The rapid cost decline of renewable energy means the cost of running coal generation now exceeds the all-in cost of replacing it with wind and solar in many parts of the United States. This cost crossover is causing rapid reconsideration of the prudency of allowing existing coal generation to continue operating, particularly for regulated investor-owned utilities that recover plant costs through regulation. Untangling potentially stranded assets and transitioning this unproductive capital into new clean energy resources requires balancing consumer, environmental, investor, and local interests through complicated regulatory proceedings.
Regulators, utilities, and investors must work together to ensure customers benefit from closures while helping affected communities transition away from a coal-based economy. But regulation needs to adapt – regulated utilities that own uneconomic plants will seek to keep them running as long as possible because they can still earn some rate of return even on uneconomic assets.
This resource library highlights different tools to balance stakeholder interests and facilitate the transition away from uneconomic fossil fuel plants. These briefs provide utility stakeholders with more tools to manage financial transition to balance stakeholder interests, and can help states facing new economic realities embrace clean energy.
Tools to Manage Financial Transition for Regulated Utilities
Utility Financial Transition Impact: From Fossil to Clean, by Ron Lehr – America’s Power Plan (Dec. 2018)
By analyzing publicly available financial information, policymakers and utility stakeholders can identify where running existing generation (particularly older, less efficient coal-fired plants) costs more than replacing it with new wind or solar. A suite of financial instruments can facilitate and reduce costs of this financial transition away from fossil fuels toward clean energy. This brief uses Colorado’s experience transitioning from coal to clean energy as a case study analyzing existing generation costs, and introduces financial tools to help electric utilities that own fossil generation manage the accelerating clean energy transition.
“Steel for Fuel”: Opportunities for Investors and Customers, by Ron Lehr & Mike O’Boyle – America’s Power Plan (Dec. 2018)
Early retirement of uneconomic coal assets can improve shareholder earnings if the utility is allowed to reinvest capital in new renewable energy generation. When building new renewables is cheaper than operating existing coal, swapping steel for fuel adds value for investors, customers, and the environment. This brief addresses equity shareholder perspectives and suggests how potential funding sources can mitigate impacts on communities and workers affected by early plant retirements while improving environmental performance
Depreciation and Early Plant Retirements, by Ron Lehr & Mike O’Boyle – America’s Power Plan (Dec. 2018)
Depreciation accounting recognizes asset value reduction over time. For coal plants, depreciation determines the value remaining when plants retire early. Depreciation is an important tool for transitioning away from older assets, such as coal plants, to cheaper resources, such as wind and solar. This brief reviews how depreciation schedules affect utility earnings and ratepayer costs, as well as other stakeholder interests.
Debt for Equity Utility Refinance, by Ron Lehr & Mike O’Boyle – America’s Power Plan (Dec. 2018)
When electric utilities transition from fossil fuels to clean energy, they must address unrecovered investment balances. Depreciation schedules are often accelerated to line up with earlier-than-planned retirement dates, which can increase short term consumer rates. This brief reviews how utilities can refinance undepreciated balances on plants in service to lessen the consumer rate burden, primarily through replacing some portion of equity with corporate debt.
Managing the Transition: Proactive Solutions for Stranded Gas Asset Risk in California, by Andy Bilich, Michael Colvin, and Timothy O’Connor – Environmental Defense Fund (Mar. 2019)
EDF’s report covers how to avoid stranded assets due to the reduced natural gas usage associated with building electrification. Building electrification is converting the fossil fuel end uses in buildings to electricity. This leads to reduced natural gas usage, and eventually, will mean that utilities will no longer be able to rate base the assets. First, the report provides a framework for evaluating the level of risk for gas assets. Then, the report explains how to strategically target electrification, develop pathways for early retirement, as well as suggest alternative uses for the at-risk assets.
Steel-for-fuel, data-for-fuel, and other good ideas for asset retirement, by Carl Linvill and Megan O’Reilly – Regulatory Assistance Project (Mar. 2019)
RAP’s article address three elements of the steel-for-fuel approach: 1) The need to retire uneconomic coal and therefore address stranded assets, 2) The use of a securitization approach, which allows regulators to balance costs to ratepayers and recovery to shareholders, and 3) The need to design a replacement portfolio, a steel-for-fuel and/or data-for-fuel approach can be used. Steel-for-fuel is the term for replacing conventional assets with renewables, and data-for-fuel solutions include energy efficiency, distributed generation, demand response, flexible demand, and improved use of existing infrastructure.
Managing Electricity Rates Amidst Increasing Capital Expenditures: Is Securitization the Right Tool? An Update, by Joseph S. Fichera – National Regulatory Research Institute (Jan. 2019)
Fichera provides an overview of securitization and how it benefits both utilities and consumers by lowering a utility’s borrowing costs and keeping ratepayer costs low. There are many situations in which a utility needs to recoup large-scale capital costs, such as natural disaster, retiring uneconomic plants, and investing in renewable energy, but utilities also have a mandate to keep power affordable. Securitized utility bonds are a special form of financing that meets the needs of utilities, regulators, and consumers. Fichera’s firm also created the following curated library of resources on this topic.
Harnessing Financial Tools to Transform the Electric Sector, by Uday Varadarajan, David Posner, & Jeremy Fisher – Prepared for Sierra Club (Nov. 2018)
The report identifies financial tools that can help utilities retire uneconomic coal plants, protecting ratepayers and investors. It focuses on securitization as a key tool to reduce the cost of financial transition. This report outlines the mechanics of how ratepayer-backed bonds and capital recycling can minimize the cost of transition away from coal while balancing utility financial integrity.
Managing the Coal Capital Transition, by Annie Benn, Paul Bodnar, James Mitchell, & Jeff Waller – Rocky Mountain Institute (Oct. 2018)
Based on interviews with nearly 50 stakeholders, RMI lays out 10 strategies for collaborative approaches that can manage the coal capital transition more rapidly while minimizing financial losses. The report demonstrates how collaboration among coal asset owners, policymakers, and environmental advocates can get better results than going to war for or against coal.
PacifiCorp Coal Unit Valuation Study: A Unit-by-Unit Cost Analysis of PacifiCorp’s Coal-Fired Generation Fleet, by Jeff Burks, Gary Mirich, Don Hendrickson, Kathleen Fraser, Daniel Ramirez, & Hollie Hohlfelder – Sierra Club (June 2018)
Using an approach similar to that used in utility resource planning, Sierra Club and Energy Strategies determined the relative economic merit of each coal unit within PacifiCorp’s service territory. Each coal unit was compared to market, wind, and solar replacement options, the report also reviewed relative costs with environmental controls.
No country for coal gen– Below 2°C and regulatory risk for US coal power owners– Carbon Tracker (Sept. 2017)
Carbon Tracker found that phasing out uneconomic coal units could save US consumers $10 billion per year by 2021. Households in Kentucky, Indiana, and Michigan saving on average 10%, 9%, and 7% respectively on their electricity bills. Using innovative financial tools to transition away from unprofitable coal helps regulators make decisions that benefit utilities as well as consumers.