PG&E bankruptcy darkens outlook for renewable energy investment
Credit ratings for several suppliers to the California utility have been cut sharply
The plan for Pacific Gas and Electric, the California utility, to enter bankruptcy to manage its $30bn wildfire liabilities has sent shockwaves through the US energy industry, raising concerns about the outlook for investment in renewable power in the state and beyond.
Credit ratings for several businesses that supply power to PG&E were cut sharply last week, potentially raising the cost of capital for the industry and creating additional difficulties for California’s plan to source 100 per cent of its electricity from low-carbon technologies by 2045.
Projects that supply PG&E with electricity under long-term contracts at prices that are well above today’s rates face the threat that in bankruptcy the company will reject those contracts, or insist on renegotiating them at lower levels, hurting the projects’ cash flows and their ability to service their debts.
PG&E said last Monday that it intended to enter bankruptcy on or around January 29. It argued that this would be the best way to address the liabilities, estimated at $30bn-plus, which it faces as a result of its involvement in the devastating wildfires in northern California in 2017 and 2018.
Topaz Solar Farms, owned by Warren Buffett’s Berkshire Hathaway Energy, Genesis Solar, owned by NextEra Energy, and ExGen Renewables IV, owned by Exelon, are among the renewable energy businesses that have been downgraded by rating agencies, along with other suppliers to PG&E including the Panoche Energy Center, a gas-fired “peaker” plant used at times of high demand, and Kinder Morgan’s Ruby gas pipeline.
Some energy yieldcos, listed companies structured to pay dividends from regular cash flows, have also been hit. Shares in Clearway Energy, which earned 23 per cent of its revenue from PG&E in 2017, fell sharply when the company announced its bankruptcy plan, although they recovered in subsequent days and ended the week down only 6 per cent.
A bankruptcy of a US regulated utility is a rare event, and companies that agreed to supply PG&E did so on the basis that it was unlikely to fail to meet its obligations. Until this month, PG&E was rated as investment grade by S&P Global, Moody’s and Fitch. Its decision to seek Chapter 11 bankruptcy protection has overturned the assumptions used by its suppliers to finance their projects.