Dive Brief:

• California regulators are set to vote this Thursday on a request from Pacific Gas & Electric to amend four energy storage project contracts required to ensure grid reliability, including by increasing the price of the four contracts and reducing one project’s capacity by 50 MW.
• There have been “unprecedented industry-wide market changes and inflationary pressure on project costs” since the storage contracts were executed in 2021, PG&E noted in its request, including high battery prices and supply chain constraints.
• The projects are part of an 11.5 GW procurement package that the California Public Utilities Commission approved last year, in a bid to ensure grid reliability during the middle of the decade. That decision represented the agency’s largest capacity procurement ordered in one shot.

Dive Insight:

The CPUC’s 11.5 GW procurement order sought to address the then-planned retirement of the 2.2 GW Diablo Canyon nuclear plant by 2025 – now tentatively extended through 2030 – as well as a suite of natural gas plants slated for closure in the coming years. Regulators directed California’s load serving entities to procure at least 2 GW by mid-2023, another 6 GW by mid-2024, followed by installments of 1.5 GW and 2 GW by 2025 and 2026 respectively. 

In early 2022, PG&E approached the commission for approval of nine agreements, totaling nearly 1.6 GW of nameplate capacity, stemming from the order. Regulators approved the contracts in April. 

However, in September, PG&E filed an advice letter with the commission regarding four lithium-ion battery project contracts: the 300 MW Nighthawk energy storage project, 100 MW Beaumont project, 80 MW Canyon Country project and the originally 100 MW Inland Empire project. It informed regulators that the contract counterparties for these projects were concerned that current market conditions would make them uneconomical.

These include rising battery prices, a result of spiking lithium carbonate prices and other metals used in lithium-ion batteries. In addition, developers are still facing supply chain constraints and rising materials and labor costs due to high inflation. Lastly, higher interest rates have also increased the cost of capital. 

“PG&E has negotiated aggressively with the counterparties with respect to the price increase and has conducted due diligence on the proposed price increase…” the utility said in its letter. It also noted that it is currently in the second phase of its mid-term reliability request-for-offers and the proposed price increases align with the market prices it is seeing in those bids.

The CPUC’s draft resolution, if approved, would increase the prices of the four contracts – although it does not specify by how much, as contract costs are confidential – and delay the deadlines to June 1, 2024, for three of the projects scheduled to come online between August 2023 and April 2024. The capacity of the Inland Empire project would also be reduced from 100 MW to 50 MW. 

Jin Noh, policy director with the California Energy Storage Alliance, said in an email that contract renegotiations are expected due to factors like rising commodity prices, cost of capital and supply chain constraints. In addition, benefits of the Inflation Reduction Act could exert downward pressure on prices, according to Noh.

Parties also may negotiate extensions for projects to come online, or adjustments in megawatt capacity, Noh said. 

“It is likely a case-by-case determination on where the buyer stands in terms of their procurement obligations and compliance requirements and where the seller stands in the economic viability of their project in the face of these macro factors,” he said. 

Noh is not aware of any other California utilities that have made similar requests thus far. 

While projects are facing supply chain constraints and price increases due to macro-economic factors, these may prove temporary, Matthew Freedman, staff attorney with ratepayer group The Utility Reform Network said in an email.

“It doesn’t alter the basic trajectory of California’s goals or diminish our clean energy and decarbonization ambitions. It just means that there may be minor delays for near-term projects and some price increases,” he said. 

Looking ahead, recently-approved federal support for clean energy and reliability resources should end up muting, if not reversing, these cost increases, according to Freedman.

“There is plenty of funding in the pipeline that has yet to be released,” he said.