A power purchase agreement, or PPA, is a contract between the owner of a power plant and an entity that wants to buy the power. It is the most common financial instrument for buying and selling renewable energy. And, having a PPA in place is often essential for developers to obtain financing to begin construction.
The company has billions of dollars of renewable energy PPAs on the books, some of which extend to the 2040s.
Most of the company’s PPAs are for solar power, including some from years ago when solar equipment was much more expensive. The power prices don’t look good today, and a bankruptcy court could force PG&E to renegotiate those deals.
Here’s where this becomes a national problem:
Many other utilities face climate risks that could lead to bankruptcy. Renewable energy developers could be looking at a ledger full of PPAs whose prices are not nearly as firm as once thought, said Ben Serrurier of Cypress Creek Renewables, one of the country’s largest renewable energy developers.
“If PPAs—even with a major utility—are subject to change, it could raise borrowing costs and hamper new development,” he told me.
While his company doesn’t have any PPAs directly affected by PG&E’s bankruptcy, just about every developer stands to lose from the potential erosion of confidence in PPAs.
This type of risk is not new and should not be a surprise, said Ron Lehr, a former Colorado utility regulator who is now a consultant for Energy Innovation, a clean energy think tank.
“Bankruptcy risk existed all along,” he said. In other words, that risk should have been priced into existing contracts. If it wasn’t, then it should be going forward—especially as climate change worsens and poses such wide-ranging risks.
While the bankruptcy process unfolds, PG&E says it will have enough money to pay for ongoing operations. So the lights will remain on, but not much is certain beyond that.
“Our goal will be to work collaboratively to fairly balance the interests of our many constituents—including wildfire victims, customers, employees, creditors, shareholders, the financial community and business partners—while creating a sustainable foundation for the delivery of safe service to our customers in the years ahead,” Richard C. Kelly, chair of the board of directors, said in a statement.
(Photo: Justin Sullivan/Getty Images)