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Sierra Club lays out tools to ease investor, ratepayer shift from coal

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A large field of coal is stored on the property of Dominion Energy's Chesterfield Power station in Chester, Va. The station is a coal-fired power station along the James River. The units are currently on cold reserve as Dominion regularly reviews whether to place them back into service or retire them in 2021.
Source: Associated Press

Utilities exploring ways to close down their coal plants have several financial tools at their disposal to do so while minimizing impacts to investors and ratepayers, according to a new white paper published by the Sierra Club.

The publication from one of the coal sector's fiercest opponents lays out a roadmap of green tariffs, securitization, capital recycling and other paths toward accelerating coal plant retirements while building out renewable energy resources. Even in situations where coal plants were financed 40 years ago, there are economic win-win scenarios for utilities and ratepayers, said Jeremy Fisher, senior strategy and technical adviser at Sierra Club's environmental law program, in a news release announcing the report.

"With 279 coal-fired power plants retired or announced for retirement since 2010, and the cost of clean energy technology dropping rapidly, it's clear that utility executives need a rapid exit path for their remaining coal plants," Fisher said. "In this white paper, we show that what's good for ratepayers can also be good for utility investors and for vulnerable communities suffering under coal pollution."

While the coal sector has enjoyed some financial relief in recent months thanks to strong export demand for both metallurgical and thermal coal, at home, domestic utility customers continue to announce power plant retirements. Glenn Kellow, president and CEO of Peabody Energy Corp. the largest coal producer in the U.S., said on a third-quarter earnings call that 2018 was likely one of the largest in terms of coal plant retirements and said the company is taking "the five-year picture that the overall market is in decline."

The utility Southern Co. reported on a Nov. 7 call that the third quarter represented its lowest level of coal generation in more than 15 years with its natural gas generation "displacing virtually all of our coal units in the dispatch curve." Trade groups supporting coal have been working to secure policy or regulatory support that would incentivize the operation of aging coal plants, but have not yet been successful.

The Sierra Club white paper points to a 2017 Carbon Tracker Initiative finding that regulated utilities are potentially carrying $185 billion of potentially stranded assets in the form of non-economic coal units. When a generating plant becomes uneconomic in regulated markets and is shut down, officials can force investors to absorb the lost capital cost or pass on those costs to ratepayers who are no longer receiving the benefits of electricity from that plant.

The environmental advocacy group's report aims to give utilities a path to avoid the "uneconomic, yet rational impasse" of utilities choosing to operate uneconomic units in order to avoid conversations about unrecovered capital.

"The financial sector may offer a unique opportunity to ease this transition and break the stalemate," the report concludes. The Sierra Club suggests utilities do so through reallocation of over-collected earnings, securitization and green bonds and tariffs.

Across the U.S., many utilities already over-collected from ratepayers thanks to recent federal tax reform lowering the corporate federal tax rate from 35% to 21%. Regulators in areas where rates were set before tax reform and not subsequently adjusted could choose to allow utilities to use the excess revenue to address coal plant retirements and community transition needs, the Sierra Club suggests.

Shortly after the Republican-led U.S. Congress passed tax reform, The Brattle Group speculated that utilities could find "creative ways" to return tax savings to customers, including accelerating book depreciation for the early retirement of power plants.

Xcel Energy Inc. said on a July earnings call that while it proposed to refund some of its tax reform benefits, it would also use some of that cash to accelerate the depreciation of its Tolk coal-fired power plant in Texas and its Allen S. King plant in Minnesota. In May, Duke Energy Corp. touted receiving approval from Florida regulators to use tax reform benefits to accelerate depreciation of some of its "older coal-fired generation units" in addition to offsetting costs from Hurricane Irma.

The Sierra Club report encourages mitigating the rate shock of accelerated depreciation through securitization, allowing ratepayers to raise funds by issuing a bond to debt investors and effectively buying out the utility's debt on a non-economic asset. A ratepayer-backed securitization, the Sierra Club said, could raise funds at a far lower cost of capital and could be directed toward assisting workers and communities negatively impacted by early plant retirement. Critical to the process, the report said, is state legislation that would ensure a zero risk of ratepayers not paying the bond.

The report points out securitization has been used in recent years by utilities including Duke to finance $1.3 billion in assets of a closed nuclear plant in Florida and by a CMS Energy Corp. subsidiary to sell $389.6 million in bonds to capture unrecovered net book value of 950 MW of coal-fired capacity retired in 2016.

Better outcomes for both shareholders and ratepayers, the Sierra Club concludes, can be achieved by recycling bond proceeds into renewable assets on its balance sheets, particularly with current renewable subsidies available to consumers. Offering renewable energy and storage in place of fossil fuel generation also redirects dollars from the pass-through fuel purchases at fossil fuel plants into capital-intensive projects that generally enhance a utility's profit.

Green bonds and green tariffs, both relatively new financial mechanisms, mix the concept of a standard bond with an environmental component such as lowering emissions or other pollutants. Investors or corporate buyers with sustainability commitments could find such offerings from utilities attractive, the report states.