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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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Decarbonizing U.S. Utilities: The Money Talks


If policy makers in Washington wanted to hasten the demise of coal fired electric generating stations, they could not have done a better job. What interests us here is that policy makers intended precisely the opposite. However simply abandoning regulatory scrutiny at federal agencies like the EPA may reduce corporate expenses but it is no substitute for revenues. Electricity, where sold in a market, is a commodity. and this means that the lowest cost producer drives all others out of business.

At this moment (from a simple production standpoint) coal fired electricity looks like the most expensive form of electricity except for nuclear. That is why coal plants are shutting down. There is only one question. Will politicians take credit for what markets are already accomplishing? The good news for us as a society is that closing coal stations could reduce greenhouse gas emissions in the country by 15%.

Just in case you wonder about our concentration on electric power generation, consider two points.

As part of what we will call the electrify everything movement, policy makers want to convert fossil fuel users to electricity. Powering automobiles by batteries as opposed to internal combustion engines is one example. But that will only reduce greenhouse gas emissions if the electric power source energizing the battery did not produce emissions.  

Not to pick on coal generation again, but due to its concentration it is an easy target for regulators. Simply stated there are not many generating stations, they are all regulated one way or another and are owned by a small number of corporations. The 40 largest coal generating stations account for 40% of US coal fired capacity. The 20 largest gas fired stations account for 10% of gas fired capacity. Electric power generators are an easy target for additional regulation. Related: OPEC+ Finally Reaches Deal On 2021 Oil Output Cuts

The fall back position of the US utility industry is to replace coal with natural gas as a boiler fuel in large power plants. One large generating station replacing another albeit with an improved emissions profile. Whether this “good enough” approach satisfies the environmental movement remains to be seen . We have our doubts.

One of the intangibles in policy debates is who has legitimacy. Interestingly, legitimacy is often only recognized by its absence or loss. A crusading politician caught taking bribes often loses legitimacy for example. The reason we bring this up here is that we believe we are about to enter a crisis of legitimacy in the utility industry. We could see the public asking industry executives, “Why should we listen to you since we now know you’ve lied to us about climate change?” Rifts of this nature can be healed. But they also set the stage for competition, making it easier to challenge electric industry incumbents.

The utility industry response to rapid decarbonization is threefold: 1) too many renewable resources in the generating mix destabilizes the grid; 2) transition from coal to gas fired base load generation (business as usual) is an economic way to maintain grid reliability; 3) rapidly decarbonizing the grid will lead to asset impairments, financially painful both to utilities and their customers.

Are you confused? Good, so were we until we stumbled onto a few numbers. They have nothing to do with operating costs and system operations, or even good economics, so please do not send us estimates that show that renewables are really economical.

Start with this number. Investor-owned utilities in the US have about $55 billion still invested in coal-fired stations. Public power agencies might have another $15 billion. Unregulated power generators have additional capacity but no claim to restitution if a plant is closed prematurely. However regardless of status, none of these coal plant owners want to lose the flow of earnings from those assets. We expect they will fight to keep those plants open as long as possible unless compensated through the regulatory process. (If you have any doubts about the ability of utilities to throttle decarbonization, look at how they tied up Obama’s clean air initiative in the courts and consider that the courts now appear more pro business than ever.) Related: The Oilfield Service Industry Will Never Truly Recover

The regulated power generators will, we expect, recover the value of coal assets via securitization bonds agreed to by regulators. Next they will attempt to replace coal plants with natural gas. After all, they have the sites and transmission lines, so why not?

The alternative would be to replace natural gas with renewables. But utility monopolies may not have as good a chance of keeping renewables in house. Another firm might build and operate these new assets, selling green electricity to the utility. There is less money in delivering another firm’s product especially.

Now back to numbers. We estimate new gas fired power generation to replace existing coal could add $100-150 billion to US utility rate base. Utilities earn return on rate base, and currently that return is above cost of capital. That provides another reason to build and operate those power plants. Will gas-fired electricity cost more or less than renewables? We don’t know. But one thing is clear. If a new fleet of gas fired generation is built, the industry will attempt to run them (with all the greenhouse gas emissions that implies) for the next 20 to 30 years.


But one not so subtle change has occurred. The legitimacy or the degree to which we trust our energy monopolies to make good decisions in our interests has been shaken. Both the oil industry and the US utility industry wholeheartedly embraced climate change denial. However the electric industry now appears to be in a position to take over part of the oil market, especially transportation. For US electric utilities, the price for attempting to deceive the public on this scale may simply be lower equity returns and a lot more competition, but in a growing market. The oil companies might not be as lucky.

By Leonard Hyman and William Tilles for Oilprice.com

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