Renewable Contracts With PG&E Corporation - A Risk To Be Reckoned With

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About: PG&E Corporation (PCG)
by: Lon W. House
Summary

The bankruptcy court ruled it has jurisdiction and that it could allow PCG out of renewable energy contracts.

Many of these contracts are significantly overpriced relative to the market and PCG doesn’t need the electricity from many of them anymore.

Estimates are PCG could save over $2 billion per year by renegotiating renewable contracts to market prices.

PCG has lost almost one-half of its retail electricity sales and is projected to lose over 80 percent by the mid-2020’s.

BRK.A, BRK.B, NEE, ED, SRE, AY, NEP, EXC, CWEN, IBDSF, PEGI, DTE, SO, GOOG,  EDP, D, AES,KEP, KKR, AGR, PSE.F, AQN, BAM, TERP, 9TO.F, CPN, BEP, WM, TKECY, JPM, IDA, MITSY,ENEL.MI have existing contracts with PCG that could be impacted.

Risk comes in various shapes and forms. But one would have thought that a signed Power Purchase Agreement (PPA) with an electric utility that was approved by its regulatory agency would be money in the bank, a revenue stream that you could count on for the duration of the contract.

Until the Pacific Gas and Electric (PCG) bankruptcy.

When PCG filed for bankruptcy in January of this year, it spawned a blizzard of articles and opinions. PCG listed $42 billion in commitments through 387 Power Purchase Agreements with 350 counterparties, involving 13,668 MW of capacity. Renewable energy projects account for more than half of that capacity. Last Fridays decision (June 7, 2019) by the bankruptcy court to allow PCG out of renewable energy contracts spawned another flurry of articles (e.g. WSJ article), many opining that the renewable energy contracts were relatively safe, or at best, were still needed and would be renegotiated (e.g., Bloomberg Opinion).

There are two issues regarding the PCG renewable energy contracts that need to be understood: many of these contracts are significantly overpriced relative to the market and PCG doesn’t need the electricity from many of them anymore.

Overpriced Renewable Energy Contracts

As the following figure shows, the average price paid for renewable generation by California utilities dropped from a high of about 18 cents/kWh in 2008 to below 4 cents/kWh in 2018. The levelized price for solar dropped 25% in the last three years to subsidized prices in 2018 of 3.2 cents/kWh and wind dropped 10% in the last three years to subsidized prices of 1.4 cents/kWh.

California Utility Renewable Energy Contract Prices (source: California Public Utilities Commission, “Cost and Cost Savings for the RPS Program”)

More than half of PCG’s solar contracts were signed prior to 2012. The average price of PCG’s solar contracts is 14.0 cents per kWh, compared with the 3.25 cents per kWh solar deals recently signed by the company. An analysis by Credit Suisse estimates that PCG could save $2.2 billion per year by renegotiating those deals.

PGC Doesn’t Need All The Renewable Power

As another recent SA article noted, PCG has already lost almost one-half of its retail electricity sales to other providers, primarily Community Choice Aggregators. The California Public Utilities Commission CPUC and California Energy Commission estimate that as much as 85% of bundled retail load from the investor owned utilities in California will be unbundled, with generation provided by Community Choice Aggregators (CCAs), Electric Supply Providers (Direct Access), or distributed generation, rather than provided by the incumbent utility by the mid-2020s.

We see this in PGC’s procurement efforts. For the past few years PCG has been selling renewable energy from its portfolio.

Where Will This Renewable Power Go?

If PCG gets out of some or most of their renewable energy contracts, where will all this power go? After all, California still has its clean-energy targets, codified in SB 100, the law passed last year committing the state to reach 100 percent zero-carbon power by 2045.

There will be a lot of negotiating going on. Currently California has 5 other investor-owned electric utilities, 50 public electric utilities, 13 active Community Choice Aggregators and another 23 Community Choice Aggregators in the process of forming, and 15 private electricity marketers and Load Serving Entities operating, all of which are potential candidates for the purchase of more renewable generation.

Who is at Risk?

The following table shows companies with power sales contracts with PGC.

COMPANY

TICKER

MWs

Berkshire Hathaway, Inc.

BRK.A / BRK.B

674

Nextera Energy Inc

NEE

571

Consolidated Edison Inc

ED

377

Sempra Energy

SRE

286

Atlantica Yield PLC

AY

280

Mextera Energy Partners LP

NEP

254

Exelon Corp

EXC

242

Clearway Energy Inc

CWEN

199

Iberdrola SA

IBDSF

134

Pattern Energy Group Inc.

PEGI

101

DTE Energy Co

DTE

86

Southern Co

SO

76

Alphabet Inc

GOOG

75

Berkshire Hathaway Energy Co

BRK

73

Energias de Portugal, S.A.

EDP

72

Dominion Energy Inc

D

67

AES Corp

AES

60

Korean Electric Power Corp

KEP

50

KKR & Co Inc

KKR

40

Global Atlantic Financial Group Inc

38

Avangrid Inc

AGR

31

Public Service Enterprise Group Inc

PSE.F

22

Algonquin Power & Utilities Corp

AQN

20

Brookfield Asset Management Inc

BAM

18

Terraform Power Inc

TERP

16

Toyota Tsuso Corp

9TO.F

14

Calpine Corp

CPN

12

Brookfield Renewable Partners LP

BEP

12

Waste Management Inc

WM

9

Tokyo Electric Power Co Holdings Inc

TKECY

9

JPMorgan Chase & Co

JPM

5

IDACORP Inc

IDA

5

Mitsui & Co Ltd

MITSY

2

Enel SpA

ENEL.MI

1

Companies With Power Contracts with PCG

(source: MarketIntelligence, ticker symbols added)

Impact On Renewable Suppliers With Contracts with PCG

Many of these companies initially looked at their exposure to the PCG bankruptcy earlier this year but the recent bankruptcy court decision makes it clear that these contracts are potentially at risk. The individual company risk depends upon:

  • Whether PCG decides to renegotiate the contract
  • The size of the PCG contract relative to the rest of the company’s portfolio
  • For contracts that are replaced – what the replacement price is relative to the PCG contract price.

But investors can expect that some of these contracts, particularly early PCG contracts that are substantially above current market replacement costs, to be at heightened risk for renegotiation.

Actionable Conclusions

We won't know for months which contracts PCG decides to renegotiate or try and get out of, but investors in the mentioned companies with renewable contracts with PCG should factor in a risk premium in their evaluation of the company.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.