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Golden coils in soil with young plants

Financing Tools for an Equitable Transition to a Clean Economy

Meeting the United States’ NDC target of reducing emissions 50–52 percent below 2005 levels by 2030 will require rapid action from companies, governments, and other entities across the country. These actors must accelerate the retirement and clean replacement of long-lived assets and infrastructure that support carbon-intensive economic activity (or, if cost-effective, transition them to low- or zero-carbon operation). Almost all sectors have durable fossil fuel assets with useful lives that span decades, such as electricity generation infrastructure, personal and commercial vehicles, industrial equipment, and even buildings. Clean replacement assets will be necessary in all these sectors.

Without policy support, the costs and risks of rapidly transitioning fossil fuel assets would largely fall on those least able to shoulder them: customers of carbon-intensive goods and services (including electric and gas ratepayers), as well as the frontline energy communities working in and impacted by fossil fuel supply. Failure to embrace this transition could prevent US companies and workers from retaining first-mover advantages in emerging clean industries, such as electric vehicle manufacturing. It could also create damaging trade barriers to US-built goods in global markets that demand improved carbon productivity.

While the United States has the opportunity to become a global leader in innovative low-carbon goods and services, doing so equitably and sustainably requires addressing the challenges that a rapid transition can pose for energy customers and frontline energy communities.

 

Policy Can Foster an Equitable Transition

Regulated electric utility companies in the United States hold nearly $160 billion in fossil generation assets on their books—investments approved by their regulators that will need to be repaid by their customers. Utilities will likely need to accelerate the retirement of most of these assets or transition them to low-carbon operation by 2030 to meet the NDC emissions target.

RMI estimates that this fossil transition would leave customers on the hook to keep paying $20 billion to $25 billion in ongoing annual capital costs for retired or repurposed plants. That could continue for many years or even decades to come, on top of the cost of the additional investment needed for the transition to low- or zero-carbon operation or clean replacement generation. Moreover, accelerated plant retirement can often leave frontline energy communities burdened with the environmental, economic, and health legacy of decades of fossil pollution, as well as uncertainty about funding for basic services and future economic growth prospects.

One promising approach to mitigate these risks and costs involves refinancing customers’ obligation to repay utility investors and lenders using much lower-cost debt. Replacing utility capital with low-cost debt could halve those ongoing fossil capital costs, significantly reducing the burden of a rapid transition on the customers of fossil fuel-intensive utilities. Further, some of the cost savings from refinancing could be used to mitigate the risks and challenges faced by frontline energy communities.

Unfortunately, changes to state policy are usually required to execute such a refinancing via a tool known as ratepayer-backed bond securitization. While bipartisan support for securitization legislation has been gaining momentum (most recently in Kansas, Missouri, and Indiana), at present only nine states with significant fossil capacity have authorized the tool.

 

Introducing the Clean Transition Financing Program

The federal government can play a critical role in making this refinancing approach—with its demonstrated bipartisan appeal—available across the country to mitigate transition energy burdens and, in particular, to address the needs of frontline energy communities. For example, the Department of Energy’s Loan Programs Office (LPO) could unlock the nationwide use of tools like securitization and extend it to other carbon-intensive sectors of the economy, paving the way for equitable and efficient emissions reductions.

At present, Title XVII of the Energy Policy Act of 2005 allows the federal government to support the commercialization of new clean technologies with various forms of supportive financing. In the last 10 years alone, the LPO has provided over $35 billion in financing across a range of sectors, including transportation and power generation. The default rate for loans in this portfolio is below 3 percent of all the disbursed funds, far better than the performance of private investments. Through support for early Tesla manufacturing facilities and utility-scale renewable projects of all technologies, the program has been instrumental in sparking growth in the American clean transportation and generation industries—consistently the fastest growing job sectors nationally.

Expanding this success to enable the low-cost transition and redevelopment of fossil energy assets could produce even greater economic benefits and allow them to be channeled to those most in need. Title XVII could be amended to authorize a Clean Transition Financing Program, allowing LPO to use a suite of financial tools to mitigate transition costs and risks—and to encourage redevelopment of frontline energy communities. These tools would help protect vulnerable populations and enable a more equitable transition to a net-zero economy that stimulates and sustains growth.

Innovative transition financing tools through the Clean Transition Financing Program could include:

  • low-cost direct loans similar in impact to ratepayer-backed bond securitizations,
  • financing for the repurposing and transition of transportation-related manufacturing and infrastructure—including vehicle part suppliers and gas stations—to retool, remediate, and repurpose lands and facilities to provide parts and fast-charging services for electrified transport,
  • outcome-based impact bonds that enable communities to unlock health and environmental benefits and foster economic development, and
  • environmental risk insurance that could reduce barriers to redevelopment of communities that hosted fossil assets with uncertain future environmental liabilities.

These financing tools would aim to support improvements in carbon productivity across the economy, maintaining or increasing economic services and jobs while reducing carbon emissions.

 

Benefits for Utility Customers and Beyond

Returning to the example of regulated utilities, RMI estimates that a federal credit subsidy appropriation of between $3 billion and $4 billion could be used by this new Clean Transition Financing Program to save electricity ratepayers more than $10 billion annually in costs associated with the accelerated transition of utility generation assets. Additional credit subsidies could accelerate the transition economy-wide.

The Clean Transition Financing Program could be scaled with different levels of appropriated credit subsidy and without a specific loan volume cap, providing flexibility across the economy. As the program looks beyond the regulated utility sector, LPO could provide a range of financial products beyond guarantees to support the economic redevelopment of fossil fuel communities, a critical piece of a just and equitable transition.

Financing tools provided through the LPO have proven effective at commercializing innovative clean energy technologies, thereby helping to make a transition economically possible. These tools must now be brought to bear to enable an equitable and inclusive transition that addresses existing assets and infrastructure and benefits all Americans. The Clean Transition Financing Program can play a key role in meeting America’s necessarily ambitious climate targets with limited ratepayer impacts and robust economic growth, especially in our most vulnerable communities.

 

Learn more about the challenges and opportunities of energy transition in the utility sector by exploring RMI’s Utility Transition Hub (https://utilitytransitionhub.rmi.org/). To stay up to date on the latest RMI insights and data releases on the utility transition, subscribe to the Hub’s mailing list (https://utilitytransitionhub.rmi.org/#subscribe).