California’s ambitious push for clean energy will be a tough lift for utilities and potentially their bondholders.
The law Governor Jerry Brown signed this month commits the state to generate all its electricity from carbon-free sources such as wind and solar by 2045. That’s a big jump for state that currently gets about 30 percent of its power from renewable sources, posing a costly and difficult goal, said Toby Shea, a senior credit officer at Moody’s Investors Service. The company said that the mandate could hurt the credit ratings of electricity providers such as the Los Angeles Department of Water and Power and the investor-owned PG&E Corp.
The warning from Moody’s underscores the risks to investors as California increasingly acts as the nation’s leader on combating climate change as President Donald Trump’s administration seeks to roll back environmental regulations. The state is betting that technological advances will ultimately drive down key costs.
For California to have stable power, it will likely need “a massive amount of battery storage” given the vagaries of the wind and sun, Shea said. He estimated the tab for enough batteries to meet the mandate would be more than $100 billion — an expense that would force utilities to seek rate hikes if the battery costs don’t decline as the state predicts.
“The legislation is kind of taking a gamble on what will happen in the future,” Shea said in an interview. “The way it is going, if costs don’t come down dramatically, then yes, there will be a huge increase in rates.”
But it will take years to see the potential impact on ratings and bond trades: the utilities have until 2030 to achieve 60 percent of their energy supply from renewable sources. But the mandate adds to the uncertainties the entities already face, such as liabilities from wildfires that are expected to grow because of climate change. State lawmakers in their session that ended last month didn’t provide relief from strict rules that hold a utility liable if its equipment caused a fire, even if it followed safety rules. Their inaction led Moody’s to downgrade PG&E and other utilities.
“The confluence of the 2045 deadline and reliance on still emerging technologies raises the concern that utilities will be hampered by sizable cost increases while simultaneously challenged to maintain the high reliability levels that ratepayers have come to expect,” Fitch Ratings said in a release.
While PG&E expressed concerns about the impact the law may have on consumers, the company supports the state’s push toward renewable energy, spokeswoman Lynsey Paulo said.
“PG&E is deeply committed to the California vision of a sustainable energy future,” she said. “How the state implements this important clean energy goal will be critical, and we believe California has consistently, over time, achieved the right balance.”