The Public Utilities Commission staff investigated Hawaiian Electric’s cancellation earlier this year of contracts for three utility-scale solar farms on O`ahu, all owned by subsidiaries of the financially troubled SunEdison, Inc., and the resulting report casts Hawai`i’s electric utility giant in a light that is anything but flattering.
Although the report concluded that HECO’s actions “cannot be viewed as serving the best interests of the state or the people of Hawai`i,” it is ultimately up to the commission to make a formal determination on this question. That determination, the report states, could become relevant should there be an attempt to recover costs associated with these power purchase agreements (PPAs) from ratepayers, costs and/or damages associated with any failure to meet legislatively mandated renewable portfolio standard goals due to the termination of these projects, or costs associated with efforts to get commission approval of replacement PPAs, among other things.
The three solar farms – at Waiawa, Mililani, and Kawailoa – were designed to have a total capacity of 112 megawatts. They and one other solar farm (EE Waianae Solar Project) were all approved last summer by the PUC, which, in a press release, stated that the four projects “were based on the commission’s determination that [they] represent the best likelihood of providing long-term customer value and are reasonable and in the public interest.” The three SunEdison projects accounted for more than 81 percent of the total capacity to be developed by all four plants.
A ‘Premature’ Decision
Commission chair Randy Iwase asked the PUC staff to explore “the relevant facts and circumstances surrounding HECO’s decision to terminate the PPAs,” a decision announced by HECO in early February.
Up until the start of the year, the report states, “the projects were progressing normally – that is, some things proceeded smoothly while others did not. Generally, accommodations were made between the parties with respect to various delays and other problems, and construction moved forward.” The three projects were in various stages of construction, with SunEdison having sunk into them more than $42 million (for land, design and engineering, site work, and equipment, among other things) while also paying HECO $31.4 million for interconnection work.
Even as work on the projects was proceeding, SunEdison was experiencing financial difficulties, with its stock prices plunging in the second half of 2015. By late December, the company had found a willing buyer for the three solar farms in D.E. Shaw Renewable Investments, Inc., a company with deep pockets and a solid history of managing large projects such as those SunEdison was developing. Shaw already owns two facilities on O`ahu: the Kawailoa wind farm and Kalaeloa Two, a solar farm on the south side of the island.
“SunEdison’s financial condition was certainly no secret to HECO,” the report states, “and prompted the developers and SunEdison to seek remedies that would keep the project on schedule and assure completion.” However, HECO seemed to have little interest in the proposal to sell the projects to Shaw and, the report continues, adding, “Instead, HECO appeared to devote the majority of its efforts to pursuing termination.”
By January, as SunEdison was attempting to close the sale to Shaw of its O`ahu projects, it fell behind in certain milestones set forth in the power purchase agreements, including locking in construction financing.
As late as January 22, HECO was negotiating with SunEdison and Shaw, offering to forgo exercising its option to terminate contracts for the three projects if the developers met certain conditions. The PUC staff noted that in a January 26 letter, Shaw accepted “virtually all of these conditions and requested several modifications.”
“Nevertheless,” the report continues, “rather than continue negotiations and attempt to complete the agreement, HECO decided that the conditions it had proposed could ‘no longer provide adequate assurance that the projects will be completed consistent with the terms of the approved PPAs…’ Thus, on February 1, 2016, HECO revoked its proposed offer to forbear its termination rights under the PPAs. SunEdison’s proposed exceptions to terms contained in HECO’s January 22 offer, the company said, were “extremely broad and unreasonable given Seller’s [SunEdison’s] current status of performance.”
In addition, HECO was now raising concerns about how a potential SunEdison bankruptcy could stall the sale to Shaw and ultimately delay the projects. Just a day later, HECO notified SunEdison that it was considering its option to terminate the power-purchase agreements.
SunEdison replied on February 5, noting that it was going to cure the defaults by selling the projects to Shaw, with the deals for all three being completed by April 15. In addition, construction at all three sites would be completed by the guaranteed commercial operations date. “As such, while the intermediate milestone of financing was not achieved by the planned date, the much more significant final milestone of finishing the projects will be achieved on time, so that the low-cost renewable energy will be available to HECO and its customers on schedule.” It was HECO itself that was identified as the obstacle to moving forward with this plan: “to date, HECO has refused to forbear from terminating the PPAs to enable the financing to close. HECO’s forbearance is the last remaining significant item required for sellers to complete the sale to D.E. Shaw, finance the projects, and resolve the missed milestones.”
HECO was unmoved. On February 12, it issued termination notices to SunEdison for each of the three projects. As summarized in the PUC staff report, the rationale for termination was given as: “(1) the alleged failure of all three project deelopers to meet the construction financing closing milestone and (2) the alleged failure of two of the three project developers to make a timely payment, although in each case payment was made after the due date. With respect to the latter, HECO has not stated, to staff’s knowledge, that there is any irreparable harm to HECO as a consequence of these failures.”
In fact, far from harming the company or its ratepayers, SunEdison and Shaw were offering to make concessions that would significantly lower the price of electricity sold to HECO. On February 23, they filed a reply to HECO’s termination notice with the PUC, disputing the claims made by HECO and noting that they had offered to sell power to HECO at 12.378 cents per kilowatt hour, a reduction of roughly 9 percent from the price stipulated in the power purchase agreements. They also pointed out, the PUC staff noted, how HECO’s intention to replace the three projects with other developments “would extend, not shorten, the time necessary to get projects of this size into operation (end of 2016 versus at least 20 to 30 months to do a new solicitation, obtain approvals, and build).”
‘Voluminous … Documents’
In March, the PUC staff scheduled a conference on March 11, intended to allow it “to follow up as necessary with respect to the various responses” to information requests made to all parties involved.
“On March 4, 2016, the commission’s chief clerk was informed that … HECO planned to file 4,500 pages of non-confidential material (4,000 pages of which are copies of various emails) and 1,500 pages of confidential material (which are copies of various emails),” the report notes. Because of the time required to read through this material – a task which, the staff observes in a footnote, “was greatly hampered by HECO’s failure to provide copies of the thousands of pages of emails in searchable format” – the conference was rescheduled to March 18. (A transcript of the hearing, frequently cited in the staff report, is available for review at the PUC office in Honolulu.)
Still, by April 12, the staff, led by chief PUC counsel Thomas Gorak, had completed its work and filed its report. Its conclusions are highly critical of HECO.
First, there is the matter of SunEdison’s precarious financial position. Even given this, the report states, in light of Shaw’s “expressed willingness to acquire, construct and operate the three projects, HECO could and should have aggressively pursued a way by which to ensure that construction of these projects would continue … even if a SunEdison bankruptcy occurred.”
The February 12 termination notices “were issued summarily, that is, they were issued before Shaw’s ability to acquire the projects and the issues related to SunEdison’s bankruptcy were fully explored,” the staff report states. By terminating the contracts, HECO put itself in a position “of being able to dictate terms in exchange for its agreement to withdraw the February 12 termination notices without complying with any of the requirements contained in the now-defunct PPAs as approved by the commission.”
The staff also takes note of the role HECO suitor NextEra played in shaping the eventual outcome. In the weeks before the notices were issued, “HECO stated that it was operating on parallel tracks,” the report says. “That is, according to HECO, it began to consider terminating the PPAs on or about January 27, 2016, and requested NextEra’s approval to do so on February 10, 2016. Thus, while HECO was considering termination, it was, at the same time, both (a) continuing to work with SunEdison and Shaw … and (2) continuing ‘business as usual’ with respect to interconnection work.”
As late as March 16, Shaw expressed its willingness to find a solution to the issues. A representative of Shaw “remained eager to find a commercially reasonable solution to the issues and was available to engage in face-to-face meetings in Hawai`i over a ten day period following the letter,” the report states. But when HECO was asked at the March 18 conference whether it had agreed to meet, HECO responded, “No, Mr. Oshima” – Alan Oshima, the utility’s CEO – “is away in Washington, D.C. He has received the letter and reviewed it but I’m not aware that there’s been any discussions. He should be back in town next week.”
To staff, this response suggested that “HECO did not feel any sense of urgency to attempt to resolve the issues.”
Chief PUC counsel Gorak then asked HECO, SunEdison, and Shaw to report back to the commission by March 22 on the status of negotiations. “If there are any negotiations or if there simply won’t be or aren’t or they’re finished, we would like to know that,” he stated.
Bryan Martin of Shaw indicated that his firm was eager to move forward with the acquisition of the three solar farms and that he was “prepared to travel to Hawai`i for meetings this Thursday and Friday, March 24th and 25th.”
Oshima, on the other hand, was not interested. His filing with the PUC on March 22 stated, “we do not anticipate our customers will be negatively impacted by an incremental delay… With continued declines in PV technology costs, coupled with the extension of the investment tax credit, our primary objective is to procure projects in a timely manner that offer the greatest benefit to our customers while furthering our progress in achieving Hawai`i’s renewable energy goals.”
As to that point, the PUC staff was highly critical. The statement by HECO that it did not anticipate harm to ratepayers given low oil prices and the expected decline in technology costs “is troubling to staff,” the report states.
First, it notes, “HECO does not currently have an RFP [request for proposals] issued to replace the [SunEdison] projects. … Typical projects of this nature take 20 to 30 months to develop, obtain approvals, and construct. Moreover, staff observes that HECO initially sought waivers for approval of these projects in order that they be developed quickly. HECO’s comments concerning delay at this point appear to be at odds with its original requests.”
Second, “staff is concerned that HECO believes that decreasing prices are a reason to investigate and pursue ways to terminate commission-approved PPAs. … [I]f one waits to execute contracts in an era when solar prices continue to decrease, projects may never be built as one will always be waiting fot the next lowest price. Such an approach will not assist the state in reaching its RPS goals and ignores the time spent by the commission in analyzing and approving a given PPA.”
— Patricia Tummons
For Further Reading
The PUC staff report is available on the Public Utilities Commission website. Go to http://puc.hawaii.gov. Select the “Dockets” menu, then enter 2014-0356 in the “Dockets Quick Link” box. Click on the “Documents” tab, then scroll down the list of documents to the April 12, 2016, entry. This is the link to the pdf file containing the full staff report.
Volume 26, Number 12 June 2016