reduced its quarterly shareholder dividend in February, saying the bankruptcy “has heightened the risk” to Clearway.
Just as PG&E was about to file for bankruptcy, the feds stepped in. At the urging of two renewable companies that sell to PG&E — NextEra Energy of Florida and Exelon Corp. of Chicago — the Federal Energy Regulatory Commission declared that it had “concurrent jurisdiction” with the Bankruptcy Court over PG&E’s contracts.
PG&E fought back, filing papers in Bankruptcy Court demanding the right to sever any contracts. Last week Bankruptcy Judge Dennis Montali sided with the utility, bluntly telling the feds to mind their own business. The agency was trying “to exercise power it wholly lacks,” the judge wrote.
The utility released a statement saying it’s “pleased with the court’s decision” but adding that it hasn’t decided what to do about its renewable contracts. It also said it shares California’s commitment to battling climate change.
“We appreciate the concerns from stakeholders across the state concerning the impact that (the) Chapter 11 filing could have on the state’s clean energy progress,” PG&E added.