Pacific Gas & Electric’s bankruptcy has already threatened the credit ratings of some of the solar and wind farms, cogeneration plants and other independent power generators that rely on the utility to buy their electricity through power-purchase agreements.
Now these generators may face a new threat from PG&E’s massive public safety power shutoff (PSPS) events, meant to prevent its power grid from starting another fire like the 2017 and 2018 blazes that drove it into bankruptcy.
This year’s fire-prevention outages have introduced a “new form of curtailment risk for the state’s independent power producers," according to a recent report from credit ratings firm S&P Global. The concern stems from the possibility that PG&E will effectively shut down projects during PSPS events, and then not pay the developer for the lost production.
The report focused on PG&E, which was far more aggressive than the state’s two other investor-owned utilities with its fire-prevention blackouts in October and November, leaving millions of people without power for hours or days at a time. What’s more, PG&E's first PSPS in early October was marred by widespread communications and planning breakdowns, drawing demands of a public takeover of the utility by California politicians and an investigation from state regulators.
In terms of their impact on power-purchase agreements, S&P forecasts only a “modest” financial and credit risk, at least in the near term.
Out of the eight California PPA projects rated by S&P, most will face “minimal” risk of losing revenue to PSPS curtailments. That’s either because they’re located in deserts or other low-fire-risk areas, such as some of its solar farm PPA projects, or because their revenue structures rely more on capacity payments than on energy market revenues, such as the two natural-gas-fired power plants it rates.
Still, other projects covered by S&P are well within the state’s high-fire-risk regions and have already been forced to curtail during this autumn’s fire season, the report notes. For example, a geothermal power plant in Geyserville, Calif. was forced to shut down by last month’s Kincade fire. And the Crockett Cogeneration plant was offline during an October PSPS that blacked out the town of Crockett, Calif. shortly before a growing fire forced its temporary evacuation.
Litigation on the horizon?
The big question facing developers with PPAs and utilities is this: Who pays for the lost revenue resulting from PSPS events? Unfortunately, this risk is too new to have been written into existing PPA contracts, which means that “there is likely to be litigation” to answer it, S&P writes.
That’s because utilities are likely to declare that PSPS events fall under the concept known as “force majeure,” or events beyond human control. The old-fashioned term of art is “acts of God,” but California PPA contracts have also used language such as "unforeseeable causes" and "sudden actions of the elements" to refer to the same concept, S&P said.
Whatever the language, if PSPS events can gain legal standing as force majeure, "the utilities are generally not liable."
S&P highlighted that many PPA contracts use definitions like "unusual" fires or droughts, "other natural catastrophes,” or "unusual or extreme adverse weather-related events.” California’s wildfires have been driven by dry and windy conditions exacerbated by climate change, lending support to the idea that blackouts to prevent them are a reasonable response to an “extreme adverse weather-related event,” S&P notes.
On the other hand, PG&E bears responsibility for delaying maintenance on timeworn grid infrastructure that may have increased its fire risks, compared to the state’s other utilities. Developers could argue that these human failures on PG&E’s part, rather than acts of God, are to blame for the losses their PPAs may face from fire-prevention outages.
“Although this too will be up to the courts, in the case of PG&E, that utility's troubled safety record and questions about whether it has sufficiently hardened its grid or managed surrounding vegetation may not help its case,” S&P notes in the report.
Adjusting future PPAs
S&P’s report makes clear that it sees only minimal risks for existing PPAs from fire-prevention outages, at least in the short run, even if court decisions lead to verdicts that support a utility-friendly interpretation of force majeure. For example, a typical 300-megawatt solar farm that lost 30 hours of output at $100 per megawatt-hour to a PSPS event deemed to be force majeure would see only a 1 to 2 percent reduction in annual expected revenue.
That means that developers needn’t fear another across-the-board credit downgrade from S&P because of PSPS curtailment risk.
But in the future, preventative power shutdowns will raise "important questions" for developers considering building projects in California, particularly if they aspire to be investment-grade. As a credit ratings agency, S&P suggested it would expect any future project to either specifically mitigate its PSPS risks in its PPA contract, or “be able to withstand a shutoff with minimal impact to debt service coverage ratios,” to earn an investment-grade rating.
The problem for S&P and other ratings agencies is that it’s not yet clear how big or disruptive future PSPS events might be, or how quickly PG&E will be able to reduce their scale and impact.
That differentiates them from other curtailment risks in California, such as "duck curve" supply-demand imbalances, driven by the state's growing share of midday solar power, which “has mostly been quantified and thus can be sized in take-or-pay PPAs.”