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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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The Secret To Successfully Closing Down Coal Plants

Close down coal-fired power stations. Do not replace them with gas-fired electricity. That would reduce greenhouse gas emissions in the USA by 15 percent. That’s a big number. Those plants are old and will close eventually. So why not sooner rather than later? The answer, of course, is money. We figure that investor-owned utilities and public power agencies have, between them, close to $70 billion worth of coal-fired generators still on their books (in rate base). Those utilities will not give up those money-earning assets without compensation. They stalled the Obama clean air program in order to keep those assets operating. They didn’t have to do anything during the Trump years to keep pumping out those greenhouse gases. 

If Biden wins, we can expect the plant owners to employ dogged delaying tactics in a federal court system stacked in favor of business interests to keep the plants running. And herein lies the problem. By delaying what appears inevitable - that coal in the U.S. is finished as a power generation boiler fuel - the utility industry continues to miss a step. So policy makers may have to decide whether they want endless delay or figure out how to buy out the utilities in the most cost effective manner. 

But first, how did the industry get into this unenviable position of having so much money tied up in facilities whose future is so uncertain?  

The U.S. electric utility industry made two mistakes. First, it did not accept the inevitable decline in coal fired power generation and, second, it did not at the same time pivot to natural gas as a “cleaner” transition fuel to a renewable future. Had the utility industry taken the lead on this issue, say early in the Obama administration, some of the unpleasantness could have been avoided. (We are thinking specifically about the Atlantic gas pipeline cancelled this week.) Coal plants could have been shuttered expeditiously while gas was hailed as a better —though still fossil— transition fuel. Most importantly we could have had a political and regulatory acceptance of gas-as-transition fuel at that time. Now that window appears to have closed.  

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The electricity business suffers from a fundamental divide between business owners and customers. Utility customers by definition all want the same thing: safe, reliable and affordable energy. Recently consumers have added another criterion that may be phrased as a request: “Please produce this electricity in a manner that won’t contribute to an increasingly hostile environment.” 

And in this we see a split in the electric utility industry. The monopoly wing of the industry, with its inherent disdain for customers, produces electricity on a “take it or leave it” basis. That is, if you don’t like the “dirty” electricity we produce that’s fine. Sit in a dark, hot place with no running water or refrigeration.

Customer focused utilities take the opposite approach. They view themselves as energy providers with a broad spectrum of solutions at various price points. It is the opposite of the legacy utility, top down, command and control approach.

Several decades ago, electric utilities in the U.S. and Europe had pretty much the same mix of assets with only the percentages differing. Then the Europeans began to take climate issues more seriously and saw a business in it. Now customer centric utilities, even in the USDA, are shedding legacy fossil assets at a faster rate in response to their customers’ preferences. This trend could reduce the risk of asset write offs related to fossil fired power generation.

Now, let’s return to the practical questions. What about the argument that too many renewables in the generating mix will create system instability, therefore forcing the grid to employ a lot of expensive storage (batteries). Engineers assert that the problem arises when intermittent renewables reach 40 percen or more of generation. For the nation as a whole, renewables made up about 18 percent of generation in 2019, but half of that was in the form of conventional hydro, burning waste, etc, which are dispatchable and therefore not much different than conventional generation. If we close down coal stations and replace them with intermittent renewables, we still have room to maneuver, although that may not be the case everywhere. 

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We are certain, though, that utility engineers will figure out how to manage the grid once the money question is cleared up. 

The states, however, may not want to act individually to close coal stations because doing so might raise electric rates in places that have managed to keep rates low by sticking with old coal plants. A federal carbon tax would make it more difficult to justify the continued burning of coal, but we didn’t notice a carbon tax in the Biden platform and don’t expect one from Trump. 

So we suggest a different answer, securitization, that financial scheme that delivered so much money to utilities during the deregulation heyday. Here is how it works: an entity created for the purpose borrows money in the markets to buy the power stations (or other “stranded” asset) from the utilities, an all cash deal, all money up front. The state sets a surcharge on utility bills that pays interest on and pays down principal on those loans. Consumers, in effect, pay for the assets on a monthly installment plan. Roughly speaking, spread the payment over 10 years and borrow in the corporate bond market, and securitization of coal fired power plants might add about 5 percent to the average electric bill over the payment period. Not bad, say the state regulators, but why make consumers in our state pay more just to save the earth?  

So, here is our suggestion. Make believe that we are selling a house or a car. Make the monthly payment as small as possible. That is usually a bad policy because those interest payments pile up and the lender has to worry about the value of collateral and the borrower’s prospects so many years out. But interest rates are close to zero, so why not take advantage? And to obtain the lowest interest rates, get the federal government (as part of a no- budgetary- cost carbon reduction plan) to guarantee the bond for a fee? A 20-year securitization plan, at government guaranteed interest rates, might raise the electric bill by less than 2%. 

Here is the deal: the feds should offer to back 100 percent securitization for coal [plants, if the states involved agree and if the utilities use the money to invest in rate- based non-carbon emitting power plants or investments that reduce energy consumption by an amount equal to what the power plants produced. If the states do not accept, they and the utilities take their chances on more punitive legislation later. 

You might ask why the feds should bail out utilities, even if consumers really foot the bill? And our answer is: no reason except that it would make a big dent in greenhouse gas emissions, and that would benefit everybody, a lot more than another decade of lawsuits.

By Leonard Hyman and William Tilles for Oilprice.com

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Leave a comment
  • John Galt on August 20 2020 said:
    "The answer, of course, is money."

    Duh. The SECRET, however, is simply to wait another 6-8 years for battery prices to drop by another 50%. When grid storage actually makes financial sense, utilities will drop coal as fast as they can replace it with solar and batteries. The difference of 6-8 years? MAYBE as much as 0.02C, according to the IPCC report.

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