PG&E Will Not Be Able To Renegotiate PPAs

PG&E Roadside cone image (Story topic: PPA Renegotiation Is Very Unlikely)
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In January 2019, the company filed for bankruptcy in response to mounting liabilities related to a series of wildfires caused by PG&E’s equipment. This move was done as a way for the California legislature to make changes to wildfire liability, which would align the California utility regulatory regime with other states more closely.

Unlike other states, California has what is called “Inverse Condemnation,” which says PG&E can be held liable for damage caused by its equipment, even if the company wasn’t negligent. In view of the potential for massive wildfire liabilities, this doctrine will continue to make operating PG&E a huge risk. By holding California’s renewable energy goals to the fire, PG&E believed California would be forced to act.

By declaring bankruptcy, PG&E signaled to the state that it would attempt to negotiate its lower Power Purchase Agreements (PPAs) to match the market rates. PPAs are long-term contracts with specified tariffs that allow developers and buyers to see revenue and expenditure, giving lenders confidence in their ability to fund projects. PG&E holds 387 PPAs with over 350 firms worth around $42 billion (more than half of which are renewable projects).

On the surface, this seems to make sense as PG&E’s renewable energy PPAs from several years ago have significantly higher rates than the current market. The reality shows a completely different picture as this move would threaten California’s clean-power ambitions, hit the Department of Energy’s coffers directly, and have broad political consequences.

Political considerations make renegotiations of PPA significantly unlikely. By 2045, California has an ambitious target of 100% clean power. California has always led the way in clean power and has used PG&E as a tool to help support clean power. Back before traditional lenders would finance expensive renewable projects, PG&E signed generous PPAs in order to get these projects off the ground.

These projects rely on PG&E to remain profitable with elevated costs and leverage based on these PPAs. Since many of these projects came online, merchant pricing for renewable energy has dropped significantly, so even small reductions in PPA prices could make the project uneconomic.

These changes would not only threaten existing renewable projects but could also threaten future development. If the PG&E bankruptcy court allows the company to renegotiate its contracts, it will send the market a signal that PPAs are not safe. Developers will not only have second thoughts about investing in projects in California but also, more importantly, lenders will see greater risks involved and shy away from these projects or jack up interest rates too much higher levels.

If the cost of renewable electricity continues to decline as it has in recent years, all projects would be at risk of performance issues if their contract revenues were forced into merchant generation. California will do its utmost to protect the development of renewables to meet its climate objectives. As such, regulators in California have stated that PG&E needs permission from the CPUC to renegotiate any contracts.

It is very unlikely that the Department of Energy will allow PG&E to renegotiate its PPAs since PG&E bankruptcy is not just a state issue. It is said that the Department of Energy has billions of dollars in exposure from loans linked to projects with the primary offtaker being PG&E. This is the money of taxpayers, and the DOE will do its utmost to protect it, particularly given funding constraints.

Trump has sought to eliminate the DOE’s Loan Programs office, and losses of this magnitude would certainly help lend credence to his cause. Remember, this is the same division that faced criticism from Republicans for their failed loans to Solyndra. With its reputation and jobs at stake, it is likely it will do everything in its power to keep these PPAs intact.

The Federal Energy Regulatory Commission (FERC) has declared concurrent jurisdiction with the bankruptcy court to protect utilities and federal power in the PG&E case. It will not be as simple as having it renegotiated in court if PG&E wants to fight to lower these PPAs. FERC will have to approve all changes to the PPA, and with a deadlocked commission of 2 Democrats and 2 Republicans, this seems like an opportunity for bipartisan to oppose these changes.

PPA Renegotiation Is Very Unlikely

While renegotiation of PPA is unlikely, stocks still have some upside potential if PG&E remains solvent. In a solvency case, although no PPAs would be renegotiated, it would probably be possible for common shareholders to retain some equity value.

Furthermore, PG&E has been paying its full obligations under its PPA, with numerous suppliers affirming this. This seems to be largely off the table, especially in the near term, with California regulators, suppliers, and the Department of Energy opposed to renegotiating PPAs for the reasons discussed.