OrCal Geothermal Inc. has three PPAs for its geothermal plants and CE Generation, LLC has seven PPAs that will shift to SRAC pricing in 2013.
California's latest clean energy legislation, the Qualifying Facility (QF) and Combined Heat and Power (CHP) Program settlement, is designed to reduce greenhouse gases and establish a CHP framework for investor-owned utilities. The settlement replaces an older version that required investor-owned utilities to contract capacity from CHPs at their avoided cost of generation.
The new settlement updates the Short Run Avoided Cost (SRAC) pricing model, sets new capacity targets, and creates a competitive solicitation process that will establish new power purchase contracts. Fitch believes that these changes increase recontracting and pricing risk for affected power projects. The changes are neutral to the credit profile of the California utilities.
In late February, South California Edison (SCE, 'A-' IDR, Outlook Stable) and Pacific Gas & Electric (PG&E, 'BBB+' IDR, Outlook Stable) will each launch their first Request for Offers (RFOs) to fulfill the new capacity targets. Eligible QF and CHP generators may submit pro forma power purchase agreements to enter the selection process. PG&E's first RFO will result in the execution of new contracts in the third quarter of 2012 and aims to fill 630 MW of its 1,387 MW goal. Pricing on these contract renewals is still to be determined, and the ultimate exposure to the affected projects is unknown.
OrCal Geothermal Inc. ('BBB-', Negative Outlook) is one power project that could be affected. The company has three PPAs for its geothermal plants. Two will shift to SRAC pricing in 2013, utilizing fixed heat rates for the next two years and market heat rates from 2015 through maturity. Additionally, one of the PPAs expires in 2015, bringing recontracting risk to nearly 50% of total output.
CE Generation, LLC ('BBB-', Negative Outlook) is another project that will face recontracting and price risk. The majority of this project's geothermal output is sold under seven PPAs that will shift to SRAC pricing in 2013. This output will be exposed to market heat rate-based pricing beginning in 2015 and faces two PPA expirations before debt maturity.
