In New Challenge for California’s Utilities, Rating Agency Warms to Community Aggregators

The community-choice aggregators disrupting California’s electricity market have come a long way in a short time, and the credit rating agencies are taking notice.

Peninsula Clean Energy, which procures electricity for around 300,000 accounts in the San Francisco Bay Area, obtained an investment-grade credit rating this week from Moody’s, along with a stable outlook. It’s the second community-choice aggregator (CCA) to secure such a rating, after Marin Clean Energy did so last year.

With investment-grade ratings in hand, CCAs may be able to negotiate better credit terms and lower energy prices, making them more competitive suppliers of renewable power. The implications for California’s market are potentially big, particularly given the bankruptcy of utility PG&E, whose own credit rating has been lowered to junk territory.

“Right now, we have a better credit rating than the incumbent investor-owned utility [PG&E],” Jan Pepper, CEO of two-year-old Peninsula Clean Energy, said in an interview. “If someone wants to take a risk in doing a deal with us versus them, as far as the credit rating agency is concerned we are more stable financially.”

The ratings are "really positive news for renewables," said Britta von Oesen, managing director and head of the San Francisco office at CohnReznick Capital.

CohnReznick has worked with CCAs to finance projects with and without credit ratings, von Oesen said. "By achieving an investment-grade credit rating, those financing options will be even more competitive, allowing for additional deployments of renewables and growth of renewable energy offerings to consumers." 

Peninsula Clean Energy's new rating will give it an immediate boost in its renewable procurements, Pepper said.

The CCA has a contract in place for a 200-megawatt (AC) solar project under construction in California’s Central Valley that’s owned by developer Centaurus Renewable Energy, due online by the end of the year. Another 100-megawatt solar project will follow in 2020.

Meanwhile, “we’ll be finalizing a couple more PPAs in the next few months,” likely for projects in the 100 MW ballpark, Pepper said.

“Since we haven’t finalized those deals yet, we anticipate the credit rating should have a positive impact on the pricing and terms we’ll be getting for those contracts."

Existential questions

From a relatively slow start after the launch of Marin Clean Energy in 2010, CCAs have rapidly gained momentum in recent years, as more California communities seize responsibility for procuring their own power.

The CCA model sees nonprofits like Peninsula Clean Energy buying or generating renewable power, typically along a more aggressive schedule than the utilities themselves are on. The utilities, meanwhile, are left to operate the grid and collect the bills, paying the CCAs what they are owed for their power.

When it comes to procuring renewables, CCAs have an advantage in lacking expensive legacy power-purchase agreements signed at an earlier stage of the renewables industry’s development. While renewables operators historically may have preferred to sign PPAs with big and well-known utilities, that could change in the wake of PG&E’s bankruptcy.

Views differ on whether CCAs pose an existential threat to California’s big utilities, although CCAs insist the two can coexist.

Regardless, the proliferation of CCAs in the largest U.S. state economy has been remarkable, with 19 programs now in place serving more than 10 million customers — and many more in the pipeline. The model is now spreading in Southern California, where it was slower to take off than in counties around San Francisco.

“Over the past two to three years, CCAs have positioned themselves as the de facto energy buyers for California,” said Colin Smith, senior analyst for U.S. utility solar at Wood Mackenzie Power & Renewables.

CCAs are already having a significant impact in the country’s biggest solar market, Smith said, “and we expect a lot more in the future.”

California CCAs are also making waves in the wind market, including for the growing list of out-of-state projects looking to sell into California via new transmission lines. Last year Pattern Development signed 15-year PPAs with Silicon Valley Clean Energy and Monterey Bay Community Power for its Duran Mesa wind project, set to enter construction this year in New Mexico. 

Tip of the spear?

The question is whether more CCAs — like the recently launched East Bay Community Energy, based in Oakland and already with more than half a million accounts — can follow in obtaining an investment-grade credit rating.

Moody’s cited a number of factors specific to Peninsula Clean Energy in announcing its Baaa2 rating, including the CCA’s “conservative management strategy” and its business-minded board of directors.

As of March 2019, Peninsula Clean Energy had unrestricted cash of $108 million and steady internal cash flow generation.

“From the very beginning, we’ve been very conservative in our financial policies,” Pepper said. “Before rolling out any other programs, anything beyond the basic goal of providing electricity, we wanted to make sure we were financially stable, and put in place policies to ensure we had sufficient funds to weather ups and downs in the market.”

Much of Moody’s decision on Peninsula Clean Energy would also seem to apply to other CCAs as well.

The ratings agency notes the “inherent strengths of the California CCA model,” which is based on state legislation, and the fact that the court overseeing PG&E’s bankruptcy proceedings has acknowledged that the money the utility collects for Peninsula Clean Energy is “not a part of PG&E’s estate.”

Beth Vaughan, executive director of the California Community Choice Association trade group, said in an email that other CCAs are already pursuing credit ratings “and we expect more will do so in the future.”

“While we cannot speculate on future determinations by credit rating agencies, the assessments to date by Moody’s present a bullish view of the CCA business model in California,” Vaughan said.

Pepper, too, thinks more credit ratings are coming.

“As other CCAs start to have a couple of years of operating history like we do, I see no reason why they won’t be able to get a credit rating,” she said.