Securitization in Action
US States Continue to Retire Coal and Reduce Electricity Rates
As the cost of renewable energy continues to decline, over 12 gigawatts of coal capacity are set to retire in 2022 in the United States. Yet, as previous RMI analysis has shown, an influx of investment into coal plants over the past decade and a half, mainly for pollution control equipment, has led to large sunk costs. In 2020, over $100 billion of coal assets remained “on the books” — in other words, electricity ratepayers across the country were still committed to paying these costs as coal plants operated until the end of their useful life. And with the increased investments into existing coal plants, utilities had extended their ability to keep these coal plants operating — in some cases, through the 2070s.
Despite the lack of federal action limiting carbon emissions, utilities’ views on coal have drastically changed, leading to an accelerating march of coal retirements. The rapid cost decline of renewables, as well as the abundance of cheaper natural gas, has driven a sharp decline in coal generation. And while the economic rebound from COVID-19 led to a temporary increase in coal generation in 2021, and Russia’s invasion of Ukraine has led to price spikes for natural gas, coal use is still projected to decline in the near future.
As utilities reckon with the unfavorable economics of coal, they are increasingly turning to an innovative financing tool called securitization to phase out coal plants without unduly saddling their customers with the costs of the transition. In this article, we’ll take a look at some of the latest developments in securitization, how it’s being used to save millions of dollars in the transition away from coal, and how it could be employed more effectively.
Letting Customers off the Hook
While the trend of replacing coal with cheap renewables has undeniable benefits for the climate (not to mention local air pollution), recent, undepreciated investments in coal plants lead to a paradoxical conclusion. Because of the cost-of-service ratemaking that occurs in regulated electricity markets (the system in place for the majority of US states), customers are obligated by regulatory decisions to pay for the remaining cost of coal plants, even if they are retired much earlier than planned. Thus, forcing customers to pay for both the retiring coal plant and the cheaper clean energy replacement can either lead to high sustained costs over decades, or shorter-term rate shocks that disproportionately burden low-income ratepayers who are already suffering from the economic impacts of COVID-19.
Fortunately, as we explained last year, securitization, the process of taking out low-interest bonds to pay off remaining coal investments, can help resolve this predicament. It can provide both immediate and long-term savings for ratepayers, while allowing utilities to retire their uneconomic coal plants and profit off of cheap clean energy instead. And while securitization requires state legislation that specifically authorizes its use, four states have passed legislation just this past year (Kansas, Missouri, Indiana, and North Carolina), joining seven other states (Michigan, New Mexico, Colorado, Idaho, Montana, Wisconsin, and Louisiana) that have some form of securitization that allows for retiring coal costs.
While few of these states are typically considered “climate leaders,” legislators, utilities, and other stakeholders in these states have decided that securitization just makes smart financial sense. Major utilities in these states, like Evergy, Ameren, CenterPoint, and Duke, have net-zero commitments ranging from 2035 to 2050. Securitization can help them achieve those goals.
Two recent examples demonstrate the cost benefits of securitization. In Missouri, Empire Electric District recently filed to securitize the remaining plant balance of its retired Asbury coal plant. RMI analysis shows savings of $25 million compared to traditional utility financing methods. And just two weeks ago, CenterPoint filed to retire and securitize its Indiana A.B. Brown coal plant in 2023, estimating savings of $60 million once approved.
RMI has also analyzed the potential savings in Idaho, a state that has authorized coal plant retirement securitization but where it has not yet been used, and in South Carolina, where legislation has been proposed but not yet passed. In Idaho, we analyzed Idaho Power’s 2023 securitization of the Jim Bridger plant’s coal balance and found that securitization could save ratepayers $63 million, as compared with the current proposed accelerated depreciation. In South Carolina, if all the remaining coal plants in the state owned by Duke and Dominion were retired early and securitized, South Carolina ratepayers would see savings of nearly $350 million.
An Ounce of Prevention
On its own, securitization is not a panacea. Utilities are still building new gas plants, most of which will likely shut down before the end of their useful lifetime due to the increasingly favorable economics of renewables and continuing pressure to reduce carbon emissions, leading to additional stranded costs. Securitization can help mitigate these costs, but the most cost-effective solution would simply be not building these plants at all, especially when 80 percent of new gas plants proposed in 2021 could be more economically replaced by clean energy portfolios.
Furthermore, like any legislation, policy design is crucial. Indiana’s legislation only authorized a pilot program specifically designed for A.B. Brown, and North Carolina only mandates 50 percent of coal balance be securitized, thus limiting the scale of potential savings. Missouri’s legislation also included a provision that restricted municipalities from banning new natural gas hookups, despite clear health benefits and cost savings. When legislation does include provisions on capital recycling — the ability to reinvest money into new sources of generation — they allow for investment in natural gas plants, despite the aforementioned risks of stranded costs and the likelihood of higher costs compared to renewables. Finally, none of the laws include funding for transition assistance — programs that help coal plant workers transition to new jobs and encourage economic development to replace the large local tax benefits that came with hosting a coal plant.
Despite these shortcomings, securitization can and will save customers money, all while reducing harmful climate and air pollutants. However, out of the nearly 50 GW of coal that exists in the 10 states that have enabled coal retirement securitization, only 2.7 GW of coal has been retired and securitized, with an additional 13 GW having seen proposals for retirement and securitization.
Securitization can lead to enormous benefits for ratepayers, the climate, and local communities. Legislators, utilities, and stakeholders must work together to ensure that it is scaled up and implemented in a responsible manner.