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NRG Facing Default on Ivanpah Solar PPAs with PG&E

(photo Gilles Mingasson/Getty Images for Bechtel)

(photo Gilles Mingasson/Getty Images for Bechtel)

NOTE: This post has been updated and expanded for KQED News.

Ivanpah, the biggest power-tower solar plant in the world, is doing better after woeful energy production in its first year of operation in 2014. But not better enough.

In its quarterly report filed in November, majority owner NRG Energy says it faces a default on its contracts with Pacific Gas & Electric, which has power purchase agreements for production from two of the plant’s three units:

Ivanpah Energy Production Guarantee — The Company’s PPAs with PG&E with respect to the Ivanpah project contain provisions for contract quantity and guaranteed energy production, which require that Ivanpah units 1 and 3 deliver to PG&E no less than the guaranteed energy production amount specified in the PPAs in any period of twenty-four consecutive months, or performance measurement period, during the term of the PPAs. If either of Ivanpah units 1 and 3 deliver less than the guaranteed energy production amount in any performance measurement period, PG&E may, at its option, declare an event of default. Based on the energy production amount since January 2014, the Company expects that the units will not meet their guaranteed energy production amount for the initial performance measurement period. The Company is exploring options to mitigate this risk or its consequences.

Electricity production at Ivanpah was up 71 percent in the first nine months of 2015 compared to the same period in 2014. But 2014 was so dismal, the plant still won’t be able to meet the production guarantee outlined in SEC filings:

The “contract quantity” for each year is expected to be 304,000 MWH for Solar Partners II (Unit 1) and 335,600 MWH for Solar Partners VIII (Unit 3) throughout the delivery term, and the seller must deliver a guaranteed amount of energy in two-year measuring periods. The production guarantee generally is 140% of the contract quantity during the first measuring period after the commercial operation date and 160% in subsequent measuring periods, subject to reduction if the project company is unable to deliver power due to a force majeure or curtailment.

Unit 1 declared commercial operations on January 10, 2014, and Unit 3 on January 15, 2014. Through September 2015, Unit 1 had produced 319,994 megawatt-hours, according to the Energy Information Administration. Its production guarantee during the first measuring period works out to 425,600 MWh. Based on past performance and trend, the unit will probably fall at least 50,000 MWh short of that threshold. Unit 3 was at 311,057 MWh through September toward a goal of 469,840, so its shortfall will likely be even greater.

You have to wonder how PG&E might proceed here. Would it be interested in getting out of its Ivanpah contracts, if it could? The utility needs renewable energy, like that produced at Ivanpah, to meet California’s aggressive renewable portfolio standard. That said, the Ivanpah contracts date back several years (last amended in 2010, it appears), and renewable energy prices have plunged recently. Consider: In the third quarter of this year, PG&E paid $201.99/MWh for electricity from Ivanpah’s Unit 3. Meanwhile, PPAs for utility-scale PV in the Southwest in the past year have fallen to around—and in some cases below—$50/MWh.

Update: What about Unit 2, you ask? Electricity from Ivanpah Unit 2 (Solar Partners I) is sold under a power purchase agreement to Southern California Edison. The production standard for Unit 2 is essentially the same as for Units 1 and 3 and it, too, will fall well short two years after going into operation on January 31, 2014. So why did it escape mention in NRG’s filing? The apparent answer: The PPA with Edison doesn’t leave NRG (and minority owners BrightSource and Google) similarly vulnerable to a default declaration. According to a BrightSource filing, the contract stipulates only that “If these production levels are not met, the project company will have to pay SCE for replacement power.” (12/9/2015)