Facing costly coal plant closures more states are looking to using securitized bonds

Energize Weekly, March 20, 2019

Faced with a growing number of coal plant closures, some states are looking at the use of securitized bonds to soften the financial impact. New Mexico and Colorado already have legislation to create such bonds.

“Securitized bonds are a way to avoid a rate shock and benefit from lower rates from cheaper generation,” said by Uday Varadarajan, a principal at the Rocky Mountain Institute, a non-profit energy think tank.

In addition to New Mexico and Colorado, Varadarajan said Montana, Wisconsin and Utah are considering statutes to permit securitization.

Long-term bonds are secured by ratepayers’ payments to the utility. As such, the bonds can command top credit ratings, a minimum of AA/Aa2 with lower interest rates.

“Securitized bonds can lower the overall financing costs, and that eventually follows back to customers,” said Travis Miller, a senior equity analyst at Morningstar Inc.

Twenty states have bond securitization statutes, and the tool has been used by the utility industry to fund a range of issues. Entergy Louisiana and Entergy Gulf States, for example, sold $1.65 billion in bonds to cover storm costs in the last few years.

Duke Energy used $1.3 billion in utility cost-recovery bonds to retire its Crystal River Unit 3 nuclear plant in Florida. Michigan Consumers Energy used $390 million in securitized bonds to retire a 950-megawatt coal-fired plant.

An analysis of how the bonds would work by Varadarajan concluded that for a plant shut 20 years before its scheduled closure date for every $100 million unrecovered costs securitized ratepayers save $35 million to $45 million.

On top of that, substituting cheaper wind and solar generation, which requires no fuel and has lower operating and maintenance costs, creates another saving, Varadarajan said.

The Colorado Energy Impact Assistance Act would enable utilities to use securitized bonds to close coal-fired plants, but requires that a portion of the savings be used to help workers and communities affected by the closures.

In Nucla, a town of about 700 in Southwest Colorado, the announced closure of the coal-fired plant and the coal mine that serves it has hit the community hard. Employment at the plant and mine has dropped to 24 from a peak of 170, and the school and fire districts are looking at a 56 percent cut in their revenues.

“Nucla is going to suffer tremendously from that closure,” said the bill’s main sponsor, Rep. Chris Hansen, D-Denver. “The status quo is unacceptable. It is a lose-lose situation.”

Under the bill, 15 percent of the savings would go to workers and communities. The legislation would create a seven-member Colorado Energy Impact Assistance Authority to administer the funds.

“Securitization is a really an effective tool for handling coal plant debt,” said Emily Gedeon, Colorado conservation director for the Sierra Club, which supports the bill. “What is unique about this bill is that it specifically looks at savings being reinvested in workers and communities. That is really trailblazing.”

In Varadarajan’s $100 million example, securitization would create around $6 million in community and worker impact funds.

The bill was passed by the House of Representatives and is awaiting action in the Senate.

In New Mexico, the state Senate has passed the Energy Transition Act, SB 489, which would require 50 percent of the state’s electricity to come from renewable sources in 2030, 80 percent by 2040 and carbon free by 2045.

The bill includes the use of securitized bonds to help Public Service Company of New Mexico (PNM) cover the costs of closing the coal-fired San Juan Generating Station by 2022 and getting out of its share of the Four Corners Power Plant by 2031. The bonds can also be used to obtain clean replacement generation.

The bill is backed by Gov. Michelle Lujan Grisham and PNM. “It takes us out of our comfort zone,” PNM CEO Pat Vincent-Collawn told the Albuquerque Journal. “But it’s where New Mexico wants to go. … We need to be able to step up to the challenge.”

Securitized bonds are poised to play a bigger role in financing as more coal-fired plants come under regulatory and financing pressures, analysts say.

In 2018, a near-record year, 16 gigawatts (GW) of coal-fired capacity closed and another 4 GW of coal plants are forecast to close in 2019, according to the federal Energy Information Administration.

An analysis by Varadarajan of possible Minnesota coal plant closures found that using the standard accounting tools of accelerated depreciation over five years and a regulatory asset would cost $29 a megawatt-hour (MWh), while securitized 20-year bonds would cost $5 a MWh—a saving of $45 million.

“You can’t ignore economic reality, you can’t ignore basic math,” Rep. Hansen said. “We can prepare Colorado for these closures and be ready to help the people who are going to be impacted.”

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