Utility Credit Requirements Undermine Renewables

By Published On: June 30, 2006

Utility Credit Requirements Undermine Renewables Stringent credit requirements imposed by utility power-purchase agreements are hampering construction of renewable energy facilities in California, according to financial industry experts. The requirements force project developers to pay millions of dollars to investor-owned utilities before entering agreements, which are a precondition for obtaining power plant construction financing. The effects of the requirements on new construction, particularly renewable energy facilities, were aired June 27 before the California Energy Commission, the California Resources Agency, the California Public Utilities Commission, and the Electricity Oversight Board in Sacramento. The workshop – held in conjunction with development of the CEC’s 2007 Integrated Energy Policy Report – was aimed at stimulating discussion about how to reduce the cost of obtaining credit for power plant construction. “There are better ways to do this than the way we’re doing it today,” said Joe Desmond, California undersecretary of energy affairs. Fees that California utilities charge to protect themselves against contract risk can amount to as much as 10 percent of the total cost of constructing a new plant, said Steve Zaminski, Starwood Energy Group vice-president. Credit requirements “are pretty hard,” Zaminski added, because some renewable power companies are small businesses. During this week’s meeting, utility representatives indicated a willingness to reexamine the fees. “Let’s face it, we have a problem here,” Pedro Pizarro, Southern California Edison senior vice-president of power procurement, told the agencies. He explained that the utilities put the requirements in place after the 2000-01 energy crisis to guard against developers who fail to complete projects or adequately perform after building new facilities. “At the end of the day, we’re trying to manage risk,” he said. He noted that Edison is examining how to ease some financial hurdles. At issue are a wide range of credit requirements that utilities impose in power-purchase deals. These include bid deposits, development security payments, and operating collateral. Both renewable and fossil-fuel project developers must agree to such fees before being able to obtain construction loans for new power plants. And the loans generally are contingent upon having a long-term power-purchase agreement in hand. In a report prepared for the Energy Commission in June, consultant KEMA found that Pacific Gas & Electric and Edison charged bid submission fees of $3/kW, based on the generating capacity of the proposed projects. For a 100 MW wind project, the fee would amount to $300,000. The charge is imposed to make sure that those who submit bids are serious project developers, said the report, The Cost of Credit: A Review of Credit Requirements in Western Energy Procurement. Development security fees of $20/kW charged by the two utilities – typically due 30 to 90 days after contract execution – would total $2 million for such a project, the report found. San Diego Gas & Electric’s $10/MWh development security payment would require a payment of $3 million. On top of that there are operating collateral payments to ensure delivery of the promised power. A 100 MW wind project with PG&E would total $12.2 million. Edison would add on $23 million. KEMA was unable to specify what SDG&E likely would require for the risk premium. “We’ve not seen these types of credit requirements in other states,” said John Seymour, FPL Energy executive director. “These numbers are significantly higher” than elsewhere, he added. FPL develops and operates power plants in 24 states. Ironically, the problems created by utility credit requirements in California come as financial managers are plowing billions of dollars into new energy infrastructure after a hiatus during the 1990s, said Russell Read, California Public Employees’ Retirement System chief financial officer. “We see a great deal of opportunity, particularly in the renewables market,” he said. “We’ll be looking at several billion dollars of new capital invested on an annual basis.”

Share this story

Not a member yet?

Subscribe Now