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Energy transition advocates push financial tools for smooth exit from coal

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Energy transition advocates push financial tools for smooth exit from coal

While U.S. mining companies push for policies to support the coal-fired power generation units that make up much of their customer base, power generators and the bodies that regulate them are increasingly being directed to tools that will allow them exit from coal in the most painless ways possible.

In November, the Sierra Club published a white paper that laid out a road map using green tariffs, securitization, capital recycling and similar pathways toward accelerating coal plant retirements while building out renewable energy resources in a way that is minimally disruptive to investors and consumers. Earlier this month, Energy Innovation, an organization with a mission to "accelerate progress in clean energy," released four policy briefs aimed at helping regulators, utilities and investors work together to make sure customers benefit from a transition away from coal power generation.

"What we wanted to do with this set of reports is to create a pathway for utilities to look at the transition and get ahead of it on their own terms, and get uneconomic coal off the books profitably, and reinvest in clean energy in a way that helps their shareholders and their bottom lines, but also helps the communities where coal closures would affect economies and the workforce," said Silvio Marcacci, communications director for the organization.

The briefs focus on showing how policymakers and other stakeholders can identify where running uneconomic generation costs more than building new wind or solar; the benefits of swapping "steel for fuel" when it comes to costs of renewables versus fossil fuels; processes for utilizing depreciation accounting in early coal retirements; and the process for refinancing un-depreciated balances on coal plants in service to lessen the burden on consumers, primarily by replacing some portion of equity with corporate debt.

Together, the policy papers outline the steps for a holistic plan for assessing the cost of existing coal units, managing depreciation of those assets, refinancing regulatory assets and then reinvesting proceeds.

Utilities have already begun a rather speedy transition away from coal. While some observers expect that to slow down, the pressure is mounting on power generators to move away from the fuel by retiring existing assets and building out other forms of generation. A recent PacifiCorp Inc. report to regulators concluded that most of its coal units cost more to run than to close and replace. Xcel Energy Inc. has already announced it would hit an 80% carbon emissions reduction target by 2030 and achieve zero emissions by 2050. DTE Energy Co. has vowed to retire all of its coal plants by 2040.

"There's a financial transition that has to happen," said Ron Lehr, a former commissioner and chairman of the Colorado Public Utilities Commission who also was an author on the four Energy Innovation reports. "We want to avoid Chapter 11 [bankruptcy reorganizations]. ... We want to see this transition from uneconomic to more economic resources to happen in a thoughtful and more beneficial way, if we can, instead of having the creditors take over and drive the process."

At times, that means diving into some of the more esoteric topics around regulating U.S. power generation. For example, Lehr says decisions about the depreciation of assets may not attract a lot of headlines but are key to determining when a coal plant might retire and when that is going to happen in regulated markets. The figure, which marks the useful life of an asset such as a coal generating unit, is more elastic than many may think and might move by years or even decades, he said.

"Since transition can lead to substantial fuel, operations, and maintenance savings, and refinancing and reinvesting capital can provide significant interest rate savings, reinvestment in other elements of transition that increase the velocity of capital recycling to meet customer goals is possible," the group wrote in the policy brief focused on depreciation. "A variety of outcomes deserve further consideration: energy efficiency, demand management, distributed resources, and additional grid-scale clean energy investments."

While some coal plants are still operating profitably across the U.S., there are plenty that are either uneconomic already or getting close as the price of renewable energy trends downward and natural gas continues to pressure them as well, Lehr said.

"There are some of them that just stick out as wildly out of the money," he added. "You scratch your head and wonder why this isn't happening already for some of the plants."

Some of the measures recommended could require changes to state policy, so acting sooner rather than later could ease the transition for a utility looking to retire coal and for its consumers, said Mike O'Boyle, director of electricity policy for Energy Innovation. O'Boyle cited recent research from the Carbon Tracker Initiative, a group doing similar work to promote the idea coal is becoming increasingly uneconomic, which recently found more than two-fifths of the world's coal-fired power plants are already unprofitable and more than 96% of coal units in the world could be unprofitable by 2030.

"The process of determining when a coal plant needs to retire takes years," O'Boyle said. "So looking out to 2030 and seeing that kind of number should scare anyone who owns a coal plant into considering a lot of these tools."